Companies that are planning mergers and acquisitions should be aware of proposed changes to the disclosures required by the Hart-Scott-Rodino Act (HSR), changes that could make more M&A transactions reportable, with more detail required in filings. The Federal Trade Commission published the proposed rule changes in the Federal Register on September 21, 2020, with the concurrence of the Antitrust Division of the U.S. Department of Justice.
In announcing the proposed changes, the agencies underscored their interest in receiving HSR filings that contain enough information to assess whether a deal would be anticompetitive, but also in not receiving filings about acquisitions that would be unlikely to raise competition concerns.
The agencies say that two categories of filings make it difficult for them to focus their resources effectively.
- Filings for acquisitions by certain investment entities. “[D]ue to changes in investor structure and behavior since the HSR Act and Rules went into effect, filings from certain investment entities do not capture the complete competitive impact of a transaction. When certain investment entities file as acquiring persons, the Rules and Form do not currently require the disclosure of substantive information concerning both the complete structure of the acquiring person and the complete economic stake being acquired in an issuer.”
- Filings for acquisitions of 10 percent or less of an issuer. The agencies say they “regularly receive filings involving proposed acquisitions, not solely for the purpose of investment, that would result in the acquiring person holding 10 percent or less of an issuer.” They say these filings “almost never present competition concerns.”
The changes would exempt the acquisition of 10 percent or less of an issuer’s voting securities unless the acquiring person already has a “competitively significant” relationship with the issuer.
In addition to the 10 percent threshold, according to the proposed rules, an acquiring person would not have a competitively significant relationship if:
- The acquiring person is not a competitor of the issuer (or any entity within the issuer);
- The acquiring person does not hold voting securities in excess of 1 percent of the outstanding voting securities (or, in the case of a noncorporate entity, in excess of 1 percent of the noncorporate interests) of any entity that is a competitor of the issuer (or any entity within the issuer);
- No individual who is employed by, a principal of, an agent of, or otherwise acting on behalf of the acquiring person is a director or officer of a competitor of the issuer (or of an entity within the issuer); and
- There is no vendor–vendee relationship between the acquiring person and the issuer (or any entity within the issuer), where the value of sales between the acquiring person and the issuer in the most recently completed fiscal year is greater than $10 million in the aggregate.
Also proposed is a change that would require filers to disclose additional information about their associates and to aggregate acquisitions in the same issuer across those entities, according to the Federal Trade Commission (FTC).
The FTC is seeking information on seven topics it says will “help determine the path for future amendments to the HSR rules and interpretations of those rules.” These topics are:
- Transaction size.
- Real estate investment trusts.
- Noncorporate entities.
- Acquisitions of small amounts of voting securities.
- Influence outside the scope of voting securities.
- Transactions or devices for avoiding HSR requirements.
- Issues pertaining to the HSR filing process.
The bottom line is that more deals will be reportable, because:
- The rules would expand the definition of a “person.” Currently, the ultimate parent entity (UPE) of the acquiring “person” is responsible for the HSR filing. In the case of investment funds, each fund serves as its own UPE. Entities not controlled by a common UPE do not have to combine the holdings of commonly managed affiliated funds to determine their reporting obligations. “Treating these non-corporate entities as separate entities under HSR is often at odds with the realities of how fund families and MLPs are managed,” the agencies explain. Under the new rule, filers must disclose information about their associates and aggregate acquisitions. In other words, “associates” of a UPE and the UPE will be considered the same acquiring person. The term person will now mean “(a) an ultimate parent entity and all entities which it controls directly or indirectly; and (b) all associates of the ultimate parent entity.”
- The rules would narrow the de minimis exemptions. Currently, deals that result in the acquirer controlling 10 percent or less of an issuer's voting securities do not have reporting obligations. This exemption was carved out for investors. The FTC’s proposed de minimis exemption would truly narrow what is not reportable, since the exemption would only apply if an acquiring fund or any commonly managed fund has 1 percent or less in a competitor. The proposed rule defines a competitor broadly, which the FTC acknowledges: “[A]ny 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.” The agencies say that the broad definition will benefit the public because it will net more potentially anticompetitive deals.
The impacts of the proposed rule changes would be significant, especially for private equity and other investment funds that operate through a family of commonly managed funds. And while the new de minimis exemption would allow minority investors to participate in active corporate governance of the issuer, unlike the current “Investment Only” and “Institutional Investor” exemptions, the requirement of no “competitively significant” relationship is key. The definition of “competitively significant” relationships in the proposed rule is rather broad, so we will need to wait and see how that plays out in practice.