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Under what circumstances is a transaction caught by merger control legislation?
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, parties to certain transactions involving the acquisition of assets, voting securities and non-corporate interests must file formal notification of the proposed transaction with the Federal Trade Commission (FTC) and Department of Justice (DOJ) and wait until the prescribed waiting periods have expired or been terminated before consummating the deal. The Hart-Scott-Rodino Act applies to acquisitions of voting securities, regardless of whether the transaction involves the transfer of control, confers a majority or a minority interest, creates a joint venture or constitutes a complete merger of two entities. For acquisitions of unincorporated entities, the Hart-Scott-Rodino Act applies only to transactions that confer a controlling interest.
Transactions that do not meet the jurisdictional monetary thresholds of the Hart-Scott-Rodino Act can still be reviewed and challenged by the FTC, the DOJ and other regulators, although adherence with the procedures of the Hart-Scott-Rodino Act is not required.
Although the term ‘assets’ is not defined in either the Hart-Scott-Rodino Act or the Hart-Scott-Rodino Rules, the FTC and the DOJ have defined ‘assets’ to include both tangible and intangible goods. Intangible goods include downloadable music, mobile apps and other intellectual property.
The Hart-Scott-Rodino Rules define ‘voting securities’ as any securities that grant the current right to vote (ie, the right to vote for the election of directors of the issuer or an entity included within the same person as the issuer) to the holder of the securities or that can be converted into securities that grant voting power to the holder. An acquisition of securities that does not confer voting power is exempt from the Hart-Scott-Rodino Act filings requirements. Convertible securities that have not yet been converted, as well as options and warrants, are also exempted from the filing requirements at the time of their acquisition. If the conversion of these financial instruments would result in the holder meeting the Hart-Scott-Rodino Act jurisdictional thresholds, Hart-Scott-Rodino notification may be required before converting or exercising the financial instruments if no exemption applies.
A ‘non-corporate interest’ is defined as “an interest in any unincorporated entity which gives the holder the right to any profits of the entity or, in the event of dissolution of the entity, the rights of any of its assets after payment of its debts”. If the acquisition of a non-corporate interest exceeds the jurisdictional thresholds and confers control of the acquired entity on the acquiring person, the Hart-Scott-Rodino filing requirement applies unless there is an applicable exemption.
For non-corporate entities (eg, limited liability companies and limited partnerships), ‘control’ is defined as the right to 50% or more of the profits or the right to 50% or more of the assets upon dissolution.
The Hart-Scott-Rodino Act exempts most internal reorganisations from the filing requirements under the ‘intraperson transaction’ exemption. Transactions where the same ultimate parent entity controls the acquiring and at least one of the acquired persons are exempt. The person that ultimately controls the buyer or seller is considered an ultimate parent entity. For corporate entities, ‘control’ means holding 50% or more of the voting securities of the corporation or the present right to appoint 50% or more of the board. As noted above, ‘control’ for unincorporated entities is holding the right to 50% or more of the profits or the right to 50% or more of the assets upon dissolution. If the transaction meets the jurisdictional thresholds and no exemption applies, the Hart-Scott-Rodino Act may require a filing for an internal reorganisation if there is a change in the ultimate parent entity.
Do thresholds apply to determine when a transaction is caught by merger control legislation?
Transactions that meet each of the following criteria (as applicable) are reportable under the Hart-Scott-Rodino ActAntitrust Improvements Act of 1976, as amended, unless a specific exemption under the Hart-Scott-Rodino Act or Hart-Scott-Rodino Rules applies:
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The Federal Trade Commission (FTC) revises all monetary thresholds, including the applicable reporting thresholds, annually to account for changes in gross national product. The adjusted thresholds are typically indicated by ‘as adjusted’ language. The thresholds stated above became effective on February 20 2015.
Some transactions qualify for an exemption under the Hart-Scott-Rodino Act or Hart-Scott-Rodino Rules. Parties to these transactions need not report the transaction, even if the jurisdictional thresholds are met. For example, the following transactions are exempt from filing under the Hart-Scott-Rodino Act:
- stock splits and dividends that do not increase the percentage of stock owned by any person;
- certain acquisitions of voting securities solely for investment purposes;
- intraperson acquisitions;
- certain acquisitions of goods or realty in the ordinary course of business;
- acquisitions of certain real property;
- acquisitions of non-voting securities and obligations that are not voting securities (eg, mortgages, bonds and deeds of trust); and
- certain acquisitions involving foreign governments and entities.
The Hart-Scott-Rodino Rules and corresponding guidance from the agencies can be nuanced with regards to whether a filing is necessary; experienced antitrust counsel can offer advice in determining whether a transaction is exempt. Further, regulators may still investigate and seek to enjoin or unwind any transaction that they believe is harmful to competition, even if the transaction does not meet the jurisdictional thresholds of the Hart-Scott-Rodino Act or an exemption renders a filing unnecessary.