Mergers & Acquisitions

Give and Take of Proposed HSR Rules: Private Equity Companies and Small Transactions

September 25, 2020 | Bona Law PC

As we detailed in earlier posts (see here and here, for instance), the system established by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR) was designed to get sufficient information about impending mergers to the federal antitrust agencies so they could attempt to block anti-competitive ones before consummation. The system has grown into a complex set of rules and interpretations. Earlier this month, the antitrust agencies proposed two changes to those rules, one that would require more information from some acquiring parties and another that would eliminate the filing requirement for certain transactions deemed unlikely to be anti-competitive.

“Associates” Would Become “Persons”

HSR requires a buyer — “Acquiring Person,” in HSR parlance — to provide certain information about the entities it controls and its prior acquisitions for transactions that meet HSR’s reportability standards. Under the definition of Persons, however, separate private equity investment funds under the same parent fund usually are considered separate Persons because the parent fund did not “control” them. Therefore, until recently, an investment fund making an acquisition did not need to provide information, including information regarding acquisitions or holdings, about other investment funds under the same parent fund. Also, currently, an investment fund does not need to aggregate its holdings with those of other funds under the same parent to determine HSR reportability.

In such scenarios, the agencies might not realize that another investment fund under the same parent fund holds interests in competitors of the target entity. The agencies partially corrected this situation in 2011 by defining such related investment funds as “associates” and requiring the Acquiring Person to disclose holdings of its associates in other entities that generated revenues in the same industries as the target entity.

The proposed rule would go a step further and change the definition of “Person” to include “associates.” The intended effect of such a change is to require Acquiring Persons to provide even more information about their associates when completing the HSR form. (Again in HSR parlance, such an Acquiring Person would need to disclose additional information about its associates in Items 4 through 8 of the form.) In addition, all the holdings of the Acquiring Person in the target entity, even those held by an associate, would need to be aggregated to determine if the most recent acquisition is reportable.

As a result, the agencies should have more complete information to assess the potential competitive impact of the proposed transaction. For private equity funds structured in this way, the result likely will be additional HSR filings plus the burden to collect, track, and provide additional information in each filing.

Small Transactions Would Be Exempt Regardless of Intent

While the agencies have an incentive to receive filings for all transaction that could pose competitive issues, they also have an incentive to conserve resources and avoid the review of filings for transactions that almost certainly pose no competitive threat. As a result, the HSR statute and rules have numerous exemptions for transaction types that raise few if any competitive issues.

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US Antitrust Agencies Release Updated Vertical Merger Guidelines

January 20, 2020 | Bona Law PC

Authors: Steven Cernak and Jarod Bona

In big antitrust news, the Federal Trade Commission and Department of Justice Antitrust Division released a draft of an update to the 1984 Vertical Merger Guidelines (VMG) on January 10, 2020. Only three of the five FTC commissioners voted to release the draft with Democratic Commissioners Rebecca Kelly Slaughter and Rohit Chopra abstaining but issuing separate statements. The agency will accept public comments on the draft through February 11, 2020.

These vertical merger guidelines make extensive references to the Horizontal Merger Guidelines, most recently issued in 2010 (HMG). Like the HMG, the VMG are guidelines only, not law, and are meant to provide the merging parties some understanding of the analysis the reviewing agency will use. Because nearly all merger reviews begin and end with these agencies, however, the HMG have become both influential and persuasive for courts. The VMG rely on the HMG for much of the analysis and so, at nine pages, are much shorter and seem to break little new ground besides updating the outdated 1984 version.

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Three Lessons for an HSR Mergers and Acquisitions Problem: Did you “Aggregate”?

September 5, 2018 | Bona Law PC

The FTC Headquarters in Washington, DC. The cornerstone to the building was laid in 1937 by Franklin Roosevelt, reportedly using the same trowel George Washington used to lay the cornership of the U.S. Capital in 1793. In the spirit of competition, the National Gallery of Art has set its sights on expanding into the FTC building, and in 2016, the General Services Adminsitration has been investigating the proposal. The FTC has strongly resisted this form of competition for its space.

Author: Steven Levitsky

Under US antitrust Law, parties to certain mergers and acquisitions must prepare what is called a Hart-Scott-Rodino (HSR) filing for the antitrust agencies.

In an earlier article, we mentioned that HSR filings, at least for voting securities and LLC interests, are not triggered by the literal “size-of-transaction” amount.

