The U.S. Federal Trade Commission (FTC) and U.S. Department of Justice Antitrust Division ("DOJ" and collectively, the "Agencies") recently proposed changes1 to two aspects of the Hart-Scott-Rodino Act ("HSR Act").2 The proposed rules are subject to public comment and are unlikely to come into effect for at least a few months to a year or even longer.
The proposed changes (i) impose new information and aggregation reportability requirements primarily aimed at investment firms using multi-fund structures for investments and master limited partnerships ("MLPs") (the "Proposed Aggregation Rules")3 and (ii) create a new exemption for acquisitions of ten percent or less of an issuer's voting securities unless the acquirer falls within one of the enumerated exceptions to the exemption (the "Proposed De Minimis Exemption" and collectively, the "Proposed Rules"). The Proposed De Minimis Exemption does not replace the existing Investment Only Exemption,4 but rather a new, standalone exemption. Neither of the Proposed Rules will come into effect for at least a few months and likely even longer.
In addition to the Proposed Rules, the Agencies seek public comments on seven broad-ranging topics, suggesting that the Agencies may target specific rulemaking in these areas in the future. This update discusses only the topics that appear to have the most direct impact on the Proposed Rules.
Immediate Timing Implications
Even if no changes to the Proposed Rules are made following the public comment period, the approval timeline ranges from four months to one year or longer.
The Proposed Rules are subject to a 60-day public comment period that could result in Agencies making material changes, or even deciding not to implement either or both of the Proposed Rules. The Agencies are also required to provide another 30-day notice before any final rules (if either or both Proposed Rules are implemented) become effective.
As a data point, when the Agencies last announced and implemented new rules in 2010–2011, which introduced the concept of "associates" (e.g., requiring limited information from different funds under common operational or investment management but not within the same filing "person," the entity with the HSR filing obligation), the entire process from initial Agency press release until implementation of the final rules took just over one year (with the Agencies refining the "associates" definition as a result of public comments).
The Proposed De Minimis Rule
The Proposed De Minimis Rule, which, as discussed further below, is likely to be subject to further change after the public comment period, would exempt transactions where (a) the acquiring person will not hold in excess of ten percent of the outstanding voting securities of the issuer and (b) does not fall within one of five enumerated exceptions to the exemption, which include (i) being a "competitor"5 of the issuer, (ii) holding greater than one percent of a competitor to the issuer, (iii) being, or having individuals employed by or serving as an officer or director of the issuer (the "Director/Officer Exception"), (iv) having individuals employed by or serving as an officer or director of a competitor of the issuer and (v) having a vendor-vendee relationship with the issuer above $10 million in the most recently completed fiscal year (the "Vendor/Vendee Exception" and collectively, the "Exceptions").
Although the final public comments are several months away, the Proposed De Minimis Rule will likely be subject to further change and already appears to be generating differing views, both intra- and inter-Agency, on the appropriate scope of the Proposed De Minimis Rule.
FTC Commissioner Dissents. The FTC has five Commissioners that take action by a majority vote. The two Democrat Commissioners (currently the minority) issued dissents that specifically attacked the Proposed De Minimis Exemption, noting that, among other things, implementing the Proposed De Minimis Exemption will add to the information asymmetry the Agencies face when detecting potentially harmful transactions.
DOJ Raises Questions Regarding Two Exceptions. The DOJ, on the other hand, implied in its press release announcing the Proposed Rules that it might consider expanding the De Minimis Exemption via the removal of the Director/Officer Exception and Vendor/Vendee Exception. By specifically asking the public whether these two Exceptions should be removed, the DOJ has signaled that it may be inclined to push to strike these Exceptions.
Potential Future Changes to/Call for Comment on Investment Only Exemption. One of the topics raised in the advance notice of proposed rulemaking (not one of the two Proposed Rules) is whether the existing Investment Only Exemption should align with the Securities and Exchange Commission's approach to "passive" investors, along with a list of other questions regarding the Investment Only Exemption. The public comments the Agencies will receive with respect to the Investment Only Exemption could also affect the contours of the Proposed De Minimis Exemption, as both exemptions address minority acquisitions of ten percent or less.
The Proposed Aggregation Rules
The Proposed Aggregation Rules would affect both (i) the reportability of transactions involving investment firms using multi-fund structures or MLPs to invest and (ii) the level of information required in the HSR Act filing for any such reportable transactions.
