Checklist for Determining Reportability of Transactions Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976(Anthony A. Dean)
February 18, 2014
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, governs the reporting of acquisitions and mergers in the United States. This checklist provides a guide and answers the questions most likely to arise under the amended Act. It is not exhaustive and counsel should be consulted in any case of uncertainty.
Under the Act and the Rules every non-exempt transaction exceeding the minimum size must be reported and cannot be consummated until a defined waiting period has expired. The size-of-transaction dollar minimums, which had not been changed since the Act was passed in 1978, were substantially changed in 2001.
Two bright-line rules now exist:
- When the value of the securities or assets held as a result of the transaction is less than $ 50 million, as adjusted,  the transaction is exempt.
- When the value of the securities or assets transferred is greater than $ 200 million, the transaction must be reported unless a specific exemption is applicable.
Transactions between $ 50 and 200 million must be reported if the size-of-person test is satisfied, as explained below.
There is a sliding fee schedule keyed to the size of the transaction:
Size of Transaction
$50 up to $100 million
$100 up to $500 million
$500 million and up
The fee is paid by the acquiring person. In some transactions, as described below, both parties may be acquiring persons and both will have to pay the fee. Because the size of the transaction determines the fee to be paid, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DoJ) ("the Agencies") require greater exactitude in valuation than in the past. In close cases involving assets or securities for which there is no public market, appraisals will frequently be required.
- Identify each acquisition of assets, voting securities or non-corporate interests involved in the transaction.
- Determine the value of each such transaction:
- If value is less than $50 million, STOP. The transaction is exempt.
- If value is more than $200 million, go to Step 5. The transaction must be reported unless an exemption applies.
- For any transaction the value of which is $50 to $200 million, inclusive, identify the acquired and acquiring persons.
- Determine whether the size-of-person test is satisfied; if not, STOP. The transaction is exempt.
- Determine whether any other exemptions apply and, if so, whether the entire transaction or only a part of it is exempt. Any part that is not exempt must be reported.
Any acquisition of assets, voting securities or non-corporate interests having a value of $50 million or more is potentially reportable. An all-cash purchase of one class of voting securities or assets is a single transaction. When, however, voting securities, assets or non-corporate interests are exchanged for voting securities, assets or non-corporate interests of another entity, there may be multiple acquisitions comprising the transaction. The same person can be both an acquired person and an acquiring person with respect to acquisitions comprising the same transaction.
Example: Company A acquires a manufacturing plant valued at over $50 million from Company B in exchange for voting securities of A of commensurate value. There are two potentially reportable acquisitions: an acquisition of assets by A and an acquisition of voting securities by B. A and B will each have to report the transaction as an acquired person and an acquiring person (and pay the fee).
As a general rule, the value of the transaction will be the greater of fair market value or the acquisition price.
a. Acquisitions of assets
Under the HSR Rules, the value of an acquired asset is "fair market value" or, if it is determined and greater than fair market value, the "acquisition price." Fair market value must be determined, in good faith, by the board of directors of the acquiring person, or its delegee, as of any date within 60 calendar days prior to filing, if filing is required, or within 60 days prior to closing, if a filing has not been made. The rules do not specify the valuation or accounting techniques to be used in making such a determination.
"Acquisition price" is the total amount of consideration received by the seller(s) for the acquired assets. That consideration includes, for example, the assumption of any accrued liabilities by the acquiring person, and it includes any separate amount paid to the seller(s) for a covenant not to compete. The acquisition price is "determined" if the parties have agreed upon the consideration, or if the amount of consideration (e.g., by reason of post-closing adjustments or contingent future payments) can be reasonably estimated. Anticipated future payments are included at face value and cannot be discounted to present value. If the acquisition price is not determined, then fair market value governs the value of the transaction.
b. Acquisitions of voting securities
If the voting securities that will be held as a result of the acquisition are publicly traded, their value is the market price or the acquisition price, whichever is greater. For open market purchases, tender offers, conversions, exercises of options or warrants, and the like, "market price" means the lowest closing quotation during the 45 calendar days prior to closing. For transactions pursuant to a contract or letter of intent, "market price" is the lowest closing quotation during that portion of the same 45-day period that begins one day before execution of the contract or letter of intent. If acquisition price is not determined, market price governs the value of the transaction. If market price is indeterminable because closing is more than 45 days away, and the acquisition price is determined, then acquisition price is the value of the transaction. If neither market price nor acquisition price is determined, fair market value determines the value. If the stock is not publicly traded and the acquisition price is determined, the value of the transaction is the acquisition price. If the acquisition price is not determined, the value of the transaction is the fair market value.
