New management at the FTC keeps reviewing all aspects of the Hart-Scott-Rodino (HSR) premerger notification process. On August 26, the current head of the Bureau of Competition posted a change to a long-standing FTC informal interpretation about how potential HSR filers should view debt repayments when determining if the transaction is large enough to warrant a filing. That particular change could affect many transactions; however, perhaps more importantly, the announcement also described potential larger changes in how the FTC develops and promulgates interpretations of the complicated HSR process. Any such changes could be more examples of the “death of a thousand cuts” for the current HSR process that at least one commissioner has decried and that we discussed recently.
As we have explained, the Hart-Scott-Rodino Act requires companies to file notice of mergers and similar transactions over a certain size before they can close the deal. The first step in complying with HSR’s notification requirements is to determine whether the transaction satisfies the size of transaction test. Because that determination can be difficult, given HSR’s complicated rules that cannot anticipate every potential deal structure, merging parties have often sought informal interpretations from FTC Premerger Notification Office (PNO) staff.
For at least 15 years, PNO staff has interpreted HSR rules to exclude from the size of the transaction calculation of the payoff of a target’s debt by the acquiring person in transactions involving the acquisitions of voting securities and noncorporate interests (though not of assets). The rationale was that the purchaser of a majority of an issuer’s stock automatically acquires the issuer’s preexisting liabilities and so that fact presumably is reflected in the stock’s acquisition price.
Effective September 27, the FTC will withdraw that informal interpretation. According to the FTC blog post, it appears that some merging parties have structured their deals to take advantage of this interpretation and avoid an HSR filing. Target companies may take on debt shortly before the merger and then have the acquiring person retire it as part of the transaction, thus reducing the size of the transaction, perhaps to a level whereby the parties can avoid a filing.
At the margin, this change likely will result in more HSR filings. It will affect those transactions where the size of the transaction matters, such as transactions of private equity firms focused on the “middle market” near the current HSR threshold of $92M.
If the main reason for the change is that the FTC is seeing transactions structured as described in the blog post, it is not clear why application of 801.90 is insufficient. That regulation allows the FTC to disregard any device used for the purpose of avoiding the HSR filing obligation. Indeed, the PNO staff pointed to 801.90 last September as it modified a bright-line rule regarding extraordinary dividends into a more “holistic review” to determine reportability. A similar change could have been made here, suggesting that the more important reason for the change simply is an FTC change in policy about the interpretation.
Such changes in informal interpretations happen often, but a few aspects of last week’s post hint at potential larger future changes.
Last week’s post states that the FTC is in the process of reviewing “the voluminous log of informal interpretations [by PNO staff] to determine the best path forward.” Implicit in that statement and the rest of the post is that one “path forward” would be to eliminate the informal interpretations and rely only on the formal rules and interpretations approved by commissioners and created with assistance from the Department of Justice. Any such move would be unfortunate.
While the informal rules do not have the force of law (as the post correctly notes), they do represent the best current thinking of the PNO staff, who reviews the thousands of filings and related questions each year. The formal rules regulating the HSR process are already very complicated and it seems foolhardy at best to think any set of humans, especially if they do not regularly deal with HSR intricacies, will be able to anticipate all potential HSR questions in devising new rules.
The PNO staff has been incredibly responsive for decades in responding to questions from potential filers and other taxpayers. (We can only speak for the last 30 years, starting with John Sipple and Dick Smith in the PNO.) While the process for obtaining informal guidance has had to move from a common phone number at FTC Headquarters to a common email inbox, the response has always been fast, even during the recent pandemic and filing surge. Those informal interpretations, originally just captured in marginalia in a physical book at the FTC, are summarized in a best-selling ABA Antitrust Law Section book (though not endorsed by anyone at the FTC) and now a searchable index on the PNO part of ftc.gov. If the ability to seek informal guidance from the real experts will be lost, the HSR process will be much less certain and efficient for potential filers.
The recent post also implies that the FTC, perhaps with the DOJ, will be looking at all the informal interpretations. If so, that list is “voluminous.” The ABA book groups them into 237 questions spread out over nearly 400 pages. While the FTC has issued both a notice and advanced notice of proposed rulemaking on the HSR process, it was not clear that all the informal interpretations (and the process itself) might be on the table as well. If so, frequent filers will need to be ready for drastic changes in a process that they have come to know well.
Finally, the recent post was issued in the name of the current head of the FTC Bureau of Competition. Past changes in informal interpretations, as well as other notices regarding the HSR process, usually came from the PNO staff. While it was clear that the PNO staff had superiors who oversaw their work, it was reassuring to see that the staff with the responsibility for overseeing the process and expert in its details also had the authority to be out front on any changes. ]We hope that such experts will continue to be deeply involved in any wholesale changes to the HSR process.
Over the years, the FTC has provided plenty of helpful guidance, not just these informal interpretations, to potential HSR filers. One such example is a basic Introductory Guide that outlines HSR basics and its rationale. Presumably that Guide will be revised shortly; after all, it states “The [HSR] Program has been a success.” FTC policymakers seem to no longer believe that statement is true.
Attorney, Bona Law PC