Instead, they are triggered by a combination of (1) all existing holdings in a target plus (2) what you intend to buy in that target. (In HSR lingo, this is called “aggregation.”) Plus, you need to calculate the total existing holdings across the entire control group. (In HSR lingo, this means all the entities controlled by the “ultimate parent entity.”) When you don’t, you run the risk of being fined $40,654 per day.

Here’s a great example, based on a real-life case. Alpha Fund owns $84 million of Bravo Ltd’s voting securities. Alpha Fund is controlled by Mr. Smith. Because of this control, Mr. Smith is the hedge fund’s “ultimate parent entity,” and he is deemed to “hold” everything in his control group.

Based on his fund’s holdings, Mr. Smith was appointed to the Board of Bravo Ltd. As a board member, he was given stock options for 10,000 voting shares and exercised them. Let’s assume that those shares were worth $50 each, so that the entire option acquisition was only $500,000. This is 0.0059% of the HSR threshold of $84.4 million. But that’s not the way the HSR system works.

What Mr. Smith should have done (or rather, what his lawyers should have done) was combine, or “aggregate,” all his existing holdings ($84,000,000) with the options he was about to convert $500,000). In other words, as a result of his option transaction, Mr. Smith now “held” $85,000,000 of voting securities in Bravo Ltd. But he never made an HSR filing. In this case, the FTC fined him $250,000.

This is actually a simplified version of the real story. In fact, Alpha Fund had previously failed to make an mandatory HSR filing, and had made a corrective filing only later, only proving that it is hard to keep track of acquisitions across a control group. As part of the settlement of the corrective (after-the fact) filing, the FTC always imposes an obligation to create and maintain a compliance program for future acquisitions. The FTC takes the position that a second failure to file proves that the compliance program was not complied with.

By the way, there was absolutely no competitive issue involved in this violation. The control group’s collective holdings in Bravo Ltd. were too low for it to be able to exert any control. Furthermore, Bravo Ltd. granted the options with one single day to exercise them. There was no possibility for Mr. Smith to have made an HSR filing. Despite all these mitigating factors, the fine was imposed simply because there had been an acquisition that required an HSR filing, and no filing was made.

Here’s another complication from the same story. Let’s assume that Alpha Fund bought the shares at $50,000,000, and that over time they appreciated in value to $84,000,000. It’s not clear, but it seems possible that Alpha and Mr. Smith had considered the original acquisition cost of the stock ($50,000,000 plus $500,000). That was another serious mistake, because the HSR rules require you to calculate the current value of your existing holdings. In other words, if your original $50,000,000 investment grows to $85,000,000 through appreciation, you don’t need to do a thing. But you can’t acquire a single dollar more of stock in the same target without making a filing.

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Considering a Merger or Acquisition? Avoid these 10 Minefields in your HSR Filing to the Antitrust Agencies

August 21, 2018 | Bona Law PC

This 1942 sculpture by Michael Lantz, 17-feet long, is meant to suggest a heroic figure (the FTC) restraining violent and untamed American commerce.

Author: Steven Levitsky

If you liked the old computer game, “Minesweeper,” then you’re ready to take on Hart-Scott-Rodino (HSR) filings for antitrust review of mergers & acquisitions. Both have rules. And both can produce unexpected catastrophes even if you think you’re following the rules. In fact, major clients, advised by major law firms, have been hit with hundreds of thousands of dollars in fines for mistakes that no one thought of at the time.

Let’s start with the 50,000 foot view of HSR compliance. You might know the basics: (a) you need to make an HSR filing when one side of the transaction has sales or assets of at least $16.9 million; (b) the other side has sales or assets of at least $168.8 million; (c) the transaction size is greater than $84.4 million; and (d) no exemptions apply. (These are 2018 figures).

An example to consider

Here’s an example of how things can work out badly. Let’s assume you get a call from the CEO of your client, Alpha Co. Alpha Co. is a small and relatively new company and the CEO tells you:

Alpha’s annual sales and assets are $15 million.
Alpha plans to buy $80 million of the voting securities of Bravo Ltd. (Alpha’s borrowing $65 million to do the deal.)
Based on this, he wants to know if they need to make an HSR filing.

Applying what you know, you conclude that the “size-of-person” and “size-of-transaction” tests are both not met, so no HSR filing is required. Alpha Co. goes ahead and closes the deal.

