When Is HSR Triggered?
Premerger notification is required for transactions that satisfy the size of transaction and size of person tests and are not otherwise exempt. The size of transaction test is met if, as a result of a transaction, the acquiring person will hold aggregate voting securities, assets, or non-corporate interests of the acquired person valued at more than $126.4M (adjusted annually). For transactions valued at more than $126.4M but $505.8M or less, the parties must also meet the size of person test. The size of person threshold is met if the ultimate parent entity (“UPE”) of one party to the transaction has annual net sales or total assets of at least $252.9M and the UPE of the other party, if not engaged in manufacturing, has annual net sales of $252.9M or total assets of at least $25.3M. Transactions valued at more than $505.8M will be reportable regardless of the size of the parties unless an exemption applies.
Importantly, acquisitions of non-corporate interests that do not confer control of the target, i.e., the right to 50 percent or more of the profits of the non-corporate entity or 50 percent or more of the assets of the non-corporate entity in the event of dissolution, are not reportable. Relatedly, acquisitions of non-voting securities, such as warrants, stock options, or convertible securities, are not reportable.
Not all transactions that appear to meet the HSR Act’s size of transaction or size of person tests are reportable. As this article will discuss, there are many exemptions to the HSR Act’s reporting requirements.
Informal interpretations provided by the FTC can provide additional guidance to parties on when certain exemptions may apply. While useful, these informal interpretations cannot always be relied upon and should not substitute for thorough legal analysis of whether a filing is required, especially as the FTC disclaimed the authority of informal interpretations during Chair Khan’s leadership. Further, informal interpretations regarding the prior HSR Form may not be valid as applied to the forthcoming HSR filing requirements. Notwithstanding the position of the former FTC leadership, in the absence of alternative guidance, informal interpretations in conjunction with the Premerger Notification Practice Manual, remain a valuable reference to resolve ambiguities when considering exemptions.
State Action Doctrine
In a recent hospital merger, the parties relied on the state action doctrine as an exemption to an HSR filing obligation. In September 2023, the US District Court for the Eastern District of Louisiana held that a transaction was exempt from the HSR Act’s filing requirements under the state action doctrine because the state issued a certificate of public advantage (COPA) authorizing the transaction. The state action doctrine immunizes anticompetitive policies that are the intentional or foreseeable result of state or local government policy. Under Supreme Court precedent, antitrust laws do not apply to actions taken by private parties if (a) there is a clearly articulated policy to displace competition, and (b) the state actively supervises the policy. The COPA framework, implemented in certain states including Louisiana, entails greater state supervision over hospital mergers while immunizing transactions from antitrust scrutiny under the state action doctrine. The Court determined that the first prong was met as the COPA statute’s “language plainly indicates the state’s policy in favor of COPA-approved mergers regardless of their anticompetitive effects.” Further, the Court found that the active supervision requirement was also met because the statute gave the state the “power to veto or modify” the transaction. Accordingly, the Court extended the doctrine to exempt the parties from the HSR Act’s filing requirements. Historically, the state action doctrine has been most often applied to specific industries like the medical field, banking, and real estate, but wider application to other heavily regulated industries may soon come in the hope of avoiding the burdensome HSR filing obligations perceived to conflict with state priorities.
Common Exemptions to the HSR Act’s Filing Requirements
There are many exemptions that may avoid the costs and burdens associated with making an HSR filing for otherwise reportable transactions, and those exemptions have not been altered by the new HSR rules. The following is a non-exhaustive discussion of the most common exemptions.
Acquisitions of Voting Securities of Companies Holding Exempt Assets (802.4)
Many exemptions state that they apply either to acquisitions of voting securities or acquisitions of assets. Exemption 802.4 allows acquisitions of voting securities to take advantage of the exemptions available to acquisitions of assets. To apply this exemption, the acquirer “looks through” the company whose voting securities are being acquired to that company’s underlying assets and considers whether those assets would be exempt if acquired directly. If enough of the assets of the target are exempt such that the aggregate fair market value of the non-exempt assets is $126.4M (adjusted annually) or less, the transaction is exempt. As discussed below, there are many asset-type exemptions that can whittle down the target’s asset value.
