Premerger Notification; Reporting and Waiting Period Requirements, 77053-77093 [2020-21753]

Download as PDF Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules transactions into small slices across multiple investment vehicles under their control to avoid reporting. The proposal would require investors and other buyers to add together their stakes across commonly managed funds to determine whether they need to report a transaction. Exemption Provisions By creating a reporting threshold based on the value of a transaction, the law already exempts most transactions from agency review. Because of this, it is difficult to systematically track these transactions, and even harder to detect and deter those that are anticompetitive. Now, the FTC is proposing to widen that information gap by creating a new exemption for minority stakes of 10% or less, subject to certain conditions. Importantly, the proposal is not exempting specific aspects of the reporting requirements—it is a total exemption, so the agency will receive no information whatsoever from the buyer or the seller that the transaction even occurred. This adds to the burdens and information asymmetries that the agency already faces when it comes to detecting potentially harmful transactions.4 Companies and investors purchase minority, non-controlling stakes in a firm for a number of reasons. Sometimes, buyers might start with a minority stake, with the goal—or even with a contractual option—of an outright takeover as they learn more about the company’s operations. Even though they might have a small stake, they can exert outsized control. In other cases, buyers might look for minority stakes in multiple, competing firms within a sector or industry, and some or all of these acquisitions may fall below the reporting thresholds. Of course, if they are able to obtain seats on boards of directors of competing companies, this can be illegal. Investors and buyers can only use the proposed exemption if they do not currently own stakes in firms that compete or do business with the company they plan to acquire. Since many investors might not know about the specific business dealings across companies, this may be difficult to enforce and puts more burden on the agency. Even if one believes that transactions involving a minority stake are less likely to be illegal, there are many potential alternatives to outright elimination of reporting. Unfortunately, the rulemaking does not outline alternative approaches (such as tailored, simplified filing requirements or shortened waiting periods) for minority stakes. khammond on DSKJM1Z7X2PROD with PROPOSALS10 Advance Notice of Proposed Rulemaking As markets evolve, it is important that the HSR Act and its implementing rules reflect 4 The FTC may not be able to rely on other sources of robust data required by other agencies. For example, the Securities and Exchange Commission has proposed eliminating reporting for thousands of registered investment funds that previously detailed their holdings to the public. See Statement of SEC Comm’r Allison Herren Lee Regarding Proposal to Substantially Reduce 13F Reporting (July 10, 2020), https://www.sec.gov/ news/public-statement/lee-13f-reporting-2020-0710. VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 those developments. The Advance Notice of Proposed Rulemaking seeks input on a wide array of market-based issues that may affect the Commission’s merger oversight. One topic of particular interest is whether to include debt as part of the valuation of a transaction. Since the HSR Act’s passage, corporate debt markets have grown in importance for companies competing in developed economies. Many major deals involve vast sums of borrowed money. However, the Commission has not formally codified a view on the treatment of certain debt transactions. Instead, existing staff guidance excludes many debt transactions from the deal’s overall value. This is worrisome, since it means that many potentially anticompetitive transactions can go unreported, since they may fall below the size threshold. In addition, this view has been provided informally, communicated through unofficial interpretations outside of formal rules or guidance. It will be important to take steps to collect input and codify the Commission’s policies on valuation, particularly with respect to the treatment of debt, since formal guidance or rules will offer clarity and will be easier to enforce. The Advance Notice of Proposed Rulemaking also seeks information that will lay groundwork for broader reforms to our premerger notification program. I look forward to the data and written submissions to this document. Conclusion Adequate premerger reporting is a helpful tool used to halt anticompetitive transactions before too much damage is done. However, the usefulness of the HSR Act only goes so far. This is because many deals can quietly close without any notification and reporting, since only transactions above a certain size are reportable.5 The FTC ends up missing a large number of anticompetitive mergers every year. In addition, since amendments to the HSR Act in 2000 raised the size thresholds on an annual basis, the number of HSR-reportable transactions has decreased. I want to commend agency staff for their work in identifying potential blind spots in the premerger reporting regime. I also want to thank state legislatures and state attorneys general for enacting and implementing their own premerger notification laws to fill in some of these gaps. For example, a new law in State of Washington has taken effect, which requires advance notice of any transactions in the health care sector, where many problematic mergers fall below the radar.6 5 Small transactions can be just as harmful to competition as large transactions notified under the HSR Act. For example, ‘‘catch and kill’’ acquisitions of an upstart competitor in fast-moving markets can be particularly destructive. In addition, ‘‘roll-ups,’’ an acquisition strategy involving a series of acquisitions of small players to combine into a larger one, can have very significant negative effects on competition. See Statement of Fed. Trade Comm’r Rohit Chopra Regarding Private Equity Roll-ups and the Hart-Scott Rodino Annual Report to Congress, Comm’n File No. P110014 (July 8, 2020), https://www.ftc.gov/system/files/documents/ public_statements/1577783/p110014hsrannual reportchoprastatement.pdf. 6 See Healthcare Transaction Notification Requirement, WASH. STATE OFF. OF THE ATT’Y PO 00000 Frm 00040 Fmt 4702 Sfmt 4702 77053 As we conduct this examination of the HSR Act, we should identify areas where laws may need to be changed or updated, especially when we cannot fill those gaps through amendments to our rules. For example, we may need to pursue reforms to ensure that ‘‘roll ups’’ are reported, where a buyer might acquire a large number of small companies that may not be individually reportable. We may also need to look carefully at the length of the waiting period, to determine if it is long enough to conduct a thorough investigation. I look forward to reviewing the input to these two rulemakings, so that our approach reflects market realities. [FR Doc. 2020–21754 Filed 11–30–20; 8:45 am] BILLING CODE 6750–01–P FEDERAL TRADE COMMISSION 16 CFR Parts 801, 802 and 803 RIN 3084–AB46 Premerger Notification; Reporting and Waiting Period Requirements Federal Trade Commission. Notice of proposed rulemaking. AGENCY: ACTION: The Federal Trade Commission (‘‘FTC’’ or ‘‘Commission’’) is proposing amendments to the premerger notification rules (‘‘the Rules’’) that implement the Hart-ScottRodino Antitrust Improvements Act (‘‘the Act’’ or ‘‘HSR’’) to change the definition of ‘‘person’’ and create a new exemption. The Commission also proposes explanatory and ministerial changes to the Rules, as well as necessary amendments to the HSR Form and Instructions to effect the proposed changes. DATES: Comments must be received on or before February 1, 2021. ADDRESSES: Interested parties may file a comment online or on paper by following the instructions in the Invitation to Comment part of the SUPPLEMENTARY INFORMATION section below. Write ‘‘16 CFR parts 801–803: Hart-Scott-Rodino Coverage, Exemption, and Transmittal Rules; Project No. P110014’’ on your comment. File your comment online at https:// www.regulations.gov by following the instructions on the web-based form. If you prefer to file your comment on paper, mail your comment to the following address: Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, Suite CC–5610 (Annex J), Washington, DC 20580, or deliver your comment to the SUMMARY: GEN. (last visited Sept. 16, 2020), https:// www.atg.wa.gov/healthcare-transactionsnotification-requirement; see also S.H.B. 1607, 66th Leg., Reg. Sess. (Wash. 2019). E:\FR\FM\01DEP1.SGM 01DEP1 77054 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules following address: Federal Trade Commission, Office of the Secretary, Constitution Center, 400 7th Street SW, 5th Floor, Suite 5610 (Annex J), Washington, DC 20024. FOR FURTHER INFORMATION CONTACT: Robert Jones (202–326–3100), Assistant Director, Premerger Notification Office, Bureau of Competition, Federal Trade Commission, 400 7th Street SW, Room CC–5301, Washington, DC 20024. SUPPLEMENTARY INFORMATION: khammond on DSKJM1Z7X2PROD with PROPOSALS10 Invitation To Comment You can file a comment online or on paper. For the Commission to consider your comment, we must receive it on or before February 1, 2021. Write ‘‘16 CFR parts 801–803: Hart-Scott-Rodino Coverage, Exemption, and Transmittal Rules; Project No. P110014’’ on your comment. Your comment—including your name and your state—will be placed on the public record of this proceeding, including the https:// www.regulations.gov website. Because of the public health emergency in response to the COVID–19 outbreak and the agency’s heightened security screening, postal mail addressed to the Commission will be subject to delay. We strongly encourage you to submit your comment online through the https://www.regulations.gov website. To ensure the Commission considers your online comment, please follow the instructions on the webbased form. If you file your comment on paper, write ‘‘16 CFR parts 801–803: HartScott-Rodino Coverage, Exemption, and Transmittal Rules; Project No. P110014’’ on your comment and on the envelope, and mail your comment to the following address: Federal Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, Suite CC– 5610 (Annex J), Washington, DC 20580, or deliver your comment to the following address: Federal Trade Commission, Office of the Secretary, Constitution Center, 400 7th Street SW, 5th Floor, Suite 5610 (Annex J), Washington, DC 20024. If possible, please submit your paper comment to the Commission by courier or overnight service. Because your comment will be placed on the publicly accessible website, https://www.regulations.gov, you are solely responsible for making sure your comment does not include any sensitive or confidential information. In particular, your comment should not include sensitive personal information, such as your or anyone else’s Social Security number; date of birth; driver’s license number or other state VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 identification number, or foreign country equivalent; passport number; financial account number; or credit or debit card number. You are also solely responsible for making sure that your comment does not include any sensitive health information, such as medical records or other individually identifiable health information. In addition, your comment should not include any ‘‘trade secret or any commercial or financial information which . . . is privileged or confidential,’’—as provided by Section 6(f) of the FTC Act, 15 U.S.C. 46(f), and FTC Rule 4.10(a)(2), 16 CFR 4.10(a)(2)— including in particular competitively sensitive information such as costs, sales statistics, inventories, formulas, patterns, devices, manufacturing processes, or customer names. Comments containing material for which confidential treatment is requested must be filed in paper form, must be clearly labeled ‘‘Confidential,’’ and must comply with FTC Rule 4.9(c). In particular, the written request for confidential treatment that accompanies the comment must include the factual and legal basis for the request, and must identify the specific portions of the comment to be withheld from the public record. See FTC Rule 4.9(c). Your comment will be kept confidential only if the FTC General Counsel grants your request in accordance with the law and the public interest. Once your comment has been posted publicly at www.regulations.gov—as legally required by FTC Rule 4.9(b)—we cannot redact or remove your comment, unless you submit a confidentiality request that meets the requirements for such treatment under FTC Rule 4.9(c), and the General Counsel grants that request. Visit the FTC website to read this NPRM and the news release describing it. The FTC Act and other laws that the Commission administers permit the collection of public comments to consider and use in this proceeding as appropriate. The Commission will consider all timely and responsive public comments it receives on or before February 1, 2021. For information on the Commission’s privacy policy, including routine uses permitted by the Privacy Act, see https://www.ftc.gov/ site-information/privacy-policy. Overview The Act and Rules require the parties to certain mergers and acquisitions to file notifications (‘‘HSR Filing’’) with the Federal Trade Commission and with the Assistant Attorney General in charge of the Antitrust Division of the Department of Justice (‘‘the Assistant Attorney General’’) (collectively, ‘‘the PO 00000 Frm 00041 Fmt 4702 Sfmt 4702 Agencies’’), and to wait a specified period of time before consummating such transactions. The reporting and waiting period requirements are intended to enable the Agencies to determine whether a proposed merger or acquisition may violate the antitrust laws if consummated and, when appropriate, to seek an injunction in Federal court in order to enjoin anticompetitive mergers prior to consummation. In this notice of proposed rulemaking (‘‘NPRM’’), the Commission proposes amendments to the § 801.1(a)(1) definition of ‘‘person’’ to require certain acquiring persons to disclose additional information about their associates in Items 4 through 8 of the HSR Form and to aggregate acquisitions in the same issuer across their associates when making an HSR filing, as well as a ministerial change to § 801.1(d)(2). The Commission also proposes a new exemption, § 802.15, which would exempt the acquisition of 10% or less of an issuer’s voting securities when the acquiring person does not already have a competitively significant relationship with the issuer. Finally, the Commission proposes explanatory and ministerial changes to the Rules, as well as necessary amendments to the HSR Form and Instructions to effect the proposed changes. Section 7A(d)(1) of the Clayton Act, 15 U.S.C. 18a(d)(1), directs the Commission, with the concurrence of the Assistant Attorney General, in accordance with the Administrative Procedure Act, 5 U.S.C. 553, to require that premerger notification be in such form and contain such information and documentary material as may be necessary and appropriate to determine whether the proposed transaction may, if consummated, violate the antitrust laws. In addition, Section 7A(d)(2) of the Clayton Act, 15 U.S.C. 18a(d)(2), grants the Commission, with the concurrence of the Assistant Attorney General, in accordance with 5 U.S.C. 553, the authority to define the terms used in the Act, exempt classes of transactions that are not likely to violate the antitrust laws, and prescribe such other rules as may be necessary and appropriate to carry out the purposes of Section 7A. The Commission notes that comments it receives in response to this NPRM may also inform the Advanced Notice of Proposed Rulemaking (ANPRM) published in the Federal Register at the same time as this NPRM. Part 801—Coverage Rules § 801.1 Definitions. § 801.2 Acquiring and acquired persons. E:\FR\FM\01DEP1.SGM 01DEP1 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules § 801.12 Calculating percentage of voting securities. Part 802—Exemption Rules § 802.15 De minimis acquisitions of voting securities. khammond on DSKJM1Z7X2PROD with PROPOSALS10 Part 803—Transmittal Rules Appendix A to Part 803—Notification and Report Form for Certain Mergers and Acquisitions Appendix B to Part 803—Instructions to the Notification and Report Form for Certain Mergers and Acquisitions Background The HSR premerger notification program enables the Agencies to determine which acquisitions are likely to be anticompetitive and to challenge them before they are consummated when remedial action is most effective. Under the HSR program, the Agencies typically evaluate thousands of transactions every year. Given the large number of HSR filings submitted each year, the Agencies must use their resources effectively to focus on transactions that may harm competition. The Agencies have a strong interest in receiving HSR filings that contain enough information to conduct a preliminary assessment of whether the proposed transaction presents competition concerns, while at the same time not receiving filings related to acquisitions that are very unlikely to raise competition concerns. In the Agencies’ experience, two particular categories of filings make it difficult for the Agencies to focus their resources effectively: • Filings for acquisitions by certain investment entities. First, due to changes in investor structure and behavior since the HSR Act and Rules went into effect, filings from certain investment entities do not capture the complete competitive impact of a transaction. When certain investment entities file as acquiring persons, the Rules and Form do not currently require the disclosure of substantive information concerning both the complete structure of the acquiring person and the complete economic stake being acquired in an issuer. • Filings for acquisitions of 10% or less of an issuer. At the same time, the Agencies regularly receive filings involving proposed acquisitions, not solely for the purpose of investment, that would result in the acquiring person holding 10% or less of an issuer. In the Agencies’ experience, these filings almost never present competition concerns.1 1 From FY 2001 to FY 2017, the Agencies received a total of 26,856 HSR filings, including 1,804 for acquisitions of 10% of less of outstanding VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 To help the Agencies use their resources more effectively, the Commission proposes to address both issues in this proposed rulemaking. To obtain more complete filings from investment entities filing as acquiring persons, the Commission proposes amending the definition of person in § 801.1(a)(1) to include ‘‘associates,’’ a term that is already defined in the Rules. This proposed change would require certain acquiring persons to disclose additional information about their associates in Items 4 through 8 of the HSR Form and to aggregate acquisitions in the same issuer across their associates when making an HSR filing. In addition, the Commission proposes a new exemption, § 802.15, which would exempt the acquisition of 10% or less of an issuer’s voting securities when the acquiring person does not already have a competitively significant relationship with the issuer. Finally, the Commission proposes explanatory and ministerial changes to the Rules, as well as necessary amendments to the HSR Form and Instructions to effect the proposed changes. I. Proposed Changes to § 801.1 Definitions A. Proposed Change to the § 801.1(a)(1) Definition of ‘‘Person’’ Since the promulgation of the Rules in 1978, the investment landscape has undergone vast changes, including the proliferation of investment entities such as investment funds and master limited partnerships (‘‘MLPs’’). Both investment funds and MLPs facilitate investment through structures utilizing limited partnerships and limited liability companies. The Rules define limited partnerships and limited liability companies as ‘‘non-corporate entities,’’ and non-corporate entities are their own Ultimate Parent Entity (‘‘UPE’’) under the Rules when no one holds the right to 50% or more of the profits or assets upon dissolution. Thus, although each non-corporate entity exists within an overall structure of a ‘‘family’’ of funds or MLP, each is typically its own UPE under the HSR Rules. For instance, Parent Fund creates Fund Vehicle 1, stock. During that same period, the Agencies did not challenge any acquisitions involving a stake of 10% or less. Occasionally, the Agencies will require merging parties to divest or make passive small investments in competitors that also carry rights to influence business decisions at the firm. See U.S. v. AT&T Inc. and Dobson Communications Corp., 1:07–cv–01952 (D.D.C. 2007) (parties divested small stakes that carried significant rights to control core business decisions, obtain critical confidential competitive information, and share in profits at a rate significantly greater than the equity ownership share). PO 00000 Frm 00042 Fmt 4702 Sfmt 4702 77055 Fund Vehicle 2, and Fund Vehicle 3, each a non-corporate entity. No one controls these non-corporate entities, so each fund vehicle is its own UPE even though they exist within the same family of funds. The same is true when no one controls non-corporate entities within a MLP structure; although they exist within the same MLP, each noncorporate entity is its own UPE. Treating these non-corporate entities as separate entities under HSR is often at odds with the realities of how fund families and MLPs are managed. In the fund context, a fund vehicle typically has an entity that manages how that fund vehicle will invest,2 and this investment manager very often manages the investments of other fund vehicles within the same family of funds. As a result, Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3 might well have the same Investment Manager 3 and that Investment Manager can use Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3 to make separate investments in different issuers or the same issuer. MLPs, for their part, often have similar structures involving non-corporate entities that are their own UPEs but under common management.4 When non-corporate entities are their own UPEs but under common management as described above, this creates two scenarios in which it is difficult for the Agencies to assess the competitive impact of a transaction based on the HSR filing. The first involves filings from non-corporate entity UPEs as acquiring persons that do not contain a complete enough picture of the investment fund or MLP. The Commission first addressed this category of filings in 2011 when it created the ‘‘associates’’ concept.5 Before that time, filings from noncorporate entity UPEs within families of funds and MLPs contained limited substantive information because noncorporate entity UPEs were not required to disclose information on any other entity within the investment structure. For instance, if Fund Vehicle 1 made a filing for a 100% interest in an Issuer, and Fund Vehicle 2, under common investment management with Fund Vehicle 1, held 100% of a competitor of the Issuer, Fund Vehicle 2’s holding was not disclosed in the filing because Fund Vehicle 1 was its own UPE. A filing such as the one from Fund Vehicle 1 was of limited use to the Agencies 2 As defined in 16 CFR 801.1(d)(2). defined in 16 CFR 801.1(d)(2). 4 As defined in 16 CFR 801.1(d)(2); the management of MLPs does not have to involve investment management. 5 76 FR 42472 (July 19, 2011). 3 As E:\FR\FM\01DEP1.SGM 01DEP1 khammond on DSKJM1Z7X2PROD with PROPOSALS10 77056 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules because it did not reveal relevant holdings within the same family of funds. Filings received from newlyformed fund vehicles, which did not yet own anything, were of even less use because these filings were largely blank. Filings from non-corporate entities that were their own UPEs within MLP structures raised the same issues. In light of these issues, the Commission determined that updates to the HSR Form would allow the Agencies to ‘‘receive the information they need to get a complete picture of potential antitrust ramifications of an acquisition.’’ 6 Accordingly in 2010,7 the Commission introduced and proposed to define the term ‘‘associates’’ to capture information in the HSR Form from certain entities that are under common management with the acquiring person. The 2011 final rule 8 required certain acquiring persons to disclose in their HSR filings what their associates hold in entities that generate revenue in the same NAICS codes as the target. With this change, any fund vehicle filing as an acquiring person must look to its investment manager to determine what other fund vehicles that investment manager manages. For instance, Fund Vehicle 1’s investment manager also manages the investments of Fund Vehicle 2, making Fund Vehicle 1 and Fund Vehicle 2 associates. Fund Vehicle 1 makes an HSR filing for a 100% interest in Issuer Q. Fund Vehicle 2 controls Entity Y and has a minority position in Entity Z, both of which report in the same NAICS code as Issuer Q. Fund Vehicle 1 must therefore disclose in its HSR filing Fund Vehicle 2’s controlling interest in Y and minority interest in Z. Non-corporate entity UPEs within MLP structures must disclose the same information about their associates when filing as acquiring persons. Although this additional information has been helpful in assessing the competitive impact of a transaction, it is too limited to provide the Agencies with a sufficient overview of investment funds and MLPs as acquiring persons. For instance, the information currently required from associates is limited to controlling or minority interests in entities that report in the same NAICS codes as the entity being acquired. In the Agencies’ experience, competitors sometimes use different NAICS codes to describe the same line of business, particularly in the case of companies engaged in technology-based businesses. In addition, associates currently are not 6 Id. 9 For acquired persons, Items 5 through 7 of the Form will still be limited to the assets, voting securities, or non-corporate interests being sold. 7 75 FR 57111 (Sept. 17, 2010). 8 76 FR 42471 (July 19, 2011). VerDate Sep<11>2014 16:58 Nov 30, 2020 required to provide any substantive information, such as financials or revenues, about the entities they control, making it difficult for the Agencies to determine whether an entity within an associate might create a competitive concern in a given transaction. It is also difficult for the Agencies to understand the potential competitive impact of a transaction when a filing does not represent the total economic stake being acquired in the same issuer. For instance, Investment Manager uses Fund Vehicle 1 to acquire 6% of Issuer D and Fund Vehicles 2 and 3 to each acquire 3% of Issuer D. Only Fund Vehicle 1’s acquisition of 6% of Issuer D’s voting securities is large enough to cross the $50 million (as adjusted) size of transaction threshold. Fund Vehicle 1 makes an HSR filing, but because it is its own UPE, it need not disclose the interests of Fund Vehicles 2 and 3 in Issuer D. As a result, the filing does not reflect the 12% aggregate interest in Issuer D of the fund vehicles under common investment management. Another common example arises when Investment Manager uses Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3 to each acquire 2% in Issuer D. If none of these acquisitions of 2% is large enough to cross the $50 million (as adjusted) size of transaction threshold, the Agencies receive no HSR filing, even though the fund vehicles hold an aggregate 6% of Issuer D. Although more rare, both of these scenarios can also play out in the MLP context when non-corporate entity UPEs within the MLP structure make acquisitions in the same issuer. To help the Agencies accurately assess the potential competitive impact of a pending transaction in these scenarios, the Commission proposes to amend the § 801.1(a)(1) definition of ‘‘person’’ to include associates, such that it would read as follows: ‘‘Except as provided in paragraphs (a) and (b) of § 801.12, the term person means (a) an ultimate parent entity and all entities which it controls directly or indirectly; and (b) all associates of the ultimate parent entity.’’ This proposed change would require a non-corporate entity UPE filing as an acquiring person to disclose additional information from its associates in Items 4 through 8 of the Form 9 and to aggregate acquisitions in the same issuer across its associates. Under the proposed rule, a noncorporate entity UPE filing as an Jkt 253001 PO 00000 Frm 00043 Fmt 4702 Sfmt 4702 acquiring person would be part of a new, larger Acquiring Person. This Acquiring Person would include noncorporate entity UPE, its associates (which would also be UPEs) and the entity that manages non-corporate entity UPE and its associates (the ‘‘managing entity’’).10 The managing entity would make the filing on behalf of the Acquiring Person, identifying itself in proposed Item 1(a) of the Form, and identify the relevant UPE making the acquisition in proposed Item 1(c) of the Form.11 If two UPEs within the same Acquiring Person are making reportable acquisitions in the same issuer, the managing entity can choose which one will be the relevant UPE for purposes of the form. The relevant UPE can also file on behalf of the managing entity, as noted in proposed Item 1(c) of the Form. For example: Hypothetical #1 • Fund Vehicles 1, 2 and 3, each noncorporate entities and their own UPEs, exist within the same family of funds. Fund Vehicles 1, 2 and 3 have the same Investment Manager, and are thus associates. Fund Vehicle 1 will acquire 6% of Issuer D valued at $100 million, Fund Vehicle 2 will acquire 6% of Issuer D valued at $100 million and Fund Vehicle 3 will acquire 3% of Issuer D valued at $50 million. The Acquiring Person includes Fund Vehicles 1, 2 and 3, which are all UPEs, and Investment Manager. Æ Fund Vehicle 1 does not control any operating companies. Æ Fund Vehicle 2 controls Portfolio Company A and Portfolio Company B. Portfolio Company B was acquired two years ago and reports in the same NAICS code as Issuer D. Æ Fund Vehicle 3 controls Portfolio Company C, which does not report in the same NAICS code as Issuer D. Fund Vehicle 3 also holds a minority position in several entities, M, N, and O, which report in the same NAICS code as Issuer D. • Investment Manager files on behalf of the Acquiring Person for the 15% aggregate interest in Issuer D valued at $250 million by placing its name in Item 1(a) of the Form. Although Investment Manager could designate Fund Vehicle 1 or 2 as the UPE making the acquisition, Investment Manager indicates in Item 1(c) of the filing that Fund Vehicle 1 is making the acquisition. Fund Vehicle 1 can also indicate in Item 1(c) of the Form that it is filing on Investment Manager’s behalf. The filing must include the following: Æ Item 4(a): This item requires the Central Index Key (CIK) number of all entities within the Acquiring Person, which now includes 10 The same would be true for an Acquired Person under the proposed rule. 11 In the case of an Acquired Person, the managing entity would make the filing on behalf of the Acquired Person, identifying itself in proposed Item 1(a) of the Form, and identifying the selling UPE in proposed Item 1(c) of the Form. The selling UPE could also indicate in Item 1(c) of the Form that it is filing on the managing entity’s behalf. E:\FR\FM\01DEP1.SGM 01DEP1 khammond on DSKJM1Z7X2PROD with PROPOSALS10 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules Investment Manager, Fund Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A, Portfolio Company B, and Portfolio Company C. Æ Item 4(b): This item requires financials from the Acquiring Person, which now includes Investment Manager, Fund Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A, Portfolio Company B, and Portfolio Company C. Æ Item 4(c): This item requires responsive documents from the Acquiring Person, which now includes Investment Manager, Fund Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A, Portfolio Company B, and Portfolio Company C. Æ Item 4(d): This item requires responsive documents from the Acquiring Person, which now includes Investment Manager, Fund Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A, Portfolio Company B, and Portfolio Company C. Æ Item 5: This item requires revenues by NAICS and NAPCS codes for the Acquiring Person, which now includes Investment Manager, Fund Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A, Portfolio Company B, and Portfolio Company C. Æ Item 6: Items 6(a) and 6(b) require information from the Acquiring Person, which now includes Investment Manager, Fund Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A, Portfolio Company B, and Portfolio Company C. Item 6(c) also requires information from the Acquiring Person, which now includes Investment Manager, Fund Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A, Portfolio Company B, and Portfolio Company C. However, the information required by Item 6(c) is still limited to minority holdings in entities that report in the same NAICS code(s) as the target, here M, N and O. Æ Item 7: This item requires all responsive information from the Acquiring Person, which now includes Investment Manager, Fund Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A, Portfolio Company B, and Portfolio Company C. However, the information required by Item 7 is still limited to entities that report in the same NAICS code(s) as the target, here Portfolio Company B. Æ Item 8: This item requires information on prior acquisitions within the last five years by the Acquiring Person, which now includes Investment Manager, Fund Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A, Portfolio Company B, and Portfolio Company C. However, the information required by Item 8 is still limited to entities that report in the same NAICS code(s) as the target, here Portfolio Company B. Hypothetical #2 • MLP creates LP1, LP2, and LP3, each a non-corporate entity and its own UPE, to separately hold the MLP’s investments. LP1, LP2 and LP3 have the same Manager, and are thus associates. LP1 will acquire 100% of Issuer R valued at $500 million. LP1 is the UPE but the Acquiring Person includes Manager, LP2 and LP3. VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 Æ LP1 controls two operating companies, OpCo 1 and OpCo 2, which report in the same NAICS code as Issuer R. OpCo 1 was acquired 10 years ago and OpCo 2 was acquired 3 years ago. Æ LP2 controls OpCo 3, which reports in the same NAICS code as Issuer R and was acquired 1 year ago, and OpCo 4, which does not report in the same NAICS code as Issuer R. Æ LP3 holds minority positions in OpCo 5 and OpCo 6, and each reports in the same NAICS code as Issuer R. • Manager places its name in Item 1(a) of the Form to file on behalf of the Acquiring Person for the 100% interest in Issuer R, and indicates in Item 1(c) of the Form that LP1 is making the acquisition. LP1 can also indicate in Item 1(c) that it is filing on Manager’s behalf. The filing must include the following: Æ Item 4(a): This item requires the CIK number of all entities within the Acquiring Person, which now includes Manager, LP1, LP2, LP3, OpCo 1, OpCo 2, OpCo 3 and OpCo 4. Æ Item 4(b): This item requires financials from the Acquiring Person, which now includes Manager, LP1, LP2, LP3, OpCo 1, OpCo 2, OpCo 3 and OpCo 4. Æ Item 4(c): This item requires responsive documents from the Acquiring Person, which now includes Manager, LP1, LP2, LP3, OpCo 1, OpCo 2, OpCo 3 and OpCo 4. Æ Item 4(d): This item requires responsive documents from the Acquiring Person, which now includes Manager, LP1, LP2, LP3, OpCo 1, OpCo 2, OpCo 3 and OpCo 4. Æ Item 5: This item requires revenues by NAICS and NAPCS codes for the Acquiring Person, which now includes Manager, LP1, LP2, LP3, OpCo 1, OpCo 2, OpCo 3 and OpCo 4. Æ Item 6: Items 6(a) and 6(b) require information from the Acquiring Person, which now includes Manager, LP1, LP2, LP3, OpCo 1, OpCo 2, OpCo 3 and OpCo 4. Item 6(c) also requires information from the Acquiring Person, which now includes Manager, LP1, LP2, LP3, OpCo 1, OpCo 2, OpCo 3 and OpCo 4. However, the information required by Item 6(c) is still limited to minority holdings in entities that report in the same NAICS code(s) as the target, here OpCo 5 and OpCo 6. Æ Item 7: This item requires all responsive information from the Acquiring Person, which now includes Manager, LP1, LP2, LP3, OpCo 1, OpCo 2, OpCo 3 and OpCo 4. However, the information required by Item 7 is still limited to entities that report in the same NAICS code(s) as the target, here OpCo 1, OpCo 2, and OpCo 3. Æ Item 8: This item requires information on prior acquisitions within the last five years by the Acquiring Person, which now includes Manager, LP1, LP2, LP3, OpCo 1, OpCo 2, OpCo 3 and OpCo 4. However, the information required by Item 8 is still limited to entities that report in the same NAICS code(s) as the target, here OpCo 2 and OpCo 3, but OpCo 1 would not be listed because it was acquired more than five years ago. As these examples illustrate, the proposed change to § 801.1(a)(1) would require a non-corporate entity UPE PO 00000 Frm 00044 Fmt 4702 Sfmt 4702 77057 filing as an acquiring person to disclose more substantive information about its associates. The additional information required by the Form would be of tremendous value to the Agencies in assessing the potential competitive impact of a pending transaction. Specifically, the proposed changes to Items 4, 5 and 6(a) would give the Agencies a much better picture of what entities are under common management. The proposed changes to Item 6(b) would provide a clearer picture of the ways in which the entities within the acquiring person are connected, both within the investment structure and beyond. Proposed Item 8 would provide more complete information on entities within the acquiring person that have made acquisitions in the same industry as the target.12 All of this additional information would give the Agencies a much more complete picture of who is making the filing in the case of investment funds and MLPs filing as acquiring persons. The additional information concerning acquisitions made by a noncorporate entity UPE’s associates in the same issuer would also be of great value to the Agencies. The proposed change to § 801.1(a)(1) would give the Agencies a much clearer understanding of the total economic stake being acquired in a single issuer by entities under common management. In some cases, looking across a non-corporate entity UPE’s associates for acquisitions in the same issuer will result in a filing when one would not have been required previously. For instance, in a scenario where associates Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3 will each acquire 2% of Issuer D for $40 million, the Agencies currently do not receive a filing because none of the three $40 million acquisitions is large enough to cross the $50 million (as adjusted) size of transaction threshold. Under the proposed rule, the Agencies would now receive a filing for the aggregate 6% interest valued at $120 million (assuming an exemption does not apply).13 The Commission acknowledges that the proposed change to § 801.1(a)(1) would result in more filings and an increased burden for certain acquiring 12 There would be no change to the information Items 6(c) and 7 require, because those items already require information from associates. Each of these items would, however, be consolidated in the HSR Instructions and Form to reflect the new definition of ‘‘person,’’ as explained below. 