United States: Amendments to HSR Premerger Notification Rules Take Effect

As part of its enforcement of the Hart-Scott-Rodino Act, 15 U.S.C. § 18a ("HSR Act" or "the Act"), on February 23, 2005, the Federal Trade Commission’s Premerger Notification Office published a notice of final rulemaking adopting several significant amendments to the HSR premerger notification rules, 16 C.F.R. Parts 801-803 (the "Rules"). These amendments were published in the Federal Register on March 8, 2005 and took effect April 7, 2005.¹ The amendments concentrate on three areas: (1) harmonizing the treatment of partnerships and other unincorporated entities with the treatment of corporate entities, including the formation of, and other acquisitions of ownership interests in, these entities, (2) eliminating certain rules regarding the treatment of limited liability companies ("LLCs") in favor of the new rules for unincorporated entities, and (3) broadening certain existing exemptions. Taken together, these amendments represent a major change in the manner in which transactions involving unincorporated entities are treated for purposes of the Act.

• Under new Rule 801.50 and amended Rule 801.2(f), the formation of a partnership or other non-corporate entity, or an acquisition of ownership interests in an existing noncorporate entity, will be reportable if (a) the formation or other acquisition results in at least one acquiring person obtaining a controlling interest in the non-corporate entity (i.e., a right to 50 percent or more of the entity’s profits or assets upon dissolution) and (b) the interest that the acquiring person will hold is valued at more than $53.1 million and the size-of-the-persons test, if applicable, is satisfied. (Previously, formations of partnerships and most acquisitions of partnership interests were exempt).

• The special rules that have governed the reportability of the formation of an LLC are repealed and the formation of LLCs and other acquisitions of LLC interests will be analyzed in the same manner as transactions involving any other non-corporate entities under the amended Rules.

• The Rule 802.4 exemption has been expanded to cover acquisitions of interests in both corporations and unincorporated entities, and to cover the acquisition of such interests in an entity that holds assets the direct acquisition of which is exempted by any exemption contained in the Act or the Rules, including real estate, certain foreign assets and cash, so long as the entity does not hold more than $53.1 million in non-exempt assets. (Previously, Rule 802.4 exempted acquisitions of voting securities of entities that held only specific types of exempt assets).

• Rule 802.30, the intraperson exemption, has been expanded to apply in the same manner to both corporate and non-corporate interests. This exemption also has been expanded to apply if at least one of the acquiring persons is the same as the acquired person. (Previously the exemption applied only where the acquiring and acquired persons were the same by virtue of holding voting securities and required that all acquiring and acquired persons to be the same).

• Rule 802.10, which previously applied only to acquisitions of voting securities that did not increase the acquiring person’s ownership percentage (e.g., a stock split), has been amended to add an exemption for acquisitions resulting from conversion of a corporation or unincorporated entity into a new entity where the acquiring person’s ownership interest percentage does not increase or the acquiring person controlled the original entity.

• New Rule 802.65 adds an exemption for acquisitions of interests in financing transactions in which the acquiring person obtains a controlling interest but is contributing only cash for the purpose of providing financing and will no longer have control after realizing its preferred return.

• New Rule 801.10(d), which addresses valuation issues, conforms the valuation of non-corporate interests with the method of valuation of non-publicly traded corporate voting securities in Rule 801.10(a)(2), i.e., the value of the interests acquired is the acquisition price of the interests if determined or, if the acquisition price is undetermined, the fair market value of those interests. Additionally, fair market value will be used to value the acquisition of interests in a non-corporate entity when the acquiring person already holds interests in that entity.

• Rule 801.4 expands HSR coverage to require separate reporting for secondary acquisitions that result from an acquisition of a controlling interest in an unincorporated entity as well a corporate entity.

• Rule 801.13(b) requires aggregation of prior asset acquisitions with current acquisitions if the acquiring person signs a letter of intent or agreement in principle to acquire assets from an acquired person, and within the previous 180 days the acquiring person has (1) signed a letter of intent or agreement in principle to acquire assets from the same acquired person, which is still in effect but has not been consummated, or (2) has acquired assets from the same acquired person which it still holds, and (3) the contemplated or previous acquisition was not subject to the requirements of the Act.

• Rule 801.13(c) requires that any previously acquired non-corporate interests in the same unincorporated entity be aggregated with the newly acquired non-corporate interests for purposes of determining the value of the transaction in accordance with amended Section 801.10(d). 

Acquisitions of Interests in Partnerships and Other Unincorporated Entities

The HSR Act requires parties to acquisitions of assets or voting securities meeting certain dollar thresholds to submit premerger notification filings to the Federal Trade Commission ("FTC") and the Department of Justice ("DOJ") and observe a statutorily defined waiting period — usually 30 days — before consummating their transaction, unless an exemption applies.² Neither the HSR Act nor the Rules specifically address whether ownership interests in partnerships and other unincorporated entities are voting securities or assets for reporting purposes. By informal interpretation, however, the Premerger Notification Office has long taken the position that such interests are not voting securities or assets, and therefore, the acquisition of such interests is not reportable unless the acquisition results in the acquiring person holding 100 percent of the ownership interests.³ In such cases, the FTC deems the acquisition to be that of 100 percent of the assets of the unincorporated entity.