Acquisitions of Real Property Assets (802.2)
Certain acquisitions of real property assets, usually including equipment and other assets associated with the operation of that facility, are exempt. This includes the following types of assets:
- New Facilities – Structures that have not produced income and were constructed by the acquired person or held solely for resale.
- Used Facilities – Facilities acquired from a lessor that has held title to the facility for financing purposes in the ordinary course of the lessor’s business by a lessee that has had sole and continuous possession and use of the facility since it was first built as a new facility.
- Unproductive Real Property – Property that has not generated revenues in excess of $5M during the 36 months preceding the acquisition. However, it does not include:
- Manufacturing or non-manufacturing facilities that have not yet begun operations;
- Manufacturing or non-manufacturing facilities that were in operation at any time during the 12 months preceding the acquisition; and
- Real property that is either adjacent to or used in conjunction with real property that is not unproductive and is included in the acquisition.
- Office and Residential Property – Real property that is primarily used for office or residential purposes including: offices, residences, and common areas on the property (like parking and recreational facilities). If the acquisition includes the sale of a business conducted in that office or residential property, then the property being used by that business is not exempt. For example, a recent informal interpretation clarified that when a business was associated with homebuilding, its residential properties held for sale, lots under development, and real property held for development were not exempt. Note that for elder care facilities, the amount of medical care provided will determine whether the facility still qualifies as residential and should be analyzed carefully.
- Hotels and Motels – Hotels and motels, plus associated improvements such as golf courses, tennis courts, and restaurants. However, hotels or motels with casinos are not exempt.
- Recreational Land – Real property used primarily as a golf course, swimming facility, or tennis facility.
- Agricultural Property – Real property that primarily generates revenues from the production of crops, fruits, vegetables, livestock, poultry, milk, and eggs. However, this does not include processing facilities such as for livestock slaughtering or forestry land.
- Retail Rental Space and Warehouses – Retail rental space (including shopping centers) or warehouses. Note that the premerger notification office found that data centers are not exempt as warehouses.
Another related exemption relates to acquisitions of investment rental property assets. “Investment rental property assets” means real property that will not be rented to entities included within the acquiring person except for the sole purpose of maintaining, managing, or supervising the operation of the real property, and will be held solely for rental or investment purposes, including property currently rented.
Acquisitions Solely for the Purpose of Investment (802.9)
An acquisition of voting securities is exempt if it is solely for the purpose of investment and if the acquiring person would hold ten percent or less of the outstanding voting securities. The FTC interprets this exemption very narrowly. FTC guidance states that doing any of the following is evidence an acquiring entity does not have an investment only intent:
- Being a competitor of the issuer;
- Nominating a candidate for the board of directors;
- Proposing corporate action requiring shareholder approval;
- Soliciting proxies with respect to such issuer;
- Having a representative serve as an officer or director of the issuer;
- Doing any of the above activities with regard to an entity controlled by the issuer;
- Asking third parties about interest in being a candidate for the board or CEO of the issuer, and not abandoning such efforts;
- Communicating with the issuer about potential candidates for the board or CEO of the issuer, and not abandoning such efforts; or
- Assembling a list of possible candidates for the board or CEO of the issuer, if done with the knowledge of the CEO.
Recent cases have shed further light on how else parties may show intent inconsistent with the investment only exemption.
Pro Rata Exemption (802.10)
Acquisitions of voting securities are exempt if the buyer’s share of the target’s voting securities does not increase, directly or indirectly. This exemption most commonly applies when an early investor participates in additional rounds with a larger group of investors. However, under current informal guidance, it is very difficult to qualify for this exemption in practice because the relevant time frame is immediately before and after the investment.
Acquisitions of Foreign Assets (802.50)
Part (a) of Rule 802.50 exempts acquisitions of assets located outside the U.S. unless those foreign assets generated sales in or into the U.S. exceeding $126.4M during the acquired person’s most recent fiscal year. Where the threshold above in part (a) is exceeded, part (b) provides an additional exemption when both acquiring and acquired persons are foreign and various sales and asset thresholds are met.