13 In addition, certain acquiring persons will also be much more likely to meet the size of person test when including information about their associates as required by the proposed rule. E:\FR\FM\01DEP1.SGM 01DEP1 khammond on DSKJM1Z7X2PROD with PROPOSALS10 77058 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules persons. Non-corporate entity UPEs within families of funds and MLPs would have to provide significant additional information on behalf of their associates under the proposed change. These entities are, however, already accustomed to looking into the holdings of those associates for filings where they are acquiring persons because some information about associates’ holdings must be provided even under the current Rules. Given that these entities already conduct such inquiries, the Commission believes requiring additional information about entities that have already been identified should be manageable. The breadth of certain items will still be limited, and the burden should lessen after the first inquiry under the new rule. Nevertheless, the Commission acknowledges that there might be other ways to achieve the same result. The Commission invites comments on alternative ways the Agencies could obtain this necessary information that would result in a more limited burden for investment funds and MLPs filing as acquiring persons. The proposed change to § 801.1(a)(1) would result in fewer filings and a reduced burden for certain other acquiring persons. The proposed rule would streamline the number of filings and fees from families of funds and MLPs. For instance, in the scenario where associates Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3 will each acquire 7% of Issuer D for $200 million, each currently must make a filing and pay a separate $125,000 filing fee (assuming no exemptions apply). Under the proposed rule, the Agencies would receive one filing for 21% of Issuer D valued at $600 million and one $125,000 filing fee. In addition, the proposed rule would eliminate the need for a filing in the alternative. If the Investment Manager of associates Fund 1 and Fund 2 has not yet determined which of those funds should be the vehicle for a particular investment, the need to choose one for HSR filing purposes becomes moot under the proposed rule, eliminating the potential need to make two filings with two separate filing fees. The Commission also proposes an additional reduction in burden for acquired persons. The HSR Form already limits what acquired persons must report in Items 5 through 7 to information on those assets, voting securities, and non-corporate interests being acquired in the transaction at issue. The limitation for acquired persons in these items is an acknowledgment that only what is being sold is relevant to the Agencies’ VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 competition analysis. This is also the case for the financial information required in Items 4(a) and 4(b), and the Commission therefore proposes amending the HSR Instructions to create a similar limit for acquired persons with respect to these items. Under the proposed changes, an acquired person would provide relevant CIK numbers in response to Item 4(a) or financials in response to Item 4(b) only for (1) the assets, voting securities and noncorporate interests being acquired in the transaction at issue, and (2) the UPE of those assets, voting securities and noncorporate interests. This proposed amendment to the HSR Instructions would significantly limit what noncorporate entity UPEs within families of funds and MLPs would have to provide as acquired persons in response to Items 4(a) and 4(b) and would not adversely affect the Agencies’ competitive analysis. Finally, the Commission also acknowledges that certain non-corporate entity UPEs within families of funds and MLPs and their associates may be structured as index funds, exchangetraded funds (ETFs) or the like. Since these entities base their investments on an index, it is possible that it is not appropriate to apply the proposed change to § 801.1(a)(1) to these entities. The Commission invites comments on whether index funds, ETFs or the like should be differentiated under the proposed rule. B. Proposed Changes to § 801.1(d) Along with the proposed change to § 801.1(a)(1), the Commission also proposes conforming changes to the definition of associate in § 801.1(d)(2). Under the current definition, associate is only relevant to Items 6 and 7 of the HSR Form and to acquiring persons.14 But the proposed change to the § 801.1(a)(1) definition of person would apply the associates concept more broadly in the HSR Form and to both acquiring and acquired persons. The Commission therefore proposes to eliminate the phrase ‘‘For purposes of Items 6 and 7’’ from § 801.1(d)(2), capitalize the subsequent ‘‘An’’ in § 801.1(d)(2) and include ‘‘or acquired’’ in § 801.1 (d)(2), (d)(2)(A) and (B) to reflect this proposed change. II. Proposed § 802.15: De Minimis Acquisitions of Voting Securities To use their resources as effectively as possible, the Agencies have a strong interest not only in receiving HSR filings that contain sufficient information to assess whether proposed 14 16 PO 00000 CFR 801.1(d)(2). Frm 00045 Fmt 4702 Sfmt 4702 transactions present real competition concerns, but also in eliminating filings for categories of acquisitions that are unlikely to create competitive concerns. In 1996, the Commission acknowledged this concern in issuing final rules exempting certain ordinary course transactions, as well as certain types of acquisitions of realty and carbon-based mineral reserves.15 The Commission explained, ‘‘[t]hese rules are designed to reduce the compliance burden on the business community by eliminating the application of the notification and waiting requirements to a significant number of transactions that are unlikely to violate the antitrust laws. They will also allow the enforcement agencies to focus their resources more effectively on those transactions that present the potential for competitive harm.’’ 16 Under the same rationale, the Commission has long contemplated the exemption of acquisitions of 10% or less of the voting securities of an issuer. These kinds of acquisitions can take many forms. The most typical is when an entity acquires 10% or less of an issuer in order to provide that issuer with needed capital. Sometimes certain shareholders of the target will acquire less than 10% of the buyer’s voting securities as consideration for the transaction (typically called shareholder backside acquisitions). Except for a few instances when a shareholder backside acquisition of 10% or less of an issuer’s voting securities was linked to a larger transaction that presented competitive concerns,17 the Commission has not sought to block any acquisition of 10% or less of an issuer’s voting securities. Recognizing that some acquisitions of 10% or less are less likely than others to raise competitive concerns, the Act already includes an exemption for acquisitions of 10% or less of the voting securities of an issuer made ‘‘solely for the purpose of investment.’’ 18 This exemption is codified in § 802.9,19 and § 801.1(i)(1) defines the term ‘‘solely for the purpose of investment’’ so that filing parties may determine whether § 802.9 is available. ‘‘Voting securities are held or acquired ‘solely for the purpose of investment’ if the person holding or acquiring such voting securities has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.’’ 20 15 61 FR 13666 (Mar. 28, 1996). FR 13666 (Mar. 28, 1996). 17 See, e.g., In re Time Warner, Inc., et al., Docket No. C–3709, (Feb. 7, 1997). 18 15 U.S.C. 18a(c)(9). 19 16 CFR 802.9. 20 16 CFR 801.1(i)(1). 16 61 E:\FR\FM\01DEP1.SGM 01DEP1 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules The Statement of Basis and Purpose for the original 1978 Rules (‘‘1978 SBP’’) lays out specific factors that further illuminate the § 801.1(i)(1) definition. ‘‘[M]erely voting the stock will not be considered evidence of an intent inconsistent with investment purpose. However, certain types of conduct could be so viewed. These include but are not limited to: (1) Nominating a candidate for the board of directors of the 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. The facts and circumstances of each case will be evaluated whenever any of these actions have been taken by a person claiming that voting securities are held or acquired solely for the purpose of investment and thus not subject to the act’s requirements.’’ 21 The Agencies have interpreted these factors narrowly: When an acquiring person takes any of the enumerated actions or is a competitor of the issuer, § 802.9 is generally not available.22 On the other end of the spectrum, § 802.9 is clearly available if the acquiring person plans to do nothing but hold the stock. Given the changes in investor behavior since the HSR Act was passed,23 however, a great deal of potential shareholder engagement involves more than merely holding (and potentially selling) stock, but does not encompass what the 1978 SBP discusses.24 21 43 FR 33450, 33465 (July 31, 1978). from Thomas J. Campbell, Dir., Bureau of Competition, FTC, to Michael Sohn, Esq., Arnold & Porter (Aug. 19, 1982) (on file with the 6th report to Congress). 23 See Scott Hirst & Lucian Bebchuk, The Specter of the Giant Three, 99 B.U. L. Rev. 721, 725–26 (2019). (In 1950, U.S. equities were predominantly held by households, with institutional investors accounting for only about six percent; now institutional investors hold 65 percent of U.S. equities); and then S&P Dow Jones Indices, Comment, Re: FTC Hearing #8: Competition and Consumer Protection: Holdings of Non-Controlling Ownership Interests in Competing Companies, (Jan. 15, 2019), https://www.ftc.gov/system/files/ documents/public_comments/2019/01/ftc-20180107-d-0015-163643.pdf, at 1 (‘‘Fifty years ago, there were no index funds; all institutional (and retail) asset management was conducted on an active basis. Today, we estimate that between 20 to 25 percent of the U.S. stock market is held by index funds.’’). 24 See, e.g., Blackrock, Investment Stewardship, Engagement Priorities for 2020, https:// www.blackrock.com/corporate/literature/ publication/blk-stewardship-priorities-final.pdf (identifying and describing board quality, environmental risk and opportunities, corporate strategy and capital allocation, compensation that promotes long-termism, and human capital khammond on DSKJM1Z7X2PROD with PROPOSALS10 22 Letter VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 Notably, some argue that communications between investors and management encourage corporate accountability to shareholders,25 and that HSR filing requirements (and attendant obligations to provide notice to the issuer prior to purchase of the shares) might chill this beneficial interaction,26 particularly since, depending on the degree of shareholder engagement, it can be quite difficult to determine whether filing parties can rely on the § 802.9 exemption. For instance, a discussion between shareholders and company executives may begin with the amount of compensation each executive receives, but then evolve into how each executive’s compensation will be determined by the company’s performance. This discussion on a seemingly innocuous topic may touch on basic business decisions, precluding management as engagement priorities); Vanguard Investment Stewardship 2019 Annual Report, https://about.vanguard.com/investmentstewardship/perspectives-and-commentary/2019_ investment_stewardship_annual_report.pdf (discussing board composition (including diversity of gender, race and ethnicity) oversight of strategy and risk (including environmental risk), structure of executive compensation, and governance structures to support and ensure accountability of a company’s board and management to shareholders); and then State Street Global Advisors Stewardship Report 2018–2019, https://www.ssga.com/librarycontent/products/esg/annual-asset-stewardshipreport-2018-19.pdf (describing engagement with boards and management teams, including, among other issues, ‘‘fearless girl campaign’’ to increase diversity of boards, ‘‘climate risk and reporting’’, ethical issues in the pharmaceutical industry, including marketing of addictive substances, genetic engineering, and the use of personal data). 25 See David Hirschmann, Comment, FTC Hearings on Competition and Consumer Protection in the 21st Century, (Dec. 6, 2018), https:// www.ftc.gov/system/files/documents/public_events/ 1422929/ftc_hearings_session_8_transcript_12-618_0.pdf, at 102 (‘‘Engagement allows management to communicate with their shareholder base as they implement strategies to generate long-term growth’’ and is ‘‘important for healthy capital markets.’’). 26 See Council of Institutional Investors and the Managed Fuds Association, Comment, Re: Competition and Consumption Protection in the 21st Century Hearings, Project Number P181201— Investment Community Request for HSR Reform, (Aug. 13, 2018), https://www.ftc.gov/system/files/ documents/public_comments/2018/08/ftc-20180048-d-0010-147719.pdf, at 1–2, and 7 (‘‘[T]he investment community is concerned that the Commission’s increasingly narrow interpretation and application of the investment-only exemption under the HSR Act is imposing an undue regulatory burden and unnecessary costs on institutional investors, such as employee pension funds, charitable foundations and university endowments. That burden undermines the strong public policy in favor of management-shareholder communications, involves significant and unnecessary costs, and is not justified by the Commission’s mission to protect competition.’’ . . . ‘‘CII and MFA are concerned that the current narrow application of the investment-only exemption is interfering with an animating policy objective of the federal securities laws to ensure a free flow of information and disclosure from issuers of securities to the investing public.’’). PO 00000 Frm 00046 Fmt 4702 Sfmt 4702 77059 use of the § 802.9 exemption. In the Agencies’ experience, even the simplest of topics can present subtleties that complicate whether § 802.9 might exempt an acquisition of 10% or less of an issuer’s voting securities. Over the years, the Agencies have considered revising § 802.9 in order to provide clearer guidance on when the acquisition of 10% or less of an issuer’s voting securities is exempt from HSR filing requirements. In 1988, the Commission initiated a notice and comment proceeding on a proposed approach and two alternative approaches: The principal proposal would exempt from the premerger notification obligations all acquisitions of 10% or less of an issuer’s voting securities on the grounds that such acquisitions are unlikely to violate the antitrust laws. The alternative proposals would alter existing notification procedures for acquisitions of 10% or less of an issuer’s voting securities. One would permit the purchase, but require that the securities be placed in escrow pending antitrust review; the other would eliminate the reporting requirement imposed on the target firm, thus freeing the acquiror of its obligation to give the target prior notice.27 The Commission’s principal proposal in 1988 was a new exemption, § 802.24, that would have subsumed § 802.9 ‘‘by eliminating the filing requirement for all acquisitions of 10 percent or less of an issuer’s voting securities, regardless of the intent of the acquired person.’’ Although the Commission had rejected calls to ignore investment intent in 1978 when the original Rules were promulgated, it proposed to exempt all acquisitions of 10% or less of an issuer’s voting securities based on ten years of experience with reviewing those filings that were not solely for the purpose of investment. ‘‘It is not possible to say that voting securities acquisitions of 10 percent or less, or 5 percent or less, cannot violate the antitrust laws. The proposed exemption is rather based on the evidently low likelihood that ‘the class of transactions’ will violate the antitrust laws.’’ 28 But the Commission also considered alternative proposals that would more directly address concerns related to other aspects of the Act that could increase the cost of acquiring shares, specifically the requirement to wait for the expiration of the waiting period before acquiring shares, and the requirement to notify the target of the intended acquisition.29 As a result, the 27 53 FR 36831 (Sept. 22, 1988). at 36841. 29 ‘‘Acquirors are reluctant to file premerger notifications because both the delay imposed by the 28 Id. E:\FR\FM\01DEP1.SGM Continued 01DEP1 77060 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS10 Commission proposed two alternative approaches. The first, proposed § 801.34, ‘‘would permit acquirors to purchase, but not take possession of, up to 10 percent of an issuer’s voting securities without filing a notification. The shares purchased would be placed in escrow and voted by the escrow agent in proportion to the votes cast by all other shares. The acquiror would be required to file and observe the waiting period prior to purchasing more than 10 percent of an issuer’s voting securities or prior to taking the shares out of escrow.’’ 30 The second proposal was an optional notification for acquisitions of 10% or less of the voting securities of an issuer. ‘‘This optional system would require the acquiror to submit specified public documents describing the entity to be acquired, but would not require that the issuer be given notice of the intended acquisition.’’ 31 The 1988 proposed rulemaking received eighteen comments.32 Some encouraged the Commission to move forward with the principal proposal that would exempt all acquisitions of 10% or less of an issuer’s voting securities regardless of investment intent. Several comments in favor of the principal proposal agreed with the Commission’s assertion in the proposed rulemaking that acquisitions of 10% or less of an issuer’s voting securities were unlikely to violate the antitrust laws.33 In waiting period and informing the target could increase the cost to them of acquiring the issuer’s voting securities.’’ 53 FR 36831, 36840 (Sept. 22, 1988). 30 53 FR 36831, 36,842 (Sept. 22, 1988). 31 53 FR at 36843. 32 All comments are available at https:// www.ftc.gov/policy/public-comments/2020/08/ initiative-122. 33 See Robert S. Pirie, Comment, RE: Proposed Rulemaking Concerning Premerger Notification under Hart-Scott-Rodino Antitrust Improvements Act of 1976, 53 FR 36831, (Oct. 18, 1988), https:// www.ftc.gov/system/files/documents/public_ comments/1988/10/ p812937hsrrulemakingcomment02.pdf; James E. Knox, Comment, RE: Proposed Rulemaking Concerning Premerger Notification under HartScott-Rodino Antitrust Improvements Act of 1976, 53 FR 36831, (Nov. 8, 1988), https://www.ftc.gov/ system/files/documents/public_comments/1988/11/ p812937hsrrulemakingcomment07.pdf; Irving Scher, Comment, RE: Proposed Rulemaking Concerning Premerger Notification under HartScott-Rodino Antitrust Improvements Act of 1976, 53 FR 36831, (Nov. 21, 1988), https://www.ftc.gov/ system/files/documents/public_comments/1988/11/ p812937hsrrulemakingcomment09.pdf; John A. Reid, Jr., Comment, Re: Proposed Changes to Premerger Notification Rules, 53 FR 36831, (Nov. 18, 1988), https://www.ftc.gov/system/files/ documents/public_comments/1988/11/ p812937hsrrulemakingcomment11-2.pdf; Howard E. Steinberg, Comment, Re: Proposed Changes to Premerger Notification Rules, 53 FR 36831, (Nov. 21, 1988), https://www.ftc.gov/system/files/ documents/public_comments/1988/11/ p812937hsrrulemakingcomment12.pdf; and then William J. Kolasky, Jr., Comment, Re: Comments VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 addition, some of the comments noted that the proposed rule would ‘‘eliminate the incentive to avoid compliance with the H–S–R Act without prejudicing antitrust enforcement efforts’’ 34 and benefit the Commission through the ‘‘freeing up of Commission resources currently expended on compliance investigations regarding transactions that lack antitrust significance.’’ 35 Several comments also noted that the proposed rule would ease conflicts with the securities laws. A company wrote that ‘‘by allowing the acquisition of securities under the secrecy afforded by the securities laws, acquirors will be able to purchase stock at prices that are not artificially inflated by the publicity which can be generated by an HSR Act notification filing at the $15 million reporting threshold.’’ 36 Submitted by Wilmer, Cutler & Pickering Regarding Proposed Amendments to the Hart-Scott-Rodino Improvement Act of 1976, 53 FR 36831, (Nov. 21, 1988), https://www.ftc.gov/system/files/documents/ public_comments/1988/11/ p812937hsrrulemakingcomment13.pdf. 34 See Robert S. Pirie, Comment, RE: Proposed Rulemaking Concerning Premerger Notification under Hart-Scott-Rodino Antitrust Improvements Act of 1976, 53 FR 36831, (Oct. 18, 1988), https:// www.ftc.gov/system/files/documents/public_ comments/1988/10/ p812937hsrrulemakingcomment02.pdf, at 1. See also James E. Knox, Comment, RE: Proposed Rulemaking Concerning Premerger Notification under Hart-Scott-Rodino Antitrust Improvements Act of 1976, 53 FR 36831, (Nov. 8, 1988), https:// www.ftc.gov/system/files/documents/public_ comments/1988/11/ p812937hsrrulemakingcomment07.pdf. 35 See Howard E. Steinberg, Comment, Re: Proposed Changes to Premerger Notification Rules, 53 FR 36831, (Nov. 21, 1988), https://www.ftc.gov/ system/files/documents/public_comments/1988/11/ p812937hsrrulemakingcomment12.pdf, at 2. See also Robert S. Pirie, Comment, RE: Proposed Rulemaking Concerning Premerger Notification under Hart-Scott-Rodino Antitrust Improvements Act of 1976, 53 FR 36831, (Oct. 18, 1988), https:// www.ftc.gov/system/files/documents/public_ comments/1988/10/ p812937hsrrulemakingcomment02.pdf; and then James E. Knox, Comment, RE: Proposed Rulemaking Concerning Premerger Notification under HartScott-Rodino Antitrust Improvements Act of 1976, 53 FR 36831, (Nov. 8, 1988), https://www.ftc.gov/ system/files/documents/public_comments/1988/11/ p812937hsrrulemakingcomment07.pdf. 36 See James E. Knox, Comment, RE: Proposed Rulemaking Concerning Premerger Notification under Hart-Scott-Rodino Antitrust Improvements Act of 1976, 53 FR 36831, (Nov. 8, 1988), https:// www.ftc.gov/system/files/documents/public_ comments/1988/11/ p812937hsrrulemakingcomment07.pdf, at 2. See also Robert S. Pirie, Comment, RE: Proposed Rulemaking Concerning Premerger Notification under Hart-Scott-Rodino Antitrust Improvements Act of 1976, 53 FR 36831, (Oct. 18, 1988), https:// www.ftc.gov/system/files/documents/public_ comments/1988/10/ p812937hsrrulemakingcomment02.pdf; and then William J. Kolasky, Jr., Comment, Re: Comments Submitted by Wilmer, Cutler & Pickering Regarding Proposed Amendments to the Hart-Scott-Rodino Improvement Act of 1976, 53 FR 36831, (Nov. 21, 1988), https://www.ftc.gov/system/files/documents/ public_comments/1988/11/ p812937hsrrulemakingcomment13.pdf. PO 00000 Frm 00047 Fmt 4702 Sfmt 4702 Other comments noted concerns with the proposed rule. One company wrote: The proposed exemption for a person who acquires up to 10% of the securities of an issuer when such acquirer has the intent of influencing target’s management (which is virtually always the case for an acquisition of 10% of an issuer’s stock) is in diametric opposition to the fundamental purpose of the Act. Since power to influence the target’s management is the primary concern of Section 7, it is beyond our comprehension why the FTC would exempt review for acquisitions of up to 10% of an issuer’s stock when the acquisitions may be made for the purpose of influencing management.37 A trade association wrote: ‘‘The real thrust of the suggestion is not that the $15 million threshold test serves no antitrust purpose, but rather that the FTC finds it difficult to force compliance by those who wish to make hostile tender offers. That, however, is not by itself an appropriate reason for the rules change. Violations cannot be ignored.’’ 38 Members of Congress also weighed in on the proposed rulemaking. One argued that filing requirements should be enforced instead of changed 39 while another argued that the Agencies lacked the authority to create an exemption that would, in effect, render irrelevant the statutory minimum threshold.40 Representative James J. Florio (then Chairman of the Subcommittee on Commerce, Consumer Protection, and Competitiveness of the Committee on Energy and Commerce) wrote: ‘‘[t]he rulemaking notice points out that Congress was definitely interested in subjecting some types of acquisitions of 10 percent or less to premerger review. 37 See Dennis P. Codon, Comment, Re: Premerger Notification; Reporting and Waiting Period Requirements, 53 FR 36831, (Nov. 7, 1988), https:// www.ftc.gov/system/files/documents/public_ comments/1988/11/ p812937hsrrulemakingcomment06.pdf, at 1. 38 See John. W. Hetherington, Comment, Re: 16 CFR parts 801, 802, and 803 Premerger Notification; Reporting and Waiting Period Requirements, 53 FR 36831, (Dec. 19, 1988), https://www.ftc.gov/system/ files/documents/public_comments/1988/12/ p812937hsrrulemakingcomment17.pdf, at 2. 39 See Jim Sasser, Comment, Re: Premerger Notification, 53 FR 36831, (Oct. 25, 1988), https:// www.ftc.gov/system/files/documents/public_ comments/1988/11/ p812937hsrrulemakingcomment08.pdf, at 1, (‘‘Indeed, I find the rationale for the proposed amendments flawed. The premerger notification rules should not be relaxed because, as you say, there is too much incentive to avoid them; rather, they should be strengthened.’’). 40 See Jack Brooks, Comment, 53 FR 36831, (Dec. 9, 1988), https://www.ftc.gov/system/files/ documents/public_comments/1988/12/ p812937hsrrulemakingcomment14.pdf, at 1, (‘‘The proposal would, for all practical purposes, eliminate the $15 million premerger notification threshold. I do not believe that Congress delegated authority to the Commission to repeal that statutory notification threshold.’’). E:\FR\FM\01DEP1.SGM 01DEP1 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules In light of this Congressional intent, I am puzzled by the Commission’s proposal to overrule Congressional intent by a blanket exemption.’’ 41 The Commission did not issue a final rule. Since 1988, the parameters of the HSR premerger notification program have undergone considerable change. In 2000, Congress amended the Act to raise the minimum reportability threshold from $15 million to $50 million, and at the same time built in an automatic annual adjustment of all of the Act’s thresholds based on the change in gross national product. Currently, a transaction must be valued at more than $94 million to be potentially reportable, and the parties to that transaction must have sales or assets of at least $188 million and $18.8 million, respectively, unless the transaction is valued at more than $376 million. The statutory thresholds have increased steadily since 2000,42 which has reduced significantly the number of filings received by the Agencies.43 Since 1988, the Commission has also gained over 30 years of additional experience reviewing filings for acquisitions of 10% or less of an issuer’s voting securities. Since the promulgation of the Rules in 1978, the Agencies have not challenged a standalone acquisition of 10% or less of an issuer, and have rarely engaged in a substantive initial review of a proposed acquisition of 10% or less of an issuer.44 The Commission believes that proposed acquisitions of 10% or less of an issuer should be exempt when they are unlikely to violate the antitrust laws and that exempting this category of acquisitions will allow the Agencies to better focus their resources on transactions that create the potential for competition concerns. To achieve this goal, the Commission proposes a new approach to exempt acquisitions of 10% or less of an issuer’s voting securities under certain conditions. Proposed § 802.15 reads as follows: khammond on DSKJM1Z7X2PROD with PROPOSALS10 § 802.15 De minimis acquisitions of voting securities An acquisition of voting securities shall be exempt from the requirements of the act if as a result of the acquisition: 41 See James J. Florio, Chairman, Comment, Re: Premerger Notification; Reporting and Waiting Period Requirements, 53 FR 36831, (Oct. 12, 1988), https://www.ftc.gov/system/files/documents/ public_comments/1988/10/ p812937hsrrulemakingcomment01.pdf, at 2. 42 The thresholds have increased every year except for 2010. 75 FR 3468 (Jan. 21, 2010). 43 As a result of these changes, many acquisitions of small stakes that would have resulted in an HSR filing prior to 2001 no longer trigger an HSR filing. 44 Note 1 supra. VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 (a) The acquiring person does not hold in excess of 10% of the outstanding voting securities of the issuer; and (b)(i) the acquiring person is not a competitor of the issuer (or any entity within the issuer); (ii) the acquiring person does not hold voting securities in excess of 1% of the outstanding voting securities (or, in the case of a non-corporate entity, in excess of 1% of the non-corporate interests) of any entity that is a competitor of the issuer (or any entity within the issuer); (iii) no individual who is employed by, a principal of, an agent of, or otherwise acting on behalf of the acquiring person, is a director or officer of the issuer (or of an entity within the issuer); (iv) no individual who is employed by, a principal of, an agent of, or otherwise acting on behalf of the acquiring person, is a director or officer of a competitor of the issuer (or of an entity within the issuer); and (v) there is no vendor-vendee relationship between the acquiring person and the issuer (or any entity within the issuer), where the value of sales between the acquiring person and the issuer in the most recently completed fiscal year is greater than $10 million in the aggregate. Proposed § 802.15 exempts acquisitions that would result in the acquiring person holding 10% or less of the issuer’s outstanding voting securities, unless the acquiring person already has a competitively significant relationship with the issuer, such as where the acquiring person operates competing lines of business, has an existing vertical relationship with the issuer, or employs or is otherwise represented by an individual who is an officer or director of the issuer or a competitor. Because these types of relationships render even a small stake potentially competitively significant, the Commission proposes to continue to receive filings for any such acquisitions that are not exempt under § 802.9. Over the last several years, there has been ongoing discussion of the impact of a single entity holding small percentages of voting securities in competitors within the same industry, sometimes referred to as common ownership.45 The debate is not yet settled, but it has raised concerns about the competitive effect of common ownership because investors with small minority stakes may influence the behavior of an issuer. Thus, the 45 FTC Hearings on Competition and Consumer Protection in the 21st Century, Session 8, FTC.GOV. (Dec. 6, 2018), https://www.ftc.gov/news-events/ events-calendar/ftc-hearing-8-competitionconsumer-protection-21st-century. See also Submission of the United States to OECD Hearing on Common Ownership by institutional investors and its impact on competition, FTC.GOV. (Nov. 28, 2017), https://www.ftc.gov/system/files/ attachments/us-submissions-oecd-2010-presentother-international-competition-fora/common_ ownership_united_states.pdf. PO 00000 Frm 00048 Fmt 4702 Sfmt 4702 77061 Commission proposes that the exemption in § 802.15 not apply if the acquiring person is a competitor of the issuer or if the acquiring person holds more than 1% in a competitor of the issuer on an aggregate basis. For instance, Fund Vehicle 1 will acquire 6% of Issuer D and Fund Vehicle 1 has two associates, Fund Vehicles 2 and 3. Fund Vehicle 1 is the UPE but the Acquiring Person includes Fund Vehicles 1, 2 and 3 under the proposed change to § 801.1(a)(1) discussed above. Fund Vehicles 1, 2 and 3 do not control any competitors of Issuer D and Fund Vehicle 1 does not hold any minority interest in a competitor of Issuer D, but Fund Vehicle 2 and Fund Vehicle 3 each holds a 1% minority interest in competitors of Issuer D. In this scenario, under the proposed rule, Fund Vehicle 1 would not be able to rely on proposed § 802.15 because its associates hold more than 1% in a competitor of Issuer D. This exception to the exemption would ensure the Agencies receive filings that provide insights into the influence of holdings in competitors. The Commission invites comment on this approach, including whether a different level of ownership in a competitor of the issuer would be more appropriate in determining that the proposed exemption should not apply. The Rules do not currently define the term ‘‘competitor,’’ and to implement this exception to the exemption, a definition must be added. The Commission proposes the following definition for the purpose of implementing § 802.15: ‘‘§ 801.1(r) Competitor. For purposes of these rules, the term competitor means any person that (1) reports revenues in the same sixdigit NAICS Industry Group as the issuer, or (2) competes in any line of commerce with the issuer.’’ This proposed definition of ‘‘competitor’’ would require two separate assessments to determine whether an acquiring person is a competitor of the issuer or holds interests in a competitor of the issuer. The first prong of the proposed definition would ask an acquiring person to look at the six-digit NAICS codes of entities it controls and compare them with the NAICS codes the issuer reports. NAICS codes (and their predecessor Standard Industrial Classification (‘‘SIC’’) codes) have long been the basis for reporting revenues in the HSR Form, and they provide an objective and easy to administer measure of whether an acquiring person and an issuer compete. Moreover, because acquiring persons already compare their NAICS codes with those of the issuer in order to respond to items E:\FR\FM\01DEP1.SGM 01DEP1 khammond on DSKJM1Z7X2PROD with PROPOSALS10 77062 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules in the Form, as discussed above, this approach would be familiar to acquiring persons. Filing parties can still be ‘‘competitors’’ even if they report in different NAICS codes. Thus, the second prong of the proposed definition of ‘‘competitor’’ would rely on filing parties to conduct a good faith assessment to determine whether any part of the acquiring person competes with or holds interests in entities that compete with the issuer, in any line of commerce.46 The Commission expects that parties would do so consistent with their ordinary course documentation and informational practices and be able to defend reliance on proposed § 802.15 if challenged. The Commission acknowledges that this proposed two-prong definition of ‘‘competitor’’ is broad. The Agencies and the public will benefit from such a broad definition because the Agencies, in fulfilling their obligations to enforce the antitrust laws, have a strong interest in receiving HSR filings that reveal any indicia of competition between the filing parties so the Agencies can fully evaluate the competitive impact of the proposed acquisition. Nevertheless, the Commission invites comment on other ways to define ‘‘competitor’’ that would still provide the Agencies with thorough information on the competition that exists between filing parties. Proposed § 802.15 also asks filing parties to ascertain the existence of officer or director relationships between the acquiring person and the issuer. That is, the exemption in proposed § 802.15 would be unavailable if someone from the acquiring person is an officer or director of the issuer or a competitor of the issuer. To be an officer or director of any issuer is to be intimately connected to that issuer. Officers make the issuer’s day-to-day business decisions, and directors determine the overall direction of the issuer. If someone within the acquiring person has that kind of influence over the issuer or a competitor of the issuer, the Agencies have a strong interest in receiving filings about that proposed transaction to better understand its competitive impact. Thus, this exception to the proposed exemption would ensure that acquisitions of potential competitive significance do not become exempt. 46 As part of a typical antitrust compliance program, a company may already identify other companies that have competing sales in order to avoid violating Section 8 of the Clayton Act. Subject to certain minimum thresholds, Section 8 prohibits a person from serving as a director or an officer of two or more corporations that are horizontal competitors. VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 Finally, the proposed § 802.15 exemption would not be available if the acquiring person and the issuer are in a vertical relationship valued at $10 million or greater. There can be important competitive implications in vertical relationships, and the Agencies have a strong interest in reviewing transactions that create or expand vertical relationships. This exception to the exemption would ensure the Agencies receive filings where the buyer and issuer have a vertical relationship beyond the ordinary course. The Commission intends to exclude the purchase of ordinary course services and goods (e.g., office supplies, financial services, etc.) and invites comment on whether $10 million is an appropriate threshold to distinguish ordinary course vertical relationships from those with competitive significance. Proposed § 802.15 would allow the Agencies ‘‘to focus their resources more effectively on those transactions that present the potential for competitive harm.’’ 47 Proposed § 802.15 would further the Agencies’ goal of eliminating filings for acquisitions of 10% or less of an issuer where there is no existing competitive relationship or significant vertical relationship between the acquiror and the issuer and where the acquisition therefore is unlikely to violate the antitrust laws. At the same time, proposed § 802.15 would balance the exemption of these kinds of acquisitions with the Agencies’ interest in making sure that acquisitions of potential competitive significance are not exempt. The Commission invites comment on whether there are other factors to consider in evaluating the proposed exceptions to the exemption, or if other categories should be the subject of exceptions to the exemption. Under proposed § 802.15, acquiring persons would have to evaluate their connection to the issuer and the issuer’s competitors in several ways. Although this approach is not without burden for acquiring persons, the Commission believes that information concerning competitors, relationships with the issuer’s officers or directors, and vertical relationships will either already be in acquiring persons’ possession or will be relatively straightforward to gather. On the whole, proposed 802.15 should benefit acquiring persons by exempting acquisitions of small amounts of voting securities without an examination of intent as required by § 802.9. Section 802.9 would remain unchanged and would still be available to exempt acquisitions of 10% or less of an issuer 47 61 PO 00000 FR 13666 (Mar. 28, 1996). Frm 00049 Fmt 4702 Sfmt 4702 where there is no intention to be involved in the basic business decisions of that issuer. With the addition of proposed § 802.15, acquiring persons would have two potential ways to exempt the acquisition of 10% or less of an issuer’s voting securities.48 III. Proposed Explanatory and Ministerial Changes to the Rules and the Form and Instructions To help illustrate the proposed changes to § 801.1 discussed above, the FTC proposes adding some examples to the Rules. The proposed changes to § 801.1 would also require explanatory and ministerial updates to the Form and Instructions. A. Revised Examples to §§ 801.1, 801.2 The Commission proposes revising the examples in §§ 801.1 and 801.2 to clarify the proposed definition of person. Revised Examples to § 801.1 1. Edit example 4 to § 801.1(a)(1) to make ‘‘example’’ plural: Example 4: See the examples to § 801.2(a). 2. Add example 5 and 6 to § 801.1(a)(1): Example 5. Fund 1, Fund 2, and Fund 3, each a UPE, are all associates under the common investment management of Manager, as defined by § 801.1(d)(2). Fund 1’s portfolio company A is making a reportable acquisition. The acquiring person includes Manager, Fund 1, Fund 2, Fund 3, and A. Manager would file on behalf of the acquiring person by placing its name in Item 1(a) of the Form. Manager indicates in Item 1(c) of the filing that Fund 1 is making the acquisition. Fund 1 can also indicate in Item 1(c) of the Form that it is filing on Manager’s behalf. Example 6. Fund A will be selling its portfolio company P. Fund A’s investments are managed by Investment Manager, and Fund A’s associates are Fund B, Fund C, and Fund D. The acquired person includes Investment Manager, Fund A, Fund B, Fund C, and Fund D. Investment Manager would file on behalf of Fund A, the selling UPE, by placing its name in Item 1(a) of the Form. Fund A could also indicate in Item 1(c) of the Form that it is filing on Investment Manager’s behalf. 3. Add example 4 to § 801.1(a)(3): Example 4: See the examples to § 801.1(a)(1). 4. Edit text of § 801.1(d)(2) by removing ‘‘For purposes of Items 6 and 7 of the Form,’’ capitalizing the subsequent ‘‘An,’’ and including ‘‘or acquired’’ as appropriate, so that § 801.1(d)(2) reads as follows: (d)(2) Associate. An associate of an acquiring or acquired person shall be an 48 Institutional investors can also continue to rely on § 802.64. E:\FR\FM\01DEP1.SGM 01DEP1 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules entity that is not an affiliate of such person but: (A) Has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring or acquired entity (a ‘‘managing entity’’); or (B) Has its operations or investment decisions, directly or indirectly, managed by the acquiring or acquired person; or (C) Directly or indirectly controls, is controlled by, or is under common control with a managing entity; or (D) Directly or indirectly manages, is managed by, or is under common operational or investment decision management with a managing entity. Revised Examples to § 801.2 1. In § 801.2(a), number the current example as ‘‘Example 1’’ and add example 2. Example 2: See the examples to § 801.1(a)(1). 2. Add examples 3 and 4 to § 801.2(b) Example 3: See the examples to § 801.1(a)(1). Example 4: See the examples to § 801.12(a). Revised Examples to § 801.12(a) 1. In § 801.12(a), number the current example as ‘‘example 1’’ and add example 2: Example 2. Person ‘‘A’’ is composed of corporation A1 and subsidiary A2; person ‘‘B’’ is composed of Fund 1 and Fund 2, which are associates managed by Investment Manager. Both Fund 1 and Fund 2 hold shares of Issuer. A2 will acquire all of Issuer’s voting securities held by Fund 1 and Fund 2. Under this paragraph, for purposes of calculating the percentage of voting securities to be held, the ‘‘acquired person’’ is Issuer. For all other purposes, the acquired person is ‘‘B.’’ (For all purposes, the ‘‘acquiring person’’ is ‘‘A.’’) khammond on DSKJM1Z7X2PROD with PROPOSALS10 B. Ministerial Changes to the Instructions and the Form The Commission also proposes the following changes to the Instructions and Form to clarify the definition of person as well as to streamline the Form where appropriate in light of the proposed changes: Definitions, p.I of Instructions: The terms ‘‘person filing’’ or ‘‘filing person’’ mean an ultimate parent entity (‘‘UPE’’) and its associates. Every person will have at least one UPE, and a person may be the same as its UPE. Not every person will have associates, but when a person has associates, the person will not be the same as its UPE(s). (See § 801.1(a)(1) and (d)(2).) Item 1(a), p.IV of Instructions: Provide the name, headquarters address, and website (if one exists) of the person filing notification. A person includes associates, but not every person will have associates. In the case of a person that has associates, the VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 person filing is the entity that manages the associates (‘‘managing entity’’) as defined by § 801.1(d)(2). (See § 801.1(a)(1) and (d)(2).) Item 1(c), p.IV of the Instructions: Put an X in the appropriate box to indicate whether the person in Item 1(a) is a corporation, unincorporated entity, natural person, managing entity or other (specify). If the person is a managing entity, indicate the UPE making the acquisition. Indicate if a UPE is filing on behalf of the managing entity. (See § 801.1 and (d)(2).) Item 1(c) in the Form: This item will include a new box for managing entity and space for listing the name of the UPE making the acquisition. Item 3(a), p.V of the Instructions: Clarify that the item calls for information on the UPEs that are party to the transaction. First paragraph: At the top of Item 3(a), list the name and mailing address of each acquiring and acquired UPE, and acquiring and acquired entity, that are party to the transaction whether or not required to file notification. It is not necessary to list every subsidiary wholly-owned by an acquired entity. Item 4(a), p.VI of the Instructions: Add a requirement for acquiring persons to organize by UPE and by entity within each UPE. Specify limits for acquired persons. Acquiring persons: Provide the names of all entities within the person filing notification, including all UPEs, that file annual reports (Form 10–K or Form 20–F) with the United States Securities and Exchange Commission, and provide the Central Index Key (‘‘CIK’’) number for each entity. Responses must be organized by UPE and by entity within each UPE. Acquired persons: Provide the names of all entities within the selling UPE, including the UPE, that file annual reports (Form 10–K or Form 20–F) with the United States Securities and Exchange Commission, and provide the Central Index Key (CIK) number for each entity. Item 4(b), p.VI of the Instructions: Specify limits for acquired persons. Add a requirement to organize by UPE and by entity within each UPE. Acquiring persons: provide the most recent annual reports and/or annual audit reports (or, if audited is unavailable, unaudited) of the person filing notification. The acquiring person should also provide the most recent reports of the acquiring entity(s) and any controlled entity whose dollar revenues contribute to an overlap reported in Item 7. Responses must be organized by UPE and by entity within each UPE. If some of the UPEs or entities do not prepare separate financial statements, explain how their financial information is consolidated in the financial statements that are being submitted. Acquired persons: Provide the most recent annual reports and/or annual audit reports (or, if audited is unavailable, unaudited) of the selling UPE. The acquired person should also provide the most recent reports of the acquired entity(s). Item 5, p.VII of the Instructions: Add a requirement to organize by UPE and by entity within each UPE. Second paragraph: Responses must be organized by UPE and entity within each PO 00000 Frm 00050 Fmt 4702 Sfmt 4702 77063 UPE. List all NAICS and NAPCS codes in ascending order. Item 5(a), p.VII of the Instructions: Clarify requirement for persons. Last paragraph: Check the Overlap box for every 6-digit manufacturing and nonmanufacturing NAICS code and every 10digit NAPCS code in which both persons generate dollar revenues. Item 6(a), p.VIII of the Instructions: Add a requirement to organize by UPE and by entity within each UPE. Subsidiaries of filing person. List the name, city, and state/county of all U.S. entities, and all foreign entities that have sales in or into the U.S., that are included within the person filing notification. Responses must be organized by UPE and by entity within each UPE. Entities with total assets of less than $10 million may be omitted. Alternatively, the person filing notification may report all entities within it. Item 6(b), p.VIII of the Instructions: Add a requirement to organize by UPE and by entity within each UPE. Minority shareholders. For the acquired entity(s) and, for the acquiring person, the managing entity, all UPEs and the acquiring entity(s) or, in the case of natural persons, the top-level corporate or unincorporated entity(s) within the UPE(s), list the name and headquarters mailing address of each shareholder that holds 5% or more but less than 50% of the outstanding voting securities or non-corporate interests of the entity, and the percentage of voting securities or noncorporate interests held by that person. Responses must be organized by UPE and entity within each UPE. (See § 801.1(c)). Item 6(c), p.VIII–IX of the Instructions: Item 6(c) is currently segmented into two different sections: Item 6(c)(i) deals with the person filing and Item 6(c)(ii) deals with that person’s associates. Since the proposed definition of person would include associates, these two items within 6(c) would be collapsed and the Item renumbered to Item 6(c) with no subparts. The information required by this item would still be limited to entities within the acquiring person that report in the same NAICS code as the target. New 6(c) would read as follows: Item 6(c) Minority holdings of filing person. If the person filing notification holds 5% or more but less than 50% of the voting securities of any issuer or non-corporate interests of any unincorporated entity, list the issuer and percentage of voting securities held, or in the case of an unincorporated entity, list the unincorporated entity and the percentage of non-corporate interests held. The acquiring person should limit its response, based on its knowledge or belief, to entities that derived dollar revenues in the most recent year from operations in industries within any 6-digit NAICS industry code in which the acquired entity(s) or assets also derived dollar revenues in the most recent year. The acquiring person may rely on its regularly prepared financials that list its investments, provided the financials are no more than three months old. Responses must be organized by UPE and by entity within each UPE. E:\FR\FM\01DEP1.SGM 01DEP1 77064 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules The acquired person should limit its response, based on its knowledge or belief, to entities that derive dollar revenues in the same 6-digit NAICS industry code as the acquiring person. If NAICS codes are unavailable, holdings in entities that have operations in the same industry, based on the knowledge or belief of the acquiring person, should be listed. In responding to Item 6(c), it is permissible for the acquiring person to list all entities in which it holds 5% or more but less than 50% of the voting securities of any issuer or noncorporate interests of any unincorporated entity. Holdings in those entities that have total assets of less than $10 million may be omitted. Item 7, p.IX–X of the Instructions: Item 7(a) currently requires information from both the acquiring person and its associates. Since the proposed definition of person would include associates, Item 7(a) would be revised to eliminate the separate reference to associates. Item 7(b) The information required by Item 7(b) would be incorporated into Items 5 and 6(a), so this item would be eliminated. Items 7(c) and 7(d) Current Item 7(c) deals with the person filing and Item 7(d) deals with that person’s associates, so these two items would be collapsed and renumbered to new 7(b). New Item 7 would read as follows: If, to the knowledge or belief of the person filing notification, the acquiring person derived any amount of dollar revenues (even if omitted from Item 5) in the most recent year from operations: (1) In industries within any 6-digit NAICS industry code in which any acquired entity that is a party to the acquisition also derived any amount of dollar revenues in the most recent year; or (2) in which a joint venture corporation or unincorporated entity will derive dollar revenues; then for each such 6-digit NAICS industry code follow the instructions below for this section. Note that if the acquired entity is a joint venture, the only overlaps that should be reported are those between the assets to be held by the joint venture and any assets of the acquiring person not contributed to the joint venture. Responses must be organized by UPE and by entity within each UPE. khammond on DSKJM1Z7X2PROD with PROPOSALS10 Item 7(a) Industry Code Overlap Information Provide the 6-digit NAICS industry code and description for the industry. Item 7(b) Geographic Market Information Use the 2-digit postal codes for states and territories and provide the total number of states and territories at the end of the response. Note that except in the case of those NAICS industries in the Sectors and Subsectors mentioned in Item 7(b)(iv)(b), the person VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 filing notification may respond with the word ‘‘national’’ if business is conducted in all 50 states. Item 7(b)(i) NAICS Sectors 31–33 For each 6-digit NAICS industry code within NAICS Sectors 31–33 (manufacturing industries) listed in Item 7(a), list the relevant geographic information in which, to the knowledge or belief of the person filing the notification, the products in that 6-digit NAICS industry code produced by the person filing notification are sold without a significant change in their form (whether they are sold by the person filing notification or by others to whom such products have been sold or resold). Except for industries covered by Item 7(b)(iv)(b), the relevant geographic information is all states or, if desired, portions thereof. Item 7(b)(ii) NAICS Sector 42 For each 6-digit NAICS industry code within NAICS Sector 42 (wholesale trade) listed in Item 7(a), list the states or, if desired, portions thereof in which the customers of the person filing notification are located. Item 7(b)(iii) NAICS Industry Group 5241 For each 6-digit NAICS industry code within NAICS Industry Group 5241 (insurance carriers) listed in Item 7(a), list the state(s) in which the person filing notification is licensed to write insurance. Item 7(b)(iv)(a) Other NAICS Sectors For each 6-digit NAICS industry code listed in item 7(a) within the NAICS Sectors or Subsectors below, list the states or, if desired, portions thereof in which the person filing notification conducts such operations. 11 agriculture, forestry, fishing and hunting 21 mining 22 utilities 23 construction 48–49 transportation and warehousing 511 publishing industries 515 broadcasting 517 telecommunications 71 arts, entertainment and recreation Item 7(b)(iv)(b) For each 6-digit NAICS industry code listed in item 7(a) within the NAICS Sectors or Subsectors below, provide the address, arranged by state, county and city or town, of each establishment from which dollar revenues were derived in the most recent year by the person filing notification. 2123 nonmetallic mineral mining and quarrying 32512 industrial gases 32732 concrete 32733 concrete products 44–45 retail trade, except 442 (furniture and home furnishings stores), and 443 (electronics and appliance stores) 512 motion picture and sound recording industries PO 00000 Frm 00051 Fmt 4702 Sfmt 4702 521 522 532 62 72 811 812 monetary authorities—central bank credit intermediation and related activities rental and leasing services health care and social assistance accommodations and food services, except 7212 (recreational vehicle parks and recreational camps), and 7213 (rooming and boarding houses) repair and maintenance, except 8114 (personal and household goods repair and maintenance) personal and laundry services Item 7(b)(iv)(c) For each 6-digit NAICS industry code listed in item 7(a) within the NAICS Sectors or Subsectors below, list the states or, if desired, portions thereof in which the person filing notification conducts such operations. 442 furniture and home furnishings stores 443 electronics and appliance stores 516 internet publishing & broadcasting 518 internet service providers 519 other information services 523 securities, commodity contracts and other financial investments and related activities 5242 insurance agencies and brokerages, and other insurance related activities 525 funds, trusts and other financial vehicles 53 real estate and rental and leasing 54 professional, scientific and technical services 55 management of companies and enterprises 56 administrative and support and waste management and remediation services 61 educational services 7212 recreational vehicle parks and recreational camps 7213 rooming and boarding houses 813 religious, grantmaking, civic, professional, and similar organizations 8114 personal and household goods repair and maintenance Item 8, p.XI of the Instructions: Add a requirement to organize by UPE and by entity within each UPE. For each such acquisition, supply: (1) The 6-digit NAICS industry code (by number and description) identified above in which the acquired entity derived dollar revenues; (2) the name of the entity from which the assets, voting securities or non-corporate interests were acquired; (3) the headquarters address of that entity prior to the acquisition; (4) whether assets, voting securities or noncorporate interests were acquired; and (5) the consummation date of the acquisition. Responses must be organized by UPE and by entity within each UPE. IV. Communications by Outside Parties to Commissioners and Their Advisors Written communications and summaries or transcripts of oral communications respecting the merits of this proceeding, from any outside party to any Commissioner or E:\FR\FM\01DEP1.SGM 01DEP1 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules Commissioner’s advisor, will be placed on the public record. See 16 CFR 1.26(b)(5). V. Regulatory Flexibility Act The Regulatory Flexibility Act, 5 U.S.C. 601–612, requires that the agency conduct an initial and final regulatory analysis of the anticipated economic impact of the proposed amendments on small entities, except where the Commission certifies that the regulatory action will not have a significant economic impact on a substantial number of small entities. 5 U.S.C. 605. Because of the size of the transactions necessary to invoke an HSR filing, the premerger notification rules rarely, if ever, affect small entities.49 The 2000 amendments to the Act exempted all transactions valued at $50 million or less, with subsequent automatic adjustments to take account of changes in Gross National Product resulting in a current threshold of $94 million. Further, none of the proposed amendments expands the coverage of the premerger notification rules in a way that would affect small entities. Accordingly, the Commission certifies that these proposed amendments will not have a significant economic impact on a substantial number of small entities. This document serves as the required notice of this certification to the Small Business Administration. khammond on DSKJM1Z7X2PROD with PROPOSALS10 VI. Paperwork Reduction Act The Paperwork Reduction Act, 44 U.S.C. 3501–3521, requires agencies to submit ‘‘collections of information’’ to the Office of Management and Budget (‘‘OMB’’) and obtain clearance before instituting them. Such collections of information include reporting, recordkeeping, or disclosure requirements contained in regulations. The existing information collection requirements in the HSR Rules and Form have been reviewed and approved by OMB under OMB Control No. 3084– 0005. The current clearance expires on January 31, 2023. Because the rule amendments proposed in this NPRM would change existing reporting requirements, the Commission is submitting a Supporting Statement for Information Collection Provisions (‘‘Supporting Statement’’) to OMB. Amending § 801.1(a)(1)—Acquiring Persons The Commission proposes to amend the § 801.1(a)(1) definition of ‘‘person’’ to require certain acquiring persons to disclose additional information about 49 See 13 CFR part 121 (regulations defining small business size). VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 their associates when making an HSR filing. Thus, Items 4 through 8 (excluding Items 6(c) and 7) 50 on the Notification and Report Form (HSR Form) would be revised to seek information about associates of certain acquiring persons, including the aggregation of acquisitions in the same issuer across its associates. The Commission acknowledges that this proposed change would result in an increased burden for certain acquiring persons. Non-corporate entity UPEs within families of funds and MLPs would be required to provide significant additional information on behalf of their associates under the proposed change. These entities are, however, already accustomed to looking into the holdings of those associates for filings where they are acquiring persons as a result of the treatment of associates under the current Rules. Given that these entities already conduct such inquiries, the Commission believes requiring additional information about entities that have already been identified should result in limited additional burden for filers. Based on filing data from the past five fiscal years, the Commission estimates that 17.28% of entities would be required to provide additional information on behalf of associates. From this, we anticipate 846 filings would be affected per fiscal year (17.28% × 4894 filings per year, as estimated in the FTC’s most recent PRA clearance for the HSR Rules). The Commission also estimates that each affected filer will need about 10–15 additional hours per filing to comply. Thus, the aggregation is expected to lead to 10,575 additional annual hours of burden (846 filings × 12.5 hours per filing). The Commission seeks comments to help inform such burden estimates, to the extent applicable. The proposed change to § 801.1(a)(1) would also result in a reduced burden for certain acquiring persons by eliminating the potential need for families of funds and MLPs to make multiple filings with multiple filing fees. Based on filing data from the past five fiscal years, the Commission estimates that 39 filings would be affected per fiscal year. Since the FTC’s current clearance with OMB estimates an average reporting burden per responding filer of 37 hours per filing, the proposed change to § 801.1(a)(1) would be a reduction of 1,443 hours of annual burden (39 filings × 37 hours per filing). The Commission seeks 50 There would be no changes to what Items 6(c) and 7 require, because those items already require information from associates. PO 00000 Frm 00052 Fmt 4702 Sfmt 4702 77065 comments to help inform such burden estimates, to the extent applicable. Acquired Persons Additionally, the Commission’s proposal to revise the HSR Instructions to limit the financial information required in Items 4(a) and 4(b) should reduce burden for certain acquired persons. The HSR Form already limits what acquired persons must report in Items 5 through 7 to information on those assets, voting securities and noncorporate interests being acquired in the transaction at issue. The Commission’s proposal to amend the HSR Instructions would create a similar limit for acquired persons with respect to Items 4(a) and 4(b) and should result in a reduction in the burden for families of funds and MLPs filing as acquired persons who will now face a more limited reporting burden after the amendments. Based on filing data from the past five fiscal years, the Commission estimates that 357 filings would be affected per fiscal year. The Commission also estimates that the burden on each affected filer will be reduced by 5 hours per filing. Thus, the proposed limit for acquired party reporting is expected to lead to a reduction in burden of 1,785 annual hours (357 filings × 5 hours per filing). The Commission seeks comments to help inform such burden estimates, to the extent applicable. Amending § 802.15—Acquisition of 10% or less Additionally the Commission proposes a new exemption, § 802.15, which would exempt the acquisition of 10% or less of an issuer’s voting securities in certain circumstances. Proposed § 802.15 exempts the acquisition of 10% or less of an issuer’s voting securities unless the acquiring person already has a competitively significant relationship with the issuer, such as operating competing lines of business or having an existing vertical relationship, or where the investor (or its agent) is an officer or director of the issuer or a competitor. This proposed exemption would allow the acquisition of small amounts of voting securities without an examination of intent as required by § 802.9. As a result, the Commission anticipates that this exemption will reduce somewhat the number of transactions subject to review under the Rule and the number of entities that must engage in reporting under the Rule. Over the period from FY 2001 to FY 2017, the Commission received an average of 106 filings per fiscal year for acquisitions of 10% or E:\FR\FM\01DEP1.SGM 01DEP1 khammond on DSKJM1Z7X2PROD with PROPOSALS10 77066 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules less.51 Some of these filings would fall within the exemption in proposed § 802.15, leading to a reduction in burden for entities that would no longer need to report under the Rule. However, the Commission does not currently possess information as to how many entities would qualify for the proposed § 802.15 exemption. The Commission therefore requests comment on the percentage of entities that would qualify for the proposed exemption. (OIRA) reviews Federal information collections. Explanatory and Ministerial Changes Finally, the Commission proposes explanatory and ministerial changes to the rules, as well as necessary amendments to the HSR Form and Instructions to effect the proposed changes. These changes will result in no change to the information collection burden under the Rule. PART 801—COVERAGE RULES Request for Comments As noted above, the Commission invites comments on anticipated burdens for the proposed amendments and comments that will enable it to: (1) Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (2) evaluate the accuracy of the Commission’s estimate of the burden of the proposed collections of information, including the validity of the methodology and assumptions used; (3) enhance the quality, utility, and clarity of the information to be collected; and (4) minimize the burden of the collections of information on those who must comply, including through the use of appropriate automated, electronic, mechanical, or other technological techniques or other forms of information technology. Comments on the proposed reporting requirements subject to Paperwork Reduction Act review by OMB should additionally be submitted to www.reginfo.gov/public/do/PRAMain. Find this particular information collection by selecting ‘‘Currently under 30-day Review—Open for Public Comments’’ or by using the search function. The reginfo.gov web link is a United States Government website produced by OMB and the General Services Administration (GSA). Under PRA requirements, OMB’s Office of Information and Regulatory Affairs 51 As set out in footnote 1, the Agencies received a total of 1,804 HSR filings from FY 2001 to FY 2017 for acquisitions of 10% of less of outstanding stock. During that same period, the Agencies did not challenge any acquisitions involving a stake of 10% or less. VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 List of Subjects in 16 CFR Parts 801, 802, and 803 Antitrust. For the reasons stated in the preamble, the Federal Trade Commission proposes to amend 16 CFR parts 801, 802, and 803 as set forth below: 1. The authority citation for part 801 continues to read as follows: ■ Authority: 15 U.S.C. 18a(d). 2. Amend § 801.1 by: a. Revising paragraph (a)(1) introductory text; ■ b. Adding paragraphs (a)(1)(i) and (ii); ■ c. Revising example 4 to paragraph (a)(1); ■ d. Adding examples 5 and 6 to paragraph (a)(1); ■ e. Adding example 4 to paragraph (a)(3); ■ f. Revising paragraph (d)(2); and ■ g. Adding paragraph (r). The revisions and additions read as follows: ■ ■ § 801.1 Definitions. * * * * * (a)(1) Person. Except as provided in paragraphs (a) and (b) of § 801.12, the term person means: (i) An ultimate parent entity and all entities which it controls directly or indirectly; and (ii) All associates of the ultimate parent entity. Examples: * * * 4. See the examples to § 801.2(a).5. Fund 1, Fund 2, and Fund 3, each a UPE, are all associates under the common investment management of Manager, as defined by § 801.1(d)(2). Fund 1’s portfolio company A is making a reportable acquisition. The acquiring person includes Manager, Fund 1, Fund 2, Fund 3, and A. Manager would file on behalf of the acquiring person by placing its name in Item 1(a) of the Form. Manager indicates in Item 1(c) of the filing that Fund 1 is making the acquisition. Fund 1 can also indicate in Item 1(c) of the Form that it is filing on Manager’s behalf.6. Fund A will be selling its portfolio company P. Fund A’s investments are managed by Investment Manager, and Fund A’s associates are Fund B, Fund C, and Fund D. The acquired person includes Investment Manager, Fund A, Fund B, Fund C, and Fund D. Investment Manager would file on behalf of Fund A, the selling UPE, by placing its name PO 00000 Frm 00053 Fmt 4702 Sfmt 4702 in Item 1(a) of the Form. Fund A could also indicate in Item 1(c) of the Form that it is filing on Investment Manager’s behalf. * * * * * (3) * * * Examples: * * *4. See the examples to § 801.1(a)(1). * * * * * (d) * * * (2) Associate. An associate of an acquiring or acquired person shall be an entity that is not an affiliate of such person but: (i) Has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring or acquired entity (a ‘‘managing entity’’); or (ii) Has its operations or investment decisions, directly or indirectly, managed by the acquiring or acquired person; or (iii) Directly or indirectly controls, is controlled by, or is under common control with a managing entity; or (iv) Directly or indirectly manages, is managed by, or is under common operational or investment decision management with a managing entity. * * * * * (r) Competitor. For purposes of these rules, the term competitor means any person that: (1) Reports revenues in the same sixdigit NAICS Industry Group as the issuer, or (2) Competes in any line of commerce with the issuer. ■ 3. Amend § 801.2 by revising the example to paragraph (a) and adding examples 3 and 4 to paragraph (b) to read as follows: § 801.2 Acquiring and acquired persons. (a) * * * Examples: 1. Assume that corporations A and B, which are each ultimate parent entitles of their respective ‘‘persons,’’ created a joint venture, corporation V, and that each holds half of V’s shares. Therefore, A and B each control V (see § 801.1(b)), and V is included within two persons, ‘‘A’’ and ‘‘B.’’ Under this section, if V is to acquire corporation X, both ‘‘A’’ and ‘‘B’’ are acquiring persons. 2. See the examples to § 801.1(a)(1). (b) * * * Examples: * * *3. See the examples to § 801.1(a)(1). 