The spread of COVID-19 has already taken a significant toll on the health of individuals and economies across the globe. While governments are using fiscal and monetary policy tools in an effort to limit the impact on businesses affected by the ongoing crisis, there is still much uncertainty surrounding the scope of harm that the pandemic will ultimately inflict. It seems certain, however, that acquisitions and investments involving distressed companies are likely to increase as firms try to find a path forward through the crisis and as investors seek to inject additional capital into companies in need.

It is important to remember that in these extraordinary times, investments, and acquisitions – including those involving financially distressed companies – will often still trigger antitrust reporting obligations in the United States under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act). U.S. antitrust laws include unique rules for bankruptcy transactions and exemptions from normal notification requirements to account for the special circumstances of transactions involving distressed companies. In this alert, we (1) provide a brief overview of filing requirements under the HSR Act, (2) summarize special rules relating to transactions involving bankrupt or financially distressed firms, and (3) review the “failing firm” defense, which may permit an otherwise anticompetitive transaction to proceed in limited circumstances.

As companies face the new normal and try to keep pace with rapid developments and fast‑moving transactions, they should be mindful of these rules and engage antitrust counsel early to help navigate the merger review process.

What are my general antitrust filing obligations in the United States?

Under the HSR Act, parties to transactions that meet the following thresholds are required to report the transaction to the U.S. antitrust agencies (the Department of Justice Antitrust Division and the Federal Trade Commission), unless an exemption applies:

• The transaction is valued at more than $376 million OR
• The transaction is valued at between $94 million and $376 million, AND one party has annual net sales or total assets of at least $188 million, and the other party has annual net sales or total assets of at least $18.8 million.[1]

Subject to certain exceptions – including some bankruptcy transactions – submission of an HSR filing triggers a 30-day waiting period during which the parties may not close the transaction. Upon either filing party’s request, the agencies may grant early termination of the waiting period. Early termination was recently suspended when the agencies instituted a new e-filing program as a result of COVID-19. It has since been reinstated, albeit on a more limited basis, with grants issued more slowly and in fewer cases than usual.

If early termination is not granted, upon expiration of the 30-day waiting period, the agencies may allow the transaction to proceed. Alternatively, the reviewing agency may issue a Request for Additional Information and Documentary Materials (Second Request), initiating a more in‑depth investigation, usually due to concerns about a transaction’s competitive impact. Subject to timing agreements that parties often negotiate with the agencies, parties are prohibited from closing until 30 days after substantial compliance with a Second Request.

What special HSR rules apply to transactions in which the target is in bankruptcy?

Transactions that are subject to Section 363(b) of the Bankruptcy Code are governed by a special set of HSR rules. In order for these special rules to apply, the transaction must be subject to Section 363(b), and bankruptcy proceedings must have been formally initiated.

• Filing Person: The “acquired person” for HSR purposes is the debtor itself, rather than the “ultimate parent entity” of the target, as is normally the case under the HSR rules. The trustee or Debtor in Possession (DIP) must submit the HSR filing on behalf of the acquired person.
• Waiting Period: Both the acquirer and the trustee or DIP must submit their filings for the waiting period to start. Once both parties file, the waiting period is only 15 days, instead of the normal 30. If the trustee or DIP is unwilling to submit a filing, it may be necessary to seek a court order requiring them to do so.
• Second Requests: If the reviewing agency issues a Second Request, the waiting period is extended until 10 days (rather than 30) after the acquirer substantially complies. For most transactions, both parties must substantially comply for the waiting period to start.

For acquisitions connected to a bankruptcy, parties can file HSR using the bankruptcy order, rather than an executed agreement, as is typically required. In the case of a bankruptcy auction, multiple bidders can make HSR filings to be ready to close in case they ultimately win the auction. This will require the trustee or DIP to submit multiple filings corresponding to each potential buyer. Obtaining antitrust clearance early can increase the attractiveness of a particular bid in a bankruptcy auction.

What types of distressed transactions may be exempt from HSR filings?

In addition to the special rules for some bankruptcy transactions, certain HSR filing exemptions may apply to transactions involving companies in financial distress.

• Exemption for Creditors: Under HSR Rule 802.63(a), certain acquisitions by creditors are exempt if they are entered into in the “ordinary course of the creditor’s business,” including: acquisitions of collateral or receivables, acquisitions in foreclosure or upon default, acquisitions in connection with the establishment of lease financing, and acquisitions in connection with a bona fide debt work-out. This exemption is limited to transactions involving parties in a debtor/creditor relationship at the time of the transaction, which result in a change to that debtor/creditor relationship. While “ordinary course of business” is not defined, the antitrust agencies have found that a transaction between competitors would not be considered ordinary course. There is a “vulture fund” exception to this exemption, which prohibits acquirers from using the exemption if the debtor is in bankruptcy or if there has been a publicly-announced intention to place the debtor in bankruptcy.
• Investment Only Exemption: Acquisitions of less than 10% of a company’s outstanding voting securities that are made “solely for the purpose of investment” are also exempt from HSR filings under Section 7A(c)(9) of the HSR Act. HSR Rule 801.1(i)(1) defines “for the purpose of investment” as when the investor has “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” The FTC has recognized the following conduct as inconsistent with a purely investment purpose: (1) nominating a candidate for the board of directors; (2) holding a board seat or being an officer; (3) proposing corporate action that requires shareholding approval; (4) soliciting proxies; and (5) being a competitor of the issuer.
• Pro Rata Exemption: Under the “pro rata exemption” provided in Section 7A(c)(10) of the HSR Act, acquisitions of voting securities are exempt where they do not increase the acquiring person’s percentage of outstanding voting securities of the issuer. If existing shareholders invest their pro rata in an additional funding round, that transaction would likely fall under this exemption.
• Previous HSR Filing: Under HSR Rule 802.21, once an investor files for a voting securities acquisition at a particular HSR threshold, it can make additional investments in the company for the next five years without triggering a filing, so long as the investments do not trigger the next applicable threshold.

What about acquisitions of “failing” firms?

Regardless of whether a transaction involving a financially distressed firm implicates the special HSR rules or exemptions discussed above, U.S. antitrust agencies and courts recognize a “failing firm” defense for certain transactions that might otherwise lessen competition. This defense allows an otherwise anticompetitive transaction, such as a merger between close competitors, to proceed if the parties can show that the distressed firm (1) will be unable to meet its financial obligations in the near future, (2) would not be able to reorganize successfully under Chapter 11 of the Bankruptcy Act, and (3) has made unsuccessful good-faith efforts to elicit reasonable alternative offers from alternative buyers who would pose less of an antitrust risk.

Under normal circumstances, it is very difficult to satisfy each of these elements. However, this could change as the economic conditions worsen as a result of COVID-19, and a growing number of companies find themselves in existential distress. More generally, parties undertaking transactions in distressed situations may be able to argue that deals will not harm competition (or are indeed procompetitive) in the extraordinary circumstances presented by COVID-19.

What about the rest of the world?

Over 100 jurisdictions around the world have active merger control regimes. Transactions involving companies with operations outside the United States may trigger merger control filings and/or antitrust scrutiny in other jurisdictions. Countries with newer antitrust regimes might not yet have had cause to determine whether or how to streamline filings in the event of a pandemic or in cases involving firms in economic distress. Transactions that qualify for an exemption for distressed situations in one country might require a filing in another. Finally, several antitrust authorities have announced changes to their operations due to COVID-19, including office closures and the suspension of ongoing reviews (without terminating any mandatory waiting periods that prohibit closing).

Parties considering transactions should monitor developments carefully and consult with experienced antirust counsel to navigate the heterogeneous global enforcement landscape.

Conclusion

U.S. antitrust laws acknowledge in many ways that extraordinary times may call for extraordinary measures. However, this added complexity makes it all the more important to involve antitrust counsel early to ensure that antitrust obligations are properly identified and that companies can avail of any special rules or exemptions that may apply.

[1] These thresholds are adjusted annually based on changes in gross national product.

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