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Legislation, triggers and thresholds
What legislation applies to the control of mergers?
The primary antitrust law governing the substantive review of mergers and acquisitions is the Clayton Act 1914. Section 7 of the Clayton Act (15 USC Section 18) makes unlawful acquisitions that may substantially lessen competition or tend to create a monopoly in any line of commerce in any section of the country.
The Hart-Scott-Rodino (HSR) Act (15 USC Section 18a) and the rules promulgated thereunder (HSR rules) govern the procedural aspects of the federal antitrust agencies’ review of M&A, requiring that the Antitrust Division of the Department of Justice and the Federal Trade Commission (FTC) be notified of certain transactions before consummation.
The 50 US states – typically the state attorneys general – may also seek to block M&A and will often review proposed transactions, either separately or in coordination with the review conducted by the Antitrust Division or the FTC.
What is the relevant authority?
The Antitrust Division and the FTC both have authority to enforce the Clayton Act, and the agencies allocate matters between them so that only one agency investigates any transaction. That allocation is based on agency expertise from past investigations.
State attorneys general may investigate proposed transactions under state investigative authority and file suit under the Clayton Act.
Under what circumstances is a transaction caught by the legislation?
Transactions such as mergers, consolidations, tender offers, joint ventures and acquisitions of voting securities, non-corporate interests or assets and even certain IP licences are potentially subject to the HSR Act. Such transactions are subject to the act if both the acquiring and acquired persons are engaged in commerce or activities affecting commerce in the United States, and they meet the jurisdictional thresholds set forth in the act (described below).
What constitutes a voting security, non-corporate interest or asset subject to the HSR Act varies from common usage of those terms. The HSR Rules and Regulations and the antitrust agencies offer the following guidance regarding the meaning of those terms under the HSR rules:
- ‘Voting securities’ are defined as any securities that grant the holder the right to vote in the election of directors of the issuer or an entity included within the same person as the issuer. Securities that have the present right to vote for certain matters but do not vote in the election of board directors are considered ‘non-voting’ securities for HSR purposes. In addition, convertible securities, options and warrants or other instruments that do not have the present right to vote in the election of the board are exempt from the filing requirements at the time of their acquisition. If the conversion of these financial instruments results in the holder meeting the HSR Act thresholds, notification may be required before converting or exercising the financial instruments. Acquisitions of voting securities are subject to the HSR Act regardless of whether the transaction involves the transfer of control (defined in the act as holding 50% or more of the voting securities of an entity, or the contractual right to appoint 50% or more of the directors).
- ‘Non-corporate interests’ are interests in a limited liability company, partnership or other non-corporate entity. For transactions involving non-corporate interests, the HSR Act applies only to transactions that confer ‘control’ of the target entity. For non-corporate entities, ‘control’ is defined as having the right to 50% or more of the entity’s profits, or 50% or more of the entity’s assets on dissolution.
- While ‘assets’ is not defined in the HSR Act or the rules, the antitrust agencies have defined it to include both tangible and intangible goods. The acquisition of exclusive patent licences, for example, may require a HSR Act filing.
Importantly, transactions that do not meet the jurisdictional thresholds of the HSR Act can still be reviewed and challenged by the antitrust agencies under the Clayton Act or the Sherman Act.
Do thresholds apply to determine when a transaction is caught by the legislation?
The HSR Act applies two principal jurisdictional thresholds: the ‘size-of-person’ test and the ‘size-of-transaction’ test. These thresholds are adjusted annually based on changes in the gross national product. The current thresholds are as follows:
- Transactions valued at $84.4 million or less are not subject to the HSR Act (though valuation often requires aggregation of voting securities already held and assets recently acquired);
- Transactions valued at more than $337.6 million are subject to the HSR Act regardless of the size of persons; and
- Transactions valued at more than $84.4 million but not exceeding $337.6 million are reportable only if the size-of-person test is met.
To meet the size-of-person test, one party to the transaction must have at least $16.9 million in annual net sales or total assets and the other party must have at least $168.8 million in annual net sales or total assets. If the acquired person is not engaged in manufacturing, it must have at least $16.8 million in assets or $168.8 million in annual net sales or total sales in order to meet the size-of-person threshold. Annual net sales are based on the party’s last fiscal year and asset value is based on the party’s most recent regularly prepared balance sheet.
Is it possible to seek informal guidance from the authority on a possible merger from either a jurisdictional or a substantive perspective?
Parties may anonymously seek informal guidance from the FTC’s Pre-merger Notification Office (PNO) to determine whether a filing is required under the HSR Act. The PNO is typically responsive to such inquiries, answering most within one or two days. The FTC website also maintains a database of past requests for informal guidance, as well as the FTC’s responses.
The antitrust agencies do not usually allocate resources to the substantive review of hypothetical transactions until the merging parties have expressed the requisite intent to merge in a transaction that is reportable under the HSR Act. In certain circumstances, parties may request a business review letter from the Antitrust Division to determine how the agency may respond to a proposed joint venture or other business conduct such as the collection and dissemination of business information. However, business review letters often take a long time to obtain and are rarely sought with respect to proposed M&A.
Are foreign-to-foreign mergers caught by the regime? Is a ‘local impact’ test applicable under the legislation?
Foreign-to-foreign mergers are subject to the requirements of the HSR Act if both the acquiring person and the acquired person are engaged either in commerce or in activities affecting commerce in the United States, and if the requisite HSR jurisdictional thresholds are met. However, there are certain exemptions potentially available for such transactions. An exemption’s applicability to a particular transaction should be evaluated on a case-by-case basis.
Acquisitions of assets located outside the United States, for example, are exempt from the HSR Act unless those assets generated sales of $84.4 million or more, in or into the United States in the acquired person’s most recent fiscal year.
Acquisitions of voting securities of a foreign issuer by a US person are exempt unless the acquired person (issuer) and all entities that it controls holds assets in the United States with an aggregate total value of $84.4 million or more, or made aggregate sales of $84.4 million or more in, or into, the United States. If the acquiring person is a foreign person, the transaction also must confer control over the foreign issuer in order to be reportable.
Finally, if the acquisition of foreign assets or of voting securities of a foreign issuer by a foreign person does not come within either of the above exemptions, the transaction is nevertheless exempt if all of the following conditions are present:
- The acquiring and acquired persons are both foreign;
- The aggregate sales of the parties in or into the United States were less than $185.7 million in their respective most recent fiscal years;
- The parties’ aggregate total assets in the United States are less than $185.7 million; and
- The size of the transaction is less than $843.9 million.
What types of joint venture are caught by the legislation?
The formation of a newly incorporated entity that involves the acquisition of voting securities by joint venture partners is potentially reportable under the HSR Act. However, the formation of a non-corporate business entity is not usually subject to notification under the act, regardless of whether the parties call it or regard it as a joint venture, or whether it would generally be known as one. Nevertheless, the acquisition of a controlling stake in the non-corporate entity is potentially reportable if the requisite HSR thresholds are met.
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