Current Reportability Scenario. Under the current HSR rules, a single fund (in the form of an LP or LLC, a "Fund Vehicle") is often considered its own "Person" for purposes of the HSR filing threshold determination. For example, an investment firm investing in a target company through three Fund Vehicles, each an "associate" of one another under the HSR rules,6 will not need to conduct a cross-fund aggregation of existing and contemplated holdings in the target company to determine whether an HSR Act filing is triggered. Rather, in this example, the reportability analysis would be conducted on a Fund Vehicle-by-Fund Vehicle basis. The current "associate" definition only affects certain information that is provided in an HSR filing triggered by a single Fund Vehicle but does not require aggregation of interests across "associate" Fund Vehicles in determining whether a transaction is reportable under the HSR Act.
Reportability Scenario under the Proposed Aggregation Rules. The Proposed Aggregation Rules could significantly broaden the filing requirements for many investment firms and MLPs. The Agencies indicated that treating associate Fund Vehicles (as described in the above example) as separate Persons under the HSR Act is often at odds with the realities of how fund families and MLPs (usually in the oil & gas context) are managed. The Proposed Aggregation Rules would require Fund Vehicles under common operational or investment management, among other enumerated relationships already in existence under the current "associate" definition in the HSR rules, to aggregate existing holdings along with the contemplated holdings across associate Fund Vehicles to determine whether the filing thresholds under the HSR Act are satisfied.
Current Information Requirements for Associates. Along with the proposed broadening of the definition of the reporting "Person" discussed above, the Agencies have proposed expanding the information collection requirements for associates in the HSR filing. Currently, the HSR filing requires limited information for an "associate" of an acquiring Person if that associate overlaps in same industry code(s) with the target company.
Additional Information Requirements under the Proposed Aggregation Rules. The Proposed Aggregation Rules expand information requirements for associates to include documents discussing competition (commonly known as Item 4(c) and 4(d) documents), revenue by industry code information, audited financials, subsidiary information, minority holder information and information regarding certain prior acquisitions. If the Proposed Aggregation Rules are implemented "as is," the extent and burden of the additional filing obligations under the HSR Act will depend on (i) the complexity of the investment firm or MLP (e.g., its fund structure and the number of investments held by such funds) and (ii) the number of potentially reportable transactions the investment firm or MLP analyzes in a given year.
1. See Fed. Trade Comm'n, FTC and DOJ Seek Comments on Proposed Amendments to HSR Rules and Advanced Notice of Proposed HSR Rulemaking, (Sept. 21, 2020), and Dep't of Just., Antitrust Division Supports Modernizing Merger Filing Exemptions For Certain Investments, (Sept. 21, 2020).
2. The HSR Act requires parties to certain transactions valued above $94 million to notify the Agencies and observe a waiting period (typically 30 calendar days) before the transaction can be implemented. The thresholds are adjusted annually, typically in the first quarter of each year. Additional thresholds, such as a size of person test, also apply depending on the size of transaction.
3. As a technical matter, the notice of proposed rulemaking seeks to expand the definition of the filing "Person" (16 C.F.R. §801.1(a)(1)) to include "associates" (currently defined in 16 C.F.R. §801.1(d)(2)), which include, among other things, entities under common management.
4. 16 C.F.R. §802.9 (the Investment Only Exemption exempts transactions that are made (i) solely for the purpose of investment and (ii) result in the acquiring person holding 10 percent or less of the voting securities of the issuer).
5. 16 C.F.R. Parts 801-803: Hart-Scott-Rodino Coverage, Exemption, and Transmittal Rules, Project No. P110014, proposed Sept. 21, 2020. ("For purposes of these rules, the term competitor means any person that (1) reports revenues in the same six-digit NAICS Industry Group as the issuer, or (2) competes in any line of commerce with the issuer."
6. This concept is already captured in the existing definition of "associates" in the HSR Rules. See 16 C.F.R. § 801.1(d)(2).
"For purposes of Items 6 and 7 of the Form, an
associate of an acquiring person shall be an entity that is not an
affiliate of such person but:
(A) Has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring entity (a "managing entity"); or
(B) Has its operations or investment decisions, directly or indirectly, managed by the acquiring person; or
(C) Directly or indirectly controls, is controlled by, or is under common control with a managing entity; or
(D) Directly or indirectly manages, is managed by, or is under common operational or investment decision management with a managing entity."
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.