Acquisitions of Voting Securities of a Foreign Issuer (802.51 & 802.4/802.50)
Rule 802.51 provides an exemption when acquiring the voting securities of a foreign issuer. Under part (a), there are two different tests depending on whether the acquiring entity is foreign or not. Under both of these tests, the target must be a foreign issuer—the difference is whether or not the acquiring ultimate parent entity is foreign or not.
- By U.S. Persons. Acquisitions of foreign issuers by U.S. persons are exempt if the following criteria are met:
- The issuer holds assets located in the U.S. with a value of $126.4M or less in its most recent fiscal year; and
- The issuer made aggregate sales in or into the U.S. of $126.4M or less in its most recent fiscal year.
- By Foreign Persons. Acquisitions of foreign issuers by foreign persons are always exempt unless they confer control. Acquisitions of foreign issuers by foreign persons that confer control are still exempt if either of the following sets of criteria are met.
Under part (b) if the transaction is conferring control, it is still exempt if:
- The target holds assets located in the U.S. with a value of $126.4M or less in its most recent fiscal year; and
- The target made aggregate sales in or into the U.S. of $126.4M or less in its most recent fiscal year.
Under part (c) a transaction not meeting the above tests can still be exempt if it satisfies the test in Rule 802.50(b).
Intraperson Transactions (802.30)
Acquisitions where the target and acquiring entity are controlled by the same ultimate parent entity are exempt. This commonly exempts certain corporate restructurings.
Acquisitions of Goods in the Ordinary Course of Business (802.1)
Acquisitions of goods in the ordinary course of business are exempt, although there are specific rules regarding acquisitions of an entire operating unit (not exempt), new goods, current supplies, and used durable goods. Under HSR Rule 802.1(a), an acquisition of all or substantially all the assets of an “operating unit” is not exempt. An “operating unit” is defined as “assets that are operated by the acquired person as a business undertaking in a particular location or for particular products or services, even though those assets may not be organized as a separate legal entity.”
Other Exemptions
There are a number of other exemptions that could apply as well:
- Acquisitions of Carbon-Based Mineral Reserves
- Federal Agency Approval
- Certain Supervisory Acquisitions
- Amended or Renewed Tender Offers
- Acquisitions by Employee Trusts
- Exempt Formation of Corporations or Unincorporated Entities
- Partial Exemption for Acquisitions in Connections with the Formation of Certain Joint Ventures or Other Corporations
- Acquisitions by or from Foreign Governmental Entities
- Certain Foreign Banking Transactions
- Acquisitions by Securities Underwriters
- Certain Acquisitions by Creditors and Insurers
- Acquisitions of Voting Securities by Certain Institutional Investors
- Exempt Acquisitions of Non-Corporate Interests in Financing Transactions
- Acquisitions Subject to Order
- Acquisitions by Gift, Intestate Succession or Devise, or by Irrevocable Trust
- Transitional Rule for Transactions Investigated by the Agencies
- Transfers to or from a Federal Agency or a State or Political Subdivision thereof
Lower Burdens for Section 801.30 Transactions
Section 801.30 of the HSR rules establishes a more streamlined filing process for certain types of transactions. These types of transactions include tender offers and acquisitions of voting securities and non-corporate interests from third parties and do not need to meet the same burdensome reporting requirements as other transactions.
Devices for Avoidance
One important caution is that Rule 801.90 prohibits “devices” used for the purpose of avoiding HSR filing obligations. This rule prohibits parties from structuring transactions to intentionally skirt regulatory antitrust review. Violating Rule 801.90 can result in an agency enforcement action and civil penalties of up to $51,744 per day. Further, the agencies can also require a party in violation to sell the assets or equity giving rise to the violation, make a corrective HSR filing and observe a waiting period before making any other acquisitions from the target, or initiate and maintain an HSR compliance program.
Conclusion
In sum, with the new HSR rules on the horizon, merging parties will face an increased compliance burden. While the new HSR rules do not change the existing exemptions to submitting an HSR filing, understanding when exemptions do — and do not — apply will be more critical than ever.
