Source: https://iclg.com/practice-areas/merger-control-laws-and-regulations/usa
Timestamp: 2019-03-24 22:10:33
Document Index: 92054344

Matched Legal Cases: ['§ 18', '§ 1', '§ 2', '§ 45', '§ 18', '§ 18']

Merger Control 2019 | Laws and Regulations | USA | ICLG
ICLG.com Practice areas Merger Control USA
USA : Merger Control 2019
The principal merger authorities in the United States are the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice (DOJ). The agencies share jurisdiction; and for transactions subject to premerger reporting obligations, the notification must be submitted to both agencies, and both agencies may conduct a preliminary review. Under an interagency clearance agreement, only one of the agencies will open a formal investigation into any particular merger.
The primary substantive merger provision is Section 7 of the Clayton Act, codified at 15 U.S.C. § 18, which prohibits the acquisition of stock or assets “where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly”. Mergers may also be reached under the substantive provisions of Section 1 of the Sherman Act, 15 U.S.C. § 1, which prohibits contracts, combinations, or conspiracies in restraint of trade; Section 2 of the Sherman Act, 15 U.S.C. § 2, which prohibits monopolisation, attempt to monopolise, and conspiracy to monopolise; and Section 5 of the FTC Act, 15 U.S.C. § 45, which prohibits unfair methods of competition.
The primary procedural provision governing merger review is Section 7A of the Clayton Act, codified at 15 U.S.C. § 18a and more commonly known as the Hart-Scott-Rodino Antitrust Improvements Act (HSR or Hart-Scott-Rodino) amendments to the Clayton Act. HSR imposes premerger notification obligations on parties to non-exempt transactions when certain thresholds are exceeded (see question 3.1 below). For transactions that fall below HSR thresholds or that are otherwise exempt from HSR, the agencies may conduct investigations using their general investigative powers derived from other statutes.
For purposes of the substantive reach of Section 7 of the Clayton Act and other United States antitrust laws, the sole jurisdictional test is geographic – the parties must be “in commerce or in any activity affecting commerce [of the U.S.]”. Even transactions that are too small to trigger premerger notification (see the next paragraph) remain subject to challenge and prohibition if they result in an adverse competitive effect in violation of law.
The Commerce Test. One of the persons must be in commerce or in any activity affecting commerce. “Commerce” for this purpose means “interstate United States commerce”, but the term is broadly construed, and it would be extraordinary in an otherwise-reportable transaction for this test to be deemed not met.
The Size-of-Transaction Test. As a result of the acquisition, the acquiring person would hold an aggregate amount of voting securities, non-corporate interest, and/or assets of the acquired person exceeding $84.4 million (as of February 2018, using the amount determined and published annually by the FTC by multiplying the baseline figure of $50 million times the percentage change in gross national product since 2003). The terms “as a result of” and “aggregate amount” mean that creeping acquisitions, multi-step acquisitions, and acquisitions involving multiple affiliates of the same parents will sometimes be caught, even if the value of a particular step or a particular merger agreement is below the threshold (see question 2.8 below). The measurement of the size of transaction is subject to detailed regulations that require varying approaches depending on, among other things, whether voting securities, non-corporate interests, or assets are being acquired.
The Size-of-Persons Test. If the size of the transaction exceeds $84.4 million, but not $337.6 million, at least one “person” involved in the transaction must have annual net sales or total assets of at least $168.8 million and the other must have annual net sales or total assets of at least $16.9 million (again using the 2018 values of figures adjusted annually). The test varies slightly when the acquired person is the smaller person and is not engaged in manufacturing. The size of each “person” takes into account the sales and assets of the “ultimate parent entity” or “UPE” of the entity directly involved in the transaction as well as all entities the UPE directly or indirectly “controls”. The UPE is identified by successively applying the aforementioned “control” tests to the entity directly involved in the transaction, to any entity that “controls” it, and so on until one reaches either a natural person or an entity not “controlled” by any other entity. The measurement of the size of a “person” is subject to detailed regulations.
“Foreign-to-foreign” transactions are most likely to require HSR notification where the target holds substantial assets in the United States or makes substantial sales in or into the United States. The HSR regulations include exemptions for certain “acquisitions of foreign assets” and certain “acquisitions of voting securities of a foreign issuer”. Each exemption applies more broadly when the transaction is “foreign-to-foreign”, but even then the exemptions are limited.
