Content Assessment: An FTC Update on the Treatment of Debt in HSR Filings
Information - 95%
Insight - 90%
Relevance - 95%
Objectivity - 90%
Authority - 90%
A short percentage-based assessment of the qualitative benefit of the recent post highlighting changes in treatment of debt by the FTC in HSR filings.
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FTC Announcements on August 26, 2021*
Reforming the Pre-Filing Process for Companies Considering Consolidation and a Change in the Treatment of Debt
By Holly Vedova, FTC Bureau of Competition
As the FTC continues to experience a massive surge in planned merger deals, we are looking at every step of the merger filing process to identify ways to streamline and maximize our efficiency. Under the Hart-Scott-Rodino Act (“HSR” or the Act), companies are required to file notice of mergers over a certain size before they can close the deal. This is not an application process – it is for law enforcement purposes.
The HSR Act does not require companies to file notice with the FTC and DOJ for every deal ahead of time. It sets out a general framework for transactions that are covered and gives the FTC the authority to write rules, with the concurrence of the DOJ, to provide more specific guidance as to which deals qualify. The FTC is currently in the process of working with the DOJ to update its existing merger filing rules.
However, outside of the formal rules, agency staff also provide “informal interpretations” in response to questions from firms about whether specific types of transactions are covered. These interpretations are not reviewed or authorized by the Commission, and do not carry the force of law.
The Bureau is concerned that some of these informal interpretations may not reflect modern market realities or the policy position of the Commission. We are currently in the process of reviewing the voluminous log of informal interpretations to determine the best path forward. However, it is worth noting one initial example of where the informal interpretation program missed the mark.
Under the Hart-Scott-Rodino rules, parties generally need to file if the transaction is valued over a certain dollar-value threshold. However, previous informal interpretations gave the impression that companies could avoid filing by paying off a target company’s debt, instead of paying the company with cash.
It appears that some merging parties have responded by structuring deals in ways that they believe fall outside of the filing requirements. Target companies may be incentivized to take on debt just before an acquisition, so that the acquiring company can retire the debt as part of the deal. These deals then are not being reported to the FTC and the DOJ, which means that merging parties are effectively sidestepping the law and avoiding accountability.
Herein lies the problem of unintended consequences with informal interpretations. Despite the agency’s clearly stated assertion that informal interpretations are not a legal determination, companies appear to rely on them as a substitute or supplement for their own legal analysis. In practice, this means that informal interpretations regarding instances that companies may not have to file are being treated by merging parties as if they are legal exemptions.
That outcome is not aligned with either the statute or the agency’s stated instructions. It is the Commission’s responsibility, with the concurrence of the DOJ, to determine whether and when reporting exemptions are appropriate, through rules or formal interpretations of those rules. As a law enforcement agency, the FTC must be mindful of helping firms avoid accountability, even indirectly.
Effective September 27, 2021, the Bureau will begin to recommend enforcement action for companies that fail to file when retirement of debt is part of the consideration for the deal. The details of this change can be accessed via this link. [Text Provided Below for Convenience]
The Treatment of Debt as Consideration
The HSR Act provides that “no person shall acquire, directly or indirectly, any voting securities or assets of any other person” without first complying with the notification requirements if certain conditions are met. The first step in complying with the HSR Act’s notification requirements is to determine whether the transaction satisfies the size of transaction test. Section 801.10 of the Rules provides the basis for this determination, which in many cases hinges on the Acquisition Price.
Section 801.10(c)(2) of the Rules states that Acquisition Price “shall include the value of all consideration for such voting securities, non-corporate interests or assets to be acquired.” The original Statement of Basis and Purpose promulgating the Rules (the 1978 SBP) provides useful background on the intent of 801.10, advising that “cash, voting securities, non-voting securities, tangible and intangible assets and assumption of liabilities, if consideration for an acquisition, must all be valued in computing the acquisition price.” 43 FR 33450, 33471 (Jul. 31, 1978) (emphasis added).
The 1978 SBP makes it clear that, under 801.10(c)(2), the assumption of liabilities must be included in the Acquisition Price if it is part of the consideration. Up until now, the Bureau advised that the retirement of debt should never be included in this calculation. This approach was based on the Bureau’s understanding of debt in the earliest days of the HSR program. The Bureau no longer considers this the correct approach because, as a result of developments in deal structures and financing, sometimes the retirement of debt is part of the consideration for a transaction in that it benefits the selling shareholder(s). Therefore, while the Bureau acknowledges that not all debt retired as a part of a proposed transaction is consideration, the full or partial retirement of debt should be included in calculating the Acquisition Price in any instance where selling shareholder(s) benefit from the retirement of that debt. This approach better reflects the intent of the Rule as reflected in the 1978 SBP.
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- Ahead of Schedule? A Hart-Scott-Rodino Act Transaction Update (March 2021)
- Springing into Spring? A Hart-Scott-Rodino Act Transaction Update (February 2021)
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