United States: What Companies Don’t Know Can Hurt Them: Basics Of Premerger Notification Filings*

Last Updated: April 10 2013
Article by Neil W. Imus and Matthew P. Greeson

I. An Introduction to Premerger Notification Filings

The Hart-Scott-Rodino Act (commonly known as "HSR" or the "HSR Act")1 requires the notification of certain mergers and acquisitions to the Federal Trade Commission ("FTC") and the Antitrust Division of the United States Department of Justice ("DOJ") (collectively referred to as "the agencies") prior to closing a transaction. The parties may only close the transaction after the "HSR waiting period" has expired. Some transactions will also trigger competition law notifications in other countries. Approximately eighty countries have laws requiring pre- or post-merger competition filings. Like the U.S., many countries prohibit the parties from consummating the transaction until their analysis is complete. Generally speaking, if either or both parties have revenue or assets outside the United States, is important to analyze whether foreign filings will be required.

"Small" deals do not trigger HSR filing requirements. The HSR filing thresholds are met if, as a result of the acquisition: (1) the acquiring person will hold voting securities or assets of the acquired person in excess of $283.6 million, or (2) one party has at least $14.2 million in assets or net revenue and the other has at least $141.8 million in assets or net revenue (the current "size-of-person" threshold), and the "value" of the voting securities, LLC or partnership interests, or assets involved exceed $70.9 million (the current "size-of-transaction" threshold). These size thresholds are indexed to inflation and change every year.

The "value" determination depends on the nature of the transaction. For asset acquisitions, the size-of-transaction is measured by the fair market value of the assets to be acquired or, if greater, the acquisition price plus the value of any debt that will be assumed as part of the deal. For stock acquisitions, size-of-transaction is measured by the value of all stock of the target held after the consummation of the transaction. Finally, for acquisitions of LLC and partnership interests, a party must file if the value of interests held after the transaction exceed the size-of-transaction threshold and if the acquiring party is acquiring "HSR control" of the entity (where "HSR control" is defined as the right to fifty percent or more of the profits or fifty percent or more of assets on dissolution of the LLC or partnership).

Outside the U.S., each country has its own statutory thresholds that determine whether filing is required in that country. Those thresholds are typically based on some combination of worldwide and in-country revenue for the target and the buyer's group in the last fiscal year. Some countries also look at seller group revenue, asset value, or each party's respective market shares. In most countries, both the target and the buyer must have revenue or assets in the country for a filing to be required, though there are several notable exceptions.

There are some exemptions for which a party contemplating a transaction may qualify. Some of the more common exemptions in the HSR regime include acquisitions of: unproductive real property2; office and residential property3; certain reserves of oil, natural gas, shale or tar sands and associated exploration or production assets4; non-U.S. assets5; and voting securities held solely for investment purposes6. Like other aspects of HSR, the application of these and other exemptions can be highly technical, so it is wise to seek legal counsel before relying on them.

There are substantial penalties for failing to file under HSR when it is required or to produce all of the required documentation. The maximum penalty is $16,000 per day of violation, which can amount to a substantial sum. For example, the FTC fined Biglari Holdings, Inc. $850,000 in September 2012 for violations of the HSR Act in connection with June 2011 stock acquisitions.7

II. The Filing Process

Both the acquiring and acquired parties must submit HSR Premerger Notification Forms and all required attachments, along with the required filing fee, to begin the initial HSR waiting period. The form requires the name of all parties involved, a brief description of the transaction, revenue information broken down by North American Industry Classification System ("NAICS") codes, information about where the NAICS codes of the involved parties overlap, and an explanation of corporate structure, including subsidiaries and large shareholders.8 This information provides the agencies with the data they use to begin evaluating the competitive effects of the transaction. The review of the HSR forms and attachments, along with other information the agencies may request from the parties on an informal basis during the initial waiting period, will allow them to decide whether to open a formal investigation and issue a "Second Request."

Unlike HSR in the United States, most countries' competition authorities only require one notification form using information compiled by both parties to the transaction. Typically, these forms are more substantive than the HSR form, and some require documents similar to those required by HSR item 4 (discussed below). Canada is a notable example of this practice.9

Item 4 of the HSR form requires the parties to submit certain documents prepared in connection with the deal to the agencies with the HSR form itself.10 Item 4(c) requires "all studies, surveys, analyses, and reports which were prepared by or for any officers or directors" and were created "for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, or potential for sales growth or expansion into product or geographic markets . . . ."11 Item 4(d) (a new requirement as of 2011) requires any confidential information memoranda prepared by or for officers and directors relating to the transaction, as well as studies, surveys, analyses and reports prepared by investment bankers, consultants, or other third-party advisors for the purpose of analyzing any related competitive issues.12 Taken as a whole, item 4 requires any documents prepared by the parties or their agents relating to the competitive effects or aspects of the deal to be submitted with the HSR filing. There can be substantial penalties for a failure to produce responsive documents.

