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On September 21, 2020, the Federal Trade Commission (“FTC”), with the concurrence of the Antitrust Division of the U.S. Department of Justice (“DOJ”), announced a Notice of Proposed Rulemaking and an Advance Notice of Proposed Rulemaking regarding proposed changes to the rules and interpretations implementing the Hart-Scott-Rodino (“HSR”) Act. The amendments proposed by the Notice of Proposed Rulemaking and some of the changes contemplated by the Advanced Notice of Public Rulemaking may greatly affect financial investors.
The Notice of Proposed Rulemaking (“NPRM”) proposes two significant amendments to the HSR rules. The first change would broaden the definition of “person” to include associate entities. The second change would create a new exemption for the acquisition of 10% or less of an issuer’s voting securities unless the acquiring person already has a competitively significant relationship with the issuer. These two rules are not necessarily conditioned on each other (i.e., the Commission may finalize one but not the other). Note that, although Democratic Commissioners Rohit Chopra and Rebecca Kelly Slaughter voted against publishing the NPRM because of their concerns regarding the 10% exemption, both Commissioners support the NPRM’s proposed aggregation of associate entities.
The Advanced Notice of Public Rulemaking (“ANPRM”) seeks to gather information on specific topics that will help determine the path for future amendments to the premerger notification program. These topics include several that would impact financial investors, such as the competitive effect of an investor holding small minority positions in issuers that operate competing lines of businesses, whether the definition of “solely for the purpose of investment” as applied to the investment-only exemption should be rethought, and whether the acquisition of convertible voting securities or the use of board observers should be reportable events. The FTC unanimously voted to publish the ANPRM.
Why does this matter?
The NPRM proposes changes, and the ANPRM seeks information regarding potential changes, that may significantly impact investment funds and similar financial investors. Over the next two months, investors have the opportunity to submit input for the Commission’s consideration. We have detailed below the proposals and topics that would most significantly affect financial investors.
TWO PROPOSED AMENDMENTS
Aggregation of Associate Entities. The Commission seeks to capture the complete structure of the acquiring person and the complete economic stake being acquired in the issuer. For example, if Funds A, B and C, each its own ultimate parent entity (“UPE”), exist within the same family of funds managed by an Investment Manager, the funds and their manager all are “associates” under § 801.1(d)(2). For example, under the current rule, if Fund A plans to acquire 6% of Issuer X for $100 million, and Funds B and C each plan to acquire 3% of Issuer X for $50 million, only the acquisition by Fund A is large enough to cross the $50 million (as adjusted) size-of-transaction threshold. Under the current HSR Rules, Fund A does not need to disclose in its HSR filing the less-than-5% interests in Issuer X of Funds B and C. Under the proposed changes, the Investment Manager would make a single filing for the fund family’s aggregated acquisition of 12% in Issuer X for $200 million. Similarly, if Funds A, B and C each were to acquire 3% of Issuer X for $50 million, no filing would be required under the current Rules because none of the acquisitions would exceed the size-of-transaction threshold. Under the proposed changes, however, a filing would be required for the aggregated acquisitions by the fund family of 9% in Issuer X for $150 million. On the other hand, if Funds A, B, and C each will acquire 6% of Issuer X for $100 million, the current HSR rules would require three separate filings from each UPE. Under the proposed changes, only a single filing by the Investment Manager for an aggregated 18% of Issuer X for $300 million would be required.
Proposed Exemption for De Minimis Acquisitions of Voting Securities. The Rules currently include an exemption for acquisitions of 10% or less of the voting securities of an issuer made “solely for the purpose of investment” (see § 802.9). “Voting securities are held or acquired ‘solely for the purpose of investment’ if the person holding or acquiring such voting securities has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer” (see § 801.1(i)(1)). Aside from the specific factors set forth in the Statement of Basis and Purpose for the original 1978 Rules, there is little guidance as to what type of conduct—other than simply holding the stock—may fall under the “solely for the purpose of investment” umbrella. Communications between investors and management generally serve to encourage corporate accountability to shareholders and to stoke competition. However, the Commission acknowledges that “seemingly innocuous” topics may touch on basic business decisions (e.g., a discussion on executive compensation may evolve into how each executive’s compensation will be determined by the company’s performance) that may preclude the use of the § 802.9 exemption. The uncertainty related to the subjective assessment of investment intent may dampen shareholder activism and its attendant benefits to competition.
A decade after the promulgation of the original Rules, following complaints by investors about the negative impact of HSR on their small stock purchases and a study that showed the Agencies had never challenged one, the Commission considered a blanket exemption for all acquisitions of 10% or less of an issuer’s voting securities, regardless of intent of the acquiring person (see 53 FR 36831 (Sept. 22, 1988)), but did not issue a final rule. Commissioner Noah Phillips states, “[t]ransactions of 10% or less are just as unlikely to lessen competition today as they were 30 years ago; and small stock purchases have almost never needed even a second look.” According to the NPRM, none of the 10%-or-less standalone acquisitions reviewed by the Agencies over the last four decades has warranted a challenge, and rarely have the Agencies engaged in a substantive initial phase investigation of such an acquisition. The Commission believes that proposed acquisitions of 10% or less should be exempt “when they are unlikely to violate antitrust laws and that exempting this category of acquisitions will allow the Agencies to better focus their resources on transactions that create the potential for competition concerns.”
INFORMATION SOUGHT IN ADVANCE NOTICE OF PROPOSED RULEMAKING
Common Ownership. Since the promulgation of the HSR program, there has been significant expansion of the holdings of investment entities, such as investment funds and institutional investors, as well as expanded interest and ability of such shareholders to participate in corporate governance. Through the ANPRM, the Commission seeks to explore the potential competitive effect of an investor holding small minority positions in issuers that operate competing lines of business. The Commission seeks input on the following:
Influence Outside the Scope of Voting Securities. Through the ANPRM, the Commission is exploring the ability of an acquirer to gain influence over a company without the acquisition of the right to vote for the election of directors inherent in voting securities. Specifically, the Commission seeks to understand whether the acquisition of convertible voting securities or board observer rights—neither of which currently requires filing—provide opportunities to influence an issuer’s business decisions such that they should be reportable events.
What happens next?
Interested parties may file comments to the Notice of Proposed Rulemaking and the Advance Notice of Proposed Rulemaking online or on paper. Comments are due 60 days after publication of the notices in the Federal Register, and any comments will be placed on the publicly accessible website, https://www.regulations.gov.
How can Cadwalader help?
Cadwalader’s antitrust team, located in key jurisdictions in the United States (New York, Washington, D.C., Charlotte) and London, is composed of specialists that offer ‘end-to-end’ advice on compliance, investigations and related litigation. Our practitioners are experienced in counseling on HSR and merger issues and are available to discuss the possible impact of the notices of proposed rulemakings and to help with the drafting and submission of comments during the public comment period.