In September 2020, the FTC announced that it would be proposing a series of changes to the Hart-Scott-Rodino Premerger Notification regulatory regime with the anticipated publication of both a Notice of Proposed Rulemaking (“NPRM”) and Advanced Notice of Proposed Rulemaking (“ANPRM”). Both were published in the Federal Register on December 1, 2020, triggering a 60-day comment period, which is set to expire on February 1, 2021.

The published notices cover different ground, summarized as follows:

• NPRM: Contains two important changes:
  • the first requiring filing parties to make additional disclosures of information about “associates” and to aggregate acquisitions in the same issuer across those entities, and
  • the second is a new rule which would exempt the acquisition of 10 percent or less of an issuer’s voting securities, unless there is a pre-existing  “competitively significant relationship” with the issuer.
• ANPRM: Here, the FTC is seeking input and comment on seven specific topics with an eye towards how that input can help to shape potential rule changes in the future, and how those rules would be interpreted. The issues are:
  • Size of transaction
  • REITs
  • Non-corporate entities
  • Acquisitions of small amounts of voting securities
  • Influence issues beyond the scope of voting securities
  • Transactions / devices for avoiding the rules
  • HSR filing process issues

The changes of the NPRM, and areas of study of the ANPRM, are further examined below.

1. The Notice of Proposed Rulemaking

Expanding the Definition of “Person”

The NPRM accomplishes the first of the proposed changes by expanding the definition of the word “Person” in a manner which would clearly capture more filings from investment funds. By way of just one example, currently, the HSR filing process requires the ultimate parent entity (“UPE”) of the “acquiring person” to make the filing. More often than not, investment funds are typically their own UPEs. Therefore, under the current rules there is no required aggregation of commonly managed funds  when determining the size of transaction and reportability.  Such commonly managed funds fall within the definition of “associates” and trigger only, in some circumstances, the need for the UPE to provide some information in its filing.

The rule change would now include “associates” to be within the same “Person.”  Currently, if a fund sponsor has two of its funds make investments in a company’s voting securities, but neither investment exceeds the current $94M threshold, no filing is required as long as the two funds are separate “Persons” under the HSR rules. Under the new rules, a filing would be required if the total investment exceeds the threshold because the two funds are commonly managed, and therefore part of the same “Person” and are not just “associates” of that “Person.”

That impact, along with a similar impact on other structures, will increase the number of filings but reflects the realities of fund management in today’s markets. The definitional change will also capture filings by new funds and special purpose vehicles (“SPV”) which have no UPE or regularly prepared balance sheet, such that they are not reportable currently unless they exceed the large transaction threshold (currently $376M), because it does not meet the size of person threshold. Under the new rules, if, for example,  the new fund  has “associates” or if 50 percent or more  of the equity of the SPV is held by funds that are “associates.” Clearly, stemming, it seems, from a concern with whether and how a control and influence element is exercised, through the expanded definition of “Person” the FTC has now positioned itself to give the competition-related significance of private equity - engendered industry consolidations and the influence of funds fuller and more extensive examination under the HSR microscope.

De Minimis Exemption

As for the second change posed by the NPRM, the current HSR regime exempts acquisitions which result in holding 10 percent or less of an issuer’s voting securities when the acquisition meets the solely for purposes of investment test. FTC interpretations have been stingy because investment-only claims are laid up against, for example, how active an investor (a fund or otherwise) is in the company whose voting securities were acquired. As changed, the FTC has effectively created a de minimis exemption – if the acquisition is of 10 percent or less of the issuer’s voting securities, the exemption is available, but only in the absence of a “competitively significant relationship” between the parties.

The question now faced will be in the application of the “competitively significant relationship” test – which could potentially override the nature of the de minimis exemption. The acquiring person must be able to demonstrate that:

• it does not compete with the issuer,
• it does not hold more than a 1 percent interest in any competitor of the issuer,
• no person authorized by the acquiring person is an officer or director of the issuer, and
• there is no sales (“vendor/vendee”) relationship, in excess of $10M in the aggregate in the most recent fiscal year between the issuer and the acquiring person.

In addition to those requirements, the changed definition of “Person” is likely to limit the availability of the de minimis exemption where multiple funds are involved – for example if one fund, seeking the de minimis exemption, is within the same Person as another fund which owns more than 1 percent of a competitor of the entity the first fund is buying into, that “competitively significant relationship” will override the de minimis exemption, and require a filing assuming other thresholds are met.

2. The Advance Notice of Proposed Rulemaking

The ANPRM represents the FTC’s effort to engage interested parties in the dialogue as it considers what regulatory changes need to be considered and made to bring the HSR regime’s rules into the realities of the current commercial marketplace in a manner which keeps the process relevant and material to the preservation of competition.

For example, the FTC wants to hear more about how parties to a deal determine its acquisition price and fair market value, so as to analyze, what, if any, regulatory changes may be needed. Similarly, the FTC is asking for comment on the continuing efficacy and need for the REIT exemption, how non-corporate interests (“NCI”) are treated and whether the “solely for the purposes of investment” definition, in light of the new de minimis exemption (discussed above), requires further attention. In addition, the FTC is asking for input on whether things like the acquisition of board observer rights and convertible voting securities ought to trigger an HSR filing requirement.

Conclusion

HSR is, and always has been, a complex regulatory minefield. The new rules, and the potential for additional rulemaking changes, indicate that HSR is acquiring additional density as the nature and structure of the merger and acquisition world develops its own complexities. The involvement of private equity, hedge and other funds, and wealthy individual investors in new and more creative ways in multiple industries, and the manner in which it advances their consolidation and, realistically, market concentration has been elusive at times. While the fairly routine, bolt-on acquisitions still occur, deal structure has outpaced the HSR regime in some ways, and the FTC is, by the NPRM and ANPRM, making an effort to keep pace.