4. See the examples to § 801.12(a). * * * * * ■ 4. Amend § 801.12 by revising the example to paragraph (a) to read as follows: § 801.12 Calculating percentage of voting securities. (a) * * * E:\FR\FM\01DEP1.SGM 01DEP1 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules Examples: 1. Person ‘‘A’’ is composed of corporation A1 and subsidiary A2; person ‘‘B’’ is composed of corporation B1 and subsidiary B2. Assume that A2 proposes to sell assets to B1 in exchange for common stock of B2. Under this paragraph, for purposes of calculating the percentage of voting securities to be held, the ‘‘acquired person’’ is B2. For all other purposes, the acquired person is ‘‘B.’’ (For all purposes, the ‘‘acquiring persons’’ are ‘‘A’’ and ‘‘B.’’)2. Person ‘‘A’’ is composed of corporation A1 and subsidiary A2; person ‘‘B’’ is composed of Fund 1 and Fund 2, which are associates managed by Investment Manager. Both Fund 1 and Fund 2 hold shares of Issuer. A2 will acquire all of Issuer’s voting securities held by Fund 1 and Fund 2. Under this paragraph, for purposes of calculating the percentage of voting securities to be held, the ‘‘acquired person’’ is Issuer. For all other purposes, the acquired person is ‘‘B.’’ (For all purposes, the ‘‘acquiring person’’ is ‘‘A.’’) * * * * * PART 802—EXEMPTION RULES 5. The authority citation for part 802 continues to read as follows: ■ Authority: 15 U.S.C. 18a(d). ■ 6. Add § 802.15 to read as follows: § 802.15 De minimis acquisitions of voting securities. khammond on DSKJM1Z7X2PROD with PROPOSALS10 An acquisition of voting securities shall be exempt from the requirements of the act if as a result of the acquisition: (a) The acquiring person does not hold in excess of 10% of the outstanding voting securities of the issuer; and (b)(1) The acquiring person is not a competitor of the issuer (or any entity within the issuer); (2) The acquiring person does not hold voting securities in excess of 1% of the outstanding voting securities (or, in the case of a non-corporate entity, in excess of 1% of the non-corporate interests) of any entity that is a VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 competitor of the issuer (or any entity within the issuer); (3) No individual who is employed by, a principal of, an agent of, or otherwise acting on behalf of the acquiring person, is a director or officer of the issuer (or of an entity within the issuer); (4) No individual who is employed by, a principal of, an agent of, or otherwise acting on behalf of the acquiring person, is a director or officer of a competitor of the issuer (or of an entity within the issuer); and (5) There is no vendor-vendee relationship between the acquiring person and the issuer (or any entity within the issuer), where the value of sales between the acquiring person and the issuer in the most recently completed fiscal year is greater than $10 million in the aggregate. Example 1 to paragraph (b)(5). Investment Manager manages the investments of Fund 1 and Fund 2, which are associates. Investment Manager, Fund 1 and Fund 2 are all part of the Acquiring Person. Fund 1 is acquiring 5% of Issuer. Fund 1 has a .4% interest in a competitor of Issuer and Fund 2 has a .5% interest in the same competitor of Issuer. The acquisition of the 5% interest in Issuer would be exempt under § 802.15. Example 2 to paragraph (b)(5). Investment Manager manages the investments of Fund 1 and Fund 2, which are associates. Investment Manager, Fund 1 and Fund 2 are all part of the Acquiring Person. Fund 1 is acquiring 5% of Issuer. Fund 1 has a .4% interest in a competitor of Issuer and Fund 2 has a .3% interest in a different competitor of Issuer. The acquisition of the 5% interest in Issuer would be exempt under § 802.15. Example 3 to paragraph (b)(5). Investment Manager manages the investments of Fund 1 and Fund 2, which are associates. Investment Manager, Fund 1 and Fund 2 are all part of the Acquiring Person. Fund 1 is acquiring 5% of Issuer. Fund 1 controls an operating company that is a competitor of Issuer. The acquisition of the 5% interest in Issuer would not be exempt under § 802.15. PO 00000 Frm 00054 Fmt 4702 Sfmt 4702 77067 Example 4 to paragraph (b)(5). Investment Manager manages the investments of Fund 1, Fund 2, Fund 3, and Fund 4, which are associates. Investment Manager, Fund 1, Fund 2, Fund 3 and Fund 4 are all part of the Acquiring Person. Fund 1 is acquiring 5% of Issuer. Fund 2, Fund 3 and Fund 4 each have a .4% interest in a competitor of Issuer. The acquisition of the 5% interest in Issuer would not be exempt under § 802.15. Example 5 to paragraph (b)(5). Investment Manager manages the investments of Fund 1 and Fund 2, which are associates. Investment Manager, Fund 1 and Fund 2 are all part of the Acquiring Person. Fund 1 is acquiring 5% of Issuer. One of Fund 2’s officers (or the equivalent thereof) also serves as an officer of Issuer. The acquisition of the 5% interest in Issuer would not be exempt under § 802.15. Example 6 to paragraph (b)(5). Investment Manager manages the investments of Fund 1, Fund 2, Fund 3, and Fund 4, which are associates. Investment Manager, Fund 1, Fund 2, Fund 3 and Fund 4 are all part of the Acquiring Person. Fund 1 is acquiring 5% of Issuer. One of Fund 4’s officers (or the equivalent thereof) also serves as an officer of a competitor of Issuer’s subsidiary. The acquisition of the 5% interest in Issuer would not be exempt under § 802.15. Example 7 to paragraph (b)(5). Investment Manager manages the investments of Fund 1 and Fund 2, which are associates. Investment Manager, Fund 1 and Fund 2 are all part of the Acquiring Person. Fund 1 is acquiring 5% of Issuer. Fund 1 controls an operating company that has a vendor-vendee relationships with Issuer valued in excess of $10 million. The acquisition of the 5% interest in Issuer would not be exempt under § 802.15. PART 803—TRANSMITTAL RULES 7. The authority citation for part 803 continues to read as follows: ■ Authority: 15 U.S.C. 18a(d). 8. Revise Appendix A to part 803 to read as follows: ■ BILLING CODE 6750–01–P E:\FR\FM\01DEP1.SGM 01DEP1 VerDate Sep<11>2014 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00055 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 EP01DE20.031</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 77068 VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00056 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 77069 EP01DE20.032</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00057 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 EP01DE20.033</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 77070 VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00058 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 77071 EP01DE20.034</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00059 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 EP01DE20.035</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 77072 VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00060 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 77073 EP01DE20.036</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00061 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 EP01DE20.037</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 77074 VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00062 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 77075 EP01DE20.038</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00063 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 EP01DE20.039</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 77076 VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00064 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 77077 EP01DE20.040</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00065 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 EP01DE20.041</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 77078 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules 77079 9. Revise Appendix B to part 803 to read as follows: VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00066 Fmt 4702 Sfmt 4702 E:\FR\FM\01DEP1.SGM 01DEP1 EP01DE20.042</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 ■ VerDate Sep<11>2014 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00067 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 EP01DE20.043</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 77080 VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00068 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 77081 EP01DE20.044</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00069 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 EP01DE20.045</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 77082 VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00070 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 77083 EP01DE20.046</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00071 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 EP01DE20.047</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 77084 VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00072 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 77085 EP01DE20.048</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00073 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 EP01DE20.049</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 77086 VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00074 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 77087 EP01DE20.050</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules VerDate Sep<11>2014 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00075 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 EP01DE20.051</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 77088 VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00076 Fmt 4702 Sfmt 4725 E:\FR\FM\01DEP1.SGM 01DEP1 77089 EP01DE20.052</GPH> khammond on DSKJM1Z7X2PROD with PROPOSALS10 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS10 BILLING CODE 6750–01–C By direction of the Commission, Commissioner Chopra and Commissioner Slaughter dissenting. April J. Tabor, Acting Secretary. Note: The following appendix will not appear in the Code of Federal Regulations. VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 Statement of Commissioner Noah Joshua Phillips or ‘‘HSR’’).1 The NPRM proposes two nonministerial changes: (1) Broadening the filing requirement to include holdings of affiliates September 18, 2020 Today, the Federal Trade Commission (the ‘‘Commission’’) voted to publish for public comment a Notice of Proposed Rulemaking (‘‘NPRM’’) and an Advance Notice of Proposed Rulemaking (‘‘ANPRM’’), both relating to the premerger notification rules that implement the Hart-Scott-Rodino Antitrust Improvements Act (the ‘‘HSR Act’’ PO 00000 Frm 00077 Fmt 4702 Sfmt 4702 1 The HSR Act established the federal premerger notification program, which provides the Federal Trade Commission and the Department of Justice with information about large mergers and acquisitions before they occur. The parties may not close their deal until the waiting period outlined in the HSR Act has elapsed, or the government has granted early termination of the waiting period. Under this framework, the government may sue to block those deals it determines may violate the antitrust laws before the deals have been consummated. E:\FR\FM\01DEP1.SGM 01DEP1 EP01DE20.053</GPH> 77090 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules of the acquirer, and (2) the creation of a new exemption, discussed below. The ANPRM poses a series of questions around several topics that may inform future efforts to update and refine the rules. I write today to discuss the proposed exemption for de minimis acquisitions of voting securities, and to explain why I voted in favor of seeking comment on this proposal. In brief, the proposed exemption will carve out from the HSR Act’s reporting requirements acquisitions of voting securities that leave the acquirer holding 10% or less of the issuer’s total voting stock,2 subject to several limitations. The HSR Act was enacted to give the Commission and the Antitrust Division of the Department of Justice (the ‘‘Division’’) (collectively, the ‘‘Agencies’’) advance notice of mergers and acquisitions so that the Agencies could challenge anticompetitive transactions before they were consummated. Among other things, the system it established often allows the government and companies to avoid the more difficult process of ‘‘unscrambling the eggs’’—separating, say, two illegally merged companies. That is a good thing; but, like most good things, it comes at a cost. Investors must notify the target of the acquisition, wait as long as a month, and pay a fee of $45,000 to $280,000. That can make simple transactions much more costly, and sometimes not worth doing. The target may publicize the deal, driving up the price. Management may take defensive measures. The waiting period may change the viability of the transaction. The fees are substantial. All of that leads investors to hold off, to keep quiet, and to hide what they are doing. They are less likely to pressure management, or share ideas, dampening operational and financial improvement—and, ultimately, competition. The HSR Act provides an exemption for the acquisition of 10% or less of voting securities made ‘‘solely for the purpose of investment’’.3 But the large grey area between what the investment-only exemption clearly permits shareholders to do (e.g., just hold on to their stock) and what it clearly forbids (e.g., proposing corporate action requiring shareholder approval) 4 encompasses interactions with management that play a critical role in keeping corporations accountable and stoking competition. Today, in effect, HSR operates as a tax on activities that can often be beneficial. But it is not supposed to be a tax, whether on shareholder input or mergers and acquisitions activity. It also is not supposed khammond on DSKJM1Z7X2PROD with PROPOSALS10 2 The 10% threshold applies to the acquirer’s aggregate holdings of the issuer’s voting securities. Therefore, the de minimis exemption does not permit those claiming it to avoid HSR review by acquiring control of an entity via a ‘‘creeping’’ series of acquisitions, each involving less than 10% of the firm’s voting securities. Once an acquirer comes to own 10% of an issuer’s voting securities, it may no longer avail itself of the exemption. 3 15 U.S.C. 18a(c)(9). 4 According to this definition, ‘‘[v]oting securities are held or acquired ‘solely for the purpose of investment’ if the person holding or acquiring such voting securities has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.’’ 16 CFR 801.1(i)(1) (2020). VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 to be an early-warning system for tender offers and corporate takeovers—for that we have a number of laws at the federal and state level.5 And it is not supposed to be a monitoring system for equity investments generally. To the extent possible, it should not be any of those things. It should effectuate its purpose: Helping the Agencies spot transactions likely to violate the antitrust laws, so that we can stop or remedy them prophylactically. That is why Congress gave the Commission, with the concurrence of the Division’s Assistant Attorney General, the ability to exempt from premerger notification those ‘‘acquisitions, transfers, or transactions which are not likely to violate the antitrust laws’’.6 The proposed de minimis exemption covers transactions that we know are not likely to do so. The HSR Act was enacted in 1976, and 44 years of experience since then have taught us that acquisitions of 10% or less of a company are extremely unlikely to raise competition concerns. According to the NPRM, the Agencies have reviewed a multitude of 10%-or-less acquisitions that do not qualify for the investment-only exemption over the last four decades; and none have warranted a challenge. For example, from fiscal year 2001 to 2017, the Agencies received 1,804 10%-or-less filings. What do these real-world data show? Only a handful of 10%-or-less acquisitions required any substantive review whatsoever, and none were challenged by the Agencies. Not one. Thus, the proposal represents an important step in tailoring the HSR regime to its intended purpose of identifying and addressing competition issues, while simultaneously eliminating unnecessary regulatory burdens on beneficial investment activity that does not harm competition and, indeed, often promotes it.7 Four-plus decades of real world experience should go a long way towards allaying concerns that the proposed de minimis exemption will allow competitively troubling acquisitions to fly under the Agencies’ radar. But scholarship in recent years has raised the question whether common ownership of substantial but non-controlling interests in competing companies (often by large, diversified, asset managers) has an anticompetitive effect. That debate, including its implications for antitrust policy, continues.8 For now, the proposed de minimis exemption errs on the side of caution, excluding from its scope transactions that might implicate this 5 See, e.g., Williams Act, 15 U.S.C. 78m(d)–(e), 78n(d)–(f). 6 15 U.S.C. 18a(d)(2)(B). 7 See Noah Joshua Phillips, Comm’r, U.S. Fed. Trade Comm’n, Competing for Companies: How M&A Drives Competition and Consumer Welfare, Keynote Address at the Global Antitrust Economics Conference (May 31, 2019), https://www.ftc.gov/ system/files/documents/public_statements/ 1524321/phillips_-_competing_for_companies_531-19_0.pdf. 8 See Noah Joshua Phillips, Comm’r, U.S. Fed. Trade Comm’n, Taking Stock: Assessing Common Ownership, Keynote Address at the Global Antitrust Economics Conference (June 1, 2018), https://www.ftc.gov/system/files/documents/ public_statements/1382461/phillips_-_taking_ stock_6-1-18_0.pdf. PO 00000 Frm 00078 Fmt 4702 Sfmt 4702 77091 concern. (To the extent that the feared competition harms of common ownership result from the passivity of the largest shareholders, the de minimis exemption may help mitigate the concern by facilitating the smaller, more active, voices.9) It also does not apply to other transactions where a competitively significant relationship between the issuer of the voting securities and the acquirer claiming the exemption exists. What it does reach are transactions that, in over 40 years, have raised no competition issues. In 1988, following complaints by investors about the negative impact HSR was having on their small stock purchases and a study that showed the Agencies had never challenged one as violating Section 7 of the Clayton Act, the FTC considered whether to exempt acquisitions of 10% or less of a company’s voting securities from HSR reporting. Those problems are still with us, and the data today show the same thing. Transactions of 10% or less are just as unlikely to lessen competition today as they were 30 years ago; and small stock purchases have almost never needed even a second look. Those decades of experience speak volumes, and what they tell us is that, at great cost, the benefits of continuing to tax de minimis stock purchases are virtually nonexistent. We can change that. Statement of Commissioner Rohit Chopra September 21, 2020 Summary • Premerger notification is a critical data source, but the Commission faces enormous information gaps when seeking to detect and halt anticompetitive transactions. • While the proposed rule closes a loophole when it comes to investment manager holdings, the proposed approach to exempt a wide swath of minority stakes is concerning and adds to existing information gaps. • The Commission needs to update the treatment of certain debt transactions when determining deal size for the purpose of premerger notification. The current approach allows dealmakers to structure anticompetitive transactions in ways that can go unreported. In September 1976, Congress gave the Federal Trade Commission an important tool enabling it to block harmful mergers. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (‘‘HSR Act’’) requires prior notification to the antitrust agencies in advance of closing certain mergers and acquisitions.1 Prior to the HSR Act’s enactment, companies could quickly ‘‘scramble the eggs’’ of assets and operations, or even shut down 9 See Noah Joshua Phillips, Comm’r, U.S. Fed. Trade Comm’n, Opening Remarks at FTC Hearing #8: Competition and Consumer Protection in the 21st Century: Corporate Governance, Institutional Investors, and Common Ownership (Dec. 6, 2018), https://www.ftc.gov/system/files/documents/ public_statements/1454690/phillips_-_ftc_hearing_ 8_opening_remarks_12-6-18.pdf. 1 Clayton Act section 7A, 15 U.S.C. 18a. E:\FR\FM\01DEP1.SGM 01DEP1 77092 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules khammond on DSKJM1Z7X2PROD with PROPOSALS10 functions. This made it extremely difficult for the antitrust agencies to remedy competitive harms through divestitures of assets. Years of protracted litigation to stop further damage and distortions were often the result.2 The HSR Act fundamentally changed the process of merger review by giving the antitrust agencies time to halt anticompetitive transactions before these deals closed. Today, the FTC focuses a substantial portion of its competition mission on investigating and challenging mergers reported under the HSR Act. Importantly, only a small set of transactions—the ones with the highest valuations—are subject to premerger notification. The HSR Act specifies the valuation threshold, currently set at $94 million, which is typically adjusted upward each year. Since there are many ways to determine a deal’s valuation, Congress gave the FTC broad authority to implement rules so that buyers know if they need to report their transactions and what they are required to submit with their filing. The Commission can also exempt classes of transactions and tailor filing requirements. While premerger notification filings provide the Commission with certain nonpublic information,3 gathering and analyzing market intelligence on transaction activity and competitive dynamics is a major challenge. We need to continuously assess how we can enhance our market monitoring techniques and evolve our analytical approaches. Today, the Commission is soliciting comment on two rulemaking notices regarding our policies to implement the HSR Act’s premerger notification protocols. The first publication, a Notice of Proposed Rulemaking, proposes specific rules and exemptions. While some of the proposals are helpful improvements, I respectfully disagree with our approach to exempting a broad swath of transactions from reporting. The second publication, an Advance Notice of Proposed Rulemaking, requests comment on a broad range of topics to set the stage for modernizing the premerger notification program to align with market realities. I support soliciting input to rethink our approach. I discuss each of these notices below. Notice of Proposed Rulemaking The Notice of Proposed Rulemaking outlines specific amendments that the Commission is proposing to the HSR rules. The aggregation and exemption provisions are particularly noteworthy. The aggregation provisions are worthwhile, since they close a loophole and align with market realities. However, I am concerned about the exemption provisions, since we will completely lose visibility into a large set of transactions involving non-controlling stakes. 2 For example, in United States v. El Paso Natural Gas Co., 376 U.S. 651 (1964), it took seventeen years of litigation before a divestiture finally took place. 3 I agree with Commissioner Slaughter that current filing requirements, including for minority stakes, can have the beneficial effect of deterring certain anticompetitive transactions. VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 Aggregation Provisions The financial services industry is well known for using an alphabet soup of small entities, like shell companies, partnerships, and other investment vehicles, to structure deals. Even though they may be under common management by the same person or group, like a private equity fund or a hedge fund, these smaller legal entities are all treated separately under the existing rules. The proposed aggregation provisions will help to prevent acquirers from splitting up transactions into small slices across multiple investment vehicles under their control to avoid reporting. The proposal would require investors and other buyers to add together their stakes across commonly managed funds to determine whether they need to report a transaction. Exemption Provisions By creating a reporting threshold based on the value of a transaction, the law already exempts most transactions from agency review. Because of this, it is difficult to systematically track these transactions, and even harder to detect and deter those that are anticompetitive. Now, the FTC is proposing to widen that information gap by creating a new exemption for minority stakes of 10% or less, subject to certain conditions. Importantly, the proposal is not exempting specific aspects of the reporting requirements—it is a total exemption, so the agency will receive no information whatsoever from the buyer or the seller that the transaction even occurred. This adds to the burdens and information asymmetries that the agency already faces when it comes to detecting potentially harmful transactions.4 Companies and investors purchase minority, non-controlling stakes in a firm for a number of reasons. Sometimes, buyers might start with a minority stake, with the goal—or even with a contractual option—of an outright takeover as they learn more about the company’s operations. Even though they might have a small stake, they can exert outsized control. In other cases, buyers might look for minority stakes in multiple, competing firms within a sector or industry, and some or all of these acquisitions may fall below the reporting thresholds. Of course, if they are able to obtain seats on boards of directors of competing companies, this can be illegal. Investors and buyers can only use the proposed exemption if they do not currently own stakes in firms that compete or do business with the company they plan to acquire. Since many investors might not know about the specific business dealings across companies, this may be difficult to enforce and puts more burden on the agency. 4 The FTC may not be able to rely on other sources of robust data required by other agencies. For example, the Securities and Exchange Commission has proposed eliminating reporting for thousands of registered investment funds that previously detailed their holdings to the public. See Statement of SEC Comm’r Allison Herren Lee Regarding Proposal to Substantially Reduce 13F Reporting (July 10, 2020), https://www.sec.gov/ news/public-statement/lee-13f-reporting-2020-0710. PO 00000 Frm 00079 Fmt 4702 Sfmt 4702 Even if one believes that transactions involving a minority stake are less likely to be illegal, there are many potential alternatives to outright elimination of reporting. Unfortunately, the rulemaking notice does not outline alternative approaches (such as tailored, simplified filing requirements or shortened waiting periods) for minority stakes. Advance Notice of Proposed Rulemaking As markets evolve, it is important that the HSR Act and its implementing rules reflect those developments. The Advance Notice of Proposed Rulemaking seeks input on a wide array of market-based issues that may affect the Commission’s merger oversight. One topic of particular interest is whether to include debt as part of the valuation of a transaction. Since the HSR Act’s passage, corporate debt markets have grown in importance for companies competing in developed economies. Many major deals involve vast sums of borrowed money. However, the Commission has not formally codified a view on the treatment of certain debt transactions. Instead, existing staff guidance excludes many debt transactions from the deal’s overall value. This is worrisome, since it means that many potentially anticompetitive transactions can go unreported, since they may fall below the size threshold. In addition, this view has been provided informally, communicated through unofficial interpretations outside of formal rules or guidance. It will be important to take steps to collect input and codify the Commission’s policies on valuation, particularly with respect to the treatment of debt, since formal guidance or rules will offer clarity and will be easier to enforce. The Advance Notice of Proposed Rulemaking also seeks information that will lay groundwork for broader reforms to our premerger notification program. I look forward to the data and written submissions to this document. Conclusion Adequate premerger reporting is a helpful tool used to halt anticompetitive transactions before too much damage is done. However, the usefulness of the HSR Act only goes so far. This is because many deals can quietly close without any notification and reporting, since only transactions above a certain size are reportable.5 The FTC ends up missing a large number of anticompetitive mergers every year. In addition, since amendments to the HSR Act in 2000 raised the size 5 Small transactions can be just as harmful to competition as large transactions notified under the HSR Act. For example, ‘‘catch and kill’’ acquisitions of an upstart competitor in fast-moving markets can be particularly destructive. In addition, ‘‘roll-ups,’’ an acquisition strategy involving a series of acquisitions of small players to combine into a larger one, can have very significant negative effects on competition. See Statement of Fed. Trade Comm’r Rohit Chopra Regarding Private Equity Roll-ups and the Hart-Scott Rodino Annual Report to Congress, Comm’n File No. P110014 (July 8, 2020), https://www.ftc.gov/system/files/documents/ public_statements/1577783/ p110014hsrannualreportchoprastatement.pdf. E:\FR\FM\01DEP1.SGM 01DEP1 Federal Register / Vol. 85, No. 231 / Tuesday, December 1, 2020 / Proposed Rules thresholds on an annual basis, the number of HSR-reportable transactions has decreased. I want to commend agency staff for their work in identifying potential blind spots in the premerger reporting regime. I also want to thank state legislatures and state attorneys general for enacting and implementing their own premerger notification laws to fill in some of these gaps. For example, a new law in State of Washington has taken effect, which requires advance notice of any transactions in the health care sector, where many problematic mergers fall below the radar.6 As we conduct this examination of the HSR Act, we should identify areas where laws may need to be changed or updated, especially when we cannot fill those gaps through amendments to our rules. For example, we may need to pursue reforms to ensure that ‘‘roll ups’’ are reported, where a buyer might acquire a large number of small companies that may not be individually reportable. We may also need to look carefully at the length of the waiting period, to determine if it is long enough to conduct a thorough investigation. I look forward to reviewing the input to these two rulemaking notices, so that our approach reflects market realities. khammond on DSKJM1Z7X2PROD with PROPOSALS10 Statement of Commissioner Rebecca Kelly Slaughter September 18, 2020 Today, the Commission voted to advance two proposals with respect to our HSR premerger notification rules. I support the broad solicitation of input in the Advance Notice of Proposed Rulemaking and the proposed aggregation provisions in the Notice of Proposed Rulemaking (NPRM). But I oppose provisions in the NPRM that would broaden the categories of transactions exempt from filing HSR notice. I share the concerns Commissioner Chopra articulated, and write separately only to add a few points. I share the general view that we should do what we can to right-size our HSR requirements. We generally benefit when the universe of transactions that are required to file under HSR matches as closely as possible the universe of transactions that are competitively problematic. Too many filings on non-problematic transactions are an unnecessary resource drain for the agency, and too few filings on problematic transactions clearly would allow anticompetitive acquisitions to proceed unnoticed and unchallenged. I also generally agree that transaction size (the main trigger for HSR filing under current law) is not the only or even necessarily the best indicator of competitive significance. However, I am concerned about the expanded de minimis exemptions in the proposal released today for two reasons: Its broadening of the black box of unseen transactions and its effect on corporate governance. Commissioner Phillips is correct that, of the filings the agency has reviewed of sub10% acquisitions, none have led to enforcement action. But we cannot conclude that sub-10% acquisitions could never be problematic, because we do not know if any problematic transactions were deterred from consummation for fear of disclosures that are required in a filing, nor do we know how many might fall into that category. I worry that adding exemptions broadens the category of transactions outside of the agencies’ view, and therefore share Commissioner Chopra’s preference that the agency consider something other than a full exemption. My other concern is that expanding the de minimis exemptions will have profound policy effects primarily in an area outside of the FTC’s particular expertise and jurisdiction: Corporate governance. Commissioner Phillips in his statement points out the ways in which the current HSR filing requirement for non-passive acquisitions can chill investors. He notes the rules around HSR may lead ‘‘investors to hold off, to keep quiet, and to hide what they are doing. They are less likely to pressure management, or share ideas, dampening operational and financial improvement—and, ultimately, competition.’’ Although I have not seen evidence to support his conclusion about the effect on competition, the evidence we have seen, even anecdotally, supports his assertions about investor behavior. It follows, therefore, that expanding HSR exemptions may likely change investor incentives and behavior. These changes may ultimately be a good thing as a matter of public policy, and they might not be; the concern for me is that they would effect a public policy goal outside the realm of antitrust, and I am hesitant for the FTC unilaterally to enact rules outside the scope of our primary authority. I certainly understand that the rules as they exist today have a public policy effect outside antitrust, but they are the rules that we have, and disrupting the status quo is something that should be done only after careful consideration of and in consultation with experts on corporate governance, investor behavior, and securities law and policy. So, I welcome comments on this NPRM from those in the corporate governance and securities community, and experts on investor behavior, to help us better understand the implications of such a change—including whether it would, as Commissioner Phillips asserts, actually improve competition. [FR Doc. 2020–21753 Filed 11–30–20; 8:45 am] BILLING CODE 6750–01–P 6 See Healthcare Transaction Notification Requirement, WASH. STATE OFF. OF THE ATT’Y GEN. (last visited Sept. 16, 2020), https:// www.atg.wa.gov/healthcare-transactionsnotification-requirement; see also S.H.B. 1607, 66th Leg., Reg. Sess. (Wash. 2019). VerDate Sep<11>2014 16:58 Nov 30, 2020 Jkt 253001 PO 00000 Frm 00080 Fmt 4702 Sfmt 4702 77093 DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 165 [Docket Number USCG–2020–0630] RIN 1625–AA00 Safety Zone; Bahia de Ponce, Ponce, PR AGENCY: ACTION: Coast Guard, DHS. Notice of proposed rulemaking. The Coast Guard is proposing to establish a permanment safety zone for certain waters of the Bahia de Ponce, Ponce, Puerto Rico. This action is necessary to provide for the safety of life on these navigable waters during shipto-ship liquefied natural gas transfer operations between liquefied gas carriers. This proposed rulemaking would prohibit persons and vessels from being in the safety zone when activated unless authorized by the Captain of the Port San Juan or a designated representative. We invite your comments on this proposed rulemaking. SUMMARY: Comments and related material must be received by the Coast Guard on or before December 31, 2020. DATES: You may submit comments identified by docket number USCG– 2020–0630 using the Federal eRulemaking Portal at https:// www.regulations.gov. See the ‘‘Public Participation and Request for Comments’’ portion of the SUPPLEMENTARY INFORMATION section for further instructions on submitting comments. ADDRESSES: If you have questions about this proposed rulemaking, call or email Lieutenant Natallia Lopez, Sector San Juan Prevention Department, Waterways Management Division, U.S. Coast Guard; telephone 787–729–2380, email Natallia.M.Lopez@uscg.mil. FOR FURTHER INFORMATION CONTACT: SUPPLEMENTARY INFORMATION: I. Table of Abbreviations CFR Code of Federal Regulations COTP Captain of the Port DHS Department of Homeland Security FR Federal Register LG Liquefied Gas LNG Liquefied Natural Gas NPRM Notice of proposed rulemaking PR Puerto Rico § Section U.S.C. United States Code E:\FR\FM\01DEP1.SGM 01DEP1

