Proposed HSR Rule Changes to Increase Burdens, Especially for Asset Managers and Private Equity

October 06, 2020

Key Takeaways

  • Proposed HSR rule changes would require an acquiring fund to aggregate its holdings with those of its broader fund family. This will substantially increase the number of transactions subject to HSR reporting requirements, especially for asset managers and private equity funds.
  • The preparation of HSR filings would also be more complex and time-consuming, potentially making it more costly to close transactions.
  • A new “de minimis” exemption for acquisitions that do not exceed 10% of an issuer’s equity would allow minority investors to participate in active corporate governance of the issuer, unlike the current “Investment Only” and “Institutional Investor” exemptions.
  • However, the de minimis exemption would not be available if the acquiring firm or any of its associates is a competitor of the issuer or holds more than one percent of any competitor of the issuer. The term “competitor” is vaguely defined and will likely create uncertainty about filing obligations for some acquirers. These and other complex criteria for the exemption may limit its applicability.
  • FTC Seeking Comments: Affected companies have an opportunity to influence how the FTC finalizes these rules, and the FTC is also seeking comments on certain additional changes flagged for the near future.

The Hart-Scott-Rodino Act (HSR Act) is a procedural statute that requires parties to notify the Federal Trade Commission (FTC) and the Department of Justice (DOJ) of proposed acquisitions that exceed certain thresholds. After submitting an HSR filing, the parties must observe a mandatory waiting period before completing the acquisition, giving the FTC and DOJ an opportunity to review the filing and determine whether the acquisition presents any substantive antitrust concerns. The FTC recently proposed (with the concurrence of the DOJ) two substantial changes to the HSR rules and issued a notice seeking comments on additional changes to come. If implemented, the proposed changes would substantially increase the number of transactions subject to HSR filing requirements, significantly complicate the analysis of whether a filing is required, and increase the burden of preparing HSR filings, particularly for private equity funds and institutional investors making acquisitions within larger fund structures.

Expansion of Aggregation Rules to Include Associated Entities.

HSR Act obligations apply to acquisitions that exceed certain thresholds, namely the “size-of-transaction” and “size-of-person” thresholds. To determine whether the size-of-transaction threshold (currently $94 million*) is exceeded, the HSR rules look at the aggregate holdings of the acquiring “person” as a result of the acquisition. Similarly, the HSR rules look to the total assets and annual sales of the acquiring and acquired persons for the size-of-person analysis, which applies when the size-of-transaction does not exceed $376 million*, and which is an important analysis in many middle-range private equity transactions. The definition of “person” determines which entities and their respective holdings are included when assessing the HSR thresholds, and would be significantly expanded under the proposed rules in ways that are likely to lead to more HSR filings for institutional investors and private equity funds.

Currently, entities are deemed to be included in a “person” based on whether they are under common “control.” Control for HSR purposes can be conferred by voting or board rights (in the case of corporate entities) or by economic rights (in the case of non-corporate entities, such as partnerships and LLCs). Two entities with the same controlling equity holder are deemed to be within the same HSR person, even if there is no coordinated management of their businesses. Conversely, two entities that do not have a common controlling shareholder or investor are not generally included within the same person for HSR purposes, even if they have the same investment manager making their significant business decisions.

By virtue of the current control-based rules for aggregation, separate investment and private equity funds within the same “family” (i.e., funds having the same investment manager or adviser) often do not have to aggregate their holdings. The FTC’s proposed changes, however, would expand the definition of a “person” to include all “associates” of the acquiring and acquired parties – that is, all entities under common operational or investment management. This change would have significant ramifications for acquirers that operate within a family of funds.

