HSR Act

State Attorneys General Ramping up Merger Enforcement

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Last month, Colorado Governor Jared Polis signed a law repealing a provision of the Colorado Antitrust Act that prohibited challenging a merger under state law where the federal antitrust agencies did not also challenge the merger. This action is another sign that state Attorneys General are prepared to more aggressively enforce state antitrust laws, increasing the likelihood of divergent federal and state merger enforcement priorities and outcomes.

There are two complementary merger enforcement regimes. The federal regime, enforced by the Department of Justice (DOJ) and Federal Trade Commission (FTC), and the state regime which the state Attorneys General enforce. The Hart-Scott-Rodino Act’s pre-merger notification and waiting period requirements apply to the federal merger enforcement regime but do not apply to a state merger challenge. Generally, states may investigate a merger at any time, even after it has been consummated.

Historically, federal and state antitrust authorities have taken a cooperative approach to merger enforcement, working together to investigate and litigate proposed mergers. Playing more of a supporting role, the states typically deferred to the federal agencies’ enforcement decisions. For example, the DOJ and various states jointly investigated and successfully litigated the Anthem/Cigna merger. More recently, however, federal and state merger enforcement has diverged, most notably when several states filed an action challenging the T-Mobile/Sprint merger before the DOJ had completed its investigation. Anecdotally, line attorneys in state antitrust units have reported rising tensions with DOJ.

This recent divergence has been driven in part by a perception among many state AGs that DOJ and FTC have been under-enforcing federal antitrust law, particularly in the high-tech sector. Colorado and other states that have a record of more aggressive antitrust enforcement include New York, California, Texas and Washington. They and other states may be more willing to fill the void when they believe federal agencies have failed to act.

Given the increasing independence and assertiveness of state Attorneys General, merging parties cannot ignore their concerns. The strategic and practical considerations of state antitrust review should be on every checklist for a merger or major acquisition.

M&A HSR Premerger Notification Thresholds Increase in 2020

Takeaways

  • The new minimum HSR threshold is $94 million and applies to transactions closing on or after February 27, 2020.
  • The current threshold of $90 million is in effect for all transactions that will close through February 26, 2020.
  • Failure to file may result in a fine of up to $43,280 per day of non-compliance.
  • The HSR Act casts a wide net, catching mergers and acquisitions, minority stock positions (including compensation equity and financing rounds), asset acquisitions, joint venture formations, and grants of exclusive licenses, among others.

The Federal Trade Commission has announced new HSR thresholds for 2020. Transactions closing on or after February 27, 2020 that are valued in excess of $94 million potentially require an HSR premerger notification filing to the U.S. antitrust agencies. The HSR Act and Rules require that parties to certain transactions submit an HSR filing and wait up to 30 days (or more, if additional information is formally requested) before closing, which gives the government time to review the transaction for potential antitrust concerns. The HSR Act applies to a wide variety of transactions, including those outside the usual M&A context. Potentially reportable transactions include mergers and acquisitions, minority stock positions (including compensation equity and financing rounds), asset acquisitions, joint venture formations, and grants of exclusive licenses, among others.

Determining reportability: Does the transaction meet the Size of Transaction test?

The potential need for an HSR filing requires determining whether the acquiring person will hold an aggregate amount of voting securities, non-corporate interests, and/or assets valued in excess of the HSR “Size of Transaction” threshold that is in place at the time of closing. Calculating the Size of Transaction may require aggregating voting securities, non-corporate interests, and assets previously acquired, with what will be acquired in the contemplated transaction. It may also include more than the purchase price, such as earnouts and liabilities. Talk to your HSR counsel to determine what must be included in determining your Size of Transaction.

If the transaction will close before February 27, 2020, the $90 million threshold still applies; closings as of February 27, 2020 will be subject to the new $94 million threshold.

Determining reportability: Do the parties to the transaction have to meet the Size of Person test?

Transactions that satisfy the Size of Transaction threshold may also have to satisfy the “Size of Person” thresholds to be HSR-reportable. These new thresholds are also effective for all closings on or after February 27, 2020. Talk to your HSR counsel to determine which entity’s sales and assets must be evaluated.

Filing Fee

For all HSR filings, one filing fee is required per transaction. The amount of the filing fee is based on the Size of Transaction.

