Mergers and Acquisitions

• Pages: 113-181

113

CHAPTER IV

MERGERS AND ACQUISITIONS

The Federal Trade Commission’s (FTC or Commission) authority to

challenge mergers or to bring enforcement actions seeking divestiture

comes from Section 7 of the Clayton Act and Section 5 of the FTC Act.

Section 7 prohibits acquisitions of stock or assets where the result of

such an acquisition “may be substantially to lessen competition, or to

tend to create a monopoly.”

1

Section 5 of the FTC Act broadly prohibits

“unfair methods of competition in or affecting commerce.”

2

The FTC usually challenges a merger on the grounds that it violates

both Section 7 of the Clayton Act and Section 5 of the FTC Act. The vast

majority of mergers or acquisitions reviewed by the FTC are subject to

the reporting requirements in the Hart-Scott-Rodino Antitrust

Improvements Act of 1976 (H-S-R Act).

3

As discussed below, the H-S-R

Act requires certain waiting peri ods to expire before the parties involved

in the transaction may consummate the deal so that the government may

examine the implications of those mergers that pose competitive

concerns. In addition, however, the FTC may review transactions outside

of the H-S-R process where, for example, the H-S-R filing thresholds are

not met or the transaction has already been consummated (even if the

consummated transaction was filed pursuant to the H-S-R Act and

reviewed prior to consummation).

A. Section 7A of the Clayton Act: H-S-R Reportable Transactions

Section 7A of the Clayton Act, commonly known as the H-S-R Act,

and the implementing regulations promulgated by the FTC set forth the

rules for reportable transactions (i.e., those for which a premerger

notification must be filed with the FTC and the Antitrust Division of the

United States Department of Justice (Antitrust Division)). The purpose of

the H-S-R Act is to provide the agencies with the opportunity to

investigate likely competitive effects of proposed mergers and

1

. 15 U.S.C. § 18.

2

. 15 U.S.C. § 45. Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1-2,

may also be used to challenge mergers. Section 1 broadly prohibits

agreements in restrai nt of trad e. Section 2 prohibits monopo lization,

attempts to monopolize, and co nspiracies to monopolize interstate o r

foreign commerce.

3

. 15 U.S.C. § 18a.

114 FTC Practice and Procedure Manual

acquisitions before they are consummated and to seek an injunction to

block transactions that may tend to substantially lessen competition. The

FTC, through its Premerger Notification Office (PNO), is the agency

principally responsible for enforcing the H-S-R reporting process.

1.

H-S-R Reporting Rules

The H-S-R reporting rules are detailed and complex. The following

information provides an overview of the rules.

4

An acquisition

5

or

merger is reportable, and a mandatory post-filing waiting period

(typically thirty days) must be observed before the transaction may close,

if certain jurisdictional thresholds are met and no exemptions apply. The

thresholds that must be met i n order for the H-S-R reporting rules to

apply to the transaction are the (1) “in commerce” test, (2) “size of

transaction” test, and (3) “size of person” test.

a. Thresholds

(1) In Commerce

The in commerce test requires that either the acquiring or the

acquired person be engaged in interstate or foreign commerce or in an

activity that affects interstate or foreign commerce.

6

4

. A comprehensive review of t he H-S-R rules and interpretations is beyond

the scope of this manual. For more detailed information, see ABA

Section of Antitrust Law, THE MERGER REVIEW PROCESS: A STEP-BY-

STEP GUIDE TO U.S. AND FOREIGN MERGER REVIEW (4th ed. 2 012)

[hereinafter MERGER REVIEW PROCESS]; FTC, PRE-MERGER/HART-

SCOTT-RODINO ACT NOTIFICATION SOURCE BOOK (1999).

5

. Note that an exclusive license may be considered an acquisition for

purposes of the H-S-R Act. Further, the FTC has recentl y amended the H-

S-R Rules to cover licenses in the pharmaceutical sector that convey “all

commercially significa nt righ ts” even if they are not “exclusive” as that

term has been interpreted by the PNO. See FTC Final Rule, Premerger

Notification; Repo rting and Waiting Period Requirements, 78 Fed. Reg.

68,705 (Nov. 15, 2013) (to be codified at 16 C.F.R. § 801), available at

http://www.ftc.gov/sites/default/files/documents/federal_register_notices/

2013/11/131115premergerfrn.pdf.

6

. Even where the “in commerce” test may be met, the H-S-R rules contain

exemptions for acquisitions of forei gn assets or foreign entities that do

not also involve U.S. assets valued in excess of the minimum size-of-

Mergers and Acquisitions 115

(2) Size of Transaction

The size-of-transaction threshold is met if the acquiring person will

hold voting securities or assets of the acquired person valued in the

aggregate at more than a specified dollar value, which the FTC revises

annually based on the change in gross national product. As of February

24, 2014, the size-of-transaction threshold is $75.9 million. With regard

to acquisitions of voting securities or non-corporate interests, the size of

the transaction is determined based on the value of the total (aggregate)

voting securities or non-corporate interests of the acquired person that

the acquiring person will hold, rather than just the incremental value of

the additional voting securities or non-corporate interests if the acquiring

person already owns a part of the acquired person. The value of assets is

the greater of fair market value or acquisition price, and valuation

includes the assumption of liabilities.

7

With regard to voting securities, if

the securities are publicly traded, the value is the greater of the market

price or the acquisition price.

(3) Size of Person

Acquisitions of voting securities or assets valued in excess of $200

million, as adjusted, are reportable without regard to the size-of-person

test. Transactions valued up to $200 million, as adjusted, must meet the

size-of-person test in order to be reportable—one of the parties must

have at least $100 million, as adjusted, in total worldwide assets or

annual net sales and the other party must have at least $10 million, as

adjusted, in total worldwide assets or annual net sales.

8

The holdings of

transaction threshold or sales made in or into t he U.S. in excess of the

minimum size-of-transaction threshold. See 16 C.F.R. §§ 802.50, 802.51.

7

. A separate aggregation rule app lies to acquisitions of assets. See 16

C.F.R. § 801.13(b). In general, multiple acquisitions of assets from the

same seller within a 180-da y period are aggregated for purposes of

determining whether the size-of-transaction threshold is met, assumi ng

the initial acquisition did not require an H-S-R filing.

8

. Where an acquired person is not engaged in manufacturing, only its total

assets (unless its sales are $100 million, as adjusted, or more) are

considered in determining whether the size -of-person test is satisfied. See

FTC Premerger Notification Office, To File or Not to File: When You

Must File a Premerger Notifica tion Report Form, at 12 (Sept. 2008),

available at http://www.ftc.gov/sites/default/files/attachments/premerger-

introductory-guides/guide2.pdf.