Three months later, your client hears from the FTC. The FTC tells them that they violated the HSR Act by not filing, and that the fine is $41,484 per day, or $3,733,560 in all. What went wrong? (We’ll explain in detail in Point 2.)

But generally, what went wrong is that the 50,000 foot view is not enough. HSR rules are extremely technical and, some would say, not exactly logical. A lot of HSR terms don’t have a common sense meaning. You need to check and cross-reference the definitions and rules. And these, by the way, are not organized in any friendly or rational way, but seem to read like the Tax Code.

Here are some basic HSR concepts that might help you avoid the worst minefields.

What are the basic HSR tests?

There are two tests to see if a filing is required.

First, “size-of-person.” Normally, you don’t need to file for the antitrust enforcers unless one side of the deal has sales or assets of at least $16.9 million and the other side has sales or assets of at least $168.8 million. (This are 2018 figures; these numbers change every February.)

But, as we’ll see soon in Point 2, the size-of-person test does not mean the size of the transaction party. Instead, it means the size of the buyer’s entire business group, or everything under the control of its highest entity (see §5). Don’t fall into the trap of measuring an incomplete control group.

Second, the “size-of-transaction” must be over $84.4 million (again, this is 2018; the numbers change every February). But there are several other filing thresholds that cover more purchases in the same target and could require successive filings. These include $168.8 million; $843.9 million; 25% of the target — but only if the size-of-transaction is more than $1.688 million; and 50% of the target — or control. Once you get control, you can buy as much more of the target as you want without ever filing again.

But, as we’ll see soon in Point 2, the “size-of-transaction” does not really mean the size of the transaction. Instead, it means (1) the combination of existing holdings and planned acquisitions, (2) that the entire buyer control group will have in the target control group after the deal closes (see §2). This includes voting stock acquired years before, that has to be analyzed at its current value. Don’t fall into the trap of measuring the wrong amount.

What is an “ultimate parent entity” and why does it matter?

The “ultimate parent entity” is the top controlling entity of an entire business group.

The “ultimate parent entity” matters to your antitrust filing for the following reason. The purpose of the HSR filing system is to let the antitrust agencies know of significant shifts in competitive power. As a result, they don’t care about the names on the contract, which may be only small subs or special purpose vehicles. The antitrust agencies want to know what is really happening in terms of changes of competitive power.

To give the agencies that information, you must identify the entire control group of your transaction party. You do this by tracing control upwards from the transaction party (Alpha Co., in our case) to the very highest control level of the business group. That entity at the top, that isn’t controlled by anyone else, is the “ultimate parent entity,” which can be a company or an individual. The “ultimate parent entity” makes the filing. Its collective size and holdings affect the “size-of-person” and “size-of-transaction” tests we discussed in Point 1.

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Antitrust News: DOJ Antitrust Will Try to Speed Merger Reviews

November 18, 2017 | Bona Law PC

Antitrust News is a new feature at The Antitrust Attorney Blog. We will periodically report on and address new developments in the antitrust world, from FTC or DOJ guidance to important court decisions to relevant legislative developments to worldwide antitrust issues.

Although some of our prior articles involve antitrust developments, most of these posts consist of content that is less timely and more evergreen. Our intent is to help our readers by describing Antitrust News through the filter of our antitrust expertise.

On November 16, 2017 in Washington, DC, Deputy Assistant Attorney General Donald G. Kempf, Jr. made news about antitrust merger review at the American Bar Association’s Antitrust Fall Forum.

Kempf said—simply—that the DOJ will try to shorten the time it takes it to review mergers for antitrust and competition issues. In 2011, the average merger took just over 7 months to review. In 2016, the review time increased to 11.6 months on average.

That is unacceptable. Companies that want to merge should not have to wait almost full year to do so. A lot can happen in a year, particularly now where technology and low entry barriers mean that entire markets often change in a short period of time.

How did the excess delays happen?

To explain, let’s back up and explain—briefly—how an antitrust merger review works:

The merging parties begin by completing what is called a Hart-Scott-Rodino (HSR) filing. Either the DOJ or FTC has 30 days to decide whether to issue what is called a second request. If one of the antitrust agencies thinks that there could be genuine competition issues for the merger, they may issue this second request, which opens up a heavy set of fact-finding, including document production.