Agencies

FEDERAL TRADE COMMISSION

[Federal Register Volume 85, Number 231 (Tuesday, December 1, 2020)]
[Proposed Rules]
[Pages 77053-77093]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21753]

-----------------------------------------------------------------------

FEDERAL TRADE COMMISSION

16 CFR Parts 801, 802 and 803

RIN 3084-AB46

Premerger Notification; Reporting and Waiting Period Requirements

AGENCY: Federal Trade Commission.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Federal Trade Commission (``FTC'' or ``Commission'') is
proposing amendments to the premerger notification rules (``the
Rules'') that implement the Hart-Scott-Rodino Antitrust Improvements
Act (``the Act'' or ``HSR'') to change the definition of ``person'' and
create a new exemption. The Commission also proposes explanatory and
ministerial changes to the Rules, as well as necessary amendments to
the HSR Form and Instructions to effect the proposed changes.

DATES: Comments must be received on or before February 1, 2021.

ADDRESSES: Interested parties may file a comment online or on paper by
following the instructions in the Invitation to Comment part of the
SUPPLEMENTARY INFORMATION section below. Write ``16 CFR parts 801-803:
Hart-Scott-Rodino Coverage, Exemption, and Transmittal Rules; Project
No. P110014'' on your comment. File your comment online at https://www.regulations.gov by following the instructions on the web-based
form. If you prefer to file your comment on paper, mail your comment to
the following address: Federal Trade Commission, Office of the
Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610 (Annex J),
Washington, DC 20580, or deliver your comment to the

[[Page 77054]]

following address: Federal Trade Commission, Office of the Secretary,
Constitution Center, 400 7th Street SW, 5th Floor, Suite 5610 (Annex
J), Washington, DC 20024.

FOR FURTHER INFORMATION CONTACT: Robert Jones (202-326-3100), Assistant
Director, Premerger Notification Office, Bureau of Competition, Federal
Trade Commission, 400 7th Street SW, Room CC-5301, Washington, DC
20024.

SUPPLEMENTARY INFORMATION:

Invitation To Comment

You can file a comment online or on paper. For the Commission to
consider your comment, we must receive it on or before February 1,
2021. Write ``16 CFR parts 801-803: Hart-Scott-Rodino Coverage,
Exemption, and Transmittal Rules; Project No. P110014'' on your
comment. Your comment--including your name and your state--will be
placed on the public record of this proceeding, including the https://www.regulations.gov website.
Because of the public health emergency in response to the COVID-19
outbreak and the agency's heightened security screening, postal mail
addressed to the Commission will be subject to delay. We strongly
encourage you to submit your comment online through the https://www.regulations.gov website. To ensure the Commission considers your
online comment, please follow the instructions on the web-based form.
If you file your comment on paper, write ``16 CFR parts 801-803:
Hart-Scott-Rodino Coverage, Exemption, and Transmittal Rules; Project
No. P110014'' on your comment and on the envelope, and mail your
comment to the following address: Federal Trade Commission, Office of
the Secretary, 600 Pennsylvania Avenue NW, Suite CC-5610 (Annex J),
Washington, DC 20580, or deliver your comment to the following address:
Federal Trade Commission, Office of the Secretary, Constitution Center,
400 7th Street SW, 5th Floor, Suite 5610 (Annex J), Washington, DC
20024. If possible, please submit your paper comment to the Commission
by courier or overnight service.
Because your comment will be placed on the publicly accessible
website, https://www.regulations.gov, you are solely responsible for
making sure your comment does not include any sensitive or confidential
information. In particular, your comment should not include sensitive
personal information, such as your or anyone else's Social Security
number; date of birth; driver's license number or other state
identification number, or foreign country equivalent; passport number;
financial account number; or credit or debit card number. You are also
solely responsible for making sure that your comment does not include
any sensitive health information, such as medical records or other
individually identifiable health information. In addition, your comment
should not include any ``trade secret or any commercial or financial
information which . . . is privileged or confidential,''--as provided
by Section 6(f) of the FTC Act, 15 U.S.C. 46(f), and FTC Rule
4.10(a)(2), 16 CFR 4.10(a)(2)--including in particular competitively
sensitive information such as costs, sales statistics, inventories,
formulas, patterns, devices, manufacturing processes, or customer
names.
Comments containing material for which confidential treatment is
requested must be filed in paper form, must be clearly labeled
``Confidential,'' and must comply with FTC Rule 4.9(c). In particular,
the written request for confidential treatment that accompanies the
comment must include the factual and legal basis for the request, and
must identify the specific portions of the comment to be withheld from
the public record. See FTC Rule 4.9(c). Your comment will be kept
confidential only if the FTC General Counsel grants your request in
accordance with the law and the public interest. Once your comment has
been posted publicly at www.regulations.gov--as legally required by FTC
Rule 4.9(b)--we cannot redact or remove your comment, unless you submit
a confidentiality request that meets the requirements for such
treatment under FTC Rule 4.9(c), and the General Counsel grants that
request.
Visit the FTC website to read this NPRM and the news release
describing it. The FTC Act and other laws that the Commission
administers permit the collection of public comments to consider and
use in this proceeding as appropriate. The Commission will consider all
timely and responsive public comments it receives on or before February
1, 2021. For information on the Commission's privacy policy, including
routine uses permitted by the Privacy Act, see https://www.ftc.gov/site-information/privacy-policy.

Overview

The Act and Rules require the parties to certain mergers and
acquisitions to file notifications (``HSR Filing'') with the Federal
Trade Commission and with the Assistant Attorney General in charge of
the Antitrust Division of the Department of Justice (``the Assistant
Attorney General'') (collectively, ``the Agencies''), and to wait a
specified period of time before consummating such transactions. The
reporting and waiting period requirements are intended to enable the
Agencies to determine whether a proposed merger or acquisition may
violate the antitrust laws if consummated and, when appropriate, to
seek an injunction in Federal court in order to enjoin anticompetitive
mergers prior to consummation.
In this notice of proposed rulemaking (``NPRM''), the Commission
proposes amendments to the Sec. 801.1(a)(1) definition of ``person''
to require certain acquiring persons to disclose additional information
about their associates in Items 4 through 8 of the HSR Form and to
aggregate acquisitions in the same issuer across their associates when
making an HSR filing, as well as a ministerial change to Sec.
801.1(d)(2). The Commission also proposes a new exemption, Sec.
802.15, which would exempt the acquisition of 10% or less of an
issuer's voting securities when the acquiring person does not already
have a competitively significant relationship with the issuer. Finally,
the Commission proposes explanatory and ministerial changes to the
Rules, as well as necessary amendments to the HSR Form and Instructions
to effect the proposed changes.
Section 7A(d)(1) of the Clayton Act, 15 U.S.C. 18a(d)(1), directs
the Commission, with the concurrence of the Assistant Attorney General,
in accordance with the Administrative Procedure Act, 5 U.S.C. 553, to
require that premerger notification be in such form and contain such
information and documentary material as may be necessary and
appropriate to determine whether the proposed transaction may, if
consummated, violate the antitrust laws. In addition, Section 7A(d)(2)
of the Clayton Act, 15 U.S.C. 18a(d)(2), grants the Commission, with
the concurrence of the Assistant Attorney General, in accordance with 5
U.S.C. 553, the authority to define the terms used in the Act, exempt
classes of transactions that are not likely to violate the antitrust
laws, and prescribe such other rules as may be necessary and
appropriate to carry out the purposes of Section 7A.
The Commission notes that comments it receives in response to this
NPRM may also inform the Advanced Notice of Proposed Rulemaking (ANPRM)
published in the Federal Register at the same time as this NPRM.

Part 801--Coverage Rules

Sec. 801.1 Definitions.
Sec. 801.2 Acquiring and acquired persons.

[[Page 77055]]

Sec. 801.12 Calculating percentage of voting securities.

Part 802--Exemption Rules

Sec. 802.15 De minimis acquisitions of voting securities.

Part 803--Transmittal Rules

Appendix A to Part 803--Notification and Report Form for Certain
Mergers and Acquisitions
Appendix B to Part 803--Instructions to the Notification and Report
Form for Certain Mergers and Acquisitions

Background

The HSR premerger notification program enables the Agencies to
determine which acquisitions are likely to be anticompetitive and to
challenge them before they are consummated when remedial action is most
effective. Under the HSR program, the Agencies typically evaluate
thousands of transactions every year. Given the large number of HSR
filings submitted each year, the Agencies must use their resources
effectively to focus on transactions that may harm competition. The
Agencies have a strong interest in receiving HSR filings that contain
enough information to conduct a preliminary assessment of whether the
proposed transaction presents competition concerns, while at the same
time not receiving filings related to acquisitions that are very
unlikely to raise competition concerns. In the Agencies' experience,
two particular categories of filings make it difficult for the Agencies
to focus their resources effectively:
Filings for acquisitions by certain investment entities.
First, due to changes in investor structure and behavior since the HSR
Act and Rules went into effect, filings from certain investment
entities do not capture the complete competitive impact of a
transaction. When certain investment entities file as acquiring
persons, the Rules and Form do not currently require the disclosure of
substantive information concerning both the complete structure of the
acquiring person and the complete economic stake being acquired in an
issuer.
Filings for acquisitions of 10% or less of an issuer. At
the same time, the Agencies regularly receive filings involving
proposed acquisitions, not solely for the purpose of investment, that
would result in the acquiring person holding 10% or less of an issuer.
In the Agencies' experience, these filings almost never present
competition concerns.\1\
---------------------------------------------------------------------------

\1\ From FY 2001 to FY 2017, the Agencies received a total of
26,856 HSR filings, including 1,804 for acquisitions of 10% of less
of outstanding stock. During that same period, the Agencies did not
challenge any acquisitions involving a stake of 10% or less.
Occasionally, the Agencies will require merging parties to divest or
make passive small investments in competitors that also carry rights
to influence business decisions at the firm. See U.S. v. AT&T Inc.
and Dobson Communications Corp., 1:07-cv-01952 (D.D.C. 2007)
(parties divested small stakes that carried significant rights to
control core business decisions, obtain critical confidential
competitive information, and share in profits at a rate
significantly greater than the equity ownership share).
---------------------------------------------------------------------------

To help the Agencies use their resources more effectively, the
Commission proposes to address both issues in this proposed rulemaking.
To obtain more complete filings from investment entities filing as
acquiring persons, the Commission proposes amending the definition of
person in Sec. 801.1(a)(1) to include ``associates,'' a term that is
already defined in the Rules. This proposed change would require
certain acquiring persons to disclose additional information about
their associates in Items 4 through 8 of the HSR Form and to aggregate
acquisitions in the same issuer across their associates when making an
HSR filing. In addition, the Commission proposes a new exemption, Sec.
802.15, which would exempt the acquisition of 10% or less of an
issuer's voting securities when the acquiring person does not already
have a competitively significant relationship with the issuer. Finally,
the Commission proposes explanatory and ministerial changes to the
Rules, as well as necessary amendments to the HSR Form and Instructions
to effect the proposed changes.

I. Proposed Changes to Sec. 801.1 Definitions

A. Proposed Change to the Sec. 801.1(a)(1) Definition of ``Person''

Since the promulgation of the Rules in 1978, the investment
landscape has undergone vast changes, including the proliferation of
investment entities such as investment funds and master limited
partnerships (``MLPs''). Both investment funds and MLPs facilitate
investment through structures utilizing limited partnerships and
limited liability companies. The Rules define limited partnerships and
limited liability companies as ``non-corporate entities,'' and non-
corporate entities are their own Ultimate Parent Entity (``UPE'') under
the Rules when no one holds the right to 50% or more of the profits or
assets upon dissolution. Thus, although each non-corporate entity
exists within an overall structure of a ``family'' of funds or MLP,
each is typically its own UPE under the HSR Rules. For instance, Parent
Fund creates Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3, each a
non-corporate entity. No one controls these non-corporate entities, so
each fund vehicle is its own UPE even though they exist within the same
family of funds. The same is true when no one controls non-corporate
entities within a MLP structure; although they exist within the same
MLP, each non-corporate entity is its own UPE.
Treating these non-corporate entities as separate entities under
HSR is often at odds with the realities of how fund families and MLPs
are managed. In the fund context, a fund vehicle typically has an
entity that manages how that fund vehicle will invest,\2\ and this
investment manager very often manages the investments of other fund
vehicles within the same family of funds. As a result, Fund Vehicle 1,
Fund Vehicle 2, and Fund Vehicle 3 might well have the same Investment
Manager \3\ and that Investment Manager can use Fund Vehicle 1, Fund
Vehicle 2, and Fund Vehicle 3 to make separate investments in different
issuers or the same issuer. MLPs, for their part, often have similar
structures involving non-corporate entities that are their own UPEs but
under common management.\4\
---------------------------------------------------------------------------

\2\ As defined in 16 CFR 801.1(d)(2).
\3\ As defined in 16 CFR 801.1(d)(2).
\4\ As defined in 16 CFR 801.1(d)(2); the management of MLPs
does not have to involve investment management.
---------------------------------------------------------------------------

When non-corporate entities are their own UPEs but under common
management as described above, this creates two scenarios in which it
is difficult for the Agencies to assess the competitive impact of a
transaction based on the HSR filing. The first involves filings from
non-corporate entity UPEs as acquiring persons that do not contain a
complete enough picture of the investment fund or MLP. The Commission
first addressed this category of filings in 2011 when it created the
``associates'' concept.\5\ Before that time, filings from non-corporate
entity UPEs within families of funds and MLPs contained limited
substantive information because non-corporate entity UPEs were not
required to disclose information on any other entity within the
investment structure. For instance, if Fund Vehicle 1 made a filing for
a 100% interest in an Issuer, and Fund Vehicle 2, under common
investment management with Fund Vehicle 1, held 100% of a competitor of
the Issuer, Fund Vehicle 2's holding was not disclosed in the filing
because Fund Vehicle 1 was its own UPE. A filing such as the one from
Fund Vehicle 1 was of limited use to the Agencies

[[Page 77056]]

because it did not reveal relevant holdings within the same family of
funds. Filings received from newly-formed fund vehicles, which did not
yet own anything, were of even less use because these filings were
largely blank. Filings from non-corporate entities that were their own
UPEs within MLP structures raised the same issues.
---------------------------------------------------------------------------

\5\ 76 FR 42472 (July 19, 2011).
---------------------------------------------------------------------------

In light of these issues, the Commission determined that updates to
the HSR Form would allow the Agencies to ``receive the information they
need to get a complete picture of potential antitrust ramifications of
an acquisition.'' \6\ Accordingly in 2010,\7\ the Commission introduced
and proposed to define the term ``associates'' to capture information
in the HSR Form from certain entities that are under common management
with the acquiring person. The 2011 final rule \8\ required certain
acquiring persons to disclose in their HSR filings what their
associates hold in entities that generate revenue in the same NAICS
codes as the target. With this change, any fund vehicle filing as an
acquiring person must look to its investment manager to determine what
other fund vehicles that investment manager manages. For instance, Fund
Vehicle 1's investment manager also manages the investments of Fund
Vehicle 2, making Fund Vehicle 1 and Fund Vehicle 2 associates. Fund
Vehicle 1 makes an HSR filing for a 100% interest in Issuer Q. Fund
Vehicle 2 controls Entity Y and has a minority position in Entity Z,
both of which report in the same NAICS code as Issuer Q. Fund Vehicle 1
must therefore disclose in its HSR filing Fund Vehicle 2's controlling
interest in Y and minority interest in Z. Non-corporate entity UPEs
within MLP structures must disclose the same information about their
associates when filing as acquiring persons.
---------------------------------------------------------------------------

\6\ Id.
\7\ 75 FR 57111 (Sept. 17, 2010).
\8\ 76 FR 42471 (July 19, 2011).
---------------------------------------------------------------------------

Although this additional information has been helpful in assessing
the competitive impact of a transaction, it is too limited to provide
the Agencies with a sufficient overview of investment funds and MLPs as
acquiring persons. For instance, the information currently required
from associates is limited to controlling or minority interests in
entities that report in the same NAICS codes as the entity being
acquired. In the Agencies' experience, competitors sometimes use
different NAICS codes to describe the same line of business,
particularly in the case of companies engaged in technology-based
businesses. In addition, associates currently are not required to
provide any substantive information, such as financials or revenues,
about the entities they control, making it difficult for the Agencies
to determine whether an entity within an associate might create a
competitive concern in a given transaction.
It is also difficult for the Agencies to understand the potential
competitive impact of a transaction when a filing does not represent
the total economic stake being acquired in the same issuer. For
instance, Investment Manager uses Fund Vehicle 1 to acquire 6% of
Issuer D and Fund Vehicles 2 and 3 to each acquire 3% of Issuer D. Only
Fund Vehicle 1's acquisition of 6% of Issuer D's voting securities is
large enough to cross the $50 million (as adjusted) size of transaction
threshold. Fund Vehicle 1 makes an HSR filing, but because it is its
own UPE, it need not disclose the interests of Fund Vehicles 2 and 3 in
Issuer D. As a result, the filing does not reflect the 12% aggregate
interest in Issuer D of the fund vehicles under common investment
management. Another common example arises when Investment Manager uses
Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3 to each acquire 2%
in Issuer D. If none of these acquisitions of 2% is large enough to
cross the $50 million (as adjusted) size of transaction threshold, the
Agencies receive no HSR filing, even though the fund vehicles hold an
aggregate 6% of Issuer D. Although more rare, both of these scenarios
can also play out in the MLP context when non-corporate entity UPEs
within the MLP structure make acquisitions in the same issuer.
To help the Agencies accurately assess the potential competitive
impact of a pending transaction in these scenarios, the Commission
proposes to amend the Sec. 801.1(a)(1) definition of ``person'' to
include associates, such that it would read as follows: ``Except as
provided in paragraphs (a) and (b) of Sec. 801.12, the term person
means (a) an ultimate parent entity and all entities which it controls
directly or indirectly; and (b) all associates of the ultimate parent
entity.''
This proposed change would require a non-corporate entity UPE
filing as an acquiring person to disclose additional information from
its associates in Items 4 through 8 of the Form \9\ and to aggregate
acquisitions in the same issuer across its associates.
---------------------------------------------------------------------------

\9\ For acquired persons, Items 5 through 7 of the Form will
still be limited to the assets, voting securities, or non-corporate
interests being sold.
---------------------------------------------------------------------------

Under the proposed rule, a non-corporate entity UPE filing as an
acquiring person would be part of a new, larger Acquiring Person. This
Acquiring Person would include non-corporate entity UPE, its associates
(which would also be UPEs) and the entity that manages non-corporate
entity UPE and its associates (the ``managing entity'').\10\ The
managing entity would make the filing on behalf of the Acquiring
Person, identifying itself in proposed Item 1(a) of the Form, and
identify the relevant UPE making the acquisition in proposed Item 1(c)
of the Form.\11\ If two UPEs within the same Acquiring Person are
making reportable acquisitions in the same issuer, the managing entity
can choose which one will be the relevant UPE for purposes of the form.
The relevant UPE can also file on behalf of the managing entity, as
noted in proposed Item 1(c) of the Form. For example:
---------------------------------------------------------------------------

\10\ The same would be true for an Acquired Person under the
proposed rule.
\11\ In the case of an Acquired Person, the managing entity
would make the filing on behalf of the Acquired Person, identifying
itself in proposed Item 1(a) of the Form, and identifying the
selling UPE in proposed Item 1(c) of the Form. The selling UPE could
also indicate in Item 1(c) of the Form that it is filing on the
managing entity's behalf.
---------------------------------------------------------------------------

Hypothetical #1
Fund Vehicles 1, 2 and 3, each non-corporate entities
and their own UPEs, exist within the same family of funds. Fund
Vehicles 1, 2 and 3 have the same Investment Manager, and are thus
associates. Fund Vehicle 1 will acquire 6% of Issuer D valued at
$100 million, Fund Vehicle 2 will acquire 6% of Issuer D valued at
$100 million and Fund Vehicle 3 will acquire 3% of Issuer D valued
at $50 million. The Acquiring Person includes Fund Vehicles 1, 2 and
3, which are all UPEs, and Investment Manager.
[cir] Fund Vehicle 1 does not control any operating companies.
[cir] Fund Vehicle 2 controls Portfolio Company A and Portfolio
Company B. Portfolio Company B was acquired two years ago and
reports in the same NAICS code as Issuer D.
[cir] Fund Vehicle 3 controls Portfolio Company C, which does
not report in the same NAICS code as Issuer D. Fund Vehicle 3 also
holds a minority position in several entities, M, N, and O, which
report in the same NAICS code as Issuer D.
Investment Manager files on behalf of the Acquiring
Person for the 15% aggregate interest in Issuer D valued at $250
million by placing its name in Item 1(a) of the Form. Although
Investment Manager could designate Fund Vehicle 1 or 2 as the UPE
making the acquisition, Investment Manager indicates in Item 1(c) of
the filing that Fund Vehicle 1 is making the acquisition. Fund
Vehicle 1 can also indicate in Item 1(c) of the Form that it is
filing on Investment Manager's behalf. The filing must include the
following:
[cir] Item 4(a): This item requires the Central Index Key (CIK)
number of all entities within the Acquiring Person, which now
includes

[[Page 77057]]

Investment Manager, Fund Vehicle 1, Fund Vehicle 2, Fund Vehicle 3,
Portfolio Company A, Portfolio Company B, and Portfolio Company C.
[cir] Item 4(b): This item requires financials from the
Acquiring Person, which now includes Investment Manager, Fund
Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A,
Portfolio Company B, and Portfolio Company C.
[cir] Item 4(c): This item requires responsive documents from
the Acquiring Person, which now includes Investment Manager, Fund
Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A,
Portfolio Company B, and Portfolio Company C.
[cir] Item 4(d): This item requires responsive documents from
the Acquiring Person, which now includes Investment Manager, Fund
Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A,
Portfolio Company B, and Portfolio Company C.
[cir] Item 5: This item requires revenues by NAICS and NAPCS
codes for the Acquiring Person, which now includes Investment
Manager, Fund Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio
Company A, Portfolio Company B, and Portfolio Company C.
[cir] Item 6: Items 6(a) and 6(b) require information from the
Acquiring Person, which now includes Investment Manager, Fund
Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A,
Portfolio Company B, and Portfolio Company C. Item 6(c) also
requires information from the Acquiring Person, which now includes
Investment Manager, Fund Vehicle 1, Fund Vehicle 2, Fund Vehicle 3,
Portfolio Company A, Portfolio Company B, and Portfolio Company C.
However, the information required by Item 6(c) is still limited to
minority holdings in entities that report in the same NAICS code(s)
as the target, here M, N and O.
[cir] Item 7: This item requires all responsive information from
the Acquiring Person, which now includes Investment Manager, Fund
Vehicle 1, Fund Vehicle 2, Fund Vehicle 3, Portfolio Company A,
Portfolio Company B, and Portfolio Company C. However, the
information required by Item 7 is still limited to entities that
report in the same NAICS code(s) as the target, here Portfolio
Company B.
[cir] Item 8: This item requires information on prior
acquisitions within the last five years by the Acquiring Person,
which now includes Investment Manager, Fund Vehicle 1, Fund Vehicle
2, Fund Vehicle 3, Portfolio Company A, Portfolio Company B, and
Portfolio Company C. However, the information required by Item 8 is
still limited to entities that report in the same NAICS code(s) as
the target, here Portfolio Company B.
Hypothetical #2
MLP creates LP1, LP2, and LP3, each a non-corporate
entity and its own UPE, to separately hold the MLP's investments.
LP1, LP2 and LP3 have the same Manager, and are thus associates. LP1
will acquire 100% of Issuer R valued at $500 million. LP1 is the UPE
but the Acquiring Person includes Manager, LP2 and LP3.
[cir] LP1 controls two operating companies, OpCo 1 and OpCo 2,
which report in the same NAICS code as Issuer R. OpCo 1 was acquired
10 years ago and OpCo 2 was acquired 3 years ago.
[cir] LP2 controls OpCo 3, which reports in the same NAICS code
as Issuer R and was acquired 1 year ago, and OpCo 4, which does not
report in the same NAICS code as Issuer R.
[cir] LP3 holds minority positions in OpCo 5 and OpCo 6, and
each reports in the same NAICS code as Issuer R.
Manager places its name in Item 1(a) of the Form to
file on behalf of the Acquiring Person for the 100% interest in
Issuer R, and indicates in Item 1(c) of the Form that LP1 is making
the acquisition. LP1 can also indicate in Item 1(c) that it is
filing on Manager's behalf. The filing must include the following:
[cir] Item 4(a): This item requires the CIK number of all
entities within the Acquiring Person, which now includes Manager,
LP1, LP2, LP3, OpCo 1, OpCo 2, OpCo 3 and OpCo 4.
[cir] Item 4(b): This item requires financials from the
Acquiring Person, which now includes Manager, LP1, LP2, LP3, OpCo 1,
OpCo 2, OpCo 3 and OpCo 4.
[cir] Item 4(c): This item requires responsive documents from
the Acquiring Person, which now includes Manager, LP1, LP2, LP3,
OpCo 1, OpCo 2, OpCo 3 and OpCo 4.
[cir] Item 4(d): This item requires responsive documents from
the Acquiring Person, which now includes Manager, LP1, LP2, LP3,
OpCo 1, OpCo 2, OpCo 3 and OpCo 4.
[cir] Item 5: This item requires revenues by NAICS and NAPCS
codes for the Acquiring Person, which now includes Manager, LP1,
LP2, LP3, OpCo 1, OpCo 2, OpCo 3 and OpCo 4.
[cir] Item 6: Items 6(a) and 6(b) require information from the
Acquiring Person, which now includes Manager, LP1, LP2, LP3, OpCo 1,
OpCo 2, OpCo 3 and OpCo 4. Item 6(c) also requires information from
the Acquiring Person, which now includes Manager, LP1, LP2, LP3,
OpCo 1, OpCo 2, OpCo 3 and OpCo 4. However, the information required
by Item 6(c) is still limited to minority holdings in entities that
report in the same NAICS code(s) as the target, here OpCo 5 and OpCo
6.
[cir] Item 7: This item requires all responsive information from
the Acquiring Person, which now includes Manager, LP1, LP2, LP3,
OpCo 1, OpCo 2, OpCo 3 and OpCo 4. However, the information required
by Item 7 is still limited to entities that report in the same NAICS
code(s) as the target, here OpCo 1, OpCo 2, and OpCo 3.
[cir] Item 8: This item requires information on prior
acquisitions within the last five years by the Acquiring Person,
which now includes Manager, LP1, LP2, LP3, OpCo 1, OpCo 2, OpCo 3
and OpCo 4. However, the information required by Item 8 is still
limited to entities that report in the same NAICS code(s) as the
target, here OpCo 2 and OpCo 3, but OpCo 1 would not be listed
because it was acquired more than five years ago.

