On Monday, September 21, 2020, the Federal Trade Commission, with the support of the Department of Justice’s Antitrust Division, proposed changes to the rules governing merger notification under the Hart-Scott-Rodino Act of 1976, as amended.[i] The revisions would require investment funds to report additional information and would exempt certain minority acquisitions from the reporting requirements, including acquisitions of 10% or less of an issuer’s voting securities by activist investors. The FTC Commissioners voted 3-2 to publish the proposed rulemaking, with Commissioners Rebecca Slaughter and Rohit Chopra dissenting.[ii] The changes will be available for public comment for 60 days following their publication in the Federal Register.[iii]

Key Changes

• Investment Fund Reporting: Under the current rules, acquiring entities are required to report certain information regarding their associates, which includes any entities that manage or are managed by the acquiring entity and any entities that are under common control or common management with the acquiring entity.[iv] However, the information required is limited to any controlling or minority interests in entities reporting in the same NAICS or NAPCS industry codes as the acquired company.[v] Moreover, detailed financials and revenue information are only required for entities that are directly controlled by the acquiring entity or its ultimate parent.[vi] The general perception among the antitrust agencies is that this limited reporting does not adequately capture the competitive impact of a transaction involving investment funds.[vii] Accordingly, the proposed rules would require both the acquiring and acquired entities to disclose financials, detailed revenues, and controlling or minority interests for all associates, even where they have no NAICS or NAPCS code overlap with the acquired company.[viii] Acquiring entities will also be required to report acquisitions by associates in overlapping NAICS or NAPCS codes in the previous five-year period.[ix] The changed rules may not be applied to entities structured as index or exchange-traded funds.[x]
• Minority Acquisition Reporting: Under 16 C.F.R. 802.9 in its current form, acquisitions of voting securities solely for the purpose of investment may be exempt from the reporting requirements if the acquirer’s aggregate holdings in the issuer do not exceed 10% of the outstanding voting securities.[xi] Voting securities are considered held “solely for the purpose of investment” if the holder has no intention to participate in the “formulation, determination, or direction of the basic business decisions of the issuer.”[xii] The FTC and DOJ have noted that acquisitions of 10% or less rarely present any competitive concerns but still require agency resources to review.[xiii] Accordingly, the agencies have proposed an additional exemption for de minimis acquisitions of voting securities. This exemption would apply when the acquirer’s aggregate holdings in the target will not exceed 10% of the outstanding voting securities and the acquirer (i) is not a competitor, (ii) does not hold more than 1% of the voting securities of a competitor, (iii) does not employ any of the directors or officers of the target or its competitors, and (iv) there is not a significant vendor-vendee relationship between the acquirer and the target.[xiv]

Dissenting Opinions

FTC Commissioners Rohit Chopra and Rebecca Slaughter dissented from the Commission’s decision, particularly the proposal for the new de minimis exemption. They have argued that the proposed exemption would broaden existing information gaps in the agencies’ merger review process and that alternatives to outright elimination of the reporting requirements should be explored.[xv] The Commissioners also noted that buyers could potentially make multiple minority acquisitions of competing firms in the same business or industry and there would be no notification requirement under the proposed rule.[xvi] Commissioner Chopra has also noted that investors may have difficulty even determining whether the exemption would apply, as they may not have access to certain business-specific information such as the target’s competitors.[xvii]

Takeaways

• With the elimination of the “investment only” requirement, activist investors would be able to qualify for the exemption. Since HSR filings would not be required, activist investors could acquire 10% or less of an issuer’s voting securities without having to notify the issuer.
• In recent years, there has been growing concern that common ownership of non-controlling interests in competing companies, often by investment funds or asset managers, may have anticompetitive effects. The proposed rules address this issue by requiring additional information on “associate” (i.e., minority-held or managed) holdings and limiting the application of the new exemption where the acquirer or its associates hold shares of the target or a competitor.
• Reporting additional information on “associates” is likely to require significant resources for both acquiring and acquired entities, particularly for entities holding interests in companies that do not typically report NAICS or NAPCS codes. Prospective buyers and sellers contemplating a transaction should begin collecting this information as early as possible to avoid any delays to filing.
• The FTC previously considered revising the 802.9 exemption to eliminate the “investment only” requirement in 1988.[xviii] Critics of the 1988 proposal argued the exemption would render the statutory minimum threshold irrelevant.[xix] Critics further argued that removing the “investment only” requirement was diametrically opposed to the purpose of the HSR Act, as it would eliminate notification requirements even if a buyer intends to influence the target’s management.[xx] The 1988 proposal was ultimately not adopted.[xxi]
• The de minimis exemption is narrowly crafted and is intended to apply only to filings that already receive little attention from the antitrust agencies. According to a statement issued by FTC Commissioner Noah Philips, from 2001 to 2017, the antitrust agencies received 26,856 total HSR filings, of which only 1,804 filings involved acquisitions of 10% or less of a company’s voting securities and none were challenged by either agency.[xxii]

[i] Press Release, FTC and DOJ Seek Comments on Proposed Amendments to HSR Rules and Advanced Notice of Proposed HSR Rulemaking, FTC (Sept. 21, 2020), available at https://www.ftc.gov/news-events/press-releases/2020/09/ftc-doj-seek-comments-proposed-amendments-hsr-rules-advanced.

[ii] Id.

[iii] Id.

[iv] 16 C.F.R. § 801.1(d)(2).

[v] 16 C.F.R. §§ 801.1, 803.2. NAICS and NAPCS codes are industry codes maintained by the U.S. Census Bureau. Parties filing HSR must allocate their revenues from the prior fiscal year into the appropriate codes.

[vi] 16 C.F.R. §§ 801.1, 803.2.

[vii] See Notification of Proposed Rulemaking: Proposed Amendments to HSR Rules at 9-12, FTC (Sept. 21, 2020) [hereinafter “Notification of Proposed Rulemaking”], available at https://www.ftc.gov/system/files/documents/federal_register_notices/2020/09/p110014hsractamendnprm09182020_0.pdf.

[viii] Notification of Proposed Rulemaking, supra note 5, at 12-17.

[ix] Notification of Proposed Rulemaking, supra note 5, at 19

[x] Id.

[xi] 16 C.F.R. §§ 801.1, 802.9.

[xii] 16 C.F.R § 801.1,.

[xiii] Notification of Proposed Rulemaking, supra note 5, at 19-20.

[xiv] Notification of Proposed Rulemaking, supra note 5, at For purposes of the proposed exemption, a significant vendor-vendee relationship would involve sales greater than $10 million in the aggregate in the most recent fiscal year. Id.

[xv] See Statement of Commissioner Rohit Chopra at 2-3, FTC (Sept. 21, 2020), available at https://www.ftc.gov/system/files/documents/public_statements/1580695/p110014hsrrulemakingchoprastatement2.pdf; Statement of Commissioner Rebecca Kelly Slaughter at 1, FTC (Sept. 21, 2020), available at https://www.ftc.gov/system/files/documents/public_statements/1580703/p110014hsrrulesslaughterstatement.pdf.

[xvi] See Statement of Commissioner Rohit Chopra at 2-3, supra note 13 at 2-3.

[xvii] Id.

[xviii] Notification of Proposed Rulemaking, supra note 5, at 23-28.

[xix] Id.

[xx] Id.

[xxi] Id.

[xxii] Statement of Commissioner Noah Joshua Phillips at 2-3, FTC (Sept. 18, 2020), available at https://www.ftc.gov/system/files/documents/public_statements/1580699/p110014hsrrul