If an acquiring person already holds voting securities or assets of an acquired person, the previously acquired securities or assets may, in some circumstances, have to be included in the value of the transaction. Please consult your HSR advisor.
c. Acquisitions of non-corporate interests
In an acquisition of non-corporate interests that confers control of an unincorporated entity, the value of the interests held as a result is the acquisition price (if determined) plus the value of any interests in the acquired entity held by the acquiring person prior to the acquisition. If the acquisition price is not determined, the value is the fair market value of the interests.
d. Valuation Worksheet
The FTC has provided the following valuation worksheet.
Cash to be paid at closing $_______ Cash to be paid at any other time (do not discount to present value) $_______ Face amount of any note (do not include interest) $_______ Value of any securities to be paid (describe valuation method below) $_______ Value of other assets transferred (describe valuation method below) $_______ Assumption of accrued liabilities (only in asset acquisitions) $_______ Any other consideration to be paid (describe) $_______ Total Acquisition Price $_______
The fair market value of any exempt assets, voting securities or non-corporate interests is then deducted from the total acquisition price to determine the value of the transaction to be used to determine reportability and calculate the fee.
For each acquisition with a value from $50 to 200 million identified above, it is necessary to identify the acquiring and acquired person(s).
a. The Acquiring Person
Each entity that, as a result of the acquisition, will hold assets or voting securities that it did not previously hold is an acquiring entity. To "hold" generally means to have beneficial ownership. In addition, an entity "holds" all assets and securities of other entities that it "controls."
"Control" is defined as holding 50% or more of the voting securities of a corporation or, for a non-corporate entity, the right to 50% or more of the profits or 50% or more of the assets upon dissolution or the contractual power to designate 50% or more of the directors of a for-profit or not-for-profit corporation or the trustees of certain trusts.
The "ultimate parent entity" ("UPE") of the acquiring entity is the entity that controls the acquiring entity and is not itself controlled by any other person. "Person" is defined as, "an ultimate parent entity and all entities that it controls directly or indirectly."
Accordingly, the "acquiring person" is the UPE of the acquired entity and it includes all entities that the UPE controls.
b. The Acquired Person
The "acquired person" is the UPE of the entity whose assets are being acquired or of the entity whose voting securities or non-corporate interests are being acquired, together with all other entities controlled by that UPE.
Step 4: Apply the Size-of-Person Test to the Acquiring and Acquired Persons
a. Annual Net Sales ("sales") of the acquiring and acquired persons are determined by reference to the most recent annual consolidated statement of income and expense of each UPE. If either UPE controls any entity whose results are not consolidated, the annual sales must be restated on a fully consolidated basis.
b. Total Assets ("assets") are determined by reference to the most recently prepared consolidated balance sheet of each UPE. Any unconsolidated controlled entities must be included (if they would change the outcome). Special rules apply if a UPE does not have a regularly prepared balance sheet, if it is newly formed or if it is a natural person.
c. The Test:
- If neither the acquiring nor the acquired person has sales or assets of $100 million or more, STOP. The Act does not apply.
- If the both the acquiring person and the acquired person have sales or assets of $100 million or more, the Act applies. If not, continue to the next paragraph.
- If the acquiring person has sales or assets of $100 million or more, and the acquired person does not, is the acquired person engaged in manufacturing? If it is not, does it have assets of $10 million or more? If it does not, STOP. The Act does not apply.
- If the acquired person is engaged in manufacturing, does it have sales or assets of $10 million or more? If so, the test is satisfied and the transaction must be reported. If not, STOP. The Act does not apply.
- If the acquired person has sales or assets of $100 million or more and the acquiring person does not have sales or assets of $10 million or more, STOP. The Act does not apply. If the acquiring person has sales or assets of $10 million or more, a report must be filed.
The Act and rules provide a number of exemptions for certain types of property, certain types of buyers and sellers and certain transaction structures. An acquisition may be wholly, or only partly exempt. If it can be determined at an early stage that one of the exemptions applies to the entire transaction, it may be possible to eliminate Steps 1 to 4 above. The following are the most frequently encountered exemptions.
a. Structural Exemptions
Intraperson transactions. If the acquiring and acquired entities are part of the same person by reason of holdings of voting securities or non-corporate interests, the transaction is exempt. Thus, the creation of a new subsidiary or the transfer of assets, voting securities or non-corporate interests from one controlled subsidiary to another is not reportable. This exemption applies to the formation of some joint ventures and not others, depending on the value of the owners' contributions and the percentage of the voting securities or interests held by each.
Independent joint ventures. An acquisition of any size by newly-formed joint venture will not be subject to the act so long as the joint venture is not controlled by any other person and it does not hold $10 million or more in assets, excluding funds being used for the acquisition or previously acquired voting securities of the acquired person. This will ordinarily require at least three joint venturers, none of whom controls the joint venture.