As these examples illustrate, the proposed change to Sec.
801.1(a)(1) would require a non-corporate entity UPE filing as an
acquiring person to disclose more substantive information about its
associates. The additional information required by the Form would be of
tremendous value to the Agencies in assessing the potential competitive
impact of a pending transaction. Specifically, the proposed changes to
Items 4, 5 and 6(a) would give the Agencies a much better picture of
what entities are under common management. The proposed changes to Item
6(b) would provide a clearer picture of the ways in which the entities
within the acquiring person are connected, both within the investment
structure and beyond. Proposed Item 8 would provide more complete
information on entities within the acquiring person that have made
acquisitions in the same industry as the target.\12\ All of this
additional information would give the Agencies a much more complete
picture of who is making the filing in the case of investment funds and
MLPs filing as acquiring persons.
---------------------------------------------------------------------------

\12\ There would be no change to the information Items 6(c) and
7 require, because those items already require information from
associates. Each of these items would, however, be consolidated in
the HSR Instructions and Form to reflect the new definition of
``person,'' as explained below.
---------------------------------------------------------------------------

The additional information concerning acquisitions made by a non-
corporate entity UPE's associates in the same issuer would also be of
great value to the Agencies. The proposed change to Sec. 801.1(a)(1)
would give the Agencies a much clearer understanding of the total
economic stake being acquired in a single issuer by entities under
common management. In some cases, looking across a non-corporate entity
UPE's associates for acquisitions in the same issuer will result in a
filing when one would not have been required previously. For instance,
in a scenario where associates Fund Vehicle 1, Fund Vehicle 2, and Fund
Vehicle 3 will each acquire 2% of Issuer D for $40 million, the
Agencies currently do not receive a filing because none of the three
$40 million acquisitions is large enough to cross the $50 million (as
adjusted) size of transaction threshold. Under the proposed rule, the
Agencies would now receive a filing for the aggregate 6% interest
valued at $120 million (assuming an exemption does not apply).\13\
---------------------------------------------------------------------------

\13\ In addition, certain acquiring persons will also be much
more likely to meet the size of person test when including
information about their associates as required by the proposed rule.
---------------------------------------------------------------------------

The Commission acknowledges that the proposed change to Sec.
801.1(a)(1) would result in more filings and an increased burden for
certain acquiring

[[Page 77058]]

persons. Non-corporate entity UPEs within families of funds and MLPs
would have to provide significant additional information on behalf of
their associates under the proposed change. These entities are,
however, already accustomed to looking into the holdings of those
associates for filings where they are acquiring persons because some
information about associates' holdings must be provided even under the
current Rules. Given that these entities already conduct such
inquiries, the Commission believes requiring additional information
about entities that have already been identified should be manageable.
The breadth of certain items will still be limited, and the burden
should lessen after the first inquiry under the new rule. Nevertheless,
the Commission acknowledges that there might be other ways to achieve
the same result. The Commission invites comments on alternative ways
the Agencies could obtain this necessary information that would result
in a more limited burden for investment funds and MLPs filing as
acquiring persons.
The proposed change to Sec. 801.1(a)(1) would result in fewer
filings and a reduced burden for certain other acquiring persons. The
proposed rule would streamline the number of filings and fees from
families of funds and MLPs. For instance, in the scenario where
associates Fund Vehicle 1, Fund Vehicle 2, and Fund Vehicle 3 will each
acquire 7% of Issuer D for $200 million, each currently must make a
filing and pay a separate $125,000 filing fee (assuming no exemptions
apply). Under the proposed rule, the Agencies would receive one filing
for 21% of Issuer D valued at $600 million and one $125,000 filing fee.
In addition, the proposed rule would eliminate the need for a filing in
the alternative. If the Investment Manager of associates Fund 1 and
Fund 2 has not yet determined which of those funds should be the
vehicle for a particular investment, the need to choose one for HSR
filing purposes becomes moot under the proposed rule, eliminating the
potential need to make two filings with two separate filing fees.
The Commission also proposes an additional reduction in burden for
acquired persons. The HSR Form already limits what acquired persons
must report in Items 5 through 7 to information on those assets, voting
securities, and non-corporate interests being acquired in the
transaction at issue. The limitation for acquired persons in these
items is an acknowledgment that only what is being sold is relevant to
the Agencies' competition analysis. This is also the case for the
financial information required in Items 4(a) and 4(b), and the
Commission therefore proposes amending the HSR Instructions to create a
similar limit for acquired persons with respect to these items. Under
the proposed changes, an acquired person would provide relevant CIK
numbers in response to Item 4(a) or financials in response to Item 4(b)
only for (1) the assets, voting securities and non-corporate interests
being acquired in the transaction at issue, and (2) the UPE of those
assets, voting securities and non-corporate interests. This proposed
amendment to the HSR Instructions would significantly limit what non-
corporate entity UPEs within families of funds and MLPs would have to
provide as acquired persons in response to Items 4(a) and 4(b) and
would not adversely affect the Agencies' competitive analysis.
Finally, the Commission also acknowledges that certain non-
corporate entity UPEs within families of funds and MLPs and their
associates may be structured as index funds, exchange-traded funds
(ETFs) or the like. Since these entities base their investments on an
index, it is possible that it is not appropriate to apply the proposed
change to Sec. 801.1(a)(1) to these entities. The Commission invites
comments on whether index funds, ETFs or the like should be
differentiated under the proposed rule.

B. Proposed Changes to Sec. 801.1(d)

Along with the proposed change to Sec. 801.1(a)(1), the Commission
also proposes conforming changes to the definition of associate in
Sec. 801.1(d)(2). Under the current definition, associate is only
relevant to Items 6 and 7 of the HSR Form and to acquiring persons.\14\
But the proposed change to the Sec. 801.1(a)(1) definition of person
would apply the associates concept more broadly in the HSR Form and to
both acquiring and acquired persons. The Commission therefore proposes
to eliminate the phrase ``For purposes of Items 6 and 7'' from Sec.
801.1(d)(2), capitalize the subsequent ``An'' in Sec. 801.1(d)(2) and
include ``or acquired'' in Sec. 801.1 (d)(2), (d)(2)(A) and (B) to
reflect this proposed change.
---------------------------------------------------------------------------

\14\ 16 CFR 801.1(d)(2).
---------------------------------------------------------------------------

II. Proposed Sec. 802.15: De Minimis Acquisitions of Voting Securities

To use their resources as effectively as possible, the Agencies
have a strong interest not only in receiving HSR filings that contain
sufficient information to assess whether proposed transactions present
real competition concerns, but also in eliminating filings for
categories of acquisitions that are unlikely to create competitive
concerns. In 1996, the Commission acknowledged this concern in issuing
final rules exempting certain ordinary course transactions, as well as
certain types of acquisitions of realty and carbon-based mineral
reserves.\15\ The Commission explained, ``[t]hese rules are designed to
reduce the compliance burden on the business community by eliminating
the application of the notification and waiting requirements to a
significant number of transactions that are unlikely to violate the
antitrust laws. They will also allow the enforcement agencies to focus
their resources more effectively on those transactions that present the
potential for competitive harm.'' \16\
---------------------------------------------------------------------------

\15\ 61 FR 13666 (Mar. 28, 1996).
\16\ 61 FR 13666 (Mar. 28, 1996).
---------------------------------------------------------------------------

Under the same rationale, the Commission has long contemplated the
exemption of acquisitions of 10% or less of the voting securities of an
issuer. These kinds of acquisitions can take many forms. The most
typical is when an entity acquires 10% or less of an issuer in order to
provide that issuer with needed capital. Sometimes certain shareholders
of the target will acquire less than 10% of the buyer's voting
securities as consideration for the transaction (typically called
shareholder backside acquisitions). Except for a few instances when a
shareholder backside acquisition of 10% or less of an issuer's voting
securities was linked to a larger transaction that presented
competitive concerns,\17\ the Commission has not sought to block any
acquisition of 10% or less of an issuer's voting securities.
---------------------------------------------------------------------------

\17\ See, e.g., In re Time Warner, Inc., et al., Docket No. C-
3709, (Feb. 7, 1997).
---------------------------------------------------------------------------

Recognizing that some acquisitions of 10% or less are less likely
than others to raise competitive concerns, the Act already includes an
exemption for acquisitions of 10% or less of the voting securities of
an issuer made ``solely for the purpose of investment.'' \18\ This
exemption is codified in Sec. 802.9,\19\ and Sec. 801.1(i)(1) defines
the term ``solely for the purpose of investment'' so that filing
parties may determine whether Sec. 802.9 is available. ``Voting
securities are held or acquired `solely for the purpose of investment'
if the person holding or acquiring such voting securities has no
intention of participating in the formulation, determination, or
direction of the basic business decisions of the issuer.'' \20\
---------------------------------------------------------------------------

\18\ 15 U.S.C. 18a(c)(9).
\19\ 16 CFR 802.9.
\20\ 16 CFR 801.1(i)(1).

---------------------------------------------------------------------------

[[Page 77059]]

The Statement of Basis and Purpose for the original 1978 Rules
(``1978 SBP'') lays out specific factors that further illuminate the
Sec. 801.1(i)(1) definition. ``[M]erely voting the stock will not be
considered evidence of an intent inconsistent with investment purpose.
However, certain types of conduct could be so viewed. These include but
are not limited to: (1) Nominating a candidate for the board of
directors of the 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. The facts and
circumstances of each case will be evaluated whenever any of these
actions have been taken by a person claiming that voting securities are
held or acquired solely for the purpose of investment and thus not
subject to the act's requirements.'' \21\
---------------------------------------------------------------------------

\21\ 43 FR 33450, 33465 (July 31, 1978).
---------------------------------------------------------------------------

The Agencies have interpreted these factors narrowly: When an
acquiring person takes any of the enumerated actions or is a competitor
of the issuer, Sec. 802.9 is generally not available.\22\ On the other
end of the spectrum, Sec. 802.9 is clearly available if the acquiring
person plans to do nothing but hold the stock. Given the changes in
investor behavior since the HSR Act was passed,\23\ however, a great
deal of potential shareholder engagement involves more than merely
holding (and potentially selling) stock, but does not encompass what
the 1978 SBP discusses.\24\
---------------------------------------------------------------------------

\22\ Letter from Thomas J. Campbell, Dir., Bureau of
Competition, FTC, to Michael Sohn, Esq., Arnold & Porter (Aug. 19,
1982) (on file with the 6th report to Congress).
\23\ See Scott Hirst & Lucian Bebchuk, The Specter of the Giant
Three, 99 B.U. L. Rev. 721, 725-26 (2019). (In 1950, U.S. equities
were predominantly held by households, with institutional investors
accounting for only about six percent; now institutional investors
hold 65 percent of U.S. equities); and then S&P Dow Jones Indices,
Comment, Re: FTC Hearing #8: Competition and Consumer Protection:
Holdings of Non-Controlling Ownership Interests in Competing
Companies, (Jan. 15, 2019), https://www.ftc.gov/system/files/documents/public_comments/2019/01/ftc-2018-0107-d-0015-163643.pdf,
at 1 (``Fifty years ago, there were no index funds; all
institutional (and retail) asset management was conducted on an
active basis. Today, we estimate that between 20 to 25 percent of
the U.S. stock market is held by index funds.'').
\24\ See, e.g., Blackrock, Investment Stewardship, Engagement
Priorities for 2020, https://www.blackrock.com/corporate/literature/publication/blk-stewardship-priorities-final.pdf (identifying and
describing board quality, environmental risk and opportunities,
corporate strategy and capital allocation, compensation that
promotes long-termism, and human capital management as engagement
priorities); Vanguard Investment Stewardship 2019 Annual Report,
https://about.vanguard.com/investment-stewardship/perspectives-and-commentary/2019_investment_stewardship_annual_report.pdf (discussing
board composition (including diversity of gender, race and
ethnicity) oversight of strategy and risk (including environmental
risk), structure of executive compensation, and governance
structures to support and ensure accountability of a company's board
and management to shareholders); and then State Street Global
Advisors Stewardship Report 2018-2019, https://www.ssga.com/library-content/products/esg/annual-asset-stewardship-report-2018-19.pdf
(describing engagement with boards and management teams, including,
among other issues, ``fearless girl campaign'' to increase diversity
of boards, ``climate risk and reporting'', ethical issues in the
pharmaceutical industry, including marketing of addictive
substances, genetic engineering, and the use of personal data).
---------------------------------------------------------------------------

Notably, some argue that communications between investors and
management encourage corporate accountability to shareholders,\25\ and
that HSR filing requirements (and attendant obligations to provide
notice to the issuer prior to purchase of the shares) might chill this
beneficial interaction,\26\ particularly since, depending on the degree
of shareholder engagement, it can be quite difficult to determine
whether filing parties can rely on the Sec. 802.9 exemption. For
instance, a discussion between shareholders and company executives may
begin with the amount of compensation each executive receives, but then
evolve into how each executive's compensation will be determined by the
company's performance. This discussion on a seemingly innocuous topic
may touch on basic business decisions, precluding use of the Sec.
802.9 exemption. In the Agencies' experience, even the simplest of
topics can present subtleties that complicate whether Sec. 802.9 might
exempt an acquisition of 10% or less of an issuer's voting securities.
---------------------------------------------------------------------------

\25\ See David Hirschmann, Comment, FTC Hearings on Competition
and Consumer Protection in the 21st Century, (Dec. 6, 2018), https://www.ftc.gov/system/files/documents/public_events/1422929/ftc_hearings_session_8_transcript_12-6-18_0.pdf, at 102
(``Engagement allows management to communicate with their
shareholder base as they implement strategies to generate long-term
growth'' and is ``important for healthy capital markets.'').
\26\ See Council of Institutional Investors and the Managed Fuds
Association, Comment, Re: Competition and Consumption Protection in
the 21st Century Hearings, Project Number P181201--Investment
Community Request for HSR Reform, (Aug. 13, 2018), https://www.ftc.gov/system/files/documents/public_comments/2018/08/ftc-2018-0048-d-0010-147719.pdf, at 1-2, and 7 (``[T]he investment community
is concerned that the Commission's increasingly narrow
interpretation and application of the investment-only exemption
under the HSR Act is imposing an undue regulatory burden and
unnecessary costs on institutional investors, such as employee
pension funds, charitable foundations and university endowments.
That burden undermines the strong public policy in favor of
management-shareholder communications, involves significant and
unnecessary costs, and is not justified by the Commission's mission
to protect competition.'' . . . ``CII and MFA are concerned that the
current narrow application of the investment-only exemption is
interfering with an animating policy objective of the federal
securities laws to ensure a free flow of information and disclosure
from issuers of securities to the investing public.'').
---------------------------------------------------------------------------

Over the years, the Agencies have considered revising Sec. 802.9
in order to provide clearer guidance on when the acquisition of 10% or
less of an issuer's voting securities is exempt from HSR filing
requirements. In 1988, the Commission initiated a notice and comment
proceeding on a proposed approach and two alternative approaches:

The principal proposal would exempt from the premerger
notification obligations all acquisitions of 10% or less of an
issuer's voting securities on the grounds that such acquisitions are
unlikely to violate the antitrust laws. The alternative proposals
would alter existing notification procedures for acquisitions of 10%
or less of an issuer's voting securities. One would permit the
purchase, but require that the securities be placed in escrow
pending antitrust review; the other would eliminate the reporting
requirement imposed on the target firm, thus freeing the acquiror of
its obligation to give the target prior notice.\27\
---------------------------------------------------------------------------

\27\ 53 FR 36831 (Sept. 22, 1988).

The Commission's principal proposal in 1988 was a new exemption,
Sec. 802.24, that would have subsumed Sec. 802.9 ``by eliminating the
filing requirement for all acquisitions of 10 percent or less of an
issuer's voting securities, regardless of the intent of the acquired
person.'' Although the Commission had rejected calls to ignore
investment intent in 1978 when the original Rules were promulgated, it
proposed to exempt all acquisitions of 10% or less of an issuer's
voting securities based on ten years of experience with reviewing those
filings that were not solely for the purpose of investment. ``It is not
possible to say that voting securities acquisitions of 10 percent or
less, or 5 percent or less, cannot violate the antitrust laws. The
proposed exemption is rather based on the evidently low likelihood that
`the class of transactions' will violate the antitrust laws.'' \28\
---------------------------------------------------------------------------

\28\ Id. at 36841.
---------------------------------------------------------------------------

But the Commission also considered alternative proposals that would
more directly address concerns related to other aspects of the Act that
could increase the cost of acquiring shares, specifically the
requirement to wait for the expiration of the waiting period before
acquiring shares, and the requirement to notify the target of the
intended acquisition.\29\ As a result, the

[[Page 77060]]

Commission proposed two alternative approaches. The first, proposed
Sec. 801.34, ``would permit acquirors to purchase, but not take
possession of, up to 10 percent of an issuer's voting securities
without filing a notification. The shares purchased would be placed in
escrow and voted by the escrow agent in proportion to the votes cast by
all other shares. The acquiror would be required to file and observe
the waiting period prior to purchasing more than 10 percent of an
issuer's voting securities or prior to taking the shares out of
escrow.'' \30\ The second proposal was an optional notification for
acquisitions of 10% or less of the voting securities of an issuer.
``This optional system would require the acquiror to submit specified
public documents describing the entity to be acquired, but would not
require that the issuer be given notice of the intended acquisition.''
\31\
---------------------------------------------------------------------------

\29\ ``Acquirors are reluctant to file premerger notifications
because both the delay imposed by the waiting period and informing
the target could increase the cost to them of acquiring the issuer's
voting securities.'' 53 FR 36831, 36840 (Sept. 22, 1988).
\30\ 53 FR 36831, 36,842 (Sept. 22, 1988).
\31\ 53 FR at 36843.
---------------------------------------------------------------------------

The 1988 proposed rulemaking received eighteen comments.\32\ Some
encouraged the Commission to move forward with the principal proposal
that would exempt all acquisitions of 10% or less of an issuer's voting
securities regardless of investment intent. Several comments in favor
of the principal proposal agreed with the Commission's assertion in the
proposed rulemaking that acquisitions of 10% or less of an issuer's
voting securities were unlikely to violate the antitrust laws.\33\ In
addition, some of the comments noted that the proposed rule would
``eliminate the incentive to avoid compliance with the H-S-R Act
without prejudicing antitrust enforcement efforts'' \34\ and benefit
the Commission through the ``freeing up of Commission resources
currently expended on compliance investigations regarding transactions
that lack antitrust significance.'' \35\ Several comments also noted
that the proposed rule would ease conflicts with the securities laws. A
company wrote that ``by allowing the acquisition of securities under
the secrecy afforded by the securities laws, acquirors will be able to
purchase stock at prices that are not artificially inflated by the
publicity which can be generated by an HSR Act notification filing at
the $15 million reporting threshold.'' \36\
---------------------------------------------------------------------------

\32\ All comments are available at https://www.ftc.gov/policy/public-comments/2020/08/initiative-122.
\33\ See Robert S. Pirie, Comment, RE: Proposed Rulemaking
Concerning Premerger Notification under Hart-Scott-Rodino Antitrust
Improvements Act of 1976, 53 FR 36831, (Oct. 18, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/10/p812937hsrrulemakingcomment02.pdf; James E. Knox, Comment, RE:
Proposed Rulemaking Concerning Premerger Notification under Hart-
Scott-Rodino Antitrust Improvements Act of 1976, 53 FR 36831, (Nov.
8, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/11/p812937hsrrulemakingcomment07.pdf; Irving
Scher, Comment, RE: Proposed Rulemaking Concerning Premerger
Notification under Hart-Scott-Rodino Antitrust Improvements Act of
1976, 53 FR 36831, (Nov. 21, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/11/p812937hsrrulemakingcomment09.pdf; John A. Reid, Jr., Comment, Re:
Proposed Changes to Premerger Notification Rules, 53 FR 36831, (Nov.
18, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/11/p812937hsrrulemakingcomment11-2.pdf; Howard
E. Steinberg, Comment, Re: Proposed Changes to Premerger
Notification Rules, 53 FR 36831, (Nov. 21, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/11/p812937hsrrulemakingcomment12.pdf; and then William J. Kolasky, Jr.,
Comment, Re: Comments Submitted by Wilmer, Cutler & Pickering
Regarding Proposed Amendments to the Hart-Scott-Rodino Improvement
Act of 1976, 53 FR 36831, (Nov. 21, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/11/p812937hsrrulemakingcomment13.pdf.
\34\ See Robert S. Pirie, Comment, RE: Proposed Rulemaking
Concerning Premerger Notification under Hart-Scott-Rodino Antitrust
Improvements Act of 1976, 53 FR 36831, (Oct. 18, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/10/p812937hsrrulemakingcomment02.pdf, at 1. See also James E. Knox,
Comment, RE: Proposed Rulemaking Concerning Premerger Notification
under Hart-Scott-Rodino Antitrust Improvements Act of 1976, 53 FR
36831, (Nov. 8, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/11/p812937hsrrulemakingcomment07.pdf.
\35\ See Howard E. Steinberg, Comment, Re: Proposed Changes to
Premerger Notification Rules, 53 FR 36831, (Nov. 21, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/11/p812937hsrrulemakingcomment12.pdf, at 2. See also Robert S. Pirie,
Comment, RE: Proposed Rulemaking Concerning Premerger Notification
under Hart-Scott-Rodino Antitrust Improvements Act of 1976, 53 FR
36831, (Oct. 18, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/10/p812937hsrrulemakingcomment02.pdf; and then
James E. Knox, Comment, RE: Proposed Rulemaking Concerning Premerger
Notification under Hart-Scott-Rodino Antitrust Improvements Act of
1976, 53 FR 36831, (Nov. 8, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/11/p812937hsrrulemakingcomment07.pdf.
\36\ See James E. Knox, Comment, RE: Proposed Rulemaking
Concerning Premerger Notification under Hart-Scott-Rodino Antitrust
Improvements Act of 1976, 53 FR 36831, (Nov. 8, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/11/p812937hsrrulemakingcomment07.pdf, at 2. See also Robert S. Pirie,
Comment, RE: Proposed Rulemaking Concerning Premerger Notification
under Hart-Scott-Rodino Antitrust Improvements Act of 1976, 53 FR
36831, (Oct. 18, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/10/p812937hsrrulemakingcomment02.pdf; and then
William J. Kolasky, Jr., Comment, Re: Comments Submitted by Wilmer,
Cutler & Pickering Regarding Proposed Amendments to the Hart-Scott-
Rodino Improvement Act of 1976, 53 FR 36831, (Nov. 21, 1988),
https://www.ftc.gov/system/files/documents/public_comments/1988/11/p812937hsrrulemakingcomment13.pdf.
---------------------------------------------------------------------------

Other comments noted concerns with the proposed rule. One company
wrote:

The proposed exemption for a person who acquires up to 10% of
the securities of an issuer when such acquirer has the intent of
influencing target's management (which is virtually always the case
for an acquisition of 10% of an issuer's stock) is in diametric
opposition to the fundamental purpose of the Act. Since power to
influence the target's management is the primary concern of Section
7, it is beyond our comprehension why the FTC would exempt review
for acquisitions of up to 10% of an issuer's stock when the
acquisitions may be made for the purpose of influencing
management.\37\
---------------------------------------------------------------------------

\37\ See Dennis P. Codon, Comment, Re: Premerger Notification;
Reporting and Waiting Period Requirements, 53 FR 36831, (Nov. 7,
1988), https://www.ftc.gov/system/files/documents/public_comments/1988/11/p812937hsrrulemakingcomment06.pdf, at 1.

A trade association wrote: ``The real thrust of the suggestion is
not that the $15 million threshold test serves no antitrust purpose,
but rather that the FTC finds it difficult to force compliance by those
who wish to make hostile tender offers. That, however, is not by itself
an appropriate reason for the rules change. Violations cannot be
ignored.'' \38\
---------------------------------------------------------------------------

\38\ See John. W. Hetherington, Comment, Re: 16 CFR parts 801,
802, and 803 Premerger Notification; Reporting and Waiting Period
Requirements, 53 FR 36831, (Dec. 19, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/12/p812937hsrrulemakingcomment17.pdf, at 2.
---------------------------------------------------------------------------

Members of Congress also weighed in on the proposed rulemaking. One
argued that filing requirements should be enforced instead of changed
\39\ while another argued that the Agencies lacked the authority to
create an exemption that would, in effect, render irrelevant the
statutory minimum threshold.\40\ Representative James J. Florio (then
Chairman of the Subcommittee on Commerce, Consumer Protection, and
Competitiveness of the Committee on Energy and Commerce) wrote: ``[t]he
rulemaking notice points out that Congress was definitely interested in
subjecting some types of acquisitions of 10 percent or less to
premerger review.

