On May 19, 2016, the Federal Trade Commission (“FTC)” issued an important clarification regarding how the agency will determine whether a foreign entity is classified as corporate or non-corporate for the purpose of the agency’s premerger notification program. Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (also referred to as the “HSR Act”), parties to certain mergers or acquisitions must notify both the Federal Trade Commission and the U.S. Department of Justice prior to consummating the transaction. Under this program, whether a party to the transaction is a corporate or non-corporate entity (e.g., an LLC, partnership) can have significant implications for determining whether a filing is required and whether an exemption might apply. While evaluating party status has historically been straightforward for U.S. entities, foreign entities pose a number of challenges.
Previously, the analysis would first focus on whether the entity issued securities allowing holders to vote for the election of a board of directors. If the answer was yes, the entity would be treated as corporate. If the answer was no, the analysis would focus on whether a group of managers existed at the entity that functioned similarly to a board. If the answer was again yes, the inquiry continued further. If the managers were all officers or employees of the entity, the entity was treated as non-corporate. If, however, outside persons (e.g., independent directors) engaged in the management group, the entity was treated as corporate. In practice, parties encountered challenges (particularly for buyers involved in hostile acquisitions) to get the information needed to evaluate a foreign target’s structures.
Accordingly, the FTC will now only classify as corporate an entity that issues securities allowing the holders to vote for the election of a supervisory board of directors. If the entity does not issue such securities, the agency will not inquire as to the existence of a management group, the groups’ composition, etc. While the intent of this new guidance is to ease determinations on the reportability of transactions and the applicability of exemptions, time will tell whether the clarification ultimately proves helpful.
For more information, please click here for a copy of FTC’s notice.