At some point, the antitrust agencies may either approve the merger, reach an agreement with the parties to approve the merger with certain requirements (like selling assets) or (in the case of the DOJ) to seek a preliminary injunction stopping the merger.

According to Kempf, over time the second request period increased in scope and complexity and the preliminary injunction hearings became mini-trials. Indeed, they often have the same effect as a trial on the merger because if the DOJ wins, the parties often abandon the merger. If the DOJ loses, it often halts the challenge.

Kempf went on to articulate why shortening merger review time is so important. His best line was that “delaying competitive mergers is anticompetitive, and that’s not the business the Antitrust Division wants to be in. Just the opposite.”

He offered five suggestions to shorten antitrust merger reviews: Continue reading →

Top Antitrust Attorney Steven Levitsky Leaves DLA Piper to Open Bona Law’s New York Office

October 22, 2017 | Bona Law PC

We are ecstatic that Steve Levitsky agreed to join us in New York. It isn’t every day that an antitrust attorney of Steve’s caliber becomes available, let alone fits so perfectly into a law firm’s approach, culture, and plans. But that is the happy situation in which we find ourselves.

You can read our press release about the move here.

As you can tell, I am very excited about this next chapter in Bona Law’s history. As you can see, we now have two offices: La Jolla, California and New York, New York.

Bona Law is an antitrust boutique firm. Our client base has been worldwide for quite some time and we have had cases and other matters all over the country. So the move to add a New York office doesn’t change our focus: We have always been a national antitrust boutique firm.

But I think opening our New York office signals to the marketplace more directly that we are a national law firm that competes with biglaw for antitrust. And adding Steve to our team—with his decades of big firm antitrust experience and worldwide client base—confirms our place.

Steve Levitsky’s antitrust experience includes the big three of litigation, antitrust counseling, and antitrust merger work. But what is even more exciting for us is that Steve is particularly known for his antitrust merger expertise, which is an area in which I have much less experience.

Over the last few years, I have heard repeatedly that many companies that have an HSR filing or other antitrust merger issues are frustrated that they don’t options other than big law firms. Well, now they do: Steve has managed the antitrust side of countless complex merger transactions, domestic and global—many of them worth over $10 billion.

So if you are a corporate attorney or business with antitrust merger or acquisition issues, you should contact Steve.

Steve has such an impressive background that he would, frankly, fit in at any law firm. He would substantially raise the average quality of the attorneys no matter where he would have gone. Our traditional press release and website article goes into his background, so I am not going to repeat it here.

I enjoy writing articles for The Antitrust Attorney Blog because it allows greater flexibility in what I tell you. I try to offer some of the informal truths relating to antitrust and law practice that, although vitally important, are not usually discussed so straightforwardly.

So, obviously, adding Steve to our team is a huge deal because he is a great lawyer. But my excitement about this move goes well beyond that obvious point.

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Entrenching a Monopolist: the FCC, Net Neutrality, and the Cable-Company Merger

November 15, 2014 | Bona Law PC

An article in the Wall Street Journal caught my eye: “FCC Questions AT&T Over Investment Pause: Company Freezes Plans to Build Ultrafast Internet Service.” The reason for the pause is the FCC’s flirtation with the idea of net neutrality.

A government policy of net neutrality would require internet service providers—like broadband companies—to enable access to all content and applications no matter the source and without additional charges for particular products or websites.

This debate is in the news lately because of the issue of whether cable companies that control broadband should be able to charge extra to content companies like Netflix that make greater use of the broadband, or to offer content companies a faster and better route that isn’t available to other companies (for a price, of course). The FCC has been debating this policy, and the issue is wrapped up in the FCC and DOJ’s review of the Comcast-Time Warner merger. President Obama recently came out in support of net neutrality, which adds pressure on the FCC to adopt the policy.

So where does AT&T fit into this?

They are in the process of gaining approval to purchase the satellite company, Direct TV, which is a competitor to the broadband services from cable companies like Comcast and Time Warner. After President Obama issued a statement supporting net neutrality, AT&T announced that it would freeze plans to build ultrafast Internet service in light of new uncertainty around the government’s net-neutrality policy.

Here is the problem: Net neutrality turns broadband service into a more commoditized business. If you are in the business, you must charge everyone equally—the content providers that is—which means there is substantially less room for innovation.

Right now the cable companies offering broadband have substantial market power because they offer the fastest broadband to customers in each locality. Substantial resources over time have built-up the necessary framework and connections to offer broadband service to customers.

