DealThink: Hart-Scott-Rodino (HSR) Basics
You are the general counsel of a public company. One day, the CEO asks you how the “HSR Act” affects the company. In response, you can inform the CEO:
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), requires the filing of a notification form and supplementary information with the Federal Trade Commission and the Antitrust Division of the Department of Justice prior to consummating acquisitions that exceed specified thresholds unless an exemption is applicable. The notification gives the agencies the ability to review a transaction for anti-competitive effects and determine whether to seek injunctive or other relief before it closes. The HSR Act applies to acquisitions of voting securities (e.g., common stock), assets and noncorporate interests (e.g., partnership or LLC interests).
The key threshold is the size of the transaction test - the value of the assets, voting securities or noncorporate interests that the acquiror will beneficially own (under the HSR rules) as a result of the acquisition. Currently, this test is $68.2 million, but the dollar amount, and other dollar amounts in the rules, are adjusted each year based on the consumer price index. The value of a transaction for HSR purposes is not always the same as the price specified by the parties.
Example 1. In an asset acquisition, the amount of assumed debt must be added to the purchase price to determine the HSR valuation. As a result, if a buyer is paying $50 million for assets but assuming $30 million of debt, the transaction may meet the size of the transaction test.
Example 2. Aggregation of prior purchases is generally required. If an executive officer already owns $70 million of common stock and has not made a filing, he or she may be required to file before acquiring even one more share - whether on the open market or as a result of an option exercise.
Example 3. In a merger or acquisition of stock or noncorporate interests, the parties may generally deduct debt paid off to third parties at closing and transaction expenses in determining the value for HSR purposes. If the buyer is paying $80 million but will pay off $30 million of third party debt at closing, the size of the transaction test may not be met.
In transactions with a value less than $272.8 million, the size of the parties test must also be met. This test looks at the total assets and annual net revenues of the ultimate controlling party of each of the buyer and the target. Generally, one side must be more than $13.6 million and the other side must be more than $136.4 million.
A third test, the commerce test, is met in virtually every transaction having any nexus to U.S. commerce.
In addition, an acquisition of noncorporate interests is reportable if it meets the above thresholds and the acquiror will acquire “control” of the entity as a result of the acquisition. Under the HSR rules, a person controls a noncorporate entity, such as a partnership or LLC, if the person has the right to 50 percent or more of the profits or of the assets upon dissolution of the entity (an economic test as opposed to a governance test).
Note: The general partner is often not the control person of a partnership under the HSR rules.
The HSR Act also covers the formation of corporate, partnership and LLC joint ventures. However, if the only asset to be contributed is cash, the formation is unlikely to be reportable.
An acquisition may be exempt from reporting even if the thresholds are met. Exemptions apply to certain acquisitions of oil and gas interests, passive investments, real property acquisitions, and acquisitions of companies with primarily foreign assets or operations, among others. Whether an exemption is available is often very fact specific. An acquisition of common stock may also be exempt if the fair market value of “non-exempt” assets of the issuer is less than $68.2 million.
Example: A buyer is paying $72 million for 100 percent of the common stock of a company but the company has cash and foreign assets with a fair market value of $20 million. The transaction may be exempt even though the purchase price exceeds the size of the transaction threshold.
If a filing is required, the ultimate controlling person (the “ultimate parent entity”) of each of the target and the acquiror will file a copy of the notification form. The acquiror is responsible for the filing fee (which ranges from $45,000 to $280,000 depending on the size of the transaction) although the parties may negotiate to split the fee. The parties may not complete the acquisition until the expiration or early termination of the waiting period. The waiting period is generally 30 calendar days (shorter for bankruptcies and tender offers), but a party may request early termination of the waiting period which may be granted in the discretion of the agencies. The only downside to requesting early termination is public disclosure if it is granted. On the other hand, the agencies may extend the 30-day waiting period by making a “second request” which is generally expensive and time consuming.
Failure to comply with the HSR Act, which includes the failure to file as well as the failure to provide the required information in the filing, can result in civil penalties up to $16,000 per day of noncompliance as well as criminal penalties. In practice, the fines may run into the millions because many months may elapse between the time the filing should have been made and when the waiting period expires. The agencies may be more lenient for a first failure to file but typically assess penalties for additional violations.
Notes: In July 2012, an executive of a company pled guilty and agreed to serve five months in prison as a result of altering documents submitted under the HSR Act.
In December 2011, a public company CEO agreed to pay $500,000 to settle an enforcement action for an HSR violation that resulted from awards under the company’s stock compensation program.
In closing, you should tell the CEO:
1. Generally, anytime that assets, voting securities or noncorporate interests are changing hands, the HSR Act should be considered, including when the company is making an acquisition, selling assets or an entity, investing in another company, issuing stock or forming joint ventures.
2. Persons who own significant amounts of a company’s stock, especially directors and officers, should consider their HSR filing obligations to avoid inadvertent violations that may occur when, for example, stock options are exercised or equity grants are issued as compensation.
3. The HSR rules are complex and highly technical and legal counsel should review proposed acquisitions to determine whether reporting is required.
If you have any questions, please contact one of the following attorneys: