The Hart-Scott-Rodino Act requires parties to an acquisition of voting securities or assets to file a report form with the Federal Trade Commission (FTC) and Department of Justice (DOJ), and to observe a waiting period before the transaction is consummated, subject to certain threshold tests. Compliance with the requirements of the HSR Act should be on creditors’ checklists as they prepare to receive voting securities of reorganized debtors upon emergence from bankruptcy. Although various filing exemptions are available, creditors must timely focus on whether a filing will be required.
Basic Concepts
The HSR Act, which was passed by Congress in 1976, was designed to give the antitrust agencies — the FTC and the Antitrust Division of the DOJ — a pre-consummation look at acquisitions, so that if there are anti-competitive concerns, the agencies will not be in a position of having to “unscramble the eggs.” The HSR Act applies to acquisitions of both assets and voting securities, but only if certain quantitative thresholds are exceeded. These thresholds are adjusted each year for inflation.
There are both a size of the person test and a size of the transaction test. The size of the person test involves some complexity, and falls away if the size of the transaction exceeds $200 million, as adjusted (currently $323 million). The size of the transaction test requires that the dollar value of the transaction (computed as prescribed by the HSR rules) exceed $50 million, as adjusted (currently $80.8 million). Thus, if voting securities of an issuer (including a debtor in bankruptcy) with a value exceeding $80.8 million are being acquired, assuming the size of the person test is satisfied or inapplicable and assuming no exemption is available, an HSR filing is required before the acquisition can be consummated.
The staff of the Premerger Notification Office of the FTC (PNO) provides interpretive guidance on the HSR Act and the rules promulgated under the Act, and the staff’s guidance is generally accepted by practitioners as authoritative.
In performing an HSR analysis, it is useful to consider the following questions:
Can purchases of related entities be disaggregated?
Often, voting securities are being acquired by funds under common management, all of which would constitute a group under the federal securities laws. However, there is no group concept under the HSR Act. Generally, funds under common management, but with disparate groups of investors, none of whom have an interest of 50% or more in each of the funds, are deemed separate acquirers for HSR purposes. Thus, for example, if two funds under common investment management are each acquiring $50 million of voting securities of a debtor, the acquisitions will not be aggregated, and the size of the transaction threshold will not be satisfied.
Can an exemption be claimed because the voting securities are being acquired in connection with a bona fide debt workout?
Section 802.63 of the rules promulgated under the HSR Act provides a broad exemption for assets and voting securities acquired by creditors in a debt workout. The exemption will apply to many of the voting securities that are issued to creditors in a bankruptcy proceeding. There are both limitations and surprising breadth to the rule.
Rule 802.63(a) reads as follows:
An acquisition of collateral or receivables, or an acquisition in foreclosure, or upon default, or in connection with the establishment of a lease financing, or in connection with a bona fide debt work-out shall be exempt from the requirements of the act if made by a creditor in a bona fide credit transaction entered into in the ordinary course of the creditor’s business.
Generally, therefore, voting securities of a debtor acquired by a creditor under a bankruptcy plan on account of the creditor’s claims will be exempt from the filing requirements of the HSR Act.
The Vulture Fund Exception
There is one exception to Rule 802.63, known as the “Vulture Fund” exception.1 Where claims are acquired by a creditor after a debtor announces its intention to file for bankruptcy, the creditor is not viewed by the PNO staff as a “creditor in a bona fide credit transaction.” Voting securities acquired under a plan in respect of such claims are not exempt from the filing requirements of the HSR Act.
Rights Offerings
Rights offerings are often utilized by reorganizing debtors to raise equity capital upon emergence from bankruptcy. Although the rights offerings are in connection with the bankruptcy, and indeed the closing of the rights offering and plan effectiveness are typically cross-conditioned, rights offering participants are putting new money into the reorganized debtor.
The PNO staff has advised in a publicly available response to an outside inquiry2 that voting securities issued in a bankruptcy or other workout-related rights offering are eligible for the bona fide debt workout exemption. The PNO staff also advised that voting securities acquired as compensation for a backstop commitment in such a rights offering, and voting securities acquired in fulfillment of the backstop commitment, would likewise qualify for exemptive treatment under Rule 802.63.
Is a creditor acquiring voting securities solely for purpose of investment exempt from filing?
There may be circumstances where voting securities acquired in connection with a bankruptcy reorganization will not be exempt from the HSR Act. For example, where the reorganized debtor is conducting an equity private placement to coincide with its emergence from bankruptcy, voting securities issued in the private placement may not be eligible for treatment under Rule 802.63. A creditor acquiring voting securities in a nonexempt private placement may, however, be able to claim the investment exemption under the statute.
Section 7A(c)(9) of the HSR Act provides an exemption for:
acquisitions, solely for the purpose of investment, of voting securities, if, as a result of such acquisition, the securities acquired or held do not exceed 10 per centum of the outstanding voting securities of the issuer.
The key concepts here are that the acquisition must be “solely for the purpose of investment” and that the acquisition cannot be for more than 10% of the outstanding voting securities of the issuer.
The PNO staff takes a very strict view of “solely for the purpose of investment.” According to the staff, “any investor who anticipates seeking to influence management decisions is an ‘active’ investor and not entitled to rely on the ‘investment only’ exemption.”3 This is a more exacting standard than, for example, Rule 13d-1(c), under which passive investors holding under 20% of a class of registered voting stock of an issuer may report on Schedule 13G rather than the more detailed Schedule 13D.4 Also, a competitor, even for a small part of the issuer's business, cannot claim the investment intent exemption.
While the investment intent exemption is generally limited to no more than 10% of the issuer’s voting securities, institutional investors can hold up to 15%, subject to certain qualifications, under Rule 802.64. Institutional investors are defined as banks, insurance companies, broker-dealers and the like, and would not include hedge funds.
Where a creditor will acquire voting securities in both exempt and nonexempt acquisitions, can the nonexempt acquisitions be excluded?
Yes, in determining whether the size of the transaction threshold has been exceeded, all exempt acquisitions can be disregarded. For example, if a creditor whose purpose is solely investment will be acquiring 5% of the outstanding voting securities of an issuer in exempt acquisitions and will be acquiring an additional 7% in a nonexempt acquisition, the creditor will not be required to file under the HSR Act.
Conclusion
While there are many avenues for creditors in a bankruptcy reorganization to qualify for exemption from the filing requirements of the HSR Act, it is prudent to undertake a careful analysis of the application of the HSR Act well in advance of effectiveness. In close cases, creditors and their counsel can consult with the staff of the PNO for guidance. Of course, even where exemptions from the HSR Act apply, there may still be potential antitrust concerns, regarding which counsel should be consulted.
1 Interpretation No. 164, ABA Section of Antitrust Law, Premerger Notification Practice Manual, 5th Edition (2015).
2 See https://www.ftc.gov/enforcement/premerger-notification-program/informal-interpretations/1011007.
3 Marion Bruno, Prepared Remarks Before the American Bar Association’s “Mergers & Acquisitions: Getting Your Deal Through the New Antitrust Climate” (June 13, 2002), available at https://www.ftc.gov/public-statements/2002/06/hart-scott-rodino-25?utm_source=govdelivery.
4 The standard there is whether a person has “acquired the securities with any purpose, or with the effect, of changing or influencing the control of the issuer.”
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