In late January, the Federal Trade Commission (FTC) announced its annual adjustments to the filing thresholds under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). Because of this year's adjustments,transactions valued at more than $78.2 million and closing on or after February 25, 2016 may trigger an HSR filing. The closing date—not the date of an agreement—determines whether the new thresholds will apply. Failure to file an HSR Notification and Report Form remains subject to a statutory penalty of up to $16,000 per day of noncompliance.
The HSR Act requires parties to file notifications with the FTC and Department of Justice when a proposed transaction—such as a merger, joint venture, stock or asset acquisition, or exclusive license—meets specified thresholds and no exemptions apply. If a notification is required, the transaction cannot close while the statutory waiting period runs (generally 30 days) and the federal antitrust agencies review the transaction. Most commonly, a filing is required if the parties meet both the "size-of-person" and "size-of-transaction" tests, which will be modified by the adjusted thresholds as follows:
- 2016 Size-of-Transaction Test: Met if, as a result of the transaction, the buyer will acquire or hold voting securities or assets of the seller valued in excess of $78.2 million. In addition, if the value reaches a significantly higher level—now set at $312.6 million—a filing may be required even if the size-of-person test is not satisfied.
- 2016 Size-of-Person Test: Met if one party to the transaction has $156.3 million or more in annual sales or total assets and the other has $15.6 million or more in annual sales or total assets.
For more detail on the updated threshold amounts, please click here.
Hot Topics in HSR Enforcement
The HSR thresholds are only one part of the analysis to determine whether an HSR filing is required for a given transaction. Even though thresholds are met, certain types of transactions may be exempt from the HSR notification requirements (e.g., ordinary course of business acquisitions, certain acquisitions of real property, passive investments). Moreover, an HSR filing obligation may arise in situations beyond the traditional stock purchase or company merger—including, notably, investor acquisitions of a minority interest in a company. Because application of the HSR rules and exemptions can be highly technical, it is important to seek guidance from experienced HSR counsel in connection with any transaction where it appears the HSR thresholds might be met. Recent FTC enforcement highlights several potential pitfalls:
Improper Reliance on the "Institutional Investor Exemption"
In September 2015, Leucadia National Corporation (Leucadia) settled with the FTC for $240,000 to resolve allegations that it improperly relied on the "institutional investor exemption" when it failed to file an HSR notification in connection with its acquisition of 13.5% of KCG Holdings Inc. (valued at $173 million) via a consolidation. The "institutional investor exemption" provides that certain defined institutional investors, including certain banks, finance companies, and broker-dealers, may acquire up to 15% of the voting securities of an issuer without filing under the HSR Act if the acquisition is: made directly by an institutional investor, made in the ordinary course of business, and made solely for the purpose of investment.
However, there are exceptions to the exemption, including, most notably, that an "acquisition of voting securities of an institutional investor of the same type as an entity included within the acquiring person" is not exempt. According to the FTC, because both Leucadia (via a subsidiary) and KCG Holdings Inc. qualified as broker-dealers (i.e., the same type of institutional investor), the "institutional investor exemption" did not apply. Accordingly, Lecaudia's failure to file an HSR notification prior to consummation violated the HSR Act.
Improper Reliance on the "Investment-Only Exemption"
Parties that acquire up to 10% of the shares in a company "solely for investment purposes" may be exempt from HSR filing requirements pursuant to the "investment-only exemption." The term "solely for investment purposes" means that the holder "has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer." The question of intent is assessed at the time of the acquisition.
Recently, the FTC provided additional guidance on what "solely" means, describing boundaries regarding conduct by acquiring parties to which investors will likely try to adhere. Last year, Third Point LLC (Third Point) settled with the FTC to resolve allegations that it improperly relied on the "investment-only exemption" when it decided not to file an HSR notification regarding its acquisition of stock in Yahoo! Inc. (Yahoo). According to the FTC, Third Point's intent was not consistent with an acquisition "solely for investment purposes" because: Third Point contacted individuals to gauge their interest to become CEO of Yahoo; took steps to assemble an alternate slate of board directors for Yahoo; drafted letters indicating that Third Point was prepared to join the board of Yahoo; and stated publicly that Third Point was prepared to propose a slate of directors for Yahoo. As such, Third Point's reliance on the "investment-only exemption" was improper, and its failure to file an HSR notification was a violation of the HSR Act.
Companies are not the only entities that must be aware of the intricacies of the HSR Act; individual investors must also adhere to the HSR filing requirements. The FTC reaffirmed this principle in October 2015 when it reached a settlement with an individual investor, Len Blavatnik, for his failure to timely file an HSR notification regarding his acquisition (via his company Access Industries) of a minority interest in a technology start-up. Although Blavatnik acquired only 29.1% of the outstanding shares of the start-up, the acquisition was valued at $228 million (exceeding the "size-of-transaction" threshold) and the parties met the "size-of-person" test. Accordingly, Blavatnik was charged a $656,000 civil money penalty and required to file, and his failure to do so was a violation of the HSR Act.
The Importance of Seeking Guidance from HSR Counsel
These recent FTC enforcement actions highlight the need for robust, pre-consummation HSR review of transactions that may meet the HSR thresholds. As the above examples make clear, this includes acquisitions of minority interests—even those less than 10%—that may seem inconsequential at first glance. The HSR requirements are highly technical, and a company's failure to comply exposes it to an investigation and significant fines. For HSR questions—especially those surrounding exemptions and decisions not to file an HSR notification—it is advisable to engage HSR counsel as early in the transaction process as possible.