Stock dividends and splits. If a dividend or split is pro rata so that no shareholder's percentage of ownership is increased, the transaction is exempt.
Conversions and Reorganizations. If an entity is converted to a different form (e.g., partnership to corporation), the receipt of securities or interests in the new entity is exempt if the entity is controlled by the same person.
Bona fide debt workouts. An acquisition by a creditor of stock or assets in satisfaction of an existing debt is exempt if the creditor had entered into a "bona fide credit transaction in the ordinary course of the creditor's business." The exemption does not apply to a creditor who purchases debt instruments after the debtor has filed for bankruptcy.
b. Exemptions For Particular Types Of Property
Real property transactions. Acquisitions of many types of real property, including hotels, farms and recreational land, are exempt. In some circumstances, office and residential property, new (greenfield) facilities retail rental facilities and coal and oil reserves may also be exempt. Acquisitions of voting securities of an entity the principal assets of which are exempt real property are also exempt. Any non-exempt real property held by the acquired entity must, however, be evaluated under Steps 1-4 and may constitute a reportable transaction. (For example, the acquisition of the business of a large retail department store as part of the acquisition of the shopping center in which the store is located is not exempt under this provision.) Similarly, any "associated agricultural assets," assets that are integral to the agricultural business conducted on exempt real property, are not exempt and must be valued and reported if in excess of $50 million. Such assets include inventory (livestock, crops, dairy products), structures, fertilizers and animal feeds.
Goods (assets) acquired in the ordinary course of business. Acquisitions of new goods, current supplies (including goods acquired and held solely for resale or leasing, to be consumed by the acquiring person's business or to be incorporated into a final product) and certain used durable goods acquired for resale or lease that have a useful life greater than one year and which are promptly replaced by the seller, are exempt. Assets comprising an "operating unit" operated by the acquired person are not subject to this exemption. An "operating unit" need not be a distinct legal entity if it is operated as a business at a particular location or for particular goods or services.
Foreign assets. The acquisition of assets located outside the United States is exempt unless the assets to be acquired generated sales in or into the United States of $50 million or more in the acquired person's most recent fiscal year. Mobile assets (aircraft, ships, oil rigs, etc.) are not exempt if they have been in the United States within the last year.
An acquisition of foreign assets that exceeds the $50 million threshold will nevertheless be exempt when:(1) The acquired and acquiring persons are foreign;
(2) The aggregate sales of the acquired and acquiring persons in or into the United States in their most recent fiscal years are less than $110 million;
(3) The aggregate total value of the assets located in the United States of the acquired and acquiring persons (other than investment assets, securities of another issuer and credit guaranteed to a joint venture by the forming parties) is less than $110 million; and
(4) The total value of the transaction does not exceed $200 million.
Foreign Voting Securities. An acquisition of voting securities of a foreign issuer by a United States person is exempt unless the foreign issuer, including its controlled subsidiaries: (1) holds assets located in the United States with an aggregate fair market value of more than $50 million (excluding investment assets, securities of another issuer and credit guaranteed to a joint venture by the forming parties), or (2) made aggregate sales of over $50 million in or into the United States in its most recent fiscal year. If interests in multiple foreign issuers are being acquired by a U.S. person from the same acquired person, the assets located in the U.S. and sales in or into the U.S. of all such issuers must be aggregated to determine whether the $50 million threshold for either U.S. sales or assets is exceeded.
A foreign person's acquisition of voting securities of a foreign issuer is exempt unless, as a result of the acquisition the acquiring person will obtain control of a foreign issuer that directly or through controlled subsidiaries: (1) holds assets located in the United States (other than investment assets, securities of another person and credit guaranteed to a joint venture by the forming parties) with an aggregate value of $50 million or more, or (2) made aggregate sales of over $50 million in or into the United States in its most recent fiscal year.
If controlling interests in multiple foreign issuers are being acquired by a foreign person from the same acquired person, the assets located in the U.S. and sales in or into the U.S. of all such issuers must be aggregated to determine whether the $50 million threshold for either U.S. sales or assets is exceeded.
If either of those $50 million thresholds is exceeded, an acquisition of foreign voting securities by a foreign person is nevertheless exempt if:(1) the aggregate sales of the acquiring and acquired persons in or into the United States are less than $110 million in their most recent fiscal years,
(2) the fair market value of the aggregate total assets of the acquiring and acquired persons that are located in the United States (other than investment assets, securities of another person and credit guaranteed to a joint venture by the forming parties) is less than $110 million, and
(3) the total value of the transaction is not more than $200 million.
c. Exemptions Based On The Characteristics Of The Buyer
Acquisitions solely for purposes of investment. An acquiring person may acquire up to ten percent of the outstanding voting securities of an issuer "solely for purposes of investment." This exemption is narrowly interpreted by the Agencies and its applicability may depend on the particular facts of the transaction. Acquisitions of this type should be reviewed by an antitrust advisor to confirm that the exemption can be claimed.
