HSR Changes Sharpen Focus On HSR Changes Sharpen Focus

Congress recently made major changes to the Hart-Scott-Rodino (HSR) premerger filing law for the first time since its enactment in 1976. The changes will affect companies’ plans for mergers and acquisitions because more acquisitions will be exempted from filings but the filing fees and waiting period will be greater in some instances. The new law became effective February 1. The HSR Act requires that acquisitions of a certain size be reported to the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice prior to their consummation. The parties are permitted to close an acquisition 30 days after the filing, unless the period is shortened or extended by one of the government agencies. The purpose of the act is to give the government a chance to stop an anticompetitive acquisition before it is closed. The government has found that it is difficult to unwind a transaction after the assets have been commingled. The changes in the act include: * Elimination of filings for transactions valued at $50 million or less. Previously, the law required filing of transactions valued at more than $15 million. * A sliding scale for filing fees based on the value of the transaction. The filing fee had been $45,000, regardless of the size of the deal. * An extension of the waiting period between filing and closing to 33 days if the 30-day period ends on a weekend combined with a public holiday. * An internal appeal process to review information requested by the government in its investigation of deals. * An increase from to 30 days from 20 in the period the government is given after the end of its investigation to decide whether to challenge an acquisition. * Certain requests in the filing form. The most important change is an increase in the minimum-filing threshold, which will eliminate filings for smaller transactions. Under prior law, any purchase of stock or assets for more than $15 million required a filing if the parties had revenues or assets of a certain size. The new law requires filing only for transactions valued at more than $50 million. Transactions valued in excess of $50 million up to $200 million are to be prefiled when one party has $100 million of revenues or assets and the other party has $10 million of revenues or assets. A filing is needed only if both the transaction size and the parties’ size meet the thresholds. The former $15 million filing threshold had not been adjusted since the act became effective 25 years ago. Because of inflation and an increase in the number of acquisitions, the government has been overwhelmed with HSR filings. In 1979, the first full year of reporting under the premerger rules, only 861 filings were made. In 1991, 1,529 filings were made while in 2000 there were more than 4,900 filings. The new law is expected to reduce the number of filings by 50% by increasing the minimum threshold level that requires a filing. The reduction in the number of HSR filings is beneficial to companies involved in transactions valued at $50 million or less. It will save them the cost of the filing fee, the attorney’s fees charged to make the HSR filing, and a possible delay in the transaction while awaiting the expiration of the waiting period. In some instances, companies may have to make filings under the new law that were previously unnecessary. This will occur on transactions that are valued in excess of $200 million and involve a company with less than $10 million of revenues or assets. The new law requires filings for all transactions valued in excess of $200 million, regardless of the size of the revenues and assets of the parties. Under the old law, the parties had to meet the previously explained size requirements before a filing was necessary. The reason for this change was to require HSR filings for deals involving dot-com companies, which had nominal revenues or assets but were sold for substantial prices. Ironically, shortly before the new law became effective, the stock prices of most dot-coms plummeted and fewer of them were acquired in deals valued at more than $200 million. The absence of the parties’ size requirement could lead to more filings by newly formed entities. Venture capitalists often create new investment funds to make acquisitions. At the time of the HSR filing, those companies would have little or no assets but, nevertheless, would be required to make an HSR filing for transactions valued at more than $200 million. Under the old law there would have been no filing. The cost of filing will be increased in some instances. The filing fee, before the recent change, was a flat $45,000 per transaction, regardless of the deal’s value. This seemed unfair because small transactions that had no antitrust problems and did not take much government time to review had to pay the same fee as multi-billion dollar transactions which took the regulatory agencies months to investigate. The increase in the filing fees is expected to offset the decline in the number of filings under the new law so that there will be no reduction in the total of filing fees the government receives. The effect on companies is that the filing fees are increased substantially for transactions valued at $100 million or more. Under the new law, the fees are graduated as follows: Transaction Value Filing Fee Up to $99.99 million $45,000 $100 million to $499.99 million$125,000 $500 million or more $280,000 The transaction values and the filing fees will be adjusted annually beginning in 2005 based on changes in the gross domestic product (GDP). Companies are more likely to be required to make multiple filings under the new law than the old one. This is because holdings of stock must be aggregated – i.e., each successive purchase must be added to the current holdings. The number of levels for which a filing may be necessary for incremental acquisitions of stock has increased. It is possible that five HSR filings would be required: * The first, when stock exceeding $50 million in value is purchased; * The second, when additional stock is purchased to bring the total holdings to $100 million; * A third, when the holdings exceed $500 million; * A fourth, when the percentage of stock held exceeds 25% (if the value of stock to be held exceeds $1 billion); and * A fifth, when the amount of stock held exceeds 50% of the target company. For each filing, the appropriate filing fee would have to be paid. To avoid multiple filing fees and the cost of making each filing, acquirers should try to reduce the number of incremental purchases of stock. Valuations of transactions are more important under the new law and will have to be made with greater precision because of the number of levels at which a transaction could trigger either a filing or an increase in fees. The valuation of a transaction can be complicated; the rules are different for acquisitions of assets, publicly traded stock, and non-publicly traded stock. Asset Purchase An asset acquisition is valued at the fair market value of the assets or the acquisition price, whichever is greater. The fair market value is to be determined by the acquiring company’s board of directors or someone selected