Buyer Beware: Increase in HSR Thresholds Does Not Mean Your Non-Reportable Transaction is Safe

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The purpose of the Hart-Scott-Rodino Act (“HSR Act”) Act is to preserve the agencies’ ability to investigate competitive consequences of a transaction before closing, provide an opportunity to obtain an effective remedy, and reduce the likelihood that competition will be reduced during the HSR waiting period. Even if there is no competitive overlap, the HSR Act still applies if the transaction is reportable under the Act. However, undergoing HSR review does not establish a safe harbor for a transaction. While it is rare for there to be a post-closing challenge of a reviewed merger, the FTC and the DOJ have the right to challenge such mergers and do so from time to time.

Falling outside of the HSR Act is not the same as falling outside the antitrust laws. Approximately two dozen non-reportable transactions have been investigated over the past 10 years. Because there are no filings for these transactions, the vast majority of them are challenged post-closing – sometimes several years later. For example, in October 2012, the FTC issued a complaint and settlement with regard to a $15 million transaction that was consummated in 2007 (Magnesium Elektron’s acquisition of Revere Graphics). 

Amazingly, some of the challenged transactions were well under the reporting threshold, and the remedies imposed by the agencies can be draconian. In 2010, in the Election Systems & Software transaction, valued at approximately $5 million, the DOJ’s investigation did not begin until many of the target’s operating divisions had been dismantled. The DOJ required the buyer to divest voting equipment and other assets it had purchased the previous year and to license certain software at no charge.

In the case of a non-reportable transaction, the parties can voluntarily bring the transaction to the attention of the agencies to gain some sense as to whether the transaction will be seen as anticompetitive. However, before doing so, the parties should carefully balance greater certainty against factors, among others: that the transaction might have otherwise gained no notice, the simple fact of bringing the transaction to the attention of the agencies might lead them to think that there is something concerning that they should be considering, the existence of hot documents, and unpredictable delay because, unlike a review in the HSR context, there is no specific time by which the agencies must complete their review.

Each year, usually in February, the thresholds used to determine whether a transaction is reportable changes based on the change (if any) in the gross national product. The following are the 2013 thresholds, subject to some nuances. These revised thresholds will become effective on February 11, 2013.

Size or value of transaction in 2013. The transaction must have a value greater than $70.9 million.

Size of Persons Test in 2013. If the size of transaction test is met, the size of persons test requires that one party to the transaction, on a consolidated basis, have at least $14.2 million in sales or assets and another person that is a party to the transaction have, on a consolidated basis, at least $141.8 million in sales or assets. However, if the transaction size exceeds $283.6 million, a filing is required without regard to the size of persons.

A civil penalty can be imposed for up to $16,000 per day from the date the transaction closes until the date the delinquent filing is cleared. These penalties can be imposed on acquirers who are individuals, not just on corporations. For example, recently, a CEO was fined $500,000 for failure to submit an HSR filing when acquiring shares through a 401(k).