The FTC adopted this position, in part, to ensure consistency in the application of the premerger rules and to avoid potential conflicts regarding instances in which state law requires mandatory formation of partnerships that may not otherwise be reportable. The FTC and DOJ became concerned, however, that this position permitted many transactions involving unincorporated entities raising serious competitive concerns to go unreported (e.g., formation of a partnership that combines the operations of two major competitors.) This problem became more acute over the past decade as the rate of formation of unincorporated entities surpassed that of corporate entities.⁴

The amendments are intended to address these concerns by extending the Act’s reporting requirements to those transactions involving unincorporated entities viewed as most likely to raise antitrust concerns. Under amended Rule 801.2(f), an acquisition of partnership interests (or other non-corporate interests) that results in the acquiring person obtaining a controlling interest in a non-corporate entity will be reportable if the interest that the acquiring person will hold is valued at more than $53.1 million and the size-of-the-persons test, if applicable, is satisfied. Control of a non-corporate entity for this purpose means holding the right to 50 percent or more of the entity’s profits or the right to 50 percent or more of its assets upon dissolution.⁵ The amendments also include a new Rule, 801.50, which applies to the formation of non-corporate entities in which one or more parties to the formation is acquiring a controlling interest in the new entity. Rule 801.50 includes a special size-of-thepersons test similar to that in Rule 801.40 for the formation of corporations.⁶ If this test is satisfied and the controlling interest being acquired is valued at more than $53.1 million, the formation is reportable.

In addition to the amendments regarding partnerships and other unincorporated entities, the Commission revoked Formal Interpretation 15, which treated as reportable the formation of a limited liability company ("LLC") if (1) two or more pre-existing, separately controlled businesses were being contributed, and (2) at least one of the members was going to control the LLC. The Commission replaced the current interpretation with Formal Interpretation 18, which provides that the formation of LLCs and other acquisitions of LLC interests will be analyzed in the same manner as transactions involving any other non-corporate entities.

The Commission expanded several exemptions relating to acquisitions of interests in corporations and unincorporated entities that primarily hold assets whose direct acquisition is exempt. For instance, former Rule 802.4 exempted acquisitions of voting securities of corporations holding real estate and non-voting securities, the direct acquisition of which was exempt, so long as the corporate issuer did not hold more than $50 million in assets not covered by these exemptions.⁷ Thus, under the former rule an acquisition of voting securities of an entity that held only cash (e.g., a corporation formed to make an acquisition) was reportable, assuming the size-of-the-persons and size-of-the-transaction thresholds were met, even though the direct acquisition of cash was not reportable under Rule 801.21. Because acquisitions of interests in entities holding cash or other exempt assets are unlikely to raise competitive concerns, new Rule 802.4 expands this exemption in two ways. First, the exemption now covers acquisitions of interests in both corporations and unincorporated entities. Second, the exemption applies to the acquisition of interests in any entity that holds assets the direct acquisition of which is exempted by any exemption contained in the Act or the Rules, including exemptions that apply to real estate, certain foreign assets, cash, acquisitions made in the ordinary course of business and acquisitions made solely for purposes of investment, so long as the entity does not hold more than $53.1 million in non-exempt assets. The amendment eliminates many filings under the former rules, particularly filings in connection with the formation of corporate acquisition vehicles.

The amendments also make an important change to the intraperson exemption in Rule 802.30. Under the former rules, this exemption applied only where both the acquiring and acquired persons were the same by virtue of holding voting securities. As a result, a person that transferred assets between two corporate subsidiaries that it controlled was covered by the exemption, but a person that transferred assets between two partnerships in which it had a controlling interest (50 percent or more), but less than a 100 percent interest, or between such a partnership and a corporate subsidiary, had to report the transaction if the size-of-persons and size-of-transaction thresholds were met. Further, a person who held a controlling interest in a partnership (e.g., 60 percent) who wanted to buy out its other partners had to report if the dollar thresholds were met, while a party holding 50 percent or more of a corporation’s voting securities did not need to report additional acquisitions of that issuer’s securities. Under the new Rule 802.30, the intraperson exemption applies in the same manner to both corporate and noncorporate interests.

The amendment also broadens the exemption by allowing it to apply if at least one of the acquiring persons is the same as the acquired person. The former rule did not apply if there were two ultimate parents (e.g., a 50-50 joint venture) because all of the acquiring persons were not the same as the acquired person. Thus, if A and B each owned 50 percent of corporation C, and Acontributed assets to C valued in excess of $53.1 million, there was no exemption for either A or B; under the new Rule 802.30, Ais exempt from filing because it is both an acquiring and acquired person, but B must file because it is an acquiring person, but not an acquired person.

Similarly, Rule 802.10 has been amended to conform the treatment of transactions involving corporate and non-corporate entities that do not result in a change in the acquiring person’s percentage of ownership. For instance, former Rule 801.10 exempted acquisitions of voting securities pursuant to stock splits and pro rata stock dividends. Amended Rule 801.10 adds an exemption for acquisitions of interests in unincorporated entities or voting securities where an entity is being converted into a new entity if (a) no new assets will be contributed to the new entity as a result of the conversion, and (b) either (i) the transaction does not increase the acquiring person’s per centum holdings in the new entity relative to its per centum holdings in the original entity or (ii) the acquiring person controlled the original entity.

Finally, new Rule 802.65 exempts the acquisition of noncorporate interests that confer control of a new or existing unincorporated entity where the acquiring person is contributing only cash for the purpose of providing financing, and the terms of the financing agreement are such that the acquiring person will no longer control the entity after it realizes its preferred return.⁸

Valuation: Under the former rules, acquisitions of non-corporate interests, when reportable, were valued as if the transaction was a direct acquisition of the non-corporate entity’s assets. For example, if as a result of an acquisition, a person held 100 percent of the interests in a partnership or LLC, the acquisition was valued as an acquisition of 100 percent of the assets held by that entity. New Rule 801.10(d) conforms the valuation of non-corporate interests with the method of valuation for non-publicly traded corporate voting securities in Rule 801.10(a)(2), i.e., the value of the interests acquired is the acquisition price of the interests if determined or, if the acquisition price is undetermined, the fair market value of those interests. Additionally, fair market value will be used to value the acquisition of interests of a non-corporate entity when the acquiring person already holds interests in that unincorporated entity.

Secondary Acquisitions: Under former Rule 801.4, whenever, as a result of an acquisition of voting securities, an acquiring person obtained control of a corporate issuer that held voting securities of a second issuer that it did not control, the indirect acquisition of the second issuer’s voting securities was a "secondary acquisition" that was separately reportable if it met the Act’s jurisdictional thresholds. The amended Rule 801.4 expands coverage to require separate reporting for secondary acquisitions of voting securities that result from an acquisition of a controlling interest in unincorporated entities as well as corporate entities. Note that secondary acquisitions of non-controlling interests in non-corporate entities (e.g., an indirect acquisition of a 30 percent interest in a partnership as a result of acquiring control of the corporation or unincorporated entity that holds that interest) are not reportable because, under the amended rules, acquisitions of interests in non-corporate entities are reportable only if they confer control.

Aggregation of Current and Prior Transactions: Under former Rule 801.13(b), the value of a past asset acquisition was aggregated with the value of a current asset acquisition from the same person if (1) the acquiring person had signed a letter of intent or entered into an agreement in principle to acquire assets from the acquired person, (2) the acquiring person had acquired assets from the acquired person within 180 days preceding the signing of such agreement, and (3) the prior acquisition was not previously subject to the requirements of the Act. Thus, under the former rule, asset acquisitions that had not yet been consummated but were still pending were not aggregated with current asset acquisitions for the purpose of determining the size of the transaction. Consequently, multiple asset acquisitions from the same person would not be aggregated and an HSR filing might be avoided for the simple reason that the prior acquisition has not yet closed, a result that is inconsistent with the intent of Rule 801.13(b).

New Rule 801.13(b) remedies this by requiring aggregation of prior asset acquisitions with current acquisitions if the acquiring person signs a letter of intent or agreement in principle to acquire assets from an acquired person, and within the previous 180 days the acquiring person has (1) signed a letter of intent or agreement in principle to acquire assets from the same acquired person, which is still in effect but has not been consummated, or (2) has acquired assets from the same acquired person which it still holds, and (3) the contemplated or previous acquisition was not subject to the requirements of the Act.

In addition, amended Rule 801.13(c) requires that any previously acquired non-corporate interests in the same unincorporated entity be aggregated with the newly acquired non-corporate interests for purposes of determining the value of the transaction in accordance with proposed Section 801.10(d). An acquisition of non-corporate interests which does not confer control of the unincorporated entity would not be aggregated with any other assets or voting securities which have been or are currently being acquired from the same person.

The amended Rules largely resolve the inconsistent treatment of corporations and non-corporate entities contained in the former Rules. While these changes clearly will result in additional filings in connection with the formation of partnerships and LLCs as well as other acquisitions of controlling interests in such entities, these changes are sensible from the standpoint of treating transactions consistently under the HSR Act and the Rules regardless of the legal form of the transaction. In addition, the amended rules properly expand the exemptions for many types of transactions that clearly do not raise antitrust concerns, including the formation of acquisition vehicles by parties contributing only cash and other acquisitions of interests in entities holding mostly exempt assets. As in the past, the amended Rules are highly technical in nature and parties should evaluate transactions carefully and confer with counsel to ensure both that they submit filings on transactions to which the amendments have newly extended the HSR Act’s coverage as well as to ensure that they take full advantage of the expanded exemptions.

Copyright © 2007, Mayer, Brown, Rowe & Maw LLP. and/or Mayer Brown International LLP. This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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