Failure to File Penalty

Failing to submit an HSR filing can carry a significant financial penalty for each day of non-compliance.

Always consult with HSR counsel to determine if your transaction is HSR-reportable, especially before concluding that a filing is not required. Even if the Size of Transaction and Size of Person tests are met, the transaction may be exempt from the filing requirements.

No HSR Filing Means No Antitrust Issues? Think Again!

My transaction does not require an HSR filing. That means we don’t have to worry about potential antitrust issues, right? WRONG.

The HSR Act requires that parties to certain transactions submit a premerger notification filing to the Department of Justice Antitrust Division (DOJ) and Federal Trade Commission (FTC), and then observe a waiting period before closing. Any transaction valued in excess of the HSR threshold – currently $90 million – may require an HSR filing and expiration of the HSR waiting period as conditions to closing. An HSR filing may not be required where the transaction does not meet the minimum jurisdictional thresholds or an exemption to filing is available. Parties, however, should not equate “no HSR filing” with “no antitrust issues.”

The FTC just ordered the unwinding of a 2017 merger that was not HSR-reportable. German company Otto Bock HealthCare acquired private equity-backed Freedom Innovations; both companies supplied prosthetics and were the #1 and #3 manufacturers of microprocessor-equipped prosthetic knees. Otto Bock and Freedom confused “no HSR filing” with “no antitrust issues,” stating in the press release that “Anti-trust matters have already been clarified and a ‘simultaneous signing and closing’ was carried out.”

DOJ and FTC History of Investigating HSR Non-Reportable Deals – Even Very Small Deals

The DOJ and FTC have a history of launching investigations into transactions that did not require an HSR filing – including very small deals. Two examples are the DOJ’s post-consummation challenge of George’s $3 million acquisition of a chicken plant from Tyson Foods Inc., and the FTC’s challenge of American Renal’s $4.4 million acquisition of Fresenius dialysis clinics.

Even HSR-Cleared Deals Can Be Challenged Later

Parties also should not confuse HSR “clearance” with substantive “antitrust clearance.” While rarely used, the DOJ and FTC have the ability to later challenge transactions that were HSR-reportable and cleared. Recently, DOJ allowed the HSR waiting period to expire for Parker-Hannifin’s $4.3 billion acquisition of CLARCOR, Inc., and then challenged the consummated merger nine months later.

When the Federal Antitrust Agencies Pass, Others May Step Up to Investigate

The DOJ and FTC are not the only antitrust enforcers who can investigate a deal, and State Attorneys General (AGs) are becoming more active in merger investigations. For example, when the FTC decided against challenging Valero’s proposed acquisition of two Plains All American petroleum terminals in California, the California AG filed suit to block the deal.

All Deals Can Raise Concerns about Sharing Competitively Sensitive Information

Even after Valero abandoned the Plains All American terminal acquisition, the FTC continued to investigate if Plains improperly shared competitively sensitive information with prospective bidders, which could have been used to harm competition during or after the sale process.

Takeaways

Regardless of whether an HSR filing will be required:

  • Parties should always consider the antitrust risk of a transaction, no matter how big or small the deal or competitive overlap. Antitrust concerns can emerge from potential competition, too, in which case there may be no directly competing sales at the time the deal documents are executed. Before or after closing, filing HSR or not, the deal could face questions or a challenge from the federal antitrust agencies, State AGs or others.
  • Parties should always practice good document hygiene, bearing in mind that anything could be produced to the government or come to their attention. For example, Freedom’s own press release flagged that the merger combined the “number one and the number three” players.
  • Parties should implement practices to safeguard any competitively sensitive information that is shared through due diligence or otherwise during the bid/sale process. They also should ensure they do not violate anti-gun jumping laws that prohibit a buyer from taking control of a target or its operations pre-close.

 

Stock Compensation May Trigger HSR Filing

The requirements of the Hart-Scott-Rodino (“HSR”) Act and Rules are well known to companies that engage in significant M&A transactions. But less well known is their applicability to acquisitions of stock by individuals as part of compensation practices. Especially where relatively young and successful companies are involved, HSR obligations may unexpectedly arise where equity compensation is given to founders, board members, executives, and other employees (whom we will group together and call “Insiders”). Companies and individuals potentially caught in the HSR process for this reason should ensure they are aware of the trigger rules, as a failure to file can result in significant fines.
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