The HSR filing cannot be made until the parties have a signed agreement. This can either be a final agreement, a letter of intent, or a term sheet. An officer or director of the person filing must sign both an affidavit and a certification attesting that to the best of that person's knowledge, the information contained in the filing is accurate, and that the parties have a good faith intention of closing the deal.13 There can be personal liability for an officer or director if the filing is not completed correctly.After the parties have submitted their filing and paid the filing fee (which ranges from $45,000 to $280,000, depending on the size of the transaction), the initial 30-day HSR waiting period begins.14 If they so desire, parties may request that the agencies grant early termination of this initial waiting period. While the agencies often grant early termination for transactions that raise no competitive concerns, the decision of whether to grant early termination is wholly discretionary with the agency.15 Note that if early termination is granted, the agencies will post the names of the parties and the date the early termination was granted on their website. On the other hand, if early termination is not granted and the initial 30 day waiting period simply expires, there is no public report about the filing.

If one of the antitrust agencies has concerns about the competitive aspects of the transaction, it will issue a Second Request requiring the parties to produce extensive documentation and information about the transaction and the marketplace in which the parties operate.16 The Second Request extends the HSR waiting period until 30 days after both parties have complied with the request. It often takes several months to complete the Second Request process. Only one of the antitrust agencies conducts the investigation at the Second Request stage, and the agencies themselves determine which one of them it will be. If there is no Second Request, the initial 30 day waiting period expires automatically after the 30 days, and the parties are free to close the transaction. Note that the 30 day period cannot end on a weekend or holiday, so the "30-day" waiting period may actually take slightly longer than 30 days.

Most foreign filings are "suspensory" (like HSR), i.e. the transaction cannot close until after a mandatory waiting period has expired. These waiting periods range from thirty to sixty days on average. In the event the authorities in those countries have more questions, most countries also have a Second Request equivalent, often called a Phase II investigation, which similarly extends the waiting period.

III. What Are the Regulatory Authorities Looking For?

The agencies and foreign authorities review these deals for various competitive concerns. The focus is on the likely effect of the transaction on prices paid by customers or paid to suppliers. In horizontal transactions between competitors, regulators examine market concentration by defining markets (both product and geographic), calculating market shares and computing the Herfindahl-Hirschman Index ("HHI"). The HHI is a measure of market concentration calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. The agencies divide HHIs into three categories: unconcentrated markets (HHI below 1500); moderately concentrated markets (HHI between 1500 and 2500); and highly concentrated markets (HHI above 2500). Transactions in unconcentrated markets are less likely to be challenged than those in moderately or highly concentrated markets.

In addition to the concentration levels, the agencies will try to assess actual competitive effects: e.g., who are the firms' closest competitors, what is the likelihood of entry by potential competitors, and are there any efficiencies gained as a result of the transaction. During the initial HSR waiting period, the agencies will carefully examine the parties' 4(c) and 4(d) documents. They may also review public sources of information (e.g., websites for the parties and other companies in the industry); ask for additional information from the parties; and even speak with customers and competitors. If they determine the transaction poses no competitive concerns, they will let the waiting period expire. If the agencies need more information to reach a conclusion, they will issue a Second Request. In some cases it is useful for the parties to meet with staff at the agencies to discuss the competitive aspects of the transaction during the initial waiting period.

In the case of vertical transactions between firms (for examplebetween a supplier and a customer), the agencies will see if there are foreclosure issues, or whether the combination will facilitate collusion in the industry, or whether the transaction will allow the acquiring company to evade rate regulation.

IV. Conclusion

Every company contemplating a major transaction should be aware of the possibility that HSR and other antitrust/competition law filings may be required. In deals that may have competitive issues, it is a best practice to get antitrust experts involved early in order to address or mitigate issues that may arise down the road.

Footnotes

* This article is taken from a series of topics presented at "What Companies Don't Know Can Hurt Them: A Primer on Key Antitrust Issues," a seminar held at Vinson & Elkins' Houston office on September 19, 2012. "What Companies Don't Know Can Hurt Them: A Primer on Key Antitrust Issues" provided a practical approach to dealing with emerging legal developments and key issues in antitrust law. This article comprises Part 2 of a two-part series as featured in the Winter 2013 issue of the Corporate Counsel Section Newsletter.

1 Section 7A of the Clayton Act, 15 U.S.C. 18a, as added by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Public Law 94–435, 90 Stat. 1390.

2 16 C.F.R. § 802.2(c).

3 16 C.F.R. § 802.2(d).

4 16 C.F.R. § 802.3(a).

5 16 C.F.R. § 802.50.

6 16 C.F.R. § 802.9.

7 United States v. Biglari Holdings, Inc., Case 1:12-cv-01586 (D.D.C. 2012).

8 Appendix to 16 C.F.R. § 803.

9 Canada Competition Act (R.S.C., 1985, c. C-34).

10 Appendix to 16 C.F.R. § 803at item 4.

11 Id.

12 Id.

13 16 C.F.R. §§ 803.5 – 803.6.

14 16 C.F.R. § 803.10.

15 16 C.F.R. § 803.11.

16 16 C.F.R. § 803.20.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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