Author: Steven Cernak
As we detailed in earlier posts (see here and here, for instance), the system established by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) was designed to get sufficient information about impending mergers to the federal antitrust agencies so they could attempt to block anti-competitive ones before consummation. The system has grown into a complex set of rules and interpretations. Earlier this month, the antitrust agencies proposed two changes to those rules, one that would require more information from some acquiring parties and another that would eliminate the filing requirement for certain transactions deemed unlikely to be anti-competitive.
“Associates” Would Become “Persons”
HSR requires a buyer — “Acquiring Person,” in HSR parlance — to provide certain information about the entities it controls and its prior acquisitions for transactions that meet HSR’s reportability standards. Under the definition of Persons, however, separate private equity investment funds under the same parent fund usually are considered separate Persons because the parent fund did not “control” them. Therefore, until recently, an investment fund making an acquisition did not need to provide information, including information regarding acquisitions or holdings, about other investment funds under the same parent fund. Also, currently, an investment fund does not need to aggregate its holdings with those of other funds under the same parent to determine HSR reportability.
In such scenarios, the agencies might not realize that another investment fund under the same parent fund holds interests in competitors of the target entity. The agencies partially corrected this situation in 2011 by defining such related investment funds as “associates” and requiring the Acquiring Person to disclose holdings of its associates in other entities that generated revenues in the same industries as the target entity.
The proposed rule would go a step further and change the definition of “Person” to include “associates.” The intended effect of such a change is to require Acquiring Persons to provide even more information about their associates when completing the HSR form. (Again in HSR parlance, such an Acquiring Person would need to disclose additional information about its associates in Items 4 through 8 of the form.) In addition, all the holdings of the Acquiring Person in the target entity, even those held by an associate, would need to be aggregated to determine if the most recent acquisition is reportable.
As a result, the agencies should have more complete information to assess the potential competitive impact of the proposed transaction. For private equity funds structured in this way, the result likely will be additional HSR filings plus the burden to collect, track, and provide additional information in each filing.
Small Transactions Would Be Exempt Regardless of Intent
While the agencies have an incentive to receive filings for all transaction that could pose competitive issues, they also have an incentive to conserve resources and avoid the review of filings for transactions that almost certainly pose no competitive threat. As a result, the HSR statute and rules have numerous exemptions for transaction types that raise few if any competitive issues.
One such long-standing exemption is for transactions that would result in the buyer holding ten percent or less of the target so long as the transaction is made “solely for the purpose of investment.” Unfortunately, the definition of “solely for the purpose of investment” is narrow, allowing the buyer to do little other than passively vote its shares to remain eligible for the exemption. The definition has also required numerous informal interpretations from the staff of the FTC Premerger Notification Office based on the myriad circumstances presented to it by practitioners. (The author recalls numerous cordial, but fruitless, calls on this topic with the erudite Dick Smith of the PNO.) Over the years, the result has been at least hundreds of HSR filings for transactions that were quickly, but not costlessly, cleared.
The agencies now propose to eliminate the “investment purpose” requirement and exempt nearly all acquisitions resulting in the holding of ten percent or less of the target. Certain such small transactions that could have a competitive impact — such as when the buyer and target are competitors or when the buyer holds even a small interest in a competitor of the target — would not qualify for this expanded exemption. The agencies expect a significant reduction in the number of filings if this change is finalized.
Changes far from Final
These proposed changes will be published in the Federal Register and the agencies will then receive comments on them for sixty days. Only after receiving and reviewing any comments will the agencies finalize them. And such finalization is far from a foregone conclusion. The decision to issue this notice of proposed rulemaking was made over the dissents of FTC Commissioners Chopra and Slaughter, both of whom objected to the expansion of the exemption for small transactions. So “frequent filers,” especially private equity funds, should consider commenting but also use this time to develop a process to collect associate information. Nobody should count on making a small minority investment “not solely for the purpose of investment” without an HSR filing anytime soon.