The Hart-Scott-Rodino Antitrust Improvements Act (HSR Act)
United States antitrust laws regulate the conduct of businesses to prevent mergers that could result in substantial competitive harm. Antitrust regulations promote healthy competition and protect consumers from monopolies. Among these regulations is the Hart-Scott-Rodino Antitrust Improvements Act of 1976, more simply known as the HSR Act.
The HSR Act requires parties to make detailed filings with the Federal Trade Commission (FTC) and Department of Justice (DOJ) before they can implement certain large mergers and acquisitions. The law improves transparency and consequently detects significant competitive overlap. In January 2022, the FTC announced increased thresholds that rely upon gross national product (GNP) changes.
Applicability of the HSR Act
Certain mergers, acquisitions of assets or equity, or joint venture transactions require an HSR filing. When considering whether the HSR Act applies to the transaction, the two parties to keep in mind are the acquiring ultimate parent entity (UPE) and the acquisition entity UPE. The acquiring UPE is the individual or entity that will acquire the assets or equity, whether directly or indirectly. The acquired UPE is the individual or entity that controls the entity subject of the acquisition.
There are three applicable tests to determine whether the HSR Act pre-merger notification obligations apply to the transaction. HSR Act rules require meeting three tests to impose the obligation to file. The dollar thresholds are subject to periodic adjustment.
- Commerce test: The commerce test requires that the acquiring and acquired UPE participate in an activity that affects U.S. commerce.
- Size-of-transaction test: The size-of-transaction test states that if after the merger closes, the assets, voting securities, and non-corporate interests the acquiring UPE will hold in the acquired UPE will be valued over $101 million.
- Size-of-person test: The size-of-person test applies only if the value of the transaction is between $101 million and $403.9 million. Transactions over $403.9 million are reportable by default. The size-of-person test is met if the worldwide total assets or annual net sales of one UPE are at least $202 million and the worldwide total assets or annual net sales of the other UPE are at least $20.2 million.
HSR Act Filing Requirements
HSR Act filings require disclosure of basic information about the transaction and each party’s business lines, revenues, and subsidiaries. Both the acquiring UPE and the acquired UPE must fill out and submit the HSR Act form separately.
Each party must pay a filing fee, which depends on the transaction size. The filing fee is $45,000 for transactions with values between $101 million and $202 million, $125,000 for transactions with values between $202 million and $1.0098 billion, and $280,000 for transactions with values over $1.0098 billion.
In addition to the HSR Act form and the filing fee, the parties must submit certain competition-related documents. These may include banker’s books, pitch decks, and studies prepared by management or third-party advisers who evaluate the transaction’s potential synergies.
Once the parties submit the required HSR Act filings to the FTC and Antitrust Division of the DOJ, there is a mandatory waiting period. The statutory waiting period depends on type of transaction.
- Negotiated transactions: 30 day waiting period.
- Open market purchases and other acquisitions of voting securities: 30 day waiting period.
- Cash tender offers: 15 day waiting period.
During the waiting period, the FTC or the DOJ reviews the transaction and evaluates whether it is likely to substantially harm competition. Once the waiting period ends, the applicable antitrust agency can allow the transaction to close or block the merger. The agency may also condition the closing of the merger upon divesting a line of business that raises substantial competitive concerns.
If the parties begin to consummate the transaction prior to the end of the waiting period, there are serious consequences. Gun-jumping is the practice of prematurely engaging in unlawful activities while regulatory clearance is pending. During the waiting period, gun-jumping can include exercising control over the operations or assets to be acquired. Gun-jumping can violate the HSR Act as well as the Sherman Act, another U.S. antitrust law.
Investigations by the FTC and DOJ
Both the FTC and DOJ have jurisdiction to review antitrust filings with respect to contemplated mergers. The allocation of work between FTC and DOJ depends on their expertise with the products, services, or parties involved. If the agency has conducted a substantial investigation of these subjects, that can be an indicator of expertise.
Early Termination of the HSR Act Waiting Period
Early termination of the waiting period can be granted if the reviewing agency determines no further action is needed. Once the parties to the contemplated merger are notified their transaction has received early termination of the waiting period, the parties can move forward with any remaining steps needed to close the merger.
Issuance of a Second Request
If the reviewing agency determines after its initial investigation that further information is needed, it can issue a Second Request. Compliance can require significant time and effort to gather and produce the requested documents. The Second Request often requires both parties to submit a broad range of documents for review. Based on the new documents, the agency will assess whether it still has antitrust concerns.