At a time when there is significant M&A activity in the energy industry, it is critical for energy companies to understand how the premerger notification filing requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act” or “the Act”),1 and the regulations promulgated under the Act (“HSR Rules” or “Rule(s)”),2 may apply to their transactions. In fact, there are both energy-specific exemptions to the Act and other exemptions of more general application that can be used to exempt broad categories of energy mergers and acquisitions from HSR Act filing requirements. These exemptions are highly technical, however, and include a number of exceptions. As a result, transactions that exceed the Act’s basic jurisdictional thresholds often must be reviewed carefully to determine whether any of these exemptions can be applied to the particular transaction at issue. Moreover, amendments to the HSR Rules and reporting form implemented in 2011 require parties to certain energy transactions, particularly those involving master limited partnerships (“MLPs”), to report additional information where the transaction does not qualify for an exemption. This article provides a brief overview of how these various provisions may apply to energy-related transactions, including the circumstances under which such transactions are and are not exempt.
HSR Act Overview
Under the HSR Act and Rules, parties to acquisitions of assets, voting securities, and equity interests in non-corporate entities (e.g., limited liability companies, partnerships) that meet certain jurisdictional dollar thresholds, are required to file premerger notification forms with the Federal Trade Commission (the “FTC”) and the Department of Justice (the “DOJ”), and observe a waiting period—usually 30 days—before they are permitted to consummate the transaction. There are two basic jurisdictional thresholds. The Size-of-Persons threshold is satisfied where there is a person on one side of the transaction with $141.8 million or more in total assets or annual net sales, and a person on the other side with $14.2 million or more in total assets or annual net sales.3 The Size-of-Transaction threshold is met if the value of the transaction exceeds $70.9 million.4 Transactions valued in excess of $283.6 million meet the jurisdictional threshold regardless of the size of the persons.5 Transactions meeting these thresholds are reportable unless there is an applicable exemption.
Since 1996, the HSR Rules have included Rule 802.3, which provides specific exemptions for acquisitions of carbon-based mineral reserves. Under the Rule, an acquisition of reserves or rights in reserves of oil, natural gas, shale or tar sands, together with associated exploration or production assets, is exempt if the fair market value of such assets to be held as a result of the acquisition does not exceed $500 million.6 Similarly, an acquisition of reserves or rights in reserves of coal together with associated exploration or production assets is exempt if the fair market value of such assets to be held as a result of the acquisition does not exceed $200 million.7 “Associated exploration or production assets” means equipment, machinery, fixtures and other assets that are integral and exclusive to current or future exploration or production activities associated with the carbon-based mineral reserves that are being acquired, but does not include (1) any pipeline and pipeline system or processing facility which transports or processes oil and gas after it passes through the meters of a producing field located within reserves that are being acquired, or (2) any pipeline or pipeline system that receives gas directly from gas wells for transportation to a natural gas processing facility or other destination.8
Significantly, in determining whether the $500 million or $200 million thresholds have been exceeded, the parties do not need to count the value of any nonproducing reserves.9 As a result of this provision, acquisitions of oil and gas reserves with a total value substantially in excess of $500 million may be exempt (e.g., an $800 million acquisition consisting of $400 million in producing oil and gas reserves and $400 million in nonproducing reserves). As noted above, however, the exemption does not apply to transportation or processing assets outside of the production field. In particular, such assets may include natural gas-gathering systems, processing and treatment plants, transportation pipelines, storage facilities and terminals.10 In a transaction in which both exempt assets valued below the Rule 802.3 thresholds and nonexempt assets are being acquired, the parties must determine whether, viewed separately, the aggregate value of the nonexempt assets exceeds the $70.9 million size threshold, in which case a filing will be required for the acquisition of those assets. Note that parties can take advantage of these exemptions regardless of whether the transaction is structured as an acquisition of assets or an acquisition of voting securities or noncorporate interests. Under Rule 802.4, where a direct acquisition of assets is exempt under Rule 802.3, the acquisition of an equity interest in an entity holding such assets also will be exempt provided that the entity also does not hold nonexempt assets valued in excess of $70.9 million.
Other Exemptions Applicable to Energy Transactions
In addition to the Rule 802.3 exemptions, there are a number of exemptions of more general application that can be applied to exempt transactions involving energy-related assets. A few of the most relevant exemptions are described below.