Institutional investors. Acquisitions of voting securities by "institutional investors" such as banks, investment companies, broker-dealers, insurance companies and pension funds, are exempt if: (1) the acquisition is made directly by the institutional investor in the ordinary course of business solely for purposes of investment, (2) the buyer will hold 15% or less of the outstanding voting securities of the issuer, and (3) the securities acquired are not those of another institutional investor of the same type as the acquiring person. The applicability of this exemption should also be carefully reviewed before deciding not to report a transaction.
Securities Underwriters. Acquisitions of voting securities in the ordinary course of business and in the process of underwriting are exempt.
Employee trusts. Acquisitions of voting securities by an employee trust qualified under the Internal Revenue Code are exempt if the trust is controlled by a person that employs the beneficiaries and the securities acquired are those of the controlling person or an entity within it.
Formation of not-for-profit entities. An acquisition of voting securities or non-corporate interests at the time of formation is exempt if the entity will be not-for-profit within the meaning of the Internal Revenue Code.
d. Other Exemptions
Other agency approvals. Transactions requiring approval by other federal agencies under, for example, the Federal Aviation Act, the National Housing Act, the Federal Communications Act and banking legislation may be exempt. Such acquisitions are subject to special rules and should be the subject of specialized review. A "mixed transaction" is one that has a portion that requires regulatory approval and a portion that does not. The part that does not require advance review and approval by a regulatory agency is not exempt and must be reported as if it were a separate transaction if it meets the dollar thresholds described above.
Transfers to or from a Federal government agency or a State or political subdivision are exempt.
Foreign governmental entity. Acquisitions by or from an entity the UPE of which is a foreign state or government or agency thereof is exempt if the acquisition is of assets located in the foreign state or voting securities of an issuer organized under the laws of that state.
Convertible securities. Acquisitions of convertible voting securities are exempt. Subsequent conversions of such securities may, however, be reportable.
Gifts, wills, intestate succession and trusts. Acquisitions resulting from a gift, testamentary disposition, intestate succession or transfer by a settlor to an irrevocable trust are exempt.
Pub.L. 106-102, Title I, § 133(c), 113 Stat. 1383 (1999). The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "Act"), is codified at 15 U.S.C. § 18a. The Rules are found at 16 C.F.R. Parts 801-803.
Since October 1, 2005, the jurisdictional and fee-threshold values are indexed for inflation and are adjusted annually. The current adjusted values are shown in Appendix A. All such figures in this article should be deemed adjusted to the current values.
For 2014 the fee schedule is as follows:
Size of Transaction
$75.9 up to $151.7 million
$151.7 up to $758.6 million
$758.6 million and up
A non-corporate interest is an interest in an entity such as a general or limited partnership, limited liability corporation or partnership, cooperative or business trust that gives the holder the right to any profits of the entity or a share of its net assets upon dissolution.
Examples are certain types of real property and certain securities acquired solely for purposes of investment. For more detail see Step 5 below.
Special attribution rules apply to members of families, trusts, pension funds, banks and insurance companies.
Special rules apply to mergers and consolidations. Generally, in a merger the UPE of the surviving entity is the acquiring person and the acquired person is the UPE that, prior to the merger, controlled the entity whose securities or assets are held by another party after the merger. In a consolidation where both parties lose their pre-acquisition identities, each party is both an acquiring and an acquired person.
In practice, such restatement is only necessary if it would make a difference in outcome, that is, the unconsolidated sales would increase annual net sales from less than $10 or 100 million to in excess of either figure.
A person is "engaged in manufacturing" if it produces and derives annual sales in excess of $1million from products within industries in Sectors 31-33 as coded by the North American Industrial Classification System (1997 edition) published by the Executive Office of the President, Office of Management and Budget. Wholesalers, retailers and others not engaged in manufacturing are treated specially because they frequently have annual sales that are very large in comparison to their total assets.
"In or into" has been interpreted to mean sales actually completed in the U.S. If orders are taken, sales booked or payments are made outside the U.S. the transactions will not be considered sales "in or into" the United States even though the goods are ultimately shipped to the U.S.
"Investment assets" are cash, deposits in financial institutions, other money market instruments and government obligations.
If the acquiring person is a U.S. person, U.S. assets and sales must be aggregated for all issuers in which any interest is acquired. A foreign acquirer must only aggregate U.S. sales and assets for issuers in which it acquires controlling interest.
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