Flying Under the Radar Screen?
Antitrust Risks for Mergers and Acquisitions Deals Valued under the HSR size-of-transaction threshold
The size-of-transaction test under the HSR Act is $50 million (as adjusted). Deals that do not exceed $50 million in value are not subject to the HSR Act premerger notification and waiting period requirements. Two questions naturally arise now in smaller deals:
The currently applicable adjusted thresholds can be found in the HSR Quick Reference Outline.
- How does one know for sure that a particular deal is valued $50 million (as adjusted) or less for HSR purposes, and therefore not reportable?
- What antitrust exposure do parties face in nonreportable mergers and acquisitions deals valued at $50 million o(as adjusted) or less?
I. Valuation for HSR purposes
The issue of valuation for HSR purposes is most likely to raise questions regarding both acquisitions of assets and acquisitions of the shares of private corporations. The HSR rules specify different techniques for valuing transactions involving assets and voting securities, depending upon the circumstances.
Under the HSR rules, the value of an asset acquisition is Fair Market Value or, if determined and greater than Fair Market Value, the Acquisition Price. Fair Market Value must be determined, in good faith, by the board of directors of the acquiring person. Acquisition Price is the total amount of consideration received by the seller(s) for acquisition of their assets. That consideration includes the assumption of any accrued liabilities by the acquiring person, and it includes any separate amount paid to the seller(s) for a covenant not to compete.
Private company targets
If the stock is not publicly traded and the Acquisition Price is determined, the value of the transaction is the Acquisition Price. If the Acquisition Price is not determined, the value of the transaction is the Fair Market Value of the stock, determined by the board of directors of the Acquiring Person or its delegate.
Note how in many deals the acquiring person must make a good faith Fair Market Value determination before one can say for sure that no HSR filing is required. The FTC has published a helpful Valuation Checklist to assist parties and counsel with valuation questions.
II. Disgorgement remedies for illegal mergers
A mergers and acquisitions transaction that does not meet the HSR size-of-transaction test can still be found to be illegal under the U.S. antitrust laws if it substantially lessens competition in any relevant antitrust market. Recent FTC enforcement actions seeking disgorgement as a remedy for an allegedly illegal mergers and acquisitions deal raise the question of whether and when parties to a nonreportable deal valued at $50 million or less should ever voluntarily notify the U.S. antitrust agencies before closing.
In April 2001, the FTC sued The Hearst Corporation for HSR violations and for disgorgement of monopoly profits. The case arises from the 1998 acquisition by a Hearst subsidiary (First Data Bank) of Medi-Span, a medical database company, for approximately $38 million. The combined entity drastically raised prices, which prompted a post-closing FTC investigation that turned up unsubmitted 4(c) documents (and apparently some very bad ones at that). The FTC sought more than two years worth of HSR penalties plus disgorgement of monopoly profits and interest. In November 2001, Hearst agreed to disgorge $19 million in profits and divest an overlapping business.
FTC Director comments
A top Federal Trade Commission official at the time stated that companies involved in small mergers that could raise antitrust issues should contact the agency even if the deal is not reportable under the Hart-Scott-Rodino Act. "There is no safe harbor under $50 million," she said.
We are not recommending such voluntary self-reporting—in most cases, this will be a very bad idea.
FTC Chairman Muris announced that his staff uses consumer and competitor complaints and trade press to identify nonreportable mergers that could harm consumers.
Computer software mergers valued at less than $50 million have received special attention from FTC enforcers.