The United States was a pioneer among global competition law regimes in requiring parties to large transactions to submit filings before closing. The recent discussion on the costs and benefits of ex-post enforcement of monopolization cases highlights the originality of having the parties to large transactions give agencies a chance to intervene before the parties consummate mergers.
Filing event. Contrary to most jurisdictions, a definitive agreement is not needed to file the HSR Form and trigger the review period. Each party must submit an affidavit with their filings, attesting to the fact that a contract, an agreement in principle, or a letter of intent has been executed and that each person has a good faith intention of completing the transaction.
Filing obligation. The HSR Filing includes two separate forms submitted to the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice (DOJ): one for the acquired person and one for the acquiring person. The acquiring person is the ultimate parent entity of the buyer, defined as the entity that controls the buyer, but is not controlled by any other entity. The acquiring person is the ultimate parent entity of the target. Control for HSR purposes means holding (i) 50 % or more of the outstanding voting securities or having the right to 50% or more of the profits/ 50 % or more of the assets in the event of dissolution of an unincorporated entity or (ii) having the contractual power presently to designate 50 % or more of the directors (separate rules apply to trusts).
The HSR Act requires the acquired and acquiring persons to file notifications if the following thresholds are met (for transactions completed on or after February 23, 2022; amounts adjusted annually):
1. One person has net sales (all sales are for the most recent fiscal year) or total assets (all assets include assumed liabilities) of $20.2 million or more; the other person has net sales or total assets of $202 million or more; and as a result of the transaction, the acquiring person will hold stock and/or assets of the acquired person valued at more than $101 million; or
2. As a result of the transaction, the acquiring person will hold stock and/or assets of the acquired person valued at more than $403.9 million, regardless of the sales or assets of the acquiring and acquired persons.
Certain assets, such as cash or cash equivalent, are not included in the size of transaction test. Filing obligations need to be assessed by professionals on a case-by-case basis.
The parties can consummate a transaction once the initial (30-calendar day) or extended review period expires without challenge from the agencies. No formal approval is needed to close.
Exempt transactions. Certain exemptions apply even when the size of person and size of transaction tests are met. For example, certain acquisitions of assets in the ordinary course of business are exempt, such as acquisitions of new goods and current supplies (e.g., an airline purchases new jets from a manufacturer or a supermarket purchases its inventory from a wholesale distributor). The acquisition of certain types of real property is also exempt, including certain new and used facilities, unproductive real property (e.g., raw land), office and residential buildings, hotels, recreational land, agricultural land and retail rental space/warehouses. Finally, the acquisition of non-US assets is exempt where the sales within or into the U.S. attributable to those assets are $101 million (as adjusted) or less. This list is not comprehensive and exemptions need to be assessed on a case-by-case basis.
HSR Form. Each reporting entity (which is either the reporting person or an entity within the reporting person) must identify the acquiring and acquired persons involved and the structure of the transaction. Unless specified, a reporting person includes the ultimate parent entity and its controlled entities. The reporting person must provide certain balance sheets and other financial data as well as copies of certain documents that have been filed with the Securities and Exchange Commission. The reporting person must also submit certain planning and evaluation documents reviewed by officers or directors that pertain to the proposed transaction. The HSR Form also requires the reporting party to disclose whether the acquiring person or acquired entity currently derives revenue from businesses that fall within any of the same industry and product North American Industry Classification System (“NAICS”) codes, and, if so, in which geographic areas they operate. Identification of overlapping codes may indicate whether the acquiring person and acquired entity engage in similar lines of business. Acquiring persons must describe certain previous acquisitions in the last five years of corporations or assets engaged in businesses in any of the overlapping codes identified. Special rules apply to joint-venture filings.
HSR fees. Each transaction (as opposed to each form) reported under the HSR Act is subject to the following fees: $45,000 for transactions valued at less than $202 million, $125,000 for transactions valued at $202 million or more and less than $919.9 million, and $280,000 for transactions valued at $1.0098 billion or more. The U.S. Senate passed the Merger Filing Fee Modernization Act of 2021 in June 2021. The bill, which remains subject to passage in the House of Representatives and being signed into law, would amend the HSR Act to (1) replace this framework with a six-tiered regime; (2) significantly increase fees for transactions valued at more than $1 billion (up to 7 times current levels); and (3) decrease fees to $30,000 for transactions valued at less than $161.5 million.
Confidentiality. Neither the information submitted nor the fact that a notification has been filed is made public by the agencies except as part of a legal or administrative action in which one of the agencies is a party or in other narrowly defined circumstances permitted by the HSR Act. The fact that a transaction is under investigation may become apparent if the agencies interview third-parties during their investigation.
Failure to file. Companies or individuals that fail to comply with the reporting requirements of the HSR Act are subject to steep civil penalties – up to $46,517 per day as of January 10, 2022 – until a corrective filing is made with the agencies, irrespective of whether the underlying transaction raises antitrust concerns. In a recent December 22, 2021 decision, the FTC settled charges in two separate matters for repeated violations of the HSR Act and imposed fines totaling nearly $2 million.
Possible changes. In September 2020, the agencies proposed two changes to the existing rules. The first change would require filers to disclose additional information about their associates and to aggregate acquisitions by the same issuer across those entities. The second proposed change is a rule that would exempt the acquisition of 10 percent or less of an issuer’s voting securities unless the acquiring person has a competitively significant relationship with the issuer.