When a business becomes commoditized, there are fewer aspects of competition. That is, the product is substantially the same no matter where you get it, so price becomes the biggest area of competition. Businesses then compete by innovating on how to reduce costs and building economies of scale, which usually reduces costs. They do not, however, innovate on improving the quality of the product because, by definition, the product is the same.

If the FCC were to require a net-neutrality policy, it would remove substantial areas of potential competition between the entrenched monopolist broadband (i.e. cable) companies and potential competitors. So competition would primarily be based on cost reduction, which usually comes down to economies of scale.

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Can You Make Money From an Antitrust Hedge Fund?

October 9, 2014 | Bona Law PC

So here’s an idea. Let me know what you think: A hedge fund or other investment vehicle centered on antitrust analysis.

I’ll explain.

As you might know, I am an antitrust attorney. And I write a blog on antitrust and competition law. So, as you may expect, I follow antitrust developments somewhat obsessively at times. As a result, I have a good sense of the practical antitrust implications of certain cases, investigations, or prospective mergers.

I don’t have a crystal ball or anything. Nor do I have any inside information. And since human beings—judges or agency officials—make the relevant decisions, nobody can actually predict what will happen.

But by now, I can review a complaint or a motion to dismiss or description of facts and have a good sense of the strength and risk of the antitrust issues. I think I also have a decent idea how the major antitrust agencies—the FTC and Department of Justice—focus their priorities and like to resolve investigations, cases, and mergers. Like I said, I can’t predict anything with certainty, but there is a high learning curve for antitrust (probably more than most specialties) and I’ve spent a lot of time and effort climbing that curve.

Enough about me—for now anyway.

Let’s talk about antitrust and company stock performance. The obvious scenario is a merger. Two companies, perhaps competitors, announce a merger or acquisition. It isn’t a dead-on-antitrust-arrival merger between the first and second leading companies in a product and geographic market that is easily defined. Instead, it is the sort of merger where the markets are somewhat complicated, perhaps in flux, and it isn’t entirely clear whether an antitrust agency will challenge it or a court will stop it.

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Antitrust Law as a Negotiating Tool and the Pursuit of Family Dollar Stores

September 3, 2014 | Bona Law PC

When you are a law student, you don’t usually understand that most cases are just one of several business tools that are companies utilize to advance their interests in the marketplace.

You might think that cases are academic-like exercises that reach either trial or some appellate court (perhaps after a motion-to-dismiss or summary-judgment motion). One or the other party or both are seeking justice and will not rest until the case terminates. That’s not a surprise, really, because much of what you do in law school is read such cases. I guess that is why many law students want to become appellate attorneys.

But the reality is that—as much as lawyers like myself like to view the law through an academic lens—a lawsuit or threat of a lawsuit is often just a way for someone to seek leverage. The claim is real and is serious, but litigating the case to termination is usually a last resort. The best result is often a settlement—the earlier the better.

Lawyers don’t like to talk about that much because unless you are on a contingency fee an early settlement means less money for the attorney. But it is the truth; lawyers are not special, really. What we do in litigation is often just another business tool to advance our client’s position in the marketplace. There are exceptions, of course—cases where justice must be done—but most commercial litigation doesn’t fall into that category.

Most of commercial litigation is a negotiating tool.

And an antitrust claim is a particularly large (and effective) bat when it comes to leverage.

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The Problem with Conduct Remedies for the Comcast-Time Warner Cable Merger

April 16, 2014 | Bona Law PC

Antitrust attorneys do everything that a lawyer can do: They litigate in both courts and agencies; they counsel clients; and they participate in mergers & acquisitions. If you are a young lawyer or law student that can’t decide what type of legal activity you like best, try antitrust and competition law—you can do it all.

In the mergers & acquisitions category, antitrust’s most recent obsession is the deal between Comcast Corp. and Time Warner Cable., Inc.

Competition Policy International (CPI) was kind enough to ask me to write a few words expressing my thoughts, and you can read them here. You can view the other Comcast-TWC articles from the CPI Antitrust Chronicle here.

I won’t go into a lot of detail because you can read the actual article (which is less than five pages), but I thought I’d provide a little introduction into my thinking.

Usually in these circumstances, you will see commentary on one side stating that, of course, the merger should be approved, maybe even “as is.” On the other side, you will read analyses that the world will fall apart if the merger is not blocked forever.

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