October 8, 2020
The Federal Trade Commission has recently proposed major changes to the Hart-Scott Rodino (“HSR”) notification rules that would: 1) significantly change stock aggregation rules for funds with a common manager and 2) change the exemption which applies for acquisitions up to 10% of an issuer. Such changes will ultimately affect which acquisitions are subject to the HSR filing requirements.
While there is no firm date yet set for these changes to take effect, they could become final in the next few months, though changes to the proposals are still possible in the interim.
1. Proposed Changes to the Definition of “Person” and When Stock Holdings Must Be Aggregated
Currently, acquiring parties generally only have to aggregate the stock holdings held by each “Ultimate Parent Entity”. However, as investment managers sometimes create individual funds for each new acquisition, the FTC would like to expand the aggregation rules to encompass each of these funds under common management.
Therefore, the proposed rule requires that an acquiring party must aggregate the stock holdings of all of its “associates”, which includes all funds under common management, in determining when an HSR threshold might be crossed.
For example, if three investment funds with a common manager each sought to purchase $40 million in the same issuer, such holdings would have to be aggregated to determine whether an HSR threshold might be crossed. (The first threshold is currently at $94 million, as adjusted annually.) Currently, if each fund were considered its own Ultimate Parent Entity, they would not have to aggregate their holdings, even if they share a common manager.
If an HSR filing is required, additional financial information would also have to be provided from all of the funds under common management.
As a benefit to filing parties, the acquiring party would only have to pay one filing fee if three funds under common management each sought to cross a filing threshold individually. Currently, the rules would require three separate filing fees where each fund is its own UPE and seeks to cross a threshold (and no exemption is available).
2. Proposed Changes to the Exemption for Acquisitions Below 10% of An Issuer
The FTC also is proposing changes to the rule exempting certain acquisitions up to 10% of an issuer. Currently, only “passive” investors, which have no intent to participate in the business decisions of the issuer, are able to rely on this exemption.
The new rule would allow activist investors to also rely on the exemption, so long as their aggregate holdings (including those of their associates) remain below 10% of the target issuer, and certain conditions are met.
These other conditions include (but are not limited to):
- not owning 1% or greater of any competitor of the target (in any one line of commerce);
- not holding any officer position at the issuer;
- not having the right to appoint any director of the issuer, and
- not having any vendor-vendee relationship with the issuer in the most recent fiscal year valued at $10 million or greater.
The full text of the proposed changes can be found here:
Additional Information Gathering by the FTC
The FTC is also in the process of gathering information with regards to other potential changes to the HSR rules that have yet to be announced.
Among the topics the FTC is seeking information on include:
- How parties treat the payment of debt when calculating the deal value;
- How parties calculate the “fair market value” of a transaction;
- Whether REITs should be subject to greater notification requirements;
- Whether acquisitions of non-corporate interests in LLC’s and LP’s should be treated more like voting securities;
- How to define acquisitions which are made “solely for the purposes of investment”;
- Whether the acquisition of convertible voting rights or options, along with the right to appoint a director, allow an investor to exert influence over an issuer;
- Whether an investor’s ability to appoint board observers can influence the decision making of an issuer; and
- Whether the five-year grace period provided to acquiring parties after an HSR filing is too long.
A full list of the topics on which the FTC seeks information can be found here:
Comments on Proposed Rules
The FTC invites comments from any affected parties on the proposed rules and the topics on which they seek information. Such comments will be due 60 days after publication of the notices in the Federal Register.
Disclaimer: This post does not constitute legal advice or create any attorney-client relationship. Please contact an attorney if you have questions regarding the HSR filing rules and their application.