On Jan. 15, 2015, the Federal Trade Commission (FTC) announced revised Hart-Scott-Rodino Act (HSR) reporting thresholds under which transactions will be reportable only if, as a result of such transaction, the acquiring person will hold voting securities, assets, or non-corporate interests valued above $76.3million, compared to $75.9 million in 2014. The newly adjusted HSR thresholds will apply to all transactions that close on or after Feb. 20, 2015.
In summary, the relevant HSR thresholds are:
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Corresponding increases will also apply to certain other thresholds and exemptions under the HSR Act. The complete list of revised HSR thresholds is available on the FTC's website.
For reportable transactions, the acquiring person’s holdings must cross the threshold with respect to which the HSR notification is made within one year of the expiration or early termination of the HSR waiting period. Once the acquiring person has crossed the applicable threshold during the first year, any additional acquisitions by the same acquiring person of the same issuer’s voting securities will be exempt from notification during the five years following the expiration or early termination of the waiting period, up to the highest value of the threshold range for which the HSR notification was made. For purposes of this exemption, any subsequent acquisition by the acquiring person would be subject to the adjusted thresholds in effect when the subsequent acquisition is consummated.
HSR filing fees remain as follows:
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Transaction parties generally are familiar with HSR Act reporting in connection with mergers and acquisitions, but the Act is not limited to the acquisition of control of one entity by another. HSR Act reporting requirements also may come into play in the context of executive compensation, “internal” reorganizations, and acquisitions of control that lead to indirect secondary acquisitions of minority positions in another entity’s voting securities. At this time of year it is good to review HSR Act reporting requirements that apply to some acquisitions made outside of the merger context and what parties should do if a filing obligation has been missed.Non-merger HSR Act Reporting Scenarios
1. Executive Compensation Involving Voting Securities
The HSR Act applies to all acquisitions of voting securities in excess of the thresholds unless an exemption applies. For HSR Act purposes, voting securities are those that at present or upon conversion entitle the holder to vote for the election of directors of the issuer, but only the acquisition of voting securities with the current right to vote for directors are subject to the reporting requirements of the HSR Act. The subsequent conversion of a security with a future right to vote for directors (e.g., an option) into a security with the current right to vote for directors (e.g., common stock) is considered an acquisition of the underlying security, and may trigger the HSR Act’s reporting requirements. While some voting stock investments are exempt when made “solely for the purpose of investment,”1 the FTC staff has taken the position that the exemption is not available to a person who intends to influence the basic business decisions of the issuer or participate in its management. Thus, executives of the issuer cannot rely on this exemption.
Executives may receive or acquire company voting stock based on their own investment decisions or in connection with larger transactions involving their employer. Whether these acquisitions are voluntary (e.g., open market purchases or company-level transactions with third parties) or passive (e.g., dividend reinvestment by a 401(k) plan), the type of transaction is not dispositive for HSR Act analysis. All voting securities of the issuer held by the executive after a given acquisition are relevant for the reportability analysis. Thus, it is important to aggregate the value of the new voting securities to be acquired with all of the other voting securities of the issuer then held by the executive. Holdings of an executive’s spouse or minor children are aggregated with those held directly by the executive for HSR Act purposes.
Securities received as compensation may trigger reporting requirements under the HSR Act upon the receipt, exercise or vesting of the security. The key issue is: when does the executive acquire voting securities with the current right to vote for the election of directors of the issuer. Stock grants immediately confer securities but may be subject to forfeiture, while stock options and stock-settled stock appreciation rights require an affirmative exercise decision (after vesting or payment of an exercise payment), and other awards may be subject to vesting requirements, requiring HSR analysis of each situation based on the particular facts. A full discussion of the issues is available Winter 2011-2012 Antitrust Quarterly HSR Article.
2. Internal Reorganizations
Although many internal reorganizations are exempt from the HSR Act’s reporting requirements as “intraperson transactions,” certain reorganizations involving affiliated corporations, limited partnerships or limited liability companies that do not have a common 50 percent investor may require HSR notification.2 A common investment manager, general partner or managing member will not cause separate legal entities to be under common HSR control in the absence of a 50 percent equity position in each of the entities. If the buyer and seller do not share a 50 percent investor, then a reorganization viewed by the parties as “internal,” (e.g., when a subsidiary of the seller partnership is “transferred” to the buyer partnership), may be a reportable event under the HSR Act if the thresholds are met and an exemption does not apply.
Likewise, certain reorganizations from one type of entity to another type (or reincorporation in another state) may trigger an HSR reporting requirement. Although both entities may have the same capital structure, if they do not share a 50 percent investor the conversion could trigger reporting requirements if any new assets are contributed to the new entity, or if an investor’s relative percent holding in either entity increases.
3. Secondary Acquisitions
HSR reporting for acquisitions of control cover ownership of all entities that are 50 percent owned by the target (primary transaction). However, minority positions held by the target are not under common HSR control with the target, and their acquisition is subject to separate HSR Act analysis by the acquiring person. It may be the case that an HSR filing is required for the primary transaction and a separate HSR filing is required for the secondary transaction. The HSR Act’s reporting and waiting period requirements must be observed for both filings before the primary transaction may be consummated.
In addition, although a secondary acquisition may be exempt from the reporting requirements of the HSR Act, it is not exempt from the HSR Act merely because the primary acquisition is exempt. Thus, when the primary transaction is valued in excess of the size of transaction threshold, but still may not be reportable under the HSR Act due to an exemption or valuation below the “size of parties” test, an acquiring party should still inquire as to any minority positions held by the primary target that could independently trigger an HSR Act reporting requirement.
Action to Take In the Event of a Missed HSR Filing
If an acquiring party finds itself in the position of possibly having missed an HSR reporting requirement related to a merger or in any of the non-merger situations discussed above, prompt voluntary filings are key to avoiding or minimizing potential penalties, especially with respect to a first, inadvertent violation. The FTC will consider whether the violation was the result of understandable or simple negligence, or whether the parties realized any benefit that they would not have realized had the filing been made and the waiting period observed. Depending on the circumstances, the FTC may decide to pursue civil penalties of up to $16,000 for every day that the parties have been in violation, generally beginning with the day the transaction was consummated and ending on the day the waiting period with respect to the post-consummation HSR filing expired.
If a missed filing is identified, the party(ies) in violation must send an explanatory letter to the antitrust agencies that explains the facts and includes a detailed description of the steps that have been taken to ensure future compliance. The FTC advises that these steps should include some or all of the following: (i) implementation of training programs by antitrust counsel; (ii) monitoring of company dealings for HSR purposes by the Chief Financial Officer and the General Counsel; (iii) establishment of an HSR review committee; and (iv) inclusion of HSR provisions on acquisition checklists.
New Thresholds Announced with Respect to Prohibited Interlocking Directorates
The FTC also announced revised thresholds above which companies are prohibited from having interlocking memberships on their boards of directors under Section 8 of the Clayton Act. Clayton Act Section 8 generally prohibits a person from serving as a board member or board-elected/appointed officer of two or more competing corporations. These prohibitions do not apply unless each of the companies has combined capital, surplus, and undivided profits in excess of an adjusted threshold, which has been raised to $31,084,000 (Section 8(a)(1)). There is a safe harbor where the competitive sales of either entity are less than an adjusted threshold, which has been raised to $3,108,400 (Section 8(a)(2)(A)), the competitive sales of either entity are less than 2 percent of that entity’s total sales, or the competitive sales of each entity are less than 4 percent of their respective total sales. The new Section 8 thresholds became effective Jan. 20.