Mergers and Acquisitions

• Pages: 91-152

91

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). As discussed below, the H-S-R

Act requires certain waiting periods 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 context where, for example, the H-S-R filing

thresholds are not met or after the transaction has 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,3

sets 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 facilitate prompt, thorough

1. 15 U.S.C. § 18.

2. 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 combinations that

would restrain interstate trade. Section 2 prohibits monopolies, attempts

to monopolize, and combinations to monopolize interstate or foreign

commerce. Only the Antitrust Division, state attorneys general, and

private plaintiffs may challenge mergers under the Sherman Act.

3. 15 U.S.C. § 18a.

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investigations of acquisitions and to provide the agencies with the

opportunity to seek a preliminary injunction if necessary to block

mergers or acquisitions that may tend to lessen competition substantially.

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 postfiling waiting period (typically

30 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 in 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.

(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 $50 million, as adjusted.6 The size of the

4. A comprehensive review of the 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 FEDERAL MERGER REVIEW (2d ed. 2000) [hereinafter

MERGER REVIEW PROCESS]; FTC, PREMERGER NOTIFIC ATION SOURCE

BOOK (1999).

5. Note that an exclusive license is considered an acquisition for purposes of

the H-S-R Act.

6. The dollar amount is to be adjusted annually for changes in Gross

National Product, beginning in fiscal year 2005. Current dollar amounts

Mergers and Acquisitions 93

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

assets or voting securities of the acquired person that the acquiring

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

assets or voting securities if the acquiring person already owns a part of

the acquired person.7 The value of assets is the greater of fair market

value or acquisition price, and valuation includes the assumption of

liabilities. 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. The holdings of all entities

controlled8 by the party are included for the purposes of determining

whether the size of person test has been met; this is true even if only part

of a company is being sold. Total worldwide assets are determined by

the parties’ last regularly prepared balance sheets, and annual net sales

are determined by the parties’ annual income statements.

are available on the FTC’s H-S-R Web site at http://www.

ftc.gov/bc/hsr/faq.htm.

7. It should be noted that in an asset transaction one cannot avoid reporting

by splitting the deal into several smaller parts to be consummated at

different times, at least if the separate smaller deals will be consummated

within 180 days.

8. For purposes of H-S-R filings, the appropriate entity for measuring size

of person is not necessarily the party to the transaction but its “ultimate

parent entity,” which includes the highest person in the control chain not

controlled by another person, and all entities the ultimate parent controls.

“Control” is defined as (1) in the case of incorporated entities, beneficial

ownership of 50% or more of voting securities or a contractual right to

designate 50% or more of the directors; and (2) in the case of

unincorporated entities, right to either 50% or more of income or 50% or

more of assets on dissolution. See 16 C.F.R. § 801.1.