On January 31, the Federal Trade Commission (FTC) published its annual adjustments to the reporting thresholds under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act). The newly-revised thresholds represent modest increases over last year’s thresholds. They are published in the Federal Register and will become effective 30 days after the date of their publication. The revised thresholds will remain in effect until the FTC’s next annual adjustment in the first quarter of 2021.
HSR Act Basics
The HSR Act requires parties to mergers, acquisitions, joint ventures, and certain other transactions of a certain size or scale to file premerger notification with the FTC and the Department of Justice Antitrust Division (Antitrust Division). The transaction review process requires the parties to observe a 30-day statutory waiting period before closing their transaction, absent a successful request for early termination of the waiting period. The FTC Premerger Office or the Antitrust Division will usually assume primary responsibility for reviewing the transaction, often based on the agency’s business sector experience. If necessary, parties also must cooperate with the enforcement agency’s investigation of their proposed transaction’s competitive effects.
Merger Review Enforcement Climate
The FTC and Antitrust Division’s merger review workload was essentially flat over the prior year’s activity. In FY 2018, over 2,000 federal notifications were made; a slight 3% increase over FY 2017 and a 12% increase over FY 2016. The cumulative dollar value of reported transactions was $2.2 trillion, a 22% increase from FY 2017. A small percentage of transactions for which HSR filings are submitted involve so-called “second requests” for additional information or to aid a formal merger challenge. The Antitrust Division issued 19 Second Requests, and the FTC issued 26. In FY 2018, the FTC brought 22 merger challenges: 12 were resolved by consent orders, 5 transactions were abandoned under threat of challenge, and 5 involved formal administrative or federal court challenge. During the same period, the Antitrust Division challenged 17 merger transactions, 8 of which involved federal litigation with settlement consent decrees and 1 trial on the merits, and 8 of which were abandoned or restructured deals.
While a relatively small number of transactions result in challenge, the importance of clearance cannot be overstated. Remember also that many state attorneys general conduct active premerger review, and state clearance can be a challenge. International competition bodies are typically more aggressive than domestic enforcement.
Adjusted Threshold for Size of Transaction Test
The most significant filing threshold is the minimum size of transaction test, which has increased from $90 million to $94 million. For most purposes, the size of the transaction is calculated as the greater of the purchase price or the fair market value of the assets being acquired. If the purchase price or value of the acquired assets is below $94 million at the time of closing, there is no requirement to make an HSR filing even if the parties meet the size of parties test described below.
Adjusted Threshold for Size of Parties Test
When the size of transaction test is met, generally one party to a transaction also must have assets or annual revenues of at least $188 million (up from $180 million) and the other must have assets or annual revenues of at least $18.8 million (up from $18 million) to trigger an HSR filing. The only exceptions are:
- If the size of the transaction is $376 million or more (up from $359.9 million), there is no size of parties test and the parties will need to file regardless of the assets or annual revenues of the parties involved.
- If the buyer meets the $188 million size of parties test and the target is a non-manufacturer, the target’s annual sales are disregarded so that the target will meet the test only if its assets exceed $18.8 million.
Adjusted Filing Fees
The HSR filing fees remain the same, but the thresholds used to determine the fees have been adjusted upward.
- For transactions valued between $94 million and $188 million (up from between $90 million and $180 million), the filing fee is $45,000.
- For transactions valued between $188 million and $940.1 million (up from between $180 million and $899.8 million), the filing fee is $125,000.
- For transactions valued at greater than $940.1 million (up from $899.8 million), the filing fee is $280,000.
Adjusted Civil Penalties
The HSR Act provides penalties for businesses and persons who fail to comply with the Act. For example, consummating a reportable merger without filing the required HSR submissions and observing the statutory waiting period may subject a party to a civil penalty for each day during which the party is in violation of the Act. Gun jumping, in which parties share competitively sensitive information or otherwise act as though they were a merged entity before consummation takes place, also is a violation of the HSR Act (as well as a violation of Section 1 of the Sherman Act).
This year, the maximum penalty for an HSR Act violation will increase from $42,530 to $43,280 per day. The higher penalty amount will apply to any civil penalties adjudicated after the effective date of the adjusted thresholds, and it will apply to violations that predate the effective date.
Failure to comply with the HSR Act may have serious consequences for businesses and individuals. Businesses should consult with HSR counsel before proceeding with potentially reportable transactions.
Revised Thresholds for Section 8 of the Clayton Act Targeting Interlocking Directorates
Section 8 of the Clayton Act prohibits any person from holding positions as an officer or director of competing corporations engaged in commerce. This provision is particularly relevant to individuals at private equity firms who, in the course of his/her duties, is an officer or director of several entities. Section 8 applies where:
- Each competing corporation has capital, surplus, and undivided profits aggregating more than $38,204,000, and
- Competitive sales of either corporation are more than $3,820,400.Safe harbors exist that are based on calculating the competitive sales as a percentage of the corporation’s total sales.
Safe harbors exist that are based on calculating the competitive sales as a percentage of the corporation’s total sales.
For guidance on premerger analysis and reporting, please contact Glenn E. Davis in our St. Louis office (email: glenn.davis@HeplerBroom.com; telephone: 314-480-4154).