  •  More Filings Due to Higher Transaction Values. Under the new rule, investors would have to aggregate their own holdings with those of their associates in determining whether an HSR threshold will be met. In other words, instead of looking only at the acquiring fund’s holdings of the issuer, one would need to look at all holdings of the issuer across the commonly-managed fund family. Such aggregation increases the likelihood that a proposed acquisition will exceed the size-of-transaction threshold and trigger an HSR reporting requirement.
  • More Filings for Newly-Formed Acquisition Structures. The proposed changes to the aggregation rules would also have important ramifications for investment vehicles that would not otherwise need to report an acquisition valued between $94 million* and $376 million* because they do not have the requisite total assets or annual sales to satisfy the size-of-person test. In many cases, newly formed investment vehicles that do not have a controlling fund or investor (and therefore do not need to be aggregated with any other entities in determining their “size of person”) will not satisfy this test and, as a result, will not have to file HSR notification. This can be common in private equity transactions. The proposed inclusion of associates in the definition of “person,” however, would require aggregation across all entities that have the same investment manager for purposes of the size-of-person test, making it more likely that transactions that are not currently reportable would trigger filings under the new rules.
  • Fewer Acquisitions Qualifying for Exemptions. The new aggregation rule would also impact the availability of certain filing exemptions. Currently, the HSR rules provide an exemption for acquisitions that cross the filing thresholds but (i) are made “solely for the purpose of investment” and (ii) do not result in the acquiring person holding more than 10% of the outstanding voting securities of an issuer, regardless of dollar value. A separate exemption for certain specified institutional investors (including registered investment companies, but not registered investment advisers) applies similar rules for investments up to 15%. Expanded aggregation increases the likelihood that these 10% and 15% caps will be exceeded, and the exemption will not be available unless all of the entities within the expanded definition of the acquiring “person” have the requisite passive investment intent. Furthermore, the institutional investor exemption is not available if any entity included within the acquiring person that is not an institutional investor already holds any stock in the acquired issuer. The proposed inclusion of associates in the definition of “person” could pull in entities that will make the exemption unavailable to certain institutional investors even if they are completely passive and their holdings remain under 15%.
  • More Onerous Disclosure Requirements. Preparation of HSR filings would become more burdensome and time consuming under the proposed rules. Currently, acquiring persons are only required to make certain limited disclosures in their HSR filings about their associates. These disclosure requirements apply only if there is commercial overlap between the activities of the associates or their five percent or greater investments and the activities of the acquired issuer. Under the proposed rules, however, because associates are included in the acquiring “person,” much more detailed information would need to be disclosed and collected from those associates.This could significantly increase the time and expense of preparing an HSR filing for certain filers – even for parties that file frequently. Filings on non-complex transactions that currently may take only a few days for experienced HSR counsel to prepare may end up taking several days, or even weeks, longer, thus delaying acquisitions.

Introduction of New De Minimis Exemption for Certain Minority Investments.

Under the current rules, the “solely for the purpose of investment” exemption and the institutional investor exemption each require an examination of the intent of the investor. If the acquiring person has any intention to participate in the management, or influence the basic business decisions, of the issuer, those exemptions are not available. The FTC has offered some guidance as to particular actions that are deemed inconsistent with a “solely for the purpose of investment” intent,but minority investors that generally view themselves as passive are sometimes left wondering whether any level of engagement or discussion with management jeopardizes the availability of these exemptions.

Recognizing that acquisitions of relatively small minority interests often do not raise competitive concerns even for more active investors, and that corporate governance by minority investors can be beneficial, the FTC has proposed adding a “de minimis” exemption – regardless of investor intent – for acquisitions that do not result in the acquiring person (including associates) holding more than 10% of the outstanding voting securities of an issuer. This may give more flexibility to certain investors making targeted acquisitions of issuer stock, such as private equity investors seeking to take toehold positions in public companies. The exemption, however, is limited and would not apply if:

  • the acquiring person is a competitor of the issuer;
  • the acquiring person (which again would include all associates) holds more than one percent of the outstanding voting securities or equity interests of a competitor of the issuer; 
  • an employee, principal, or agent of the acquiring person acts as a director or officer of the issuer;
  • an employee, principal, or agent of the acquiring person acts as a director or officer of a competitor of the issuer; or
  • there is a vendor-vendee relationship between the acquiring person and the issuer where the value of such sales was more than $10 million in the aggregate in the most recently completed fiscal year.

These carve-outs are intended to address situations where the FTC believes that a “competitively significant relationship” between the acquiring person and the target issuer may cause even a small minority stake in the issuer to raise competitive concerns. These competition-based carve-outs, however, are likely to present practical challenges, particularly for investors that focus their investments on specific industries.

  • Greater Uncertainty. Although the new exemption removes the uncertainty about the investment intent of the acquiring person, it creates new uncertainty around which of the acquiring person’s investments may be deemed a “competitor” of the acquired issuer. The new definition of “competitor” under the proposed rule would include any person that either (1) reports revenues in the same NAICS industry codes as the issuer or (2) competes in any line of business with the issuer. While NAICS codes currently are used to classify reporting parties’ lines of business in the HSR form as a means of identifying possible competitive overlaps, NAICS codes are overbroad and notoriously imprecise. Reasonable minds can differ as to which NAICS codes should be applied to any given activity. Moreover, determining whether two firms “compete[] in any line of business” is highly fact specific, and typically one of the more vigorously disputed questions in antitrust cases.
  • Potential for Disputes. Such vaguely defined terms have the potential to lead to disputes with the FTC over investor eligibility for the exemption. The definition as currently drafted does not include a “knowledge and belief” qualifier, so filing parties could face strict liability for failing to file based on what is later found to be an incorrect determination of eligibility. Parties that fail to file when required are subject to a civil penalty of up to $43,280 (adjusted annually) per day and per violation for non-compliance.

Opportunities to Comment on These Proposed Changes and Other Future Changes Signaled by FTC.