by that board. Assumed liabilities must be added to the fair market value or purchase price to determine the value of the assets for HSR purposes. Also, if the acquisition price is in whole or in part paid over a period of time, the total expected payment is included in the valuation. It cannot be reduced to current value. Purchase of Publicly Traded Stock Publicly traded stock is valued at the higher of the purchase price or the lowest price at which the stock traded within 45 days before the closing. Prior purchases are valued in the same way and not at their purchase price. Consequently, if previously purchased stock has grown in value, a filing could be required for the purchase of as little as $1 of additional stock. For example, if stock purchased for $40 million has grown in value to $50 million or more, the purchase of $1 of stock would require a filing. Purchase of Non-Publicly Traded Stock The purchase price, if stated in the agreement, is the value of non-publicly traded stock for HSR purposes. If no value is stated, the fair market value of the stock must be determined by the acquirer’s board or its delegates. The government has issued a work sheet to assist companies in making HSR valuations, but there are no rules on how to make fair market valuations. As a result, the acquiring company must use its best judgment and that of outside experts in determining fair market value. For the first time, the HSR report form requires disclosure of the identity of the person making the fair market value determination. This indicates that the government may investigate the basis for the determination. Thus, acquirers and targets should make their analyses with care and retain their calculations of the valuation. Companies involved in fast-paced deals must be sensitive to the waiting requirements under the new law. Initial Waiting Period Under the old law, companies were required to wait 30 days after making their HSR filing before they could close the transaction. If the parties heard nothing from the government at the end of 30 days, they could close the deal. If the government was concerned that the acquisition might negatively affect competition, it could request information before the 30 days expired. This request for additional information is known as a “second request.” Under the new rules, if a 30-day period ends on a weekend or public holiday, the waiting period will automatically be extended to the next business day. Thus, if the waiting period expires on a Saturday and there is a public holiday the following Monday, the waiting time could be increased by as much as three days to 33 days. In planning transactions, the parties need to calculate when the 30 (or 33) days expire before setting the closing date. Merger parties still may request in their HSR filings that the waiting period be shortened to less than 30 days. Whether that request is granted depends on whether the deal raises any antitrust issues and how busy the antitrust agencies are at that time. About 90% of the filings request early termination of the waiting period, and it is granted about 75% of the time. Second Request A second request consists of a demand for documents and information by a regulatory agency. Until the response is produced, the clock stops running on the 30-day waiting period. The new law affects second requests in two ways. First, it extends the time the government has to decide whether to challenge an acquisition. Under the old law, after the government received the information it requested, it had 20 days in which to decide whether to go to court to request that the acquisition be stopped. Under the new law, the government has 30 days to reach a decision on seeking an injunction. The second key change permits the parties to appeal the scope of the second request within the government agencies. In the past, companies could negotiate the scope of the request with the investigating attorneys, but frequently did not have much success. As a result, companies often produced hundreds of boxes of documents and spent as much as $1 million solely on copying fees because of the large volume of paper produced. In some cases, the government did not have time to review all of the documents. It is hoped that the formal appeal process of the investigators’ requests will reduce the size of document productions. This is an affirmative change for merging companies. It would reduce the cost of copying bills and attorney’s fees to produce the documents, shorten the time to respond, and take less employee time to work on complying with the government’s request. An HSR filing consists of a form and certain documents. The request for documents will be the same under the new law as the old. The changes in the form will slightly increase the time that it will take to complete an HSR filing. Probably the most significant change is the form’s request that the method of determining the filing fee be explained when a transaction “straddles” a filing fee threshold. Straddle is unexplained; it probably refers to when a deal’s value is close to one of the thresholds. The new form seeks several pieces of information that the prior form did not request. The country (or countries) where foreign filings are to be made is requested because many more than half of all acquisitions require one or more foreign filings. The United States government, to the extent permitted by confidentiality laws, cooperates in investigations with foreign governments. The form now asks whether the party being sold is in bankruptcy. This is because the standard 30-day waiting period between filing the HSR and the permitted consummation is shortened to 15 days when the target is in bankruptcy. And, as noted previously, this form requires the identity of persons making fair-market valuations. The form eliminates the need to state the amount of revenues of manufactured products sold by the parties to each other. This information was required in the original form to identify the volume of vertical dealings. The FTC decided that the vertical nature of the parties’ relationship can be identified from other information in the form, so revenues between the parties no longer need to be disclosed. The penalty for failure to file an HSR form will continue to be $12,000 a day, adjusted periodically for inflation. The penalty begins to accrue on the day the filing should have been filed and ends on the day the filing actually is made. The HSR law and rules are intricate, similar in difficulty to the tax statutes. The revisions to the law, for the most part, increase the complexity and burden on companies by: * Increasing the number of filing levels that require additional valuations which can be intricate; * Increasing fees for transactions valued at $100 million or more; * Adding three days to the waiting period, in some instances; * Extending the period after compliance with the second request; and * Eliminating the requirement that the parties have revenues or assets of a minimum amount for transactions valued in excess of $200 million. The only provision of the new law that reduces burden on companies is elimination of filings for deals valued at $50 million or less.