[[Page 77061]]

In light of this Congressional intent, I am puzzled by the Commission's
proposal to overrule Congressional intent by a blanket exemption.''
\41\
---------------------------------------------------------------------------

\39\ See Jim Sasser, Comment, Re: Premerger Notification, 53 FR
36831, (Oct. 25, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/11/p812937hsrrulemakingcomment08.pdf, at 1,
(``Indeed, I find the rationale for the proposed amendments flawed.
The premerger notification rules should not be relaxed because, as
you say, there is too much incentive to avoid them; rather, they
should be strengthened.'').
\40\ See Jack Brooks, Comment, 53 FR 36831, (Dec. 9, 1988),
https://www.ftc.gov/system/files/documents/public_comments/1988/12/p812937hsrrulemakingcomment14.pdf, at 1, (``The proposal would, for
all practical purposes, eliminate the $15 million premerger
notification threshold. I do not believe that Congress delegated
authority to the Commission to repeal that statutory notification
threshold.'').
\41\ See James J. Florio, Chairman, Comment, Re: Premerger
Notification; Reporting and Waiting Period Requirements, 53 FR
36831, (Oct. 12, 1988), https://www.ftc.gov/system/files/documents/public_comments/1988/10/p812937hsrrulemakingcomment01.pdf, at 2.
---------------------------------------------------------------------------

The Commission did not issue a final rule.
Since 1988, the parameters of the HSR premerger notification
program have undergone considerable change. In 2000, Congress amended
the Act to raise the minimum reportability threshold from $15 million
to $50 million, and at the same time built in an automatic annual
adjustment of all of the Act's thresholds based on the change in gross
national product. Currently, a transaction must be valued at more than
$94 million to be potentially reportable, and the parties to that
transaction must have sales or assets of at least $188 million and
$18.8 million, respectively, unless the transaction is valued at more
than $376 million. The statutory thresholds have increased steadily
since 2000,\42\ which has reduced significantly the number of filings
received by the Agencies.\43\
---------------------------------------------------------------------------

\42\ The thresholds have increased every year except for 2010.
75 FR 3468 (Jan. 21, 2010).
\43\ As a result of these changes, many acquisitions of small
stakes that would have resulted in an HSR filing prior to 2001 no
longer trigger an HSR filing.
---------------------------------------------------------------------------

Since 1988, the Commission has also gained over 30 years of
additional experience reviewing filings for acquisitions of 10% or less
of an issuer's voting securities. Since the promulgation of the Rules
in 1978, the Agencies have not challenged a stand-alone acquisition of
10% or less of an issuer, and have rarely engaged in a substantive
initial review of a proposed acquisition of 10% or less of an
issuer.\44\ The Commission believes that proposed acquisitions of 10%
or less of an issuer should be exempt when they are unlikely to violate
the antitrust laws and that exempting this category of acquisitions
will allow the Agencies to better focus their resources on transactions
that create the potential for competition concerns. To achieve this
goal, the Commission proposes a new approach to exempt acquisitions of
10% or less of an issuer's voting securities under certain conditions.
Proposed Sec. 802.15 reads as follows:
---------------------------------------------------------------------------

\44\ Note 1 supra.

Sec. 802.15 De minimis acquisitions of voting securities
An acquisition of voting securities shall be exempt from the
requirements of the act if as a result of the acquisition:
(a) The acquiring person does not hold in excess of 10% of the
outstanding voting securities of the issuer; and
(b)(i) the acquiring person is not a competitor of the issuer
(or any entity within the issuer);
(ii) the acquiring person does not hold voting securities in
excess of 1% of the outstanding voting securities (or, in the case
of a non-corporate entity, in excess of 1% of the non-corporate
interests) of any entity that is a competitor of the issuer (or any
entity within the issuer);
(iii) no individual who is employed by, a principal of, an agent
of, or otherwise acting on behalf of the acquiring person, is a
director or officer of the issuer (or of an entity within the
issuer);
(iv) no individual who is employed by, a principal of, an agent
of, or otherwise acting on behalf of the acquiring person, is a
director or officer of a competitor of the issuer (or of an entity
within the issuer); and
(v) there is no vendor-vendee relationship between the acquiring
person and the issuer (or any entity within the issuer), where the
value of sales between the acquiring person and the issuer in the
most recently completed fiscal year is greater than $10 million in
the aggregate.

Proposed Sec. 802.15 exempts acquisitions that would result in the
acquiring person holding 10% or less of the issuer's outstanding voting
securities, unless the acquiring person already has a competitively
significant relationship with the issuer, such as where the acquiring
person operates competing lines of business, has an existing vertical
relationship with the issuer, or employs or is otherwise represented by
an individual who is an officer or director of the issuer or a
competitor. Because these types of relationships render even a small
stake potentially competitively significant, the Commission proposes to
continue to receive filings for any such acquisitions that are not
exempt under Sec. 802.9.
Over the last several years, there has been ongoing discussion of
the impact of a single entity holding small percentages of voting
securities in competitors within the same industry, sometimes referred
to as common ownership.\45\ The debate is not yet settled, but it has
raised concerns about the competitive effect of common ownership
because investors with small minority stakes may influence the behavior
of an issuer. Thus, the Commission proposes that the exemption in Sec.
802.15 not apply if the acquiring person is a competitor of the issuer
or if the acquiring person holds more than 1% in a competitor of the
issuer on an aggregate basis. For instance, Fund Vehicle 1 will acquire
6% of Issuer D and Fund Vehicle 1 has two associates, Fund Vehicles 2
and 3. Fund Vehicle 1 is the UPE but the Acquiring Person includes Fund
Vehicles 1, 2 and 3 under the proposed change to Sec. 801.1(a)(1)
discussed above. Fund Vehicles 1, 2 and 3 do not control any
competitors of Issuer D and Fund Vehicle 1 does not hold any minority
interest in a competitor of Issuer D, but Fund Vehicle 2 and Fund
Vehicle 3 each holds a 1% minority interest in competitors of Issuer D.
In this scenario, under the proposed rule, Fund Vehicle 1 would not be
able to rely on proposed Sec. 802.15 because its associates hold more
than 1% in a competitor of Issuer D. This exception to the exemption
would ensure the Agencies receive filings that provide insights into
the influence of holdings in competitors. The Commission invites
comment on this approach, including whether a different level of
ownership in a competitor of the issuer would be more appropriate in
determining that the proposed exemption should not apply.
---------------------------------------------------------------------------

\45\ FTC Hearings on Competition and Consumer Protection in the
21st Century, Session 8, FTC.GOV. (Dec. 6, 2018), https://www.ftc.gov/news-events/events-calendar/ftc-hearing-8-competition-consumer-protection-21st-century. See also Submission of the United
States to OECD Hearing on Common Ownership by institutional
investors and its impact on competition, FTC.GOV. (Nov. 28, 2017),
https://www.ftc.gov/system/files/attachments/us-submissions-oecd-2010-present-other-international-competition-fora/common_ownership_united_states.pdf.
---------------------------------------------------------------------------

The Rules do not currently define the term ``competitor,'' and to
implement this exception to the exemption, a definition must be added.
The Commission proposes the following definition for the purpose of
implementing Sec. 802.15: ``Sec. 801.1(r) Competitor. For purposes of
these rules, the term competitor means any person that (1) reports
revenues in the same six-digit NAICS Industry Group as the issuer, or
(2) competes in any line of commerce with the issuer.'' This proposed
definition of ``competitor'' would require two separate assessments to
determine whether an acquiring person is a competitor of the issuer or
holds interests in a competitor of the issuer. The first prong of the
proposed definition would ask an acquiring person to look at the six-
digit NAICS codes of entities it controls and compare them with the
NAICS codes the issuer reports. NAICS codes (and their predecessor
Standard Industrial Classification (``SIC'') codes) have long been the
basis for reporting revenues in the HSR Form, and they provide an
objective and easy to administer measure of whether an acquiring person
and an issuer compete. Moreover, because acquiring persons already
compare their NAICS codes with those of the issuer in order to respond
to items

[[Page 77062]]

in the Form, as discussed above, this approach would be familiar to
acquiring persons.
Filing parties can still be ``competitors'' even if they report in
different NAICS codes. Thus, the second prong of the proposed
definition of ``competitor'' would rely on filing parties to conduct a
good faith assessment to determine whether any part of the acquiring
person competes with or holds interests in entities that compete with
the issuer, in any line of commerce.\46\ The Commission expects that
parties would do so consistent with their ordinary course documentation
and informational practices and be able to defend reliance on proposed
Sec. 802.15 if challenged.
---------------------------------------------------------------------------

\46\ As part of a typical antitrust compliance program, a
company may already identify other companies that have competing
sales in order to avoid violating Section 8 of the Clayton Act.
Subject to certain minimum thresholds, Section 8 prohibits a person
from serving as a director or an officer of two or more corporations
that are horizontal competitors.
---------------------------------------------------------------------------

The Commission acknowledges that this proposed two-prong definition
of ``competitor'' is broad. The Agencies and the public will benefit
from such a broad definition because the Agencies, in fulfilling their
obligations to enforce the antitrust laws, have a strong interest in
receiving HSR filings that reveal any indicia of competition between
the filing parties so the Agencies can fully evaluate the competitive
impact of the proposed acquisition. Nevertheless, the Commission
invites comment on other ways to define ``competitor'' that would still
provide the Agencies with thorough information on the competition that
exists between filing parties.
Proposed Sec. 802.15 also asks filing parties to ascertain the
existence of officer or director relationships between the acquiring
person and the issuer. That is, the exemption in proposed Sec. 802.15
would be unavailable if someone from the acquiring person is an officer
or director of the issuer or a competitor of the issuer. To be an
officer or director of any issuer is to be intimately connected to that
issuer. Officers make the issuer's day-to-day business decisions, and
directors determine the overall direction of the issuer. If someone
within the acquiring person has that kind of influence over the issuer
or a competitor of the issuer, the Agencies have a strong interest in
receiving filings about that proposed transaction to better understand
its competitive impact. Thus, this exception to the proposed exemption
would ensure that acquisitions of potential competitive significance do
not become exempt.
Finally, the proposed Sec. 802.15 exemption would not be available
if the acquiring person and the issuer are in a vertical relationship
valued at $10 million or greater. There can be important competitive
implications in vertical relationships, and the Agencies have a strong
interest in reviewing transactions that create or expand vertical
relationships. This exception to the exemption would ensure the
Agencies receive filings where the buyer and issuer have a vertical
relationship beyond the ordinary course. The Commission intends to
exclude the purchase of ordinary course services and goods (e.g.,
office supplies, financial services, etc.) and invites comment on
whether $10 million is an appropriate threshold to distinguish ordinary
course vertical relationships from those with competitive significance.
Proposed Sec. 802.15 would allow the Agencies ``to focus their
resources more effectively on those transactions that present the
potential for competitive harm.'' \47\ Proposed Sec. 802.15 would
further the Agencies' goal of eliminating filings for acquisitions of
10% or less of an issuer where there is no existing competitive
relationship or significant vertical relationship between the acquiror
and the issuer and where the acquisition therefore is unlikely to
violate the antitrust laws. At the same time, proposed Sec. 802.15
would balance the exemption of these kinds of acquisitions with the
Agencies' interest in making sure that acquisitions of potential
competitive significance are not exempt. The Commission invites comment
on whether there are other factors to consider in evaluating the
proposed exceptions to the exemption, or if other categories should be
the subject of exceptions to the exemption.
---------------------------------------------------------------------------

\47\ 61 FR 13666 (Mar. 28, 1996).
---------------------------------------------------------------------------

Under proposed Sec. 802.15, acquiring persons would have to
evaluate their connection to the issuer and the issuer's competitors in
several ways. Although this approach is not without burden for
acquiring persons, the Commission believes that information concerning
competitors, relationships with the issuer's officers or directors, and
vertical relationships will either already be in acquiring persons'
possession or will be relatively straightforward to gather. On the
whole, proposed 802.15 should benefit acquiring persons by exempting
acquisitions of small amounts of voting securities without an
examination of intent as required by Sec. 802.9. Section 802.9 would
remain unchanged and would still be available to exempt acquisitions of
10% or less of an issuer where there is no intention to be involved in
the basic business decisions of that issuer. With the addition of
proposed Sec. 802.15, acquiring persons would have two potential ways
to exempt the acquisition of 10% or less of an issuer's voting
securities.\48\
---------------------------------------------------------------------------

\48\ Institutional investors can also continue to rely on Sec.
802.64.
---------------------------------------------------------------------------

III. Proposed Explanatory and Ministerial Changes to the Rules and the
Form and Instructions

To help illustrate the proposed changes to Sec. 801.1 discussed
above, the FTC proposes adding some examples to the Rules. The proposed
changes to Sec. 801.1 would also require explanatory and ministerial
updates to the Form and Instructions.

A. Revised Examples to Sec. Sec. 801.1, 801.2

The Commission proposes revising the examples in Sec. Sec. 801.1
and 801.2 to clarify the proposed definition of person.
Revised Examples to Sec. 801.1
1. Edit example 4 to Sec. 801.1(a)(1) to make ``example'' plural:
Example 4: See the examples to Sec. 801.2(a).
2. Add example 5 and 6 to Sec. 801.1(a)(1):

Example 5. Fund 1, Fund 2, and Fund 3, each a UPE, are all
associates under the common investment management of Manager, as
defined by Sec. 801.1(d)(2). Fund 1's portfolio company A is making
a reportable acquisition. The acquiring person includes Manager,
Fund 1, Fund 2, Fund 3, and A. Manager would file on behalf of the
acquiring person by placing its name in Item 1(a) of the Form.
Manager indicates in Item 1(c) of the filing that Fund 1 is making
the acquisition. Fund 1 can also indicate in Item 1(c) of the Form
that it is filing on Manager's behalf.
Example 6. Fund A will be selling its portfolio company P. Fund
A's investments are managed by Investment Manager, and Fund A's
associates are Fund B, Fund C, and Fund D. The acquired person
includes Investment Manager, Fund A, Fund B, Fund C, and Fund D.
Investment Manager would file on behalf of Fund A, the selling UPE,
by placing its name in Item 1(a) of the Form. Fund A could also
indicate in Item 1(c) of the Form that it is filing on Investment
Manager's behalf.

3. Add example 4 to Sec. 801.1(a)(3):
Example 4: See the examples to Sec. 801.1(a)(1).
4. Edit text of Sec. 801.1(d)(2) by removing ``For purposes of
Items 6 and 7 of the Form,'' capitalizing the subsequent ``An,'' and
including ``or acquired'' as appropriate, so that Sec. 801.1(d)(2)
reads as follows:
(d)(2) Associate. An associate of an acquiring or acquired person
shall be an

[[Page 77063]]

entity that is not an affiliate of such person but:
(A) Has the right, directly or indirectly, to manage the operations
or investment decisions of an acquiring or acquired entity (a
``managing entity''); or
(B) Has its operations or investment decisions, directly or
indirectly, managed by the acquiring or acquired person; or
(C) Directly or indirectly controls, is controlled by, or is under
common control with a managing entity; or
(D) Directly or indirectly manages, is managed by, or is under
common operational or investment decision management with a managing
entity.
Revised Examples to Sec. 801.2
1. In Sec. 801.2(a), number the current example as ``Example 1''
and add example 2.
Example 2: See the examples to Sec. 801.1(a)(1).
2. Add examples 3 and 4 to Sec. 801.2(b)
Example 3: See the examples to Sec. 801.1(a)(1).
Example 4: See the examples to Sec. 801.12(a).
Revised Examples to Sec. 801.12(a)
1. In Sec. 801.12(a), number the current example as ``example 1''
and add example 2:

Example 2. Person ``A'' is composed of corporation A1 and
subsidiary A2; person ``B'' is composed of Fund 1 and Fund 2, which
are associates managed by Investment Manager. Both Fund 1 and Fund 2
hold shares of Issuer. A2 will acquire all of Issuer's voting
securities held by Fund 1 and Fund 2. Under this paragraph, for
purposes of calculating the percentage of voting securities to be
held, the ``acquired person'' is Issuer. For all other purposes, the
acquired person is ``B.'' (For all purposes, the ``acquiring
person'' is ``A.'')

B. Ministerial Changes to the Instructions and the Form

The Commission also proposes the following changes to the
Instructions and Form to clarify the definition of person as well as to
streamline the Form where appropriate in light of the proposed changes:
Definitions, p.I of Instructions:

The terms ``person filing'' or ``filing person'' mean an
ultimate parent entity (``UPE'') and its associates. Every person
will have at least one UPE, and a person may be the same as its UPE.
Not every person will have associates, but when a person has
associates, the person will not be the same as its UPE(s). (See
Sec. 801.1(a)(1) and (d)(2).)
Item 1(a), p.IV of Instructions:
Provide the name, headquarters address, and website (if one
exists) of the person filing notification. A person includes
associates, but not every person will have associates. In the case
of a person that has associates, the person filing is the entity
that manages the associates (``managing entity'') as defined by
Sec. 801.1(d)(2). (See Sec. 801.1(a)(1) and (d)(2).)
Item 1(c), p.IV of the Instructions:
Put an X in the appropriate box to indicate whether the person
in Item 1(a) is a corporation, unincorporated entity, natural
person, managing entity or other (specify). If the person is a
managing entity, indicate the UPE making the acquisition. Indicate
if a UPE is filing on behalf of the managing entity. (See Sec.
801.1 and (d)(2).)
Item 1(c) in the Form:
This item will include a new box for managing entity and space
for listing the name of the UPE making the acquisition.
Item 3(a), p.V of the Instructions:
Clarify that the item calls for information on the UPEs that are
party to the transaction.
First paragraph: At the top of Item 3(a), list the name and
mailing address of each acquiring and acquired UPE, and acquiring
and acquired entity, that are party to the transaction whether or
not required to file notification. It is not necessary to list every
subsidiary wholly-owned by an acquired entity.
Item 4(a), p.VI of the Instructions:
Add a requirement for acquiring persons to organize by UPE and
by entity within each UPE. Specify limits for acquired persons.
Acquiring persons: Provide the names of all entities within the
person filing notification, including all UPEs, that file annual
reports (Form 10-K or Form 20-F) with the United States Securities
and Exchange Commission, and provide the Central Index Key (``CIK'')
number for each entity. Responses must be organized by UPE and by
entity within each UPE.
Acquired persons: Provide the names of all entities within the
selling UPE, including the UPE, that file annual reports (Form 10-K
or Form 20-F) with the United States Securities and Exchange
Commission, and provide the Central Index Key (CIK) number for each
entity.
Item 4(b), p.VI of the Instructions:
Specify limits for acquired persons. Add a requirement to
organize by UPE and by entity within each UPE.
Acquiring persons: provide the most recent annual reports and/or
annual audit reports (or, if audited is unavailable, unaudited) of
the person filing notification. The acquiring person should also
provide the most recent reports of the acquiring entity(s) and any
controlled entity whose dollar revenues contribute to an overlap
reported in Item 7. Responses must be organized by UPE and by entity
within each UPE. If some of the UPEs or entities do not prepare
separate financial statements, explain how their financial
information is consolidated in the financial statements that are
being submitted.
Acquired persons: Provide the most recent annual reports and/or
annual audit reports (or, if audited is unavailable, unaudited) of
the selling UPE. The acquired person should also provide the most
recent reports of the acquired entity(s).
Item 5, p.VII of the Instructions:
Add a requirement to organize by UPE and by entity within each
UPE.
Second paragraph: Responses must be organized by UPE and entity
within each UPE. List all NAICS and NAPCS codes in ascending order.
Item 5(a), p.VII of the Instructions:
Clarify requirement for persons.
Last paragraph: Check the Overlap box for every 6-digit
manufacturing and non-manufacturing NAICS code and every 10-digit
NAPCS code in which both persons generate dollar revenues.
Item 6(a), p.VIII of the Instructions:
Add a requirement to organize by UPE and by entity within each
UPE.
Subsidiaries of filing person. List the name, city, and state/
county of all U.S. entities, and all foreign entities that have
sales in or into the U.S., that are included within the person
filing notification. Responses must be organized by UPE and by
entity within each UPE. Entities with total assets of less than $10
million may be omitted. Alternatively, the person filing
notification may report all entities within it.
Item 6(b), p.VIII of the Instructions:
Add a requirement to organize by UPE and by entity within each
UPE.
Minority shareholders. For the acquired entity(s) and, for the
acquiring person, the managing entity, all UPEs and the acquiring
entity(s) or, in the case of natural persons, the top-level
corporate or unincorporated entity(s) within the UPE(s), list the
name and headquarters mailing address of each shareholder that holds
5% or more but less than 50% of the outstanding voting securities or
non-corporate interests of the entity, and the percentage of voting
securities or non-corporate interests held by that person. Responses
must be organized by UPE and entity within each UPE. (See Sec.
801.1(c)).
Item 6(c), p.VIII-IX of the Instructions:
Item 6(c) is currently segmented into two different sections:
Item 6(c)(i) deals with the person filing and Item 6(c)(ii) deals
with that person's associates. Since the proposed definition of
person would include associates, these two items within 6(c) would
be collapsed and the Item renumbered to Item 6(c) with no subparts.
The information required by this item would still be limited to
entities within the acquiring person that report in the same NAICS
code as the target. New 6(c) would read as follows:

Item 6(c)

Minority holdings of filing person. If the person filing
notification holds 5% or more but less than 50% of the voting
securities of any issuer or non-corporate interests of any
unincorporated entity, list the issuer and percentage of voting
securities held, or in the case of an unincorporated entity, list
the unincorporated entity and the percentage of non-corporate
interests held.
The acquiring person should limit its response, based on its
knowledge or belief, to entities that derived dollar revenues in the
most recent year from operations in industries within any 6-digit
NAICS industry code in which the acquired entity(s) or assets also
derived dollar revenues in the most recent year. The acquiring
person may rely on its regularly prepared financials that list its
investments, provided the financials are no more than three months
old. Responses must be organized by UPE and by entity within each
UPE.

[[Page 77064]]

The acquired person should limit its response, based on its
knowledge or belief, to entities that derive dollar revenues in the
same 6-digit NAICS industry code as the acquiring person.
If NAICS codes are unavailable, holdings in entities that have
operations in the same industry, based on the knowledge or belief of
the acquiring person, should be listed. In responding to Item 6(c),
it is permissible for the acquiring person to list all entities in
which it holds 5% or more but less than 50% of the voting securities
of any issuer or non-corporate interests of any unincorporated
entity. Holdings in those entities that have total assets of less
than $10 million may be omitted.
Item 7, p.IX-X of the Instructions:
Item 7(a) currently requires information from both the acquiring
person and its associates. Since the proposed definition of person
would include associates, Item 7(a) would be revised to eliminate
the separate reference to associates.

Item 7(b)

The information required by Item 7(b) would be incorporated into
Items 5 and 6(a), so this item would be eliminated.

Items 7(c) and 7(d)

Current Item 7(c) deals with the person filing and Item 7(d)
deals with that person's associates, so these two items would be
collapsed and renumbered to new 7(b).
New Item 7 would read as follows:
If, to the knowledge or belief of the person filing
notification, the acquiring person derived any amount of dollar
revenues (even if omitted from Item 5) in the most recent year from
operations:
(1) In industries within any 6-digit NAICS industry code in
which any acquired entity that is a party to the acquisition also
derived any amount of dollar revenues in the most recent year; or
(2) in which a joint venture corporation or unincorporated
entity will derive dollar revenues;

then for each such 6-digit NAICS industry code follow the
instructions below for this section.
Note that if the acquired entity is a joint venture, the only
overlaps that should be reported are those between the assets to be
held by the joint venture and any assets of the acquiring person not
contributed to the joint venture.
Responses must be organized by UPE and by entity within each
UPE.

Item 7(a)

Industry Code Overlap Information

Provide the 6-digit NAICS industry code and description for the
industry.

Item 7(b)

Geographic Market Information

Use the 2-digit postal codes for states and territories and
provide the total number of states and territories at the end of the
response.
Note that except in the case of those NAICS industries in the
Sectors and Subsectors mentioned in Item 7(b)(iv)(b), the person
filing notification may respond with the word ``national'' if
business is conducted in all 50 states.

Item 7(b)(i)

NAICS Sectors 31-33

For each 6-digit NAICS industry code within NAICS Sectors 31-33
(manufacturing industries) listed in Item 7(a), list the relevant
geographic information in which, to the knowledge or belief of the
person filing the notification, the products in that 6-digit NAICS
industry code produced by the person filing notification are sold
without a significant change in their form (whether they are sold by
the person filing notification or by others to whom such products
have been sold or resold). Except for industries covered by Item
7(b)(iv)(b), the relevant geographic information is all states or,
if desired, portions thereof.

Item 7(b)(ii)

NAICS Sector 42

For each 6-digit NAICS industry code within NAICS Sector 42
(wholesale trade) listed in Item 7(a), list the states or, if
desired, portions thereof in which the customers of the person
filing notification are located.

Item 7(b)(iii)

NAICS Industry Group 5241

For each 6-digit NAICS industry code within NAICS Industry Group
5241 (insurance carriers) listed in Item 7(a), list the state(s) in
which the person filing notification is licensed to write insurance.

Item 7(b)(iv)(a)

Other NAICS Sectors

For each 6-digit NAICS industry code listed in item 7(a) within
the NAICS Sectors or Subsectors below, list the states or, if
desired, portions thereof in which the person filing notification
conducts such operations.

11 agriculture, forestry, fishing and hunting
21 mining
22 utilities
23 construction
48-49 transportation and warehousing
511 publishing industries
515 broadcasting
517 telecommunications
71 arts, entertainment and recreation

Item 7(b)(iv)(b)

For each 6-digit NAICS industry code listed in item 7(a) within
the NAICS Sectors or Subsectors below, provide the address, arranged
by state, county and city or town, of each establishment from which
dollar revenues were derived in the most recent year by the person
filing notification.

2123 nonmetallic mineral mining and quarrying
32512 industrial gases
32732 concrete
32733 concrete products
44-45 retail trade, except 442 (furniture and home furnishings
stores), and 443 (electronics and appliance stores)
512 motion picture and sound recording industries
521 monetary authorities--central bank
522 credit intermediation and related activities
532 rental and leasing services
62 health care and social assistance
72 accommodations and food services, except 7212 (recreational
vehicle parks and recreational camps), and 7213 (rooming and
boarding houses)
811 repair and maintenance, except 8114 (personal and household
goods repair and maintenance)
812 personal and laundry services

Item 7(b)(iv)(c)

442 furniture and home furnishings stores
443 electronics and appliance stores
516 internet publishing & broadcasting
518 internet service providers
519 other information services
523 securities, commodity contracts and other financial investments
and related activities
5242 insurance agencies and brokerages, and other insurance related
activities
525 funds, trusts and other financial vehicles
53 real estate and rental and leasing
54 professional, scientific and technical services
55 management of companies and enterprises
56 administrative and support and waste management and remediation
services
61 educational services
7212 recreational vehicle parks and recreational camps
7213 rooming and boarding houses
813 religious, grantmaking, civic, professional, and similar
organizations
8114 personal and household goods repair and maintenance

Item 8, p.XI of the Instructions:
Add a requirement to organize by UPE and by entity within each
UPE.
For each such acquisition, supply:
(1) The 6-digit NAICS industry code (by number and description)
identified above in which the acquired entity derived dollar
revenues;
(2) the name of the entity from which the assets, voting
securities or non-corporate interests were acquired;
(3) the headquarters address of that entity prior to the
acquisition;
(4) whether assets, voting securities or non-corporate interests
were acquired; and
(5) the consummation date of the acquisition.

Responses must be organized by UPE and by entity within each UPE.

IV. Communications by Outside Parties to Commissioners and Their
Advisors

Written communications and summaries or transcripts of oral
communications respecting the merits of this proceeding, from any
outside party to any Commissioner or

[[Page 77065]]

Commissioner's advisor, will be placed on the public record. See 16 CFR
1.26(b)(5).

V. Regulatory Flexibility Act

The Regulatory Flexibility Act, 5 U.S.C. 601-612, requires that the
agency conduct an initial and final regulatory analysis of the
anticipated economic impact of the proposed amendments on small
entities, except where the Commission certifies that the regulatory
action will not have a significant economic impact on a substantial
number of small entities. 5 U.S.C. 605. Because of the size of the
transactions necessary to invoke an HSR filing, the premerger
notification rules rarely, if ever, affect small entities.\49\ The 2000
amendments to the Act exempted all transactions valued at $50 million
or less, with subsequent automatic adjustments to take account of
changes in Gross National Product resulting in a current threshold of
$94 million. Further, none of the proposed amendments expands the
coverage of the premerger notification rules in a way that would affect
small entities. Accordingly, the Commission certifies that these
proposed amendments will not have a significant economic impact on a
substantial number of small entities. This document serves as the
required notice of this certification to the Small Business
Administration.
---------------------------------------------------------------------------

\49\ See 13 CFR part 121 (regulations defining small business
size).
---------------------------------------------------------------------------

VI. Paperwork Reduction Act

The Paperwork Reduction Act, 44 U.S.C. 3501-3521, requires agencies
to submit ``collections of information'' to the Office of Management
and Budget (``OMB'') and obtain clearance before instituting them. Such
collections of information include reporting, recordkeeping, or
disclosure requirements contained in regulations. The existing
information collection requirements in the HSR Rules and Form have been
reviewed and approved by OMB under OMB Control No. 3084-0005. The
current clearance expires on January 31, 2023. Because the rule
amendments proposed in this NPRM would change existing reporting
requirements, the Commission is submitting a Supporting Statement for
Information Collection Provisions (``Supporting Statement'') to OMB.