The FTC’s proposed rule changes include explicit requests for comments on specific issues relating to its proposals, such as whether there might be other ways to gather relevant information regarding associates, whether index funds and ETFs should be subject to special treatment under the rules, and whether the percentage or dollar limitations in the new de minimis rule are appropriate.

The FTC also outlined and asked for comments on several other areas for potential future amendments to the HSR rules, many of which could also dramatically change the HSR requirements. 

Some of the rules flagged for potential future changes could have significant impacts for private equity transactions:

  • Treatment of Debt Payoff Amounts. Transaction proceeds that are used to pay off existing debt are currently excludable from the HSR transaction value in acquisitions of voting securities or equity interests in unincorporated entities (though not in asset acquisitions).
  • Treatment of Non-Corporate Entities. Currently, the acquisition of equity interests in an unincorporated entity such as a partnership or LLC is not HSR reportable unless it confers control of the entity. The FTC is considering whether non-corporate entities should be treated the same as corporations for HSR purposes.
  •  Calculation of Fair Market Value. In certain situations where an acquisition price is undetermined at the time of closing, or for assessing certain thresholds, the acquiring person may be obligated to make a fair market value determination, in order to assess whether an HSR filing is required. Currently, the rules only require that such determination be made in good faith by the board of the ultimate parent entity (or the board’s designee) within 60 days prior to closing, but there is no specific methodology that is required.

Other topics flagged for future rule changes could have significant impacts on investment funds:

  • Redefining “Solely for the Purpose of Investment.” The FTC is considering whether to update the “solely for the purpose of investment” definition to address concerns over common ownership (i.e., holding interests in competing businesses), and whether the analysis should align more closely with the SEC’s approach to “passive” investors.
  • Changing the Institutional Investor Exemption. The FTC is interested in understanding whether new categories of investors should qualify for the institutional investor exemption, whether the definition should be changed to focus on activities instead of type of company, whether it should be harmonized with the SEC’s definition, and whether the 15% limitation should be adjusted.
  • Shortening the Five-Year Window for Subsequent Acquisitions. Under the current rules, when an HSR filing has been made and the waiting period is observed, the acquiring person can acquire additional securities up to the next applicable threshold for five years before a new filing is required. The FTC is considering whether this window should be shortened. 
  • Influence on Issuer Management Outside the Scope of Voting Securities. The acquisition of convertible voting securities (such as options) is exempt unless they confer the present right to vote for directors. The FTC is considering whether convertible voting securities coupled with contractual rights to appoint or designate directors should be subject to HSR reporting. In addition, the FTC is considering whether the ability to designate board observers should be potentially reportable under the HSR Act.

Other potential changes that could have significant impact include:

  • Treatment of REITs. Currently, acquisitions made by REITs are deemed to be exempt as acquisitions made in the ordinary course of business. The FTC is now seeking input to help determine whether recent changes in tax law make it appropriate to reconsider whether acquisitions by REITs should continue to be broadly exempted from HSR.
  • Disclosures of Past Acquisitions. The FTC is considering whether an acquiring person’s obligation to disclose acquisitions consummated in the past five years should no longer be limited to acquisitions in NAICS codes that overlap with the target in a present transaction.

What next?

Affected companies have an opportunity to influence the FTC with respect to the proposed rule changes and the FTC’s contemplated future changes. Comments can be submitted to the FTC for 60 days following the date of publication of in the Federal Register. Dechert can help companies draft their submissions. 

Dechert will publish further advice on compliance with the new rules when they are finalized. Note, however, that the application of the HSR Act remains highly technical and specific to the facts of a given transaction. Dechert’s experienced legal counsel can advise on specific situations.

*These dollar thresholds are subject to annual adjustment based on prior year changes in the gross national product (GNP). Information on the most recent thresholds can be found here.


1) For example, revenue reporting by North American Industry Classification System (NAICS) codes would need to include all of the funds with the same manager, together with any portfolio companies controlled by such funds. Large investment firms with separate arms or groups for working on different categories of investments may find themselves needing to gather detailed information from each arm or group, including those that have no involvement with the transaction at hand. 

2) The Statement of Basis and Purpose for the original HSR rules provides the following non-exhaustive list of activities that would be evidence of an intent that is inconsistent with an investment-only purpose: (1) nominating a candidate for the board of directors of an issuer; (2) proposing corporate action requiring shareholder approval; (3) soliciting proxies, (4) having a controlling shareholder, director, officer, or employee simultaneously serving as an officer or director of the issuer; (5) being a competitor of the issuer; or (6) doing any of the foregoing with respect to any entity directly or indirectly controlling the issuer. See also D. Feinstein, K. Libby, and J. Lee, “Investment-only” means just that,” FTC Blog (Aug. 24, 2015), (“no particular conduct is likely dispositive, and we will assess a variety of factors to determine if an investor has properly invoked the investment-only exemption”).

Subscribe to Dechert Updates