The FTC’s Premerger Notification Office has expanded the Hart-Scott-Rodino (HSR) reporting requirements for certain leveraged buyouts.
The HSR reporting rules require that before certain transactions can close the antitrust enforcement agencies—the FTC and DOJ—must be notified and a 30-day waiting period must be observed.
In transactions likely to result in competitive harm, the agencies can investigate, which can further delay closing.
In the most extreme cases, the agencies can impose restrictions, order divestitures, or block a transaction from closing altogether. Therefore, any expansion in reporting requirements merits close attention.
The basic threshold for HSR reporting, known as the “Size-of-Transaction”, presently is $78.2 million and adjusts annually. Size-of-Transaction is a bit of a misnomer though because as calculated under the HSR rules it does not always also reflect the transaction value the parties have agreed.
The rules provide that asset acquisitions include the value of prior asset acquisitions from the same seller in the prior six months and that asset acquisitions also include the value of assumed liabilities.
Prior acquisitions of stock, on the other hand, are always aggregated with new acquisitions of stock in the same company for determining the Size-of-Transaction, but valuing the stock in those transactions can be tricky.
The agency recently reversed its position with respect to Leveraged Buy-Out (“LBO”) transactions where new debt is taken on to finance the transaction. Prior guidance tied reportability in the LBO context to which party incurred the new debt.
Under the new guidance, however, the agency has squarely reversed its position—new debt used to finance an LBO transaction, whether taken on by the buyer or the target, is to be included in the size of transaction.
Thus, the Size-of-Transaction for stock deals under the new guidance will most closely align with the pre-transaction equity value of the company, rather than the company’s post-closing equity value.
The change will mean more transactions will be subject to HSR reporting, particularly in the private equity arena where debt financing is common.
As the new guidance is effective immediately, it will also mean transactions presently underway that would not have been subject to reporting under the prior guidance will now need to be reevaluated potentially resulting in additional costs and delaying closing.