The Hart-Scott-Rodino Antitrust Improvements Act (“HSR” or the “Act”) requires the reporting of transactions, including acquisitions of voting securities or assets, that satisfy certain dollar thresholds. The HSR notification and report form must be filed with the federal government, and the parties to the transaction must wait a designated period of time (15 or 30 days depending upon the type of transaction) before consummating the transaction.3 Fines for failing to file the notification and wait the required period may be as high as $16,000 per day. Though HSR and the federal regulations applying the Act are far too complex and factually-dependent to detail here,4 this note highlights potential pitfalls, particularly for private equity funds that adjust their holdings on a relatively frequent basis.
“... the government is focused on private equity funds now more than ever, as reflected by the recent changes to the Act which require far greater information from private equity funds in HSR filings.”
A typical HSR rule of thumb is that transactions below $66 million (as adjusted each year) generally do not need to be reported.5
However, the so-called “aggregation rules” may require an HSR filing in instances in which a private equity fund makes even a small addition to an existing position.6 Much like the Act itself, the aggregation rules are extremely complex and highly-fact specific, as illustrated by the following basic examples:
Fund X previously acquired voting securities of Company A, worth $60 million. Several months later, Fund X buys another $10 million of Company A’s voting securities.
Even though neither transaction individually reached the $66 million threshold, a filing must now be made on the second purchase because Fund X’s total holdings in Company A now total $70 million. Though this may seem simple enough, various factors can complicate the matter. For example:
Fund Y previously acquired $40 million of Company A’s voting securities. No filing was necessary. Company A performs well and its stock value increases by 50% – to $60 million. Fund Y believes Company A’s stock will continue to climb in value and opts to buy another $15 million of Company A’s voting securities.
In the above example, even though Fund Y’s two acquisitions (of $40 million and $15 million, respectively) combined do not reach the $66 million threshold, a filing must still be made on the second acquisition because the intervening increase in Company A’s value caused Fund X’s holding in Company A to cross the $66 million threshold (i.e., to a combined $75 million).
The fluctuation in Company A’s stock in the preceding example is but one complicating factor. There are many more. For example, whether Company A is publicly traded or privately held will determine how share value and fluctuation is determined.7 Value will also depend on whether previously acquired assets, voting securities or “non-corporate interests” (e.g., interests in LLCs, LPs, etc.) are aggregated.8 Additionally, an exception may exist if the private equity fund filed for the previous acquisition,9 though even such an exception would be complicated by the timing of the prior filing and other issues.10
Indeed, it is not only a private equity fund’s practice of adjusting its holdings, but also the fund’s structure itself, that further complicate the aggregation rules. Under the HSR rules, a private equity fund’s limited partners are typically considered its beneficial owners, even though the fund’s general partner or manager may have broad investment discretion. A limited partner is deemed to “control” a fund if it holds 50% or more of the fund’s interests or will receive 50% or more of its profits or losses upon its dissolution.11 This further complication is illustrated in the example below:
A general partner manages Funds X, Y, and Z. No single limited partner holds 50% or more of the interests (or will receive 50% or more of the profits or losses upon dissolution) in any of Funds X, Y, and Z. Fund X acquires $65 million of voting securities of Company A, Fund Y acquires $60 million of voting securities of Company A, and Fund Z acquires $30 million in voting securities of Company A.
Here, no filing would be required because Fund X, Y, and Z each holds less than $66 million of voting securities of Company A. However, if two or more funds are “controlled” by the same limited partner, the general partner or manager would be required to aggregate the holdings of such commonly controlled funds in order to determine whether the HSR threshold has been met.12 To take another example:
A general partner manages Funds X, Y, and Z. Funds X and Y are both controlled by Limited Partner A with more than 50% of the assets going to Limited Partner A upon dissolution. Last month, Fund X and Y acquired $30 million and $20 million worth of voting securities of Company A, respectively. Now, Fund Y wants to acquire another $20 million worth of voting securities of Company A. Fund Z also wants to acquire $65 million worth of voting securities of Company A.
Here, the general partner would have to aggregate the current holdings of the two commonly controlled funds, Fund X and Y. Adding (i) the current holdings of Fund X ($30 million) to (ii) the current holdings of Fund Y ($20 million) and (iii) the proposed acquisition by Fund Y ($20 million) would total $70 million, which would exceed the filing threshold. Thus, upon the consummation of the proposed acquisition by Fund Y, Fund Y would have to file. However, since Fund Z is not controlled by Limited Partner A, the general partner can treat this fund as a separate entity and acquire voting securities or assets of Company A below the HSR threshold.
The above discussion is not theoretical and the government has brought enforcement actions and levied significant fines against private equity funds in the recent past in connection with HSR violations resulting from facts consistent with the above examples.13 As noted in our last Private Equity Update,14 the government is focused on private equity funds now more than ever, as reflected by the recent changes to the Act which require far greater information from private equity funds in HSR filings. Thus, it would benefit general partners and fund managers to be more sensitive to HSR issues and confirm with antitrust counsel on any adjustments to their existing positions.