An acquisition of foreign assets is exempt unless those assets, plus any other foreign assets acquired from the same person in a separate transaction near enough in time, generated sales “in or into the U.S.” in the most recent fiscal year greater than the HSR size-of-transaction threshold (currently $84.4 million). If both the acquiring and acquired persons are “foreign persons” and the size of transaction does not exceed the level (currently $337.6 million) where the size-of-persons test ceases to apply, the transaction may still be exempt even if the sales “in or into the U.S.” generated by the foreign assets exceed the size-of-transaction threshold. This further requires, however, that neither the aggregate sales in or into the U.S. nor the aggregate total U.S. assets (certain categories excepted) of the acquiring and acquired persons not exceed a certain threshold (currently $185.7 million).
An acquisition of voting securities of a foreign issuer is exempt, even if it results in “control” of the issuer, if neither the aggregate fair market value of the issuer’s U.S. assets (certain categories excepted) nor the issuer’s sales in or into the United States in its most recent fiscal year exceed the size-of-transaction threshold (currently $80.8 million). Additionally, an acquisition of a foreign issuer’s voting securities by a foreign person always is exempt unless it results in “control” of the issuer. Further, even an acquisition of a foreign issuer’s voting securities by a foreign person resulting in “control” is exempt if the transaction size does not exceed the level (currently $337.6 million) where the size-of-persons test ceases to apply and neither the aggregate sales in or into the United States nor the aggregate total U.S. assets (certain categories excepted) of the acquiring and acquired persons exceed a certain threshold (currently $185.7 million).
Identifying sales “into the U.S.” for purposes of these exemptions is often a highly fact-intensive exercise, taking into account a number of factors beyond where a party’s customers are located.
In some circumstances, an acquisition of voting securities or non-corporate interests in a U.S. entity may be exempt on the grounds that the entity’s assets include exempt foreign assets and the aggregate fair market value of its non-exempt assets does not exceed the amount of the HSR size-of-transaction threshold (currently $84.4 million).
For HSR purposes, a “foreign person” is one whose ultimate parent entity is not incorporated in the U.S., is not organised under U.S. laws, and does not have its principal offices in the U.S., or in the case that a natural person is neither a U.S. citizen nor resident. A “foreign issuer” is one that is not incorporated in the United States, is not organised under U.S. laws, and does not have its principal offices in the U.S.
Even where the jurisdictional thresholds identified in question 2.4 above are exceeded, a transaction may qualify under any of the numerous provisions in the HSR statute and regulations for exemption from premerger notification obligations. Most of the exemptions are very technical and subject to detailed definitions and limitations. In rough terms, though, in addition to the “foreign asset exemption” and “foreign voting securities exemption” described in question 2.6 above, the key exemptions are as follows:
Certain acquisitions of portfolios of financial instruments in the ordinary course of business.
Acquisitions solely for the purpose of investment, defined to mean an interest of no more than 10 per cent in an issuer and interpreted to mean essentially held passively.
Except in very limited circumstances, a person acquiring voting securities must aggregate newly-acquired shares with any earlier-acquired shares, valuing the latter at their current market price or fair market value rather than historical cost. The same holds for acquisitions of non-corporate interests such as partnership interests or LLC membership interests.
A staged series of asset acquisitions by an acquiring person from the same acquired person may also have to be aggregated, particularly where the acquiring person signs the governing letter of intent or agreement in principle less than 180 days after either signing a letter of intent (LOI) or agreement in principle to acquire other assets from the same acquired person or completing such an asset acquisition.
Acquisition of an issuer’s voting securities in stages may necessitate multiple HSR filings. The HSR Rules contain a series of reporting thresholds for voting securities acquisitions. Clearance at a given threshold applies only to that threshold; it does not permit the acquiring person to cross a higher threshold without again completing the notification process. For example, notification at the lowest threshold (currently $80.8 million) for an acquisition of less than 50 per cent of an issuer’s outstanding voting securities will not enable the acquiring person to acquire a 50 per cent or greater stake, without making another filing, if the second filing is otherwise required.
Improper failure to file currently can result in civil penalties of as much as $41,484 per violation per day; this amount is adjusted annually for inflation. Fines imposed for such violations have exceeded $10 million, particularly where an acquiring person has failed to make the required HSR filings on multiple occasions. Further, the government has the authority to seek injunctive relief unwinding a transaction completed in violation of the HSR Act.
If an acquisition of voting securities or non-corporate interests is reportable, however, then it is not permissible to carve-out completion of the transaction in the United States while completing it elsewhere.