Acquisitions of NonControlling Interests in NonCorporate Entities
There are many cases in which energy-related assets such as gathering systems and transportation pipelines are held in noncorporate entities, including limited liability companies (LLCs) and limited partnerships.11 Under the HSR Rules, acquisition of an equity interest in a noncorporate entity is not reportable unless, as a result of the acquisition, the acquiring person will hold a controlling interest in the entity.12 Control of a noncorporate entity is defined under the Rules purely in financial terms as having the right to 50 percent or more of the entity’s profits or 50 percent or more of its assets upon dissolution.13 Thus, an acquisition that will result in the acquiring person holding only a minority interest in a non-corporate entity that holds energy-related assets is exempt regardless of the dollar value of the interest acquired. Further, this exemption applies even where the minority interest being acquired is a general partner or managing member interest that will give the acquiring person management control of the entity and its underlying assets.14
Acquisitions of Non-Corporate Interests in Financing Transactions
Under Rule 802.65, an acquisition of a controlling interest in a non-corporate entity is exempt from HSR Act filing requirements if (a) the acquiring person is contributing only cash to the non-corporate entity, (b) for the purpose of providing financing, and (c) the terms of the financing are such that the acquiring person no longer will control the entity after it realizes a preferred return. In recent years, it has become increasingly common for financial investors to contribute funds to entities that hold renewable energy projects, including solar power and wind projects, under terms that meet the requirements of this rule. Thus, parties to such investments should consider whether their transaction qualifies for the Rule 802.65 exemption.
Acquisitions of Assets and Entities Located Outside the US
In an increasingly global energy industry, it is more likely that both US and non-US companies will be acquiring energy-related assets and entities located outside the US. Even if the parties to such transactions that meet the Act’s jurisdictional thresholds cannot take advantage of the exemptions discussed above, such acquisitions may be exempt under HSR Rules exempting certain acquisitions of non-US assets and interests in non-US entities. In general, the acquisition of assets located outside the US is exempt so long as the non-US assets being acquired from the same acquired person did not account for aggregate sales in or into the US of more than $70.9 million in the acquired person’s most recent fiscal year.15 A similar rule applies to acquisitions of voting securities in non-US corporations and controlling equity interests in non-US non-corporate entities. Where a non-US person acquires a non-controlling (less than 50 percent) voting securities interest in a non-US corporate issuer, the transaction is exempt. Where a non-US person acquires a controlling interest in a non-US corporate or non-corporate entity, or a US person acquires any voting securities interest in a non-US corporation or a controlling interest in a non-US non-corporate entity, the acquisition is exempt unless the target entity, including any of its controlled subsidiaries, holds assets located in the US with a current fair market value of more than $70.9 million, or had sales in or into the US of more than $70.9 million in its most recent fiscal year.16
In transactions involving the acquisition of both US and non-US assets or entities, it may be helpful for the parties first to assess whether the US part of the transaction alone is valued in excess of $70.9 million and, if not, then determine whether the non-US part is exempt; if it is, the transaction is not reportable; if the non-US part is not exempt, the parties then should determine whether the value of the US and non-US parts together exceed the $70.9 million threshold.
Additional Reporting Obligations Relating to Master Limited Partnerships
In 2011, the FTC implemented changes to the HSR Act reporting form and regulations that were designed to obtain additional information in filings made by both private equity funds and MLPs, which frequently are used to hold assets in the oil and gas sector.17 The effect of these new rules can be illustrated with the following, simplified example. Assume GP is the general partner and holds a 5 percent interest in both MLP1 and MLP2, each of which owns natural gas pipelines. MLP1 now plans to acquire another natural gas pipeline in a transaction reportable under the HSR Act. Under the old rules, MLP1 was not required to report anything about MLP2’s pipeline holdings, even if they competed directly with the pipeline MLP1 now is planning to acquire. Under the new rules, GP and MLP2 are considered to be “associates” of MLP1, and MLP1 must include information in its HSR Act filing regarding any entity in which GP or MLP2 holds a 5 percent or greater equity interest that operates in the same industry as the assets or company being acquired by MLP1. In this example, that would include information regarding MLP2’s pipelines, including the geographic areas in which they operate.18 As this example shows, an MLP that is managed by a general partner that also manages one or more other MLPs, and is engaged in a transaction reportable under the HSR Act, needs to identify both relevant associate relationships and the resulting information it may need to report regarding those relationships.
As this discussion shows, there are many energy-related transactions that, while potentially reportable under the HSR Act, may qualify for one or more energy-related or more general exemptions from the Act’s reporting requirements. Parties to transactions of the types discussed above should confer with counsel to determine whether their transaction is exempt, ensure that the transaction does not fall within an exception to the relevant exemption and, particularly if an MLP is involved, for guidance in identifying any associate relationships.