FTC Announces Minor Reductions to Hart-Scott-Rodino Premerger Notification Thresholds, Effective February 22, 2010
DOJ Issues $900,000 Fine for Failure to Honor Hart-Scott-Rodino Waiting Period
New Merger Notification Thresholds
Under the Hart-Scott-Rodino Act, parties to transactions of a certain size must provide advance notice to the U.S. Department of Justice and the Federal Trade Commission before the transaction can close. Failure to provide the required notification and comply with the statutory waiting periods can result in significant penalties.
According to amendments passed by Congress in 2000, the jurisdictional thresholds under the HSR Act are adjusted for inflation each year. On January 21, 2010, the FTC published in the Federal Register revised jurisdictional thresholds that will apply to all transactions that close on or after the effective date of the adjustment, February 22, 2010.
For the first time since the inflation adjustments have been implemented, a drop in gross national product has resulted in a reduction of the notification thresholds. Accordingly, the base threshold for most transactions of $65.2 million has decreased to $63.4 million.
The new thresholds are as follows:
- Transactions valued at $63.4 million or more are reportable if one party to the transaction has assets or revenues of at least $12.7 million and the other party has assets or revenues of at least $126.9 million.
- All transactions valued at $253.7 million or more are reportable.
HSR filing fee thresholds have also been revised. If the value of the assets or securities to be held as a result of the transaction:
- is greater than $63.4 million but less than $126.9 million, the filing fee is $45,000.
- is greater than $126.9 million but less than $634.4 million, the filing fee is $125,000.
- is $634.4 million or greater, the filing fee is $280,000.
DOJ Enforcement of HSR Waiting Period
Federal antitrust authorities continue to actively enforce HSR rules on pre-closing activities. On January 21, 2010, the Department of Justice announced a settlement with the pork and turkey producer Smithfield Foods, Inc., based on Smithfield's conduct between September 2006, when it executed an agreement to purchase Premium Standard Farms, LLC, and May 2007, when the parties completed the transaction. Under the terms of the settlement, Smithfield agreed to pay $900,000 in civil penalties because it had reviewed and approved three supply contracts executed by Premium Standard prior to the closing of the transaction.
Upon execution of a contract or purchase agreement, with transactions that are subject to HSR notification requirements, the HSR rules forbid parties from closing the transaction in substance or form prior to completion of the HSR review period. At a minimum, the HSR waiting period may run 14 days from the time the parties submit HSR notifications to the government. If a transaction is subject to a substantive review, the reviewing agency (DOJ or FTC) may extend the HSR waiting period over a course of months. During that period, the acquiring party may not control the acts of the acquired party in a manner that suggests it has obtained "beneficial ownership" of the acquired party.
With the Smithfield acquisition of Premium Standard, the transaction was subjected to several months of review by the DOJ. The DOJ did not challenge Smithfield's pre-closing covenants in the parties' written agreement, but the $900,000 penalty was imposed based on Smithfield's pre-closing conduct. During the review period, Premium Standard and Smithfield conferred and Smithfield approved three purchase contracts executed by Premium Standard with suppliers of live hogs, which Premium Standard required for its pork processing and packing operations. The DOJ challenged Smithfield's participation in these "ordinary course" contracts as an exercise of control over Premium Standard prior to expiration of the HSR waiting period. Quoted in a DOJ press release, Assistant Attorney General Christine Varney declared that "[m]erging companies must remain independent in their ordinary business operations, including purchasing decisions, until the end of the premerger waiting period."
This enforcement action follows a pattern of federal agency enforcement actions against "gun jumping" activity between merging parties that occurs prior to completion of HSR waiting periods. While the federal agencies recognize the need for pre-closing covenants to preserve the value of a business during the HSR waiting period, they have consistently challenged and imposed fines against companies that engage in pre-closing activities that demonstrate a buyer's control over a seller's operations. Parties are well advised to carefully draft pre-closing covenants that do not empower a buyer to control a seller's ordinary course business decisions, and take steps to ensure that they honor those covenants, to avoid fines and agency interference.