In a consensual transaction, the parties may file notification any time after: (a) they have executed a written agreement or letter of intent, the formality of which is not specified under the rules (the document may be primitive and non-binding); and (b) they are prepared to certify that they have the good-faith intention to proceed with the transaction.
In a tender offer or other acquisition of voting securities from third parties, the acquiring person may file notification and initiate the review process any time after: (a) it provides notice of its intentions to the issuer of the voting securities to be acquired, together with certain details specified in the applicable regulation; (b) it is prepared to certify that it has the good-faith intention to proceed with the acquisition; and (c) in the case of a tender offer, it has publicly announced its intention to make the offer.
The reviewing agency can extend the waiting period before allowing it to expire by issuing a formal request for additional information and documentary material (known as a “second request”). Responding to a second request typically entails a burdensome and costly process spanning weeks if not months during which the parties make extensive submissions of documents and data and furnish narrative responses to questions. The parties must certify substantial compliance with the second requests served on them in order to start a second waiting period of either 30 or 15 days within which the government must decide whether to challenge the transaction or let it proceed. The government may challenge a certification of substantial compliance if it believes that a party has failed to respond appropriately, and this may delay the start of the second waiting period. The government’s time to decide whether to challenge a transaction often is extended through a so-called “timing agreement”, by which the parties agree not to close the transaction without first giving the government a specified amount of advance notice that they intend to do so.
It is unlawful to complete an HSR-reportable transaction until the applicable waiting period has expired or been terminated. It is likewise unlawful for the buyer to exercise control over the target before the transaction can properly be closed. Violating these prohibitions may result in significant civil penalties and may lead to the transaction being unwound.
Notification requires completion of a prescribed form containing enumerated “items” plus submission of certain categories of documents as attachments. The form calls for: basic information about the parties and the transaction; a breakdown of the filer’s most recent year’s revenues by industry code; information on the filer’s subsidiaries and equity holders; and, where the parties’ businesses overlap in one or more industry codes, information about the geographic scope of the filer’s business and (for the acquiring person only) prior acquisitions in the overlap code within the past five years whose size exceeded specified thresholds. Required attachments include: the parties’ fully-executed agreement or letter of intent, plus any ancillary non-compete agreements and other agreements between the parties that are needed to understand the transaction; the filer’s most recent annual report and audited financials; and, most important, documents prepared by or for officers or directors that analyse the proposed transaction with respect to either certain competition-related issues or attainable cost synergies or efficiencies.
The HSR regulations do not provide for a short form of notification; nor do they provide, apart from the right to request early termination of the waiting period in any filing, for an accelerated procedure for particular types of mergers other than all-cash tender offers and certain bankruptcy-related transactions (see question 3.6 above). As a practical matter, this is not an impediment – the U.S. process does not contemplate pre-filing consultation, and the basic content of the form is largely limited to pre-existing documents and accounting data. The form does not call for the parties to define markets, express contentions as to competitive effect, or provide substantive analysis. As a result, notifications can commonly be made within two weeks, and roughly 95 per cent of transactions receive clearance within 30 days after filing.
For purposes of merger assessment, the United States uses a “substantially to lessen competition” test. That is, the primary substantive merger provision is Section 7 of the Clayton Act, codified at 15 U.S.C. § 18, which prohibits the acquisition of stock or assets “where in any line of commerce or in any activity affecting commerce in any section of the country, the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly”. The details by which the test is applied in practice are the subject of: extensive case law; government merger guidelines (most recently the 2010 edition available at: http://www.justice.gov/sites/default/files/atr/legacy/2010/08/19/hmg-2010.pdf); a detailed government commentary, available at: https://www.ftc.gov/sites/default/files/attachments/merger-review/commentaryonthehorizontalmergerguidelinesmarch2006.pdf, illustrating enforcement principles based on a prior edition of the merger guidelines; and much learned commentary.
Second, efficiency considerations are expressly recognised as a potential element relevant to evaluation of specific mergers. Under the government’s merger guidelines, the agencies will not challenge an otherwise-suspect merger “if cognisable efficiencies are of a character and magnitude such that the merger is not likely to be anticompetitive” – that is, if the efficiencies “likely would be sufficient to reverse the merger’s potential to harm”. For efficiencies to be cognisable under the guidelines, they must be merger-specific, verifiable, and derived from sources other than anticompetitive reductions in output or service.
