For many entrepreneurs, the opportunity to sell your company is a dream come true. After all of your hard work, you have built something valuable that someone else would like to purchase, allowing you to start a new venture or perhaps retire. Among all of the legal issues surrounding the sale of a business hides Hart Scott Rodino (HSR), a federal law that requires transactions of a certain size to be reported to the Federal Trade Commission (FTC) and the Department of Justice (DOJ) so that the feds can determine whether the transaction will create anti-competitive effects in the market. So when do you have to report a transaction to the FTC and the DOJ?
The First Test under Hart Scott Rodino: How big is the transaction?
Like all good federal regulatory law, HSR breaks down into multiple tests. The first threshold on whether a transaction has to be reported is based on the size of the transaction. In many ways, HSR really does break down to “mo’ money, mo’ problems.” If more than $303.4 million* of voting securities, non-corporate interests (NCI), and/or assets (“stuff”) are being acquired, you definitely have to report the transaction. If less than $75.9 million* of stuff is being acquired, you are not required to report the transaction. If the transaction falls between these two thresholds, such that the amount of stuff being acquired is between $75.9 million and $303.4 million, we move to Phase II of the analysis: the size of the transaction/size of the person test.
The Second Test: Size of the Transaction/Size of the Person
Under the size of the transaction/size of the person test, there are actually three thresholds. If all three thresholds are met, you must report the transaction to the feds. First, the transaction must affect US commerce. This is a very broad standard; most transactions satisfy this requirement. Second, the transaction must be valued at more than $75.9 million* (“size of the transaction test”). Third, one of the parties must have sales and assets of at least $151.7 million* and the other party must have sales or assets of at least $15.2 million* (“size of the person test”).
Don’t worry – there are excruciatingly detailed tests and definitions to guide you.
First, let us break down the size of the transaction test. Don’t be fooled – this is not just based on the acquisition price set in the deal. HSR defines how to value assets for purposes of this test in excruciating detail. Assets are valued at the higher of fair market value** or the acquisition price.** Voting securities are valued at the higher of the market price** or acquisition price if they are publicly traded. If the voting securities are not publicly traded, they are valued at the acquisition price or the fair market value if the acquisition price has not been set. Non-corporate interests are valued the same way: at the acquisition price or the fair market value if the acquisition price has not been set.
Keep in mind that if there have been previous acquisitions, stuff that has already been acquired may need to be aggregated with the stuff about to be acquired for purposes of this test. Also, there are special rules when foreign stuff is being acquired.
How to Define “Person” and Count the Assets
Next, we will look at the size of the person test in closer detail. While the test is framed as the singular “person,” the reality is that you may actually be looking at several entities. To calculate the size of the person, you have to include controlling entities all of the way up to the ultimate parent entities** of the buyer and seller. If the entity is involved in manufacturing, count all of the sales and assets; otherwise, just calculate total assets. Net annual sales and total assets will be determined by the last regularly prepared annual statement of the entity’s statement of income and balance sheet, and these financial statements cannot be older than 15 months old. For natural persons, certain assets do not have to be counted for purposes of this test: residence, cars, and personal property not being held for investment purposes or for income production. Basically, for natural persons, you have to count all income-producers and investments. If something could be producing income but it is not, you still have to count it. If all of the stuff adds up to at least $151.7 million* for one party and $15.2 million* for the other party, the size of the person test is satisfied. If the other two tests are satisfied (affects commerce/size of the transaction), then you must report under HSR.
There is one final wrinkle. Certain types of transactions are exempt from HSR reporting, no matter how big the size of transaction or the parties involved:
- Stock splits that do not increase the percentages owned by any person
- Acquisitions of small percentages of an issuer’s voting securities solely for the purpose of investment
- Acquisitions of additional voting securities by persons who already hold 50% of the voting shares of an issuer
- Acquisitions in the ordinary course of business, such as purchases of current supplies and used durable goods
- Acquisitions of several categories of real property, such as unproductive real property, office and residential property, and hotels
- Acquisitions in regulated industries, whose competitive effects are reviewed by other agencies
Companies who are looking at buying or selling a business or substantial assets should consult with their lawyer. There are numerous laws affecting transactions, including HSR, and counsel can guide you through the regulatory pitfalls to a successful closing of the deal.
*The actual threshold numbers literally change every year. Be very sure to check on where the thresholds are set when analyzing a transaction.
** I know what you must be thinking – where’s the fun without a long string of definitions? HSR has not let you down. This word is actually a term of art defined by the statute and regulations.
Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.