Acquisitions and Dispositions: U.S. Merger Control

• Pages: 35-72

35

ACQUISITIONS AND DISPOSITIONS:

U.S. MERGER CONTROL

A. Hart-Scott-Rodino Review

Given a private equity firm’s continuous cycle of investing,

compliance with the Hart-Scott-Rodino Antitrust Improvements Act of

1976 (HSR Act or the Act) is a key concern. Whether acquiring or

disposing of voting securities or assets, effectuating add-on acquisitions

for their portfolio companies, or selling shares in an initial public

offering, firms must be cognizant that such transactions could be subject

to premerger reporting under the HSR Act.

1. The HSR Review Process

Enacted as an amendment to the Clayton Antitrust Act of 1914

(Clayton Act), the HSR Act was created to provide the federal antitrust

agencies an opportunity to review transactions that may be competitively

significant before their consummation. To fulfill this purpose, the HSR

Act created new procedural rules to supplement traditional merger

analysis.

The HSR Act requires that parties to an acquisition of voting

securities, 1assets, or noncorporate interests (e.g., partnership or

membership interests) that meet certain jurisdictional thresholds, file a

Notification and Report Form (the HSR Form or the Form) to the Federal

Trade Commission (FTC) and the Antitrust Division of the Department

of Justice (DOJ) (collectively, the Agencies). Additionally, the parties to

the transaction must observe a waiting period prior to consummating the

transaction.

The “report and wait” obligations of the HSR Act operate

independently of the substantive requirements of the Clayton Act and the

Sherman Antitrust Act (Sherman Act). Therefore, the fact that a

transaction that is exempt from the reporting requirement, or one that has

1. Voting securities are those that entitle the owner or holder thereof, at

present or upon conversion, to vote for a director of the issuer or of an

entity included wit hin the same person as the issuer. 1 6 C.F.R.

§ 801.1(f)(1)(i).

36 Private Equity Antitrust Handbook

been reported and cleared, may be subsequently investigated and

opposed by either agency.2

2. HSR Reportability

Whether a particular transaction is subject to the requirements of the

HSR Act depends on the application of two jurisdictional thresholds

(1) the “size-of-transaction” test, and (2) the “size-of-persons” test.3

Generally, an HSR filing is required if a transaction satisfies both tests

and no statutory or regulatory exemption applies. However, in

transactions valued at more than $200 million (as adjusted), the size-of-

persons test becomes irrelevant; absent an exemption, such transactions

are reportable because of the size of the transaction alone.4

Note that both the size-of-transaction and size-of-persons thresholds

adjust annually—typically in the first quarter of the year—based on

changes to the gross national product. The thresholds are published in the

Federal Register and are also available on the FTC’s website.5

a. The Size-of-Transaction Test

The size-of-transaction test is met if, as a result of a transaction, the

acquiring person will hold voting securities, assets, or noncorporate

interests of the acquired person valued in excess of $50 million (as

adjusted). 6 Very particular and somewhat complex rules address the

calculation of the size of transaction. In general, the value of voting

securities, noncorporate interests, and, sometimes, assets of the acquired

person that the acquiring person already holds, in addition to those being

simultaneously acquired, must be included in the valuation.7 Yet many

other factors (e.g., assumed liabilities, amounts paid for non-voting

2. 15 U.S.C. §18; see also United States v. Heraeus Electro-Nite Co., 2014

WL 1927195 (D.D.C. 2014) (requiring divestiture of assets after finding

that an acquisition had harmed the market for steel manufacturing

sensors).

3. 15 U.S.C. § 18a(1) also provides for a “commerce test,” requiring that

either the acquiring or acquired person be engaged in commerce or in any

activity affecting commerce. Due to the fact that the commerce test is

almost always satisfied, it is not discussed at length.

4. 15 U.S.C. § 18a(a)(2)(A).

5. The current thresholds may be found at https://www.ftc.gov/

enforcement/premerger-notification-program/current-thresholds.

6. 15 U.S.C. § 18a(a)(2)(B).

7. 16 C.F.R. §§ 801.12-801.15.

37

Acquisitions and Dispositions: U.S. Merger Control

securities, third-party debt of the acquired issuer retired with closing

proceeds) further complicate calculating the size of transaction. This

chapter provides an overview of some of the common valuation

considerations in private equity transactions.

b. The Size-of-Persons Test

As noted above, to trigger reporting, transactions in excess of $50

million (as adjusted)8 but not in excess of $200 million (as adjusted)9

must also satisfy the size-of-persons test. The size-of-persons test is met

if a transaction involves:

(1) voting securities or assets of a person engaged in manufacturing

who has annual net sales or total assets10 of $10 million (as

adjusted) or more being acquired by any person who has total

assets or annual net sales of $100 million (as adjusted) or more;

or

(2) voting securities or assets of a person not engaged in

manufacturing who has total assets of $10 million (as adjusted)

or more being acquired by any person who has total assets or

annual net sales of $100 million (as adjusted) or more; or

(3) voting securities or assets of a person with annual net sales or

total assets of $100 million (as adjusted) or more being acquired

by any person with total assets or annual net sales of $10 million

(as adjusted) or more.11

To calculate the size-of-persons test correctly, it is important to

identify the “ultimate parent entity” (UPE) of each party to the

transaction, as that entity and all of its controlled entities constitute the

“person” being measured. Given that private equity funds do not

typically consolidate the financial reporting of their portfolio companies,

one must obtain financial statements of controlled portfolio companies,

8. Adjusted to $78.2 million, effective February 25, 2016. See Revised

Jurisdictional Thresholds for Section 7A of the Clayton Act, 81 Fed. Reg.

4299-300 (Jan 26, 2016).

9. Adjusted to $312.6 million, effective February 25, 2016. See id.

10 Typically a person’s net sales are as reflected on its last regularly

prepared annual income statement and its total assets are as stated on its

most recent regularly prepared balance sheet. See 16 C.F.R. § 801.11 for

details.

11. 15 U.S.C. § 18a(a)(2)(B).