Under the HSR statute, the FTC and DOJ have authority to issue a request for information in the form of documents and interrogatory responses from the merging parties. In addition, the agencies have authority under other statutes to issue subpoenas for testimony from employees of the merging parties and to issue subpoenas and civil investigative demands to compel the production of documents, interrogatory responses, and testimony from third parties. The government may impose civil penalties or seek injunctive relief unwinding a merger for violations of the HSR Act (see questions 3.3 and 3.7). In addition, a party’s failure to follow an agency directive or court order might lead to sanctions for civil contempt.
In principle, commercially sensitive information produced during the merger review process is protected against public disclosure, with three exceptions: (a) it may be disclosed in an administrative or judicial proceeding; (b) it may be disclosed to the U.S. Congress; and (c) notice of a grant of early termination of the HSR waiting period is published in the Federal Register, on the FTC website, and on an FTC Twitter feed, even as to otherwise-non-public transactions (see question 3.13 above). More generally, the HSR statute provides that documents and other information filed by the merging parties shall not be made public and shall be exempt from disclosure requirements of the Freedom of Information Act, except as noted in the prior sentence. Other statutes and regulations provide comparable protections for commercially sensitive information produced by third parties.
The Hart-Scott-Rodino process in the United States is a clearance process, not an approval process. For transactions within the HSR statute’s jurisdictional scope, the law requires parties to notify the enforcement agencies and to defer closing until after completing a waiting period, so as to enable the agencies to investigate and challenge problematic transactions; but it does not confer a regulatory approval or disapproval power upon the agencies. For the large majority of transactions, the review process ends one of two ways: (a) the statutory waiting period expires without formal agency action, enabling the parties to proceed by operation of law; or (b) the FTC and DOJ grant early termination of the statutory waiting period, enabling the parties to proceed as of the time of the grant. For the relatively small percentage of transactions that result in agency intervention, most are resolved through consent settlements that include remedial steps to address the agency’s competitive concerns. Transactions that result in agency intervention, but that cannot be resolved consensually, typically end either with abandonment of the transaction or with federal court litigation between the government and the parties. If the HSR waiting period in a reportable transaction has been terminated or permitted to expire without intervention, the agencies do nevertheless have continuing authority to investigate and challenge the transaction (even post-closing), but it is highly unusual for the agencies to do so. The agencies also have authority to investigate and challenge transactions that do not require HSR notification; this is a somewhat more common occurrence.
Merging parties may seek to initiate the negotiation of remedies with the government at any stage in the review process. As a practical matter, however, the FTC and DOJ are unlikely to conduct negotiations until after they first have conducted an investigation that is sufficient to enable them to conclude: (a) that the transaction presents adverse competitive effects that violate the law, thereby warranting intervention; and (b) that they understand the transaction and its effects well enough to craft an effective remedy.
The FTC and DOJ have standard procedures for monitoring and enforcing compliance with negotiated remedies, and both have policies of strict enforcement. Parties to settlements routinely are subject to rigorous reporting and inspection provisions. It is common for either agency to appoint a trustee to monitor compliance and ensure that the agreed-upon remedy is effective. Each agency also may appoint a divestiture or selling trustee where an agreed-upon divestiture has not been completed within a specified time frame. In appropriate cases, a divestiture or selling trustee may be authorised to invoke a so-called “crown jewel” provision and compel divestiture of a different asset package from what a party has agreed to divest, though in practice it is unusual for such measures to be enforced.
Most enforcement matters are resolved through consent decrees that impose remedies on the merging parties. To the limited extent that the FTC or the DOJ and the parties are unable to reach a consent settlement and the agency initiates an enforcement action, the results are mixed. This information is presented in the agencies’ joint Hart-Scott-Rodino Annual Reports, which may be accessed at: https://www.ftc.gov/policy/reports/policy-reports/annual-competition-reports.
Several proposals that would modify merger control standards or procedures in the US are pending before the U.S. Congress. The Standard Merger and Acquisition Reviews Through Equal Rules (SMARTER) Act would more closely align the standards applicable to preliminary injunction actions brought by the FTC with the standards applicable to DOJ, and it would remove the FTC’s authority to use administrative proceedings to challenge a merger under the Clayton Act. The Merger Enforcement Improvement Act would impose post-settlement data reporting requirements and would adjust merger notification filing fees, among other reforms. The Consolidation Prevention and Competition Promotion Act would lower the substantive test of illegality under Section 7 (from “substantial” lessening of competition to “more than a de minimis amount” of lessened competition), would shift the burden of proof from the government to the private parties in large transactions, and would also impose post-settlement data reporting requirements, among other reforms.
These answers are up to date as of 26 September 2018.