When Chinese investors are considering US targets, it is important to keep in mind the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”). For deals meeting certain thresholds, the HSR Act requires the parties to submit HSR filings to FTC and DOJ, pay a filing fee, and wait 30 days before closing. The purpose of this is to permit FTC and DOJ to investigate the potential antitrust and competition issues before the transaction closes. Failure to make a filing and/or observe the 30-day waiting period can have severe consequences. Currently, the maximum civil penalty for noncompliance is $43,792 per day.
In general, an HSR filing is required when a transaction meets the “size of transaction” and “size of persons” tests. The thresholds for these tests change annually. Currently, only deals valued at $92 million or more meet the size of transaction test; deals valued at less than $92 million are not reportable. For deals valued at $92 million or more, but less than $368 million, the size of persons test must also be satisfied. In general, this means that the ultimate parent entity of one party to the deal has at least $184 million in assets or annual sales, and the ultimate parent of the other party has at least $18.4 million in assets or annual sales. For deals valued at $368 million or more, the size of persons test does not apply.
The HSR landscape is changing rapidly. There have been more HSR filings this year than ever before, and the government is struggling to keep up. This year, there have been several important HSR developments, including:
- Suspension of early termination program. In February 2021, the FTC and DOJ suspended the “early termination” program, which has not been resumed. Previously, parties could request that the antitrust agencies terminate the HSR waiting period in less than 30 days, and the antitrust agencies had the discretion to grant “early termination” to deals posing no competitive concerns.
- FTC begins issuing close-at-your-own-risk letters. In August 2021, the FTC announced that when it runs out of time to fully investigate a deal before the end of the HSR waiting period, it may issue a letter informing the parties that the FTC may continue to investigate the deal after closing, and if the parties choose to close, they do so “at their own risk.”
- Payoff of debt benefitting a selling shareholder must now be included in size of transaction. In August 2021, the FTC announced that the payoff of debt should be included in the HSR size of transaction where a selling shareholder benefits from the payoff of debt.
- FTC study of 10 years of unreported big tech deals indicates additional HSR changes may be coming. In September 2021, the FTC announced the results of a study of over 600 unreported big tech deals from 2010 to 2019, and FTC commissioners commented on the need to close “loopholes” in the HSR rules.
- FTC continues to enforce HSR rules against individual shareholders. In September 2021, the FTC assessed a civil penalty of $637,950 against CEO for failing to file an HSR form before acquiring stock in his company through the vesting of performance stock units, serving as an important reminder to executives and individual shareholders that HSR requirements apply to them as well.