Proposed guidelines improve the reporting necessities for HSR offers
Companies planning mergers and acquisitions should be aware of the proposed changes to disclosure under the Hart Scott Rodino Act (HSR). These changes could result in more M&A transactions becoming reportable and requiring more detailed information in the filings. The Federal Trade Commission published the proposed rule changes in the federal register on September 21, 2020, in agreement with the Antitrust Division of the US 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 anti-competitive but also not receive filings about acquisitions that are unlikely to raise competition concerns.
The agencies say two categories of submissions make it difficult for them to effectively focus their resources.
- Filing of acquisitions by certain investment companies. “[D]Due to changes in investor structure and behavior since the HSR Act and HSR rules came into force, the filings of certain investment companies do not capture the full competitive effects of a transaction. Currently, when certain investment companies file as acquirers, the rules and form do not require the disclosure of material information pertaining to both the complete structure of the acquirer and the full beneficial interest in an issuer. “
- Registrations for acquisitions of 10 percent or less of an issuer. The agencies state that they “regularly receive documents about planned acquisitions, not just for the purpose of the investment that would lead to the acquiring person holding 10 percent or less of an issuer”. They say these filings “almost never raise competition concerns”.
The changes would exclude the acquisition of 10 percent or less of an issuer’s voting securities, unless the acquirer already has a “competitive” relationship with the issuer.
In addition to the 10 percent threshold, an employee would not have a competitive relationship according to the proposed rules if:
- The acquiring person is not a competitor of the issuer (or a company within the issuer).
- The acquirer does not hold voting securities of more than 1 percent of the outstanding voting securities (or, in the case of a non-corporate entity, more than 1 percent of the non-corporate shares) of any company that is a competitor of the issuer (or a company within the issuer) ;
- No person employed by the acquirer, whose principal, agent or other representative of the acquirer is, is a director or officer of any competitor of the issuer (or any company within the issuer). and
- There is no supplier-buyer relationship between the acquirer and the issuer (or any company within the issuer) where the total value of the sales between the acquirer and the issuer in the last completed fiscal year is more than USD 10 million.
A change is also proposed that would require applicants to disclose additional information about their affiliates, according to the Federal Trade Commission (FTC), and aggregate acquisitions from the same issuer across those companies.
The FTC is looking for information on seven topics that “should help shape the way forward for future changes to the HSR rules and the interpretation of those rules”. These topics are:
- Transaction size.
- Real estate investment fund.
- Acquisition of small quantities of voting securities.
- Influence outside of voting rights.
- Transactions or devices used to avoid HSR requirements.
- Problems related to the HSR registration process.
The bottom line is that more deals are reportable because:
- The rules would expand the definition of a “person”. Currently, the ultimate parent company (UPE) of the acquiring “person” is responsible for the HSR filing. With investment funds, each fund serves as its own UPE. Companies that are not controlled by a common UPE do not need to combine the holdings of jointly managed affiliated funds to determine their reporting requirements. “The treatment of these non-corporate units as separate units within the framework of the HSR often contradicts the reality of managing fund families and MLPs,” the agencies explain. According to the new rule, applicants must disclose information about their employees and aggregate acquisitions. In other words, “employees” of a UPE and the UPE are considered to be the same Employer. The term person now means “(a) an ultimate parent company and all entities which it directly or indirectly controls; and (b) all associates of the ultimate parent company. “
- The rules would restrict the de minimis exceptions. There are currently no reporting requirements for transactions in which the acquirer controls 10 percent or less of an issuer’s voting securities. This exception was worked out for investors. The de minimis exemption proposed by the FTC would really limit what is not reportable, as the exemption would only apply if an acquiring fund or a jointly managed fund has 1 percent or less with a competitor. The proposed rule broadly defines a competitor, which the FTC recognizes: “[A]Any person who (1) reports sales in the same six-digit NAICS industry group as the issuer or (2) competes in a trade with the issuer. “Agencies say the broad definition will benefit the public as it will potentially conduct more anti-competitive deals.
The impact of the proposed rule changes would be significant, particularly for private equity and other mutual funds operated through a family of co-managed funds. And while the new de minimis exemption would allow minority investors to participate in the active management of the issuer, unlike the current “investment only” and “institutional investor” exemptions, there is a requirement not to have a “competitive” relationship , of vital importance. The definition of “competitive” relationships in the proposed rule is quite broad, so we will have to wait and see how this works out in practice.