What is the Hart-Scott-Rodino Act?
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 requires parties to report large transactions to both the Federal Trade Commission and the US Department of Justice Antitrust Division for antitrust review. When the HSR requirements are met, the parties must submit HSR filings to both agencies and wait a specified period before they can close. The parties' HSR filings require them to disclose basic information about the transaction and their businesses, such as their subsidiaries, revenues, and information about competitive overlaps between their businesses.
During the waiting period, one of the US antitrust agencies reviews the transaction to make sure it is not likely to substantially harm competition. At the end of the waiting period, the investigating agency can allow the transaction to close or file suit in court to block the transaction. At any point, the agency may negotiate a settlement with the parties to resolve their competitive concerns, such as requiring a divestiture of a line of business.
Which transactions require an HSR filing?
The HSR Act applies to certain mergers, acquisitions of assets or equity, and joint ventures that exceed a minimum value and, in some cases, an additional threshold based on the size of each party. The HSR Act thresholds are adjusted annually. Even if the thresholds are met, there are many exemptions to HSR reportability to consider as well.
The tests, and the current thresholds for each, are the:
- Size-of-transaction test. The size-of-transaction test evaluates the assets, voting securities, and non-corporate interests (such as membership interests or units) the acquiring party will hold after the acquisition. The test is met if the value of the equity or assets to be acquired exceeds $90 million.
- Size-of-person test. An additional test applies only if the transaction is valued at between $90 million and $359.9 million. This test is generally met if the worldwide total assets or annual net sales of one party (including all entities within the group) are at least $180 million and the other party's are at least $18 million. However, there are variations of this test, depending on whether the parties are engaged in manufacturing.
One party – including any subsidiary or division – must also be engaged in commerce in the US, or activity affecting US commerce. A foreign party can meet this test if they engage in business or make sales in or into the US.
What is the review process for an HSR filing?
Once both parties have filed, a specific merger review timeline begins. For most – but not all – transactions, this starts with an initial 30-day waiting period. For cash tender offers and bankruptcies, the initial waiting period is only 15 days.
During the initial HSR waiting period:
- The FTC and DOJ complete a preliminary review and, if further investigation is needed, determine which agency will take the filing, known as the clearance process. This can take a few days, or in rare cases, a few weeks. Usually, the agencies decide based on which one has experience with the industry at issue.
- If the agencies take no further action, the initial waiting period ends at 11:59 p.m. on the last day and the parties may close. Parties may also request early termination of the waiting period, which the agencies can grant at any point if they conclude there are no competitive concerns.
- If, by the end of the waiting period, the agency still has antitrust concerns, it issues what is known as a Second Request, extending the waiting period and launching a more in-depth investigation. A Second Request requires the parties to produce an enormous volume of documents and data. Compliance with a Second Request usually takes two to four months, can cost millions of dollars, and may extend the time to close the deal by 10 months or more. These investigations often end with a settlement or litigation. However, only a small number of deals receive Second Requests each year.
What happens if you fail to comply with the HSR Act?
Companies are sometimes unaware that the HSR Act applies to their transaction and may close without first filing an HSR form and observing the initial waiting period. This can lead to enforcement actions and civil penalties.
Failures to file under the HSR Act most commonly occur because:
- Company executives, officers, and directors are unaware that acquisitions of company stock, such as because of the vesting of restricted stock units or the reinvestment of dividends in a 401(k), can trigger an HSR reporting obligation.
- Shareholders do not aggregate shares that they already hold with the to-be-acquired shares in determining whether they have crossed one of the thresholds. If stock values rise, for example, the acquisition of just one additional share may trigger an HSR filing.
- An investor is no longer eligible for the investment-only exemption, which requires the shareholder to be passive and hold no more than 10% of the outstanding voting securities of an issuer, and makes a subsequent acquisition.
What are common HSR violations?
The complexity of the HSR Act can often result in unintentional missteps. However, a solid legal strategy, combined with practical legal know-how, can help avoid common violations, including:
- Not filing in time. Knowing when to file is critical. Filing late can result in significant monetary penalties of up to $42,530 a day for each day of violation.
- Gun-jumping violations. Parties to an HSR-reportable transaction cannot close until the waiting period expires or is terminated by the agencies. If the parties begin to integrate their assets or operations or the buyer exerts control over the seller during the waiting period, the FTC or DOJ may bring an enforcement action. Jumping the gun can lead to multi-million-dollar civil penalties. Until the waiting period expires, the parties must remain separate and independent competitors.
- Failure to comply. Failing to comply with the HSR Act, or filing an incomplete HSR form, can bring serious consequences for companies and individuals, including restarting the waiting period or substantial civil penalties. Keeping up to date with current legal information, including knowing what is and isn’t a reportable transaction, can help alleviate potential issues.