The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) has long regulated mergers and acquisitions by subjecting them to review by the Federal Trade Commission (FTC) and Department of Justice (DOJ). On September 21, 2020, the FTC, with the concurrence of the DOJ, proposed amendments and exemptions to existing rules. What follows is a brief explanation of the current rules and a discussion of the FTC-DOJ proposals.
The HSR requires that parties to certain mergers and acquisitions that meet requirements as to size of the transaction and size of the parties submit pre-transaction filings with the FTC and DOJ, unless an exemption is available. Currently, thresholds generally are set at transactions in which the acquiring party will, as a result of the transaction, hold an aggregate amount of voting securities, non-corporate interests or assets of the acquired party following completion of the transaction valued at $94 million or more, one party to the transaction has annual net sales or total assets of $188 million or more, and the other party has annual net sales or total assets worth $18.8 million or more.
There is a tiered filing fee based on the value of the transaction, with a maximum of $280,000 per transaction. As the stated purpose of pre-notification is to allow the agencies to review the competitive implications of the transaction, there is also a 30-day waiting period that must be observed before the acquiring party can move forward with its purchase. These filings are not public, but if the voting securities are acquired on the open market or from third parties, the acquiring party must notify the issuer, which also has an obligation to submit an HSR filing (albeit without paying a filing fee).
On September 21, the FTC, with the concurrence of the DOJ, proposed amending existing rules and interpretations implementing HSR to create a new “de minimus” exemption from the notification filing requirements (the “NPRM”) for acquirers of 10% or less of an issuer’s voting securities unless the acquiring person already has a competitively significant relationship with the issuer. The proposal also would change the definition of “acquiring party” to include its “associates” under common management (but not majority ownership), with a result that holdings in an issuer would be aggregated across many separately controlled investment funds including private equity and hedge funds. Aggregated holdings not only determine the reportability of transactions, but also determine the availability of this new proposed exemption or other existing exemptions currently relied upon by investment funds and other institutional investors. Investors who acquire 10% or less of the voting securities of an issuer “solely for the purpose of investment” are exempt from the filing requirement (See 15 USC 18a(c)(9); 16 CFR 802.9). Institutional investors (as defined) may rely on an exemption that allows the acquisition of up to 15% of the voting securities of an issuer, provided the acquisition is in the ordinary course of business, is “only for the purpose of investment” and meets certain other requirements. (See 16 CFR 802.64).
The FTC vote to propose the rule amendments was 3-2, with Commissioners Chopra and Slaughter dissenting—they wanted more filings and information to be required. Commissioner Phillips issued a statement in support.
Concurrently the FTC also published a wide-ranging advanced notice of proposed rulemaking (the ANPRM) that addresses multiple aspects of the pre-merger notification rules, some of which would provide increased flexibility to potential acquiring parties and some that would narrow existing exclusions and exemptions. The topics of the ANPRM include: the size of transaction; real estate investment trusts; non-corporate entities; acquisitions of small amounts of voting securities; influence outside the scope of voting securities; transactions or devices for avoiding the HSR Act requirements; and issues pertaining to the HSR filing process. The FTC vote to publish the ANPRM was unanimous.
Perhaps signaling the significance of the potential changes, on October 19, 2020 the FTC announced plans to hold three virtual Q&A sessions on its HSR rulemaking initiative, with the first two on the NPRM—November 9 (focus on aggregation proposal) and November 10 (on the “de minimus” exemption) and November 16 on the ANPRM. Both the NPRM and ANPRM have a 60-day comment period after publication in the Federal Register, which as of this posting has not yet occurred.
The NPRM provides as its rationale as to the new “de minimus” exemption that the FTC and DOJ have never brought an action for anticompetitive activity in connection with the proposed acquisition of 10% or less of an issuer’s voting securities. It is worth noting that the exceptions to the proposed “de minimus” exemption may greatly reduce the benefit of that exemption for many investors. In particular, any interest greater than 1% in any competitor (broadly defined) by the acquiring fund or any commonly managed fund makes the exemption inapplicable. And, while stakes or involvement in a competitor often have been interpreted as eliminating the passive investment exemption, the proposed rule also eliminates application of the de minimus exemption for significant vertical relationships, which also could increase compliance costs to evaluate.
Commissioner Phillips also indicated that the “de minimus” exemption would address the “grey area” that arises from the FTC’s application of the constraint of “investment only” that, in his view, today prevents competition by inhibiting “active” investors. Somewhat paradoxically, the NPRM also seeks, through the proposal to require aggregation across investment funds, more data and more information from investment funds that today (for the most part) rely on either of two exemptions available if the acquisition is for purposes of “investment only.” The FTC acknowledges that the scope of “investment only” has been narrowly interpreted and asks for specific comments on this in the ANPRM.
Aggregation is likely to result in increased compliance burdens to assess reportability, and also more filings as the filing thresholds will be met more often. The rationale for requiring aggregation is to provide the FTC with more information about both the economic interest held by funds under common management, which some view a potential source of competitive harm, and the structure of the acquiring party and its associated funds.
Potential Impact of Proposed Rules
Public companies monitor who are their shareholders in several ways, including notifications received under HSR and public notice filings required by SEC rules. The SEC rules, promulgated under Section 13 of the Securities Exchange Act, require public notice filings of securities holdings under certain circumstances. Form 13D is required to be filed within 10 days of the acquisition when any person acquires 5% or more of a class of publicly traded securities of an issuer “with the intent or effect of influencing control”. An institutional investment manager with $100 million in assets under management files Form 13F on a quarterly basis listing all equity securities for which they have the “power to dispose or the power to vote,” and Form 13G is available for investors that qualify for exemptions from filing a Form 13D, including no intent of influencing control. In July 2020, the SEC proposed to amend Form 13F, requiring its filing only by managers with assets under management of $3.5 billion or more.
If the FTC were to finalize the NPRM as proposed, public companies will have less information about acquisitions of their shares. Although HSR is not intended, as Congress stated when it enacted the pre-merger notification requirement, to “affect the market for corporate control,” public companies value the ability to know when and by whom share acquisitions are made that trigger the HSR notification above and beyond relevant securities disclosures.
Index funds must manage inflows from investors and receipts of cash and securities from dividends and corporate actions as well as redemptions against an index (e.g., the S&P 500) which is relatively static. This can require daily trading of at least some of the component securities in the index. This activity is accentuated when the index provider alters the composition of the index the fund is tracking, by either adding or dropping particular company securities from the relevant index or changes the “index weight” of a company’s shares. The aggregation requirement could be especially disruptive to certain investment strategies, such as index funds, because the requisite waiting period (even with early termination) would prevent the fund manager from continually tracking the index. In addition, the filing fees would be borne by shareholders of the funds, reducing their returns. The NPRM requests comment on whether index funds and ETFs should be “differentiated” under the proposed aggregation rule.
The NPRM is likely to be supported by activist investors and opposed by issuers and those institutional investors that will be impacted by the new aggregation requirement. The FTC will need to weigh carefully the benefits of these changes as against the burdens, and most importantly whether the proposal in its entirety advances the purpose of HSR—to provide advance notice of transactions to the agencies so they may assess whether there will be a likely lessening of competition.
For more information about the notices, the Commissioners’ statements, and how to submit comments, please see: https://www.ftc.gov/news-events/press-releases/2020/09/ftc-doj-seek-comments-proposed-amendments-hsr-rules-advanced?utm_source=govdelivery.
The author gratefully acknowledges the review and comments of Adam Biegel, co-chair of the Antitrust Team at Alston & Bird. Views and any errors remain those of the author.