The Hart-Scott-Rodino (HSR) Antitrust Improvements Act 1976 (as amended) is the pre-merger notification statute for the United States. It requires parties contemplating certain types of transaction involving the acquisition of assets, non-corporate interests (eg, limited liability company membership or partnership interests) or voting securities to file a notification form describing the transaction with the Federal Trade Commission (FTC) and the US Department of Justice and to wait a prescribed waiting period before consummating the transaction.
Not all acquisitions involving voting securities, non-corporate interests or assets are reportable under the act. In general, there are two tests that apply in order to determine if an HSR filing is required:
- the size-of-transaction test; and
- the size-of-person test.
There are numerous exemptions to the filing requirements (which will not be addressed here).
The threshold that receives the most attention is the size of the transaction. To overly simplify, the HSR Act has a minimum threshold – only transactions valued at $50 million or more, as adjusted annually, are potentially subject to notification under the HSR Act. Acquisitions below this threshold are not reportable even if the proposed acquisition results in a change of control of an entity. The $50 million and other thresholds are adjusted each year by the FTC based on changes in the US gross national product. The current size-of-transaction threshold (effective until 3 March 2021) is $94 million.
If the size of transaction is $200 million or greater (again, as adjusted annually), the size of person is irrelevant and an HSR filing may be required, absent some exemption.
If the size of transaction is below $200 million (as adjusted), both the acquiring person and the acquired person are evaluated under the size-of-person test. The size-of-person test is generally satisfied if one party has more than $10 million in assets or sales (as adjusted annually) and the other has $100 million in assets or sales (as adjusted annually).
The HSR Act contemplates an initial waiting period (generally 30 days) to allow the agencies to determine whether one of the agencies wants to investigate the proposed acquisition more thoroughly. If one of the agencies decides that it does want to investigate, it will issue a so-called 'second request' seeking a substantial amount of data, information and documents from the parties to the transaction. The waiting period does not expire in such a case until both parties have substantially complied with the second request.
However, the parties can request that the initial waiting period be shortened. These 'early terminations' are granted when neither agency sees a need for further investigation, including further inquiry during the first waiting period. However, in most transactions, the initial waiting period expires without action by an agency.
On 2 February 2021 the FTC announced that the minimum threshold will be adjusted to $92 million for transactions consummated on or after 4 March 2021. It is unusual for the threshold to decrease, but this reflects the change in the size of the US economy, undoubtedly due in large part to the COVID-19 pandemic.
The other thresholds delineated in the HSR Act and implemented regulations will also be adjusted accordingly. Thus, the transaction size threshold at which the size-of-person test becomes irrelevant will be $368 million. The size-of-person tests will be $18.4 million and $184 million.
On 4 February 2021 the FTC announced that it was temporarily suspending the grant of early terminations to allow the agency to review "the processes and procedures used to grant early termination". The FTC asserts that the suspension will be brief and is caused by a "historically unprecedented volume of filings during a leadership transition amid a pandemic". Grants of early termination were also suspended for a short period in March 2020 as the FTC converted to an electronic filing system for notifications under the HSR Act. Two commissioners dissented, arguing that the suspension was unnecessary because, among other reasons, early termination is reserved for transactions that are most competitively benign.
The suspension would appear to be more of a signal that the Biden administration wants to increase the scrutiny of mergers than a response to an increase in filings or a change in the administration as such. Early terminations were always discretionary and when there have been spikes in the number of filings, the FTC handled such matters in the ordinary course: if it could confirm that neither agency wanted to investigate, it would grant early termination. If such a confirmation was not forthcoming because the staffs of the agencies were occupied, the agencies still had to garner the resources to reach a decision on whether to investigate further within the normal statutory period.
Other changes may be forthcoming
While the change in thresholds is an expected annual event and the suspensions in early terminations was not expected, there are also proposed changes to certain rules under the HSR Act that were made in September 2020. Specifically, the FTC had proposed to change the rules for combining acquisitions by funds under common management. At present, the ownership of the fund is the focus for determining whether holdings are aggregated for purposes of assessing the filing thresholds. The proposed new rule would require, for the first time, that the holdings under a common investment manager be combined for purposes of determining whether the filing thresholds have been met.
The FTC had also proposed changing the scope of the exemption for persons acquiring stock solely for purposes of investment and not for purposes of attempting to influence the operations of the company at issue. The proposal would allow investors to acquire up to 10% of a company's stock without having to make an HSR filing, even if they had an intent to influence the company (a so-called 'active' investor), so long as certain conditions are met.
The comment period on these proposed rules closed on 1 February 2021 and apparently many comments were critical of the changes.
Further, the Biden administration has frozen the implementation of all rules pending a regulatory review. This means that no new rules will be implemented unless an appointee of President Biden specifically approves the rule. Notably, the vote to propose the new rules was three to two, with the three Republican commissioners in the majority. The two Democratic commissioners, including acting Chair Rebecca Kelly Slaughter, were opposed on the ground that they did not support the expansion of the investment-only exemption.
The FTC requires a majority vote of the commissioners to publish a new rule. Since there are only four commissioners at present with the recent resignation of Chair Joe Simmons, the FTC is split evenly between Republicans and Democrats. This makes it somewhat unlikely that any new rules will be published until the Biden administration nominates and has confirmed a third Democratic commissioner. Nonetheless, the proposed change to the rules on aggregation of holdings will likely be adopted at that point.
