The Hart Scott Rodino Act (HSR) provides a federal regulatory scheme to monitor the acquisition of voting securities and assets in an effort to monitor whether such acquisitions may have anticompetitive effects on the marketplace. Section 8 of the Clayton Act has interlocking director/officer rules that may affect fund managers who find themselves holding the voting securities of competing entities and who seek to manage such entities by appointing directors and/or officers that ultimately act on behalf of the fund. This article summarizes some basic principles contained in this regulatory scheme.
When does an acquisition have to be reported under the HSR Act?
Effective February 24, 2014, all acquisitions involving the voting securities of an entity are permissible without notifying the Federal Trade Commission or the Department of Justice (the antitrust agencies) if the acquisition is valued at less than US$75.9 million. Therefore, if a fund sought to acquire a position of US$75.9 million or more of the voting securities or assets of another entity, or if a certain acquisition will result in the fund holding US$75.9 million or more, the acquisition must be reported to the antitrust agencies before the acquisition is completed. Once the acquisition is reported, the antitrust agencies have 30 days to review the acquisition. If the antitrust agencies determine that the acquisition does not harm competition, the parties to the acquisition are notified and the acquisition may then be completed.
In order to expedite the review process, the parties to the transaction may request “early termination” by requesting that the antitrust agencies provide notification prior to the expiration of the 30-day waiting period, that no antitrust issues have been found and that the transaction may proceed without further inquiry. It should be noted, however, that when the antitrust agencies comply with a request for early termination they report the early termination in the Federal Register which, since it is a public document, will result in the general public becoming aware of the pending transaction when the early termination notice is published.
Further governmental inquiry
In a recent transaction the granting of early termination occurred within 10 business days, but such a time frame usually depends upon the backlog of the antitrust agencies and the complexity of the issues involved. That complexity could result in further inquiry by the antitrust agencies, ranging from a mere telephone inquiry to a full-blown investigation. In a typical purchase agreement, buyers and sellers generally agree to cooperate to take all necessary actions to obtain HSR approval, to share all information (except for confidential business information) required for preparation and submission of required filings under the HSR Act and to inform each other of any oral or written communication with the antitrust agencies regarding the HSR filing, and also agree not to participate in any meeting or discussion absent advance notice to the other side, or when permitted by such government agencies.
Inasmuch as the general custom is to submit a signed purchase agreement with the HSR filing (although a term sheet with sufficient detail will also suffice), the parties usually negotiate their respective obligations involving the cost of responding to governmental inquiries. At the outset, the HSR filing fee (which ranges from US$45,000 to US$280,000 depending on the size of the transaction), absent an agreement to the contrary, is typically paid by the buyer. Both parties usually covenant that they will use commercially reasonable efforts to respond to requests for additional information and to resolve objections, if any, that are or could be raised by the antitrust agencies with respect to the contemplated transaction. Since a request for additional information and/or directives by the antitrust agencies could take many forms, depending upon bargaining position, a buyer usually requests that under its obligations pursuant to the purchase agreement it should not be required to
- litigate or contest in any manner any administrative or judicial proceeding or any court order,
- pay any amounts (other than the payment of filing fees and expenses and fees of counsel),
- commence or defend any litigation,
- agree to any limitation on the operation or conduct of the business acquired or as consolidated,
- waive any of the conditions of closing contained in the purchase agreement or
- make any proposal, execute or carry out any contract or submit to any court order providing for (A) the sale, license of, disposition or holding separate of any of the assets of the seller or any of the properties or assets of the buyer or any of its affiliates or (B) the imposition of any limitation or regulation on the ability of the buyer or any of its affiliates to conduct freely their respective business or exercise full rights of ownership of the seller. Each of the foregoing items are often the subject of intense negotiation.
The Clayton Act
When a fund holds equity positions in more than one company within the same industry and seeks to participate in the management of those companies by appointing officers and directors, specific care must be taken to make sure that the appointments comply with interlocking director/officer rules specified in Section 8 of the Clayton Act. The act addresses whether an individual may serve simultaneously as a director or officer of two companies that are considered competitors. Specifically, Section 8 of the act states: “(a) 1. no person shall, at the same time serve as a director or officer in any two corporations (other than banks, banking associations, and trust companies) that are — A. engaged in whole or in part in commerce; and B. by virtue of their business and location of operation, competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws…” [emphasis supplied]
In order for Section 8 of the Clayton Act to apply, both subsections A and B listed above must be true. Although there is a safe harbor with regard to the amount of commerce needed to trigger subsection A (each competitor must have, in the aggregate, capital, surplus and profit of not less than US$29,945,000, except that such companies will not be covered if competitive sales are less than US$2,994,500), most major businesses will be considered as engaging in commerce under the act. Therefore, the most reliable carve-out in the act lies in the language specified under subsection B. In order to be free of the mandate of the act as it relates to subsection B, it must be the case that an agreement between two entities not to compete would not result in a violation of antitrust laws.
The test to determine whether or not an agreement not to compete would result in a violation of antitrust laws turns on the issue of control. For example, to the extent that Entity A owns at least 50 percent of Entity B (an entity that also competes with Entity A), or has the right to receive at least 50 percent of the profits or losses of such entity upon its dissolution, Entity A is considered a “control entity,” and thus may appoint its directors and officers to serve as directors and officers of Entity B. Although the control entity and Entity B may choose to compete in the marketplace, the antitrust laws do not mandate that an entity compete with itself, and thus the elimination of such competition does not result in a violation of antitrust laws. However, if Entity A’s controlling interest in Entity B dipped below 50 percent, Entity A would no longer be considered a control entity. Under these circumstances, if Entity A and Entity B are considered competitors in the marketplace, the prohibition in Section 8 of the Clayton Act on interlocking officers or directors would likely apply. Accordingly, it is important for fund managers holding interests in companies operating within the same industry to review their voting security positions held in companies that may be competitors before appointing officers and directors to work on behalf of the fund and participate in the management of those companies.
The HSR rules and the control rules that govern Section 8 of the Clayton Act are complex. The failure to file an HSR notification with the antitrust agencies when applicable is a violation of federal law and subjects the acquiring party to a fine of up to US$16,000 per day until such filing is completed. The antitrust agencies may also institute civil proceedings for a failure to file and for violations of Section 8 of the Clayton Act. Whenever possible, legal counsel should be consulted in the early stages of a proposed transaction so that a full analysis of the structure of the transaction and HSR rules can be made in order to determine whether an HSR filing is required. Lastly, when a fund manager takes positions in multiple companies operating in the same industry, a thorough review of the manager’s equity positions in such companies, as well as whether such companies may be considered competitors, must be undertaken before the fund appoints directors and officers to assist in the management of such companies.