The Federal Trade Commission’s Premerger Notification Office (PNO) recently revised its interpretation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act) filing requirements for transactions between non-profit corporations. It specifically broadened its interpretation of the HSR filing requirements for these types of transactions by looking beyond board control to determine HSR reportability. As we explain below, this change will make certain hospital transactions reportable under the HSR Act that previously may not have been.
As a reminder, the HSR Act requires parties to a transaction above a size threshold (currently set at $84.4 M) to notify the Federal Trade Commission and the US Department of Justice of the transaction through an HSR filing and observe the statutory waiting period before closing the transaction. When analyzing HSR reportability, the first question is whether the transaction is an “acquisition” covered by the HSR Act. An acquisition under the HSR Act requires there to be an acquiring person, which is “any person which, as a result of an acquisition will hold voting securities or assets.” See 16 CFR § 801.2(a). To identify the existence of an “acquiring person” one must determine which entity in the transaction will have beneficial ownership of the assets or voting securities to be acquired. If the transaction does not produce a change in the beneficial ownership of the assets or voting securities, then the transaction is not reportable under the HSR Act, regardless of its size.
In the context of non-profit transactions, the PNO previously determined whether there was a change in “beneficial ownership” of non-profit assets by focusing exclusively on board control. In particular, the PNO solely examined which entity had control of the board of directors after the transaction—i.e., the power to designate 50 percent or more of the directors. A non-profit hospital transaction therefore may not be reportable under the HSR Act, if it did not produce an actual change in control of the board of directors of the acquired assets, even if it changed the actual control of the assets. This focus on a change of board control (as opposed to changes in actual control) gave non-profit entities (including hospitals) the ability to acquire non-profit assets above the HSR-size threshold and avoid a HSR reporting obligation. To do this, these parties could, for example, amend the bylaws of the acquired non-profit entity to require that board to report to the acquirer’s board without the acquirer gaining the power to appoint a majority of the members of the acquired entity’s board. This type of transaction would have theoretically been unreportable.
But now this instance of non-reportability is gone. PNO has realized that its over-reliance on changes of board control to determine HSR reportability has allowed parties to escape reporting obligations in circumstances where a filing otherwise would be required. Accordingly, PNO will now examine factors beyond changes in board control (i.e., indicia of control) to determine HSR reportability for non-profit transactions above the size threshold. It has issued a tip sheet to help practitioners adhere to its new interpretation of the HSR filing requirements for non-profit transactions.
The new interpretation looks to factors beyond board control to identify who will “hold” the assets or voting securities as a result of the transaction. See 16 CFR § 801.2(a). The person who “holds” is the person who acquires beneficial ownership. Thus, any future analysis of these non-profit transactions will also look to whether a newly-formed entity becomes a corporate member of the affiliating hospital entities or whether it has the right to authorize and/or approve the governance documents of the affiliating hospitals. Parties to a non-profit transaction can no longer rely on prior HSR guidance for future transactions and should consult with HSR counsel to determine whether the transaction is reportable under the HSR Act.