Amending Sec. 801.1(a)(1)--Acquiring Persons

The Commission proposes to amend the Sec. 801.1(a)(1) definition
of ``person'' to require certain acquiring persons to disclose
additional information about their associates when making an HSR
filing. Thus, Items 4 through 8 (excluding Items 6(c) and 7) \50\ on
the Notification and Report Form (HSR Form) would be revised to seek
information about associates of certain acquiring persons, including
the aggregation of acquisitions in the same issuer across its
associates. The Commission acknowledges that this proposed change would
result in an increased burden for certain acquiring persons. Non-
corporate entity UPEs within families of funds and MLPs would be
required to provide significant additional information on behalf of
their associates under the proposed change. These entities are,
however, already accustomed to looking into the holdings of those
associates for filings where they are acquiring persons as a result of
the treatment of associates under the current Rules. Given that these
entities already conduct such inquiries, the Commission believes
requiring additional information about entities that have already been
identified should result in limited additional burden for filers. Based
on filing data from the past five fiscal years, the Commission
estimates that 17.28% of entities would be required to provide
additional information on behalf of associates. From this, we
anticipate 846 filings would be affected per fiscal year (17.28% x 4894
filings per year, as estimated in the FTC's most recent PRA clearance
for the HSR Rules). The Commission also estimates that each affected
filer will need about 10-15 additional hours per filing to comply.
Thus, the aggregation is expected to lead to 10,575 additional annual
hours of burden (846 filings x 12.5 hours per filing). The Commission
seeks comments to help inform such burden estimates, to the extent
applicable.
---------------------------------------------------------------------------

\50\ There would be no changes to what Items 6(c) and 7 require,
because those items already require information from associates.
---------------------------------------------------------------------------

The proposed change to Sec. 801.1(a)(1) would also result in a
reduced burden for certain acquiring persons by eliminating the
potential need for families of funds and MLPs to make multiple filings
with multiple filing fees. Based on filing data from the past five
fiscal years, the Commission estimates that 39 filings would be
affected per fiscal year. Since the FTC's current clearance with OMB
estimates an average reporting burden per responding filer of 37 hours
per filing, the proposed change to Sec. 801.1(a)(1) would be a
reduction of 1,443 hours of annual burden (39 filings x 37 hours per
filing). The Commission seeks comments to help inform such burden
estimates, to the extent applicable.

Acquired Persons

Additionally, the Commission's proposal to revise the HSR
Instructions to limit the financial information required in Items 4(a)
and 4(b) should reduce burden for certain acquired persons. The HSR
Form already limits what acquired persons must report in Items 5
through 7 to information on those assets, voting securities and non-
corporate interests being acquired in the transaction at issue. The
Commission's proposal to amend the HSR Instructions would create a
similar limit for acquired persons with respect to Items 4(a) and 4(b)
and should result in a reduction in the burden for families of funds
and MLPs filing as acquired persons who will now face a more limited
reporting burden after the amendments. Based on filing data from the
past five fiscal years, the Commission estimates that 357 filings would
be affected per fiscal year. The Commission also estimates that the
burden on each affected filer will be reduced by 5 hours per filing.
Thus, the proposed limit for acquired party reporting is expected to
lead to a reduction in burden of 1,785 annual hours (357 filings x 5
hours per filing). The Commission seeks comments to help inform such
burden estimates, to the extent applicable.

Amending Sec. 802.15--Acquisition of 10% or less

Additionally the Commission proposes a new exemption, Sec. 802.15,
which would exempt the acquisition of 10% or less of an issuer's voting
securities in certain circumstances. Proposed Sec. 802.15 exempts the
acquisition of 10% or less of an issuer's voting securities unless the
acquiring person already has a competitively significant relationship
with the issuer, such as operating competing lines of business or
having an existing vertical relationship, or where the investor (or its
agent) is an officer or director of the issuer or a competitor. This
proposed exemption would allow the acquisition of small amounts of
voting securities without an examination of intent as required by Sec.
802.9. As a result, the Commission anticipates that this exemption will
reduce somewhat the number of transactions subject to review under the
Rule and the number of entities that must engage in reporting under the
Rule. Over the period from FY 2001 to FY 2017, the Commission received
an average of 106 filings per fiscal year for acquisitions of 10% or

[[Page 77066]]

less.\51\ Some of these filings would fall within the exemption in
proposed Sec. 802.15, leading to a reduction in burden for entities
that would no longer need to report under the Rule. However, the
Commission does not currently possess information as to how many
entities would qualify for the proposed Sec. 802.15 exemption. The
Commission therefore requests comment on the percentage of entities
that would qualify for the proposed exemption.
---------------------------------------------------------------------------

\51\ As set out in footnote 1, the Agencies received a total of
1,804 HSR filings from FY 2001 to FY 2017 for acquisitions of 10% of
less of outstanding stock. During that same period, the Agencies did
not challenge any acquisitions involving a stake of 10% or less.
---------------------------------------------------------------------------

Explanatory and Ministerial Changes

Finally, the Commission proposes explanatory and ministerial
changes to the rules, as well as necessary amendments to the HSR Form
and Instructions to effect the proposed changes. These changes will
result in no change to the information collection burden under the
Rule.

Request for Comments

As noted above, the Commission invites comments on anticipated
burdens for the proposed amendments and comments that will enable it
to: (1) Evaluate whether the proposed collections of information are
necessary for the proper performance of the functions of the
Commission, including whether the information will have practical
utility; (2) evaluate the accuracy of the Commission's estimate of the
burden of the proposed collections of information, including the
validity of the methodology and assumptions used; (3) enhance the
quality, utility, and clarity of the information to be collected; and
(4) minimize the burden of the collections of information on those who
must comply, including through the use of appropriate automated,
electronic, mechanical, or other technological techniques or other
forms of information technology.
Comments on the proposed reporting requirements subject to
Paperwork Reduction Act review by OMB should additionally be submitted
to www.reginfo.gov/public/do/PRAMain. Find this particular information
collection by selecting ``Currently under 30-day Review--Open for
Public Comments'' or by using the search function. The reginfo.gov web
link is a United States Government website produced by OMB and the
General Services Administration (GSA). Under PRA requirements, OMB's
Office of Information and Regulatory Affairs (OIRA) reviews Federal
information collections.

List of Subjects in 16 CFR Parts 801, 802, and 803

Antitrust.

For the reasons stated in the preamble, the Federal Trade
Commission proposes to amend 16 CFR parts 801, 802, and 803 as set
forth below:

PART 801--COVERAGE RULES

0
1. The authority citation for part 801 continues to read as follows:

Authority: 15 U.S.C. 18a(d).

0
2. Amend Sec. 801.1 by:
0
a. Revising paragraph (a)(1) introductory text;
0
b. Adding paragraphs (a)(1)(i) and (ii);
0
c. Revising example 4 to paragraph (a)(1);
0
d. Adding examples 5 and 6 to paragraph (a)(1);
0
e. Adding example 4 to paragraph (a)(3);
0
f. Revising paragraph (d)(2); and
0
g. Adding paragraph (r).
The revisions and additions read as follows:

Sec. 801.1 Definitions.

* * * * *
(a)(1) Person. Except as provided in paragraphs (a) and (b) of
Sec. 801.12, the term person means:
(i) An ultimate parent entity and all entities which it controls
directly or indirectly; and
(ii) All associates of the ultimate parent entity.
Examples: * * * 4. See the examples to Sec. 801.2(a).5. Fund 1,
Fund 2, and Fund 3, each a UPE, are all associates under the common
investment management of Manager, as defined by Sec. 801.1(d)(2). Fund
1's portfolio company A is making a reportable acquisition. The
acquiring person includes Manager, Fund 1, Fund 2, Fund 3, and A.
Manager would file on behalf of the acquiring person by placing its
name in Item 1(a) of the Form. Manager indicates in Item 1(c) of the
filing that Fund 1 is making the acquisition. Fund 1 can also indicate
in Item 1(c) of the Form that it is filing on Manager's behalf.6. Fund
A will be selling its portfolio company P. Fund A's investments are
managed by Investment Manager, and Fund A's associates are Fund B, Fund
C, and Fund D. The acquired person includes Investment Manager, Fund A,
Fund B, Fund C, and Fund D. Investment Manager would file on behalf of
Fund A, the selling UPE, by placing its name in Item 1(a) of the Form.
Fund A could also indicate in Item 1(c) of the Form that it is filing
on Investment Manager's behalf.
* * * * *
(3) * * *
Examples: * * *4. See the examples to Sec. 801.1(a)(1).
* * * * *
(d) * * *
(2) Associate. An associate of an acquiring or acquired person
shall be an entity that is not an affiliate of such person but:
(i) Has the right, directly or indirectly, to manage the operations
or investment decisions of an acquiring or acquired entity (a
``managing entity''); or
(ii) Has its operations or investment decisions, directly or
indirectly, managed by the acquiring or acquired person; or
(iii) Directly or indirectly controls, is controlled by, or is
under common control with a managing entity; or
(iv) Directly or indirectly manages, is managed by, or is under
common operational or investment decision management with a managing
entity.
* * * * *
(r) Competitor. For purposes of these rules, the term competitor
means any person that:
(1) Reports revenues in the same six-digit NAICS Industry Group as
the issuer, or
(2) Competes in any line of commerce with the issuer.
0
3. Amend Sec. 801.2 by revising the example to paragraph (a) and
adding examples 3 and 4 to paragraph (b) to read as follows:

Sec. 801.2 Acquiring and acquired persons.

(a) * * *

Examples: 1. Assume that corporations A and B, which are each
ultimate parent entitles of their respective ``persons,'' created a
joint venture, corporation V, and that each holds half of V's
shares. Therefore, A and B each control V (see Sec. 801.1(b)), and
V is included within two persons, ``A'' and ``B.'' Under this
section, if V is to acquire corporation X, both ``A'' and ``B'' are
acquiring persons.

2. See the examples to Sec. 801.1(a)(1).
(b) * * *
Examples: * * *3. See the examples to Sec. 801.1(a)(1).
4. See the examples to Sec. 801.12(a).
* * * * *
0
4. Amend Sec. 801.12 by revising the example to paragraph (a) to read
as follows:

Sec. 801.12 Calculating percentage of voting securities.

(a) * * *

[[Page 77067]]

Examples: 1. Person ``A'' is composed of corporation A1 and
subsidiary A2; person ``B'' is composed of corporation B1 and
subsidiary B2. Assume that A2 proposes to sell assets to B1 in
exchange for common stock of B2. Under this paragraph, for purposes
of calculating the percentage of voting securities to be held, the
``acquired person'' is B2. For all other purposes, the acquired
person is ``B.'' (For all purposes, the ``acquiring persons'' are
``A'' and ``B.'')2. Person ``A'' is composed of corporation A1 and
subsidiary A2; person ``B'' is composed of Fund 1 and Fund 2, which
are associates managed by Investment Manager. Both Fund 1 and Fund 2
hold shares of Issuer. A2 will acquire all of Issuer's voting
securities held by Fund 1 and Fund 2. Under this paragraph, for
purposes of calculating the percentage of voting securities to be
held, the ``acquired person'' is Issuer. For all other purposes, the
acquired person is ``B.'' (For all purposes, the ``acquiring
person'' is ``A.'')
* * * * *

PART 802--EXEMPTION RULES

0
5. The authority citation for part 802 continues to read as follows:

Authority: 15 U.S.C. 18a(d).

0
6. Add Sec. 802.15 to read as follows:

Sec. 802.15 De minimis acquisitions of voting securities.

An acquisition of voting securities shall be exempt from the
requirements of the act if as a result of the acquisition:
(a) The acquiring person does not hold in excess of 10% of the
outstanding voting securities of the issuer; and
(b)(1) The acquiring person is not a competitor of the issuer (or
any entity within the issuer);
(2) The acquiring person does not hold voting securities in excess
of 1% of the outstanding voting securities (or, in the case of a non-
corporate entity, in excess of 1% of the non-corporate interests) of
any entity that is a competitor of the issuer (or any entity within the
issuer);
(3) No individual who is employed by, a principal of, an agent of,
or otherwise acting on behalf of the acquiring person, is a director or
officer of the issuer (or of an entity within the issuer);
(4) No individual who is employed by, a principal of, an agent of,
or otherwise acting on behalf of the acquiring person, is a director or
officer of a competitor of the issuer (or of an entity within the
issuer); and
(5) There is no vendor-vendee relationship between the acquiring
person and the issuer (or any entity within the issuer), where the
value of sales between the acquiring person and the issuer in the most
recently completed fiscal year is greater than $10 million in the
aggregate.

Example 1 to paragraph (b)(5). Investment Manager manages the
investments of Fund 1 and Fund 2, which are associates. Investment
Manager, Fund 1 and Fund 2 are all part of the Acquiring Person.
Fund 1 is acquiring 5% of Issuer. Fund 1 has a .4% interest in a
competitor of Issuer and Fund 2 has a .5% interest in the same
competitor of Issuer. The acquisition of the 5% interest in Issuer
would be exempt under Sec. 802.15.
Example 2 to paragraph (b)(5). Investment Manager manages the
investments of Fund 1 and Fund 2, which are associates. Investment
Manager, Fund 1 and Fund 2 are all part of the Acquiring Person.
Fund 1 is acquiring 5% of Issuer. Fund 1 has a .4% interest in a
competitor of Issuer and Fund 2 has a .3% interest in a different
competitor of Issuer. The acquisition of the 5% interest in Issuer
would be exempt under Sec. 802.15.
Example 3 to paragraph (b)(5). Investment Manager manages the
investments of Fund 1 and Fund 2, which are associates. Investment
Manager, Fund 1 and Fund 2 are all part of the Acquiring Person.
Fund 1 is acquiring 5% of Issuer. Fund 1 controls an operating
company that is a competitor of Issuer. The acquisition of the 5%
interest in Issuer would not be exempt under Sec. 802.15.
Example 4 to paragraph (b)(5). Investment Manager manages the
investments of Fund 1, Fund 2, Fund 3, and Fund 4, which are
associates. Investment Manager, Fund 1, Fund 2, Fund 3 and Fund 4
are all part of the Acquiring Person. Fund 1 is acquiring 5% of
Issuer. Fund 2, Fund 3 and Fund 4 each have a .4% interest in a
competitor of Issuer. The acquisition of the 5% interest in Issuer
would not be exempt under Sec. 802.15.
Example 5 to paragraph (b)(5). Investment Manager manages the
investments of Fund 1 and Fund 2, which are associates. Investment
Manager, Fund 1 and Fund 2 are all part of the Acquiring Person.
Fund 1 is acquiring 5% of Issuer. One of Fund 2's officers (or the
equivalent thereof) also serves as an officer of Issuer. The
acquisition of the 5% interest in Issuer would not be exempt under
Sec. 802.15.
Example 6 to paragraph (b)(5). Investment Manager manages the
investments of Fund 1, Fund 2, Fund 3, and Fund 4, which are
associates. Investment Manager, Fund 1, Fund 2, Fund 3 and Fund 4
are all part of the Acquiring Person. Fund 1 is acquiring 5% of
Issuer. One of Fund 4's officers (or the equivalent thereof) also
serves as an officer of a competitor of Issuer's subsidiary. The
acquisition of the 5% interest in Issuer would not be exempt under
Sec. 802.15.
Example 7 to paragraph (b)(5). Investment Manager manages the
investments of Fund 1 and Fund 2, which are associates. Investment
Manager, Fund 1 and Fund 2 are all part of the Acquiring Person.
Fund 1 is acquiring 5% of Issuer. Fund 1 controls an operating
company that has a vendor-vendee relationships with Issuer valued in
excess of $10 million. The acquisition of the 5% interest in Issuer
would not be exempt under Sec. 802.15.

PART 803--TRANSMITTAL RULES

0
7. The authority citation for part 803 continues to read as follows:

Authority: 15 U.S.C. 18a(d).

0
8. Revise Appendix A to part 803 to read as follows:
BILLING CODE 6750-01-P

[[Page 77068]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.031

[[Page 77069]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.032

[[Page 77070]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.033

[[Page 77071]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.034

[[Page 77072]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.035

[[Page 77073]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.036

[[Page 77074]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.037

[[Page 77075]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.038

[[Page 77076]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.039

[[Page 77077]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.040

[[Page 77078]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.041

[[Page 77079]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.042

0
9. Revise Appendix B to part 803 to read as follows:

[[Page 77080]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.043

[[Page 77081]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.044

[[Page 77082]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.045

[[Page 77083]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.046

[[Page 77084]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.047

[[Page 77085]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.048

[[Page 77086]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.049

[[Page 77087]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.050

[[Page 77088]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.051

[[Page 77089]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.052

[[Page 77090]]

[GRAPHIC] [TIFF OMITTED] TP01DE20.053

BILLING CODE 6750-01-C

By direction of the Commission, Commissioner Chopra and
Commissioner Slaughter dissenting.
April J. Tabor,
Acting Secretary.

Note: The following appendix will not appear in the Code of
Federal Regulations.

Statement of Commissioner Noah Joshua Phillips

September 18, 2020

Today, the Federal Trade Commission (the ``Commission'') voted
to publish for public comment a Notice of Proposed Rulemaking
(``NPRM'') and an Advance Notice of Proposed Rulemaking (``ANPRM''),
both relating to the premerger notification rules that implement the
Hart-Scott-Rodino Antitrust Improvements Act (the ``HSR Act'' or
``HSR'').\1\ The NPRM proposes two non-ministerial changes: (1)
Broadening the filing requirement to include holdings of affiliates

[[Page 77091]]

of the acquirer, and (2) the creation of a new exemption, discussed
below. The ANPRM poses a series of questions around several topics
that may inform future efforts to update and refine the rules.
---------------------------------------------------------------------------

\1\ The HSR Act established the federal premerger notification
program, which provides the Federal Trade Commission and the
Department of Justice with information about large mergers and
acquisitions before they occur. The parties may not close their deal
until the waiting period outlined in the HSR Act has elapsed, or the
government has granted early termination of the waiting period.
Under this framework, the government may sue to block those deals it
determines may violate the antitrust laws before the deals have been
consummated.
---------------------------------------------------------------------------

I write today to discuss the proposed exemption for de minimis
acquisitions of voting securities, and to explain why I voted in
favor of seeking comment on this proposal. In brief, the proposed
exemption will carve out from the HSR Act's reporting requirements
acquisitions of voting securities that leave the acquirer holding
10% or less of the issuer's total voting stock,\2\ subject to
several limitations.
---------------------------------------------------------------------------

\2\ The 10% threshold applies to the acquirer's aggregate
holdings of the issuer's voting securities. Therefore, the de
minimis exemption does not permit those claiming it to avoid HSR
review by acquiring control of an entity via a ``creeping'' series
of acquisitions, each involving less than 10% of the firm's voting
securities. Once an acquirer comes to own 10% of an issuer's voting
securities, it may no longer avail itself of the exemption.
---------------------------------------------------------------------------

The HSR Act was enacted to give the Commission and the Antitrust
Division of the Department of Justice (the ``Division'')
(collectively, the ``Agencies'') advance notice of mergers and
acquisitions so that the Agencies could challenge anticompetitive
transactions before they were consummated. Among other things, the
system it established often allows the government and companies to
avoid the more difficult process of ``unscrambling the eggs''--
separating, say, two illegally merged companies.
That is a good thing; but, like most good things, it comes at a
cost. Investors must notify the target of the acquisition, wait as
long as a month, and pay a fee of $45,000 to $280,000. That can make
simple transactions much more costly, and sometimes not worth doing.
The target may publicize the deal, driving up the price. Management
may take defensive measures. The waiting period may change the
viability of the transaction. The fees are substantial. All of that
leads investors to hold off, to keep quiet, and to hide what they
are doing. They are less likely to pressure management, or share
ideas, dampening operational and financial improvement--and,
ultimately, competition. The HSR Act provides an exemption for the
acquisition of 10% or less of voting securities made ``solely for
the purpose of investment''.\3\ But the large grey area between what
the investment-only exemption clearly permits shareholders to do
(e.g., just hold on to their stock) and what it clearly forbids
(e.g., proposing corporate action requiring shareholder approval)
\4\ encompasses interactions with management that play a critical
role in keeping corporations accountable and stoking competition.
---------------------------------------------------------------------------

\3\ 15 U.S.C. 18a(c)(9).
\4\ According to this definition, ``[v]oting securities are held
or acquired `solely for the purpose of investment' if the person
holding or acquiring such voting securities has no intention of
participating in the formulation, determination, or direction of the
basic business decisions of the issuer.'' 16 CFR 801.1(i)(1) (2020).
---------------------------------------------------------------------------

Today, in effect, HSR operates as a tax on activities that can
often be beneficial. But it is not supposed to be a tax, whether on
shareholder input or mergers and acquisitions activity. It also is
not supposed to be an early-warning system for tender offers and
corporate takeovers--for that we have a number of laws at the
federal and state level.\5\ And it is not supposed to be a
monitoring system for equity investments generally. To the extent
possible, it should not be any of those things. It should effectuate
its purpose: Helping the Agencies spot transactions likely to
violate the antitrust laws, so that we can stop or remedy them
prophylactically.
---------------------------------------------------------------------------

\5\ See, e.g., Williams Act, 15 U.S.C. 78m(d)-(e), 78n(d)-(f).
---------------------------------------------------------------------------

That is why Congress gave the Commission, with the concurrence
of the Division's Assistant Attorney General, the ability to exempt
from premerger notification those ``acquisitions, transfers, or
transactions which are not likely to violate the antitrust
laws''.\6\ The proposed de minimis exemption covers transactions
that we know are not likely to do so. The HSR Act was enacted in
1976, and 44 years of experience since then have taught us that
acquisitions of 10% or less of a company are extremely unlikely to
raise competition concerns. According to the NPRM, the Agencies have
reviewed a multitude of 10%-or-less acquisitions that do not qualify
for the investment-only exemption over the last four decades; and
none have warranted a challenge. For example, from fiscal year 2001
to 2017, the Agencies received 1,804 10%-or-less filings. What do
these real-world data show? Only a handful of 10%-or-less
acquisitions required any substantive review whatsoever, and none
were challenged by the Agencies. Not one.
---------------------------------------------------------------------------

\6\ 15 U.S.C. 18a(d)(2)(B).
---------------------------------------------------------------------------

Thus, the proposal represents an important step in tailoring the
HSR regime to its intended purpose of identifying and addressing
competition issues, while simultaneously eliminating unnecessary
regulatory burdens on beneficial investment activity that does not
harm competition and, indeed, often promotes it.\7\
---------------------------------------------------------------------------

\7\ See Noah Joshua Phillips, Comm'r, U.S. Fed. Trade Comm'n,
Competing for Companies: How M&A Drives Competition and Consumer
Welfare, Keynote Address at the Global Antitrust Economics
Conference (May 31, 2019), https://www.ftc.gov/system/files/documents/public_statements/1524321/phillips_-_competing_for_companies_5-31-19_0.pdf.
---------------------------------------------------------------------------

Four-plus decades of real world experience should go a long way
towards allaying concerns that the proposed de minimis exemption
will allow competitively troubling acquisitions to fly under the
Agencies' radar. But scholarship in recent years has raised the
question whether common ownership of substantial but non-controlling
interests in competing companies (often by large, diversified, asset
managers) has an anticompetitive effect. That debate, including its
implications for antitrust policy, continues.\8\ For now, the
proposed de minimis exemption errs on the side of caution, excluding
from its scope transactions that might implicate this concern. (To
the extent that the feared competition harms of common ownership
result from the passivity of the largest shareholders, the de
minimis exemption may help mitigate the concern by facilitating the
smaller, more active, voices.\9\) It also does not apply to other
transactions where a competitively significant relationship between
the issuer of the voting securities and the acquirer claiming the
exemption exists. What it does reach are transactions that, in over
40 years, have raised no competition issues.
---------------------------------------------------------------------------

\8\ See Noah Joshua Phillips, Comm'r, U.S. Fed. Trade Comm'n,
Taking Stock: Assessing Common Ownership, Keynote Address at the
Global Antitrust Economics Conference (June 1, 2018), https://www.ftc.gov/system/files/documents/public_statements/1382461/phillips_-_taking_stock_6-1-18_0.pdf.
\9\ See Noah Joshua Phillips, Comm'r, U.S. Fed. Trade Comm'n,
Opening Remarks at FTC Hearing #8: Competition and Consumer
Protection in the 21st Century: Corporate Governance, Institutional
Investors, and Common Ownership (Dec. 6, 2018), https://www.ftc.gov/system/files/documents/public_statements/1454690/phillips_-_ftc_hearing_8_opening_remarks_12-6-18.pdf.
---------------------------------------------------------------------------

In 1988, following complaints by investors about the negative
impact HSR was having on their small stock purchases and a study
that showed the Agencies had never challenged one as violating
Section 7 of the Clayton Act, the FTC considered whether to exempt
acquisitions of 10% or less of a company's voting securities from
HSR reporting. Those problems are still with us, and the data today
show the same thing. Transactions of 10% or less are just as
unlikely to lessen competition today as they were 30 years ago; and
small stock purchases have almost never needed even a second look.
Those decades of experience speak volumes, and what they tell us is
that, at great cost, the benefits of continuing to tax de minimis
stock purchases are virtually non-existent. We can change that.

Statement of Commissioner Rohit Chopra

September 21, 2020

Summary

Premerger notification is a critical data source, but
the Commission faces enormous information gaps when seeking to
detect and halt anticompetitive transactions.
While the proposed rule closes a loophole when it comes
to investment manager holdings, the proposed approach to exempt a
wide swath of minority stakes is concerning and adds to existing
information gaps.
The Commission needs to update the treatment of certain
debt transactions when determining deal size for the purpose of
premerger notification. The current approach allows dealmakers to
structure anticompetitive transactions in ways that can go
unreported.
In September 1976, Congress gave the Federal Trade Commission an
important tool enabling it to block harmful mergers. The Hart-Scott-
Rodino Antitrust Improvements Act of 1976 (``HSR Act'') requires
prior notification to the antitrust agencies in advance of closing
certain mergers and acquisitions.\1\
---------------------------------------------------------------------------

\1\ Clayton Act section 7A, 15 U.S.C. 18a.
---------------------------------------------------------------------------

Prior to the HSR Act's enactment, companies could quickly
``scramble the eggs'' of assets and operations, or even shut down

[[Page 77092]]

functions. This made it extremely difficult for the antitrust
agencies to remedy competitive harms through divestitures of assets.
Years of protracted litigation to stop further damage and
distortions were often the result.\2\
---------------------------------------------------------------------------

\2\ For example, in United States v. El Paso Natural Gas Co.,
376 U.S. 651 (1964), it took seventeen years of litigation before a
divestiture finally took place.
---------------------------------------------------------------------------

The HSR Act fundamentally changed the process of merger review
by giving the antitrust agencies time to halt anticompetitive
transactions before these deals closed. Today, the FTC focuses a
substantial portion of its competition mission on investigating and
challenging mergers reported under the HSR Act. Importantly, only a
small set of transactions--the ones with the highest valuations--are
subject to premerger notification. The HSR Act specifies the
valuation threshold, currently set at $94 million, which is
typically adjusted upward each year. Since there are many ways to
determine a deal's valuation, Congress gave the FTC broad authority
to implement rules so that buyers know if they need to report their
transactions and what they are required to submit with their filing.
The Commission can also exempt classes of transactions and tailor
filing requirements.
While premerger notification filings provide the Commission with
certain nonpublic information,\3\ gathering and analyzing market
intelligence on transaction activity and competitive dynamics is a
major challenge. We need to continuously assess how we can enhance
our market monitoring techniques and evolve our analytical
approaches.
---------------------------------------------------------------------------

\3\ I agree with Commissioner Slaughter that current filing
requirements, including for minority stakes, can have the beneficial
effect of deterring certain anticompetitive transactions.
---------------------------------------------------------------------------

Today, the Commission is soliciting comment on two rulemaking
notices regarding our policies to implement the HSR Act's premerger
notification protocols. The first publication, a Notice of Proposed
Rulemaking, proposes specific rules and exemptions. While some of
the proposals are helpful improvements, I respectfully disagree with
our approach to exempting a broad swath of transactions from
reporting. The second publication, an Advance Notice of Proposed
Rulemaking, requests comment on a broad range of topics to set the
stage for modernizing the premerger notification program to align
with market realities. I support soliciting input to rethink our
approach. I discuss each of these notices below.

Notice of Proposed Rulemaking

The Notice of Proposed Rulemaking outlines specific amendments
that the Commission is proposing to the HSR rules. The aggregation
and exemption provisions are particularly noteworthy. The
aggregation provisions are worthwhile, since they close a loophole
and align with market realities. However, I am concerned about the
exemption provisions, since we will completely lose visibility into
a large set of transactions involving non-controlling stakes.

Aggregation Provisions

The financial services industry is well known for using an
alphabet soup of small entities, like shell companies, partnerships,
and other investment vehicles, to structure deals. Even though they
may be under common management by the same person or group, like a
private equity fund or a hedge fund, these smaller legal entities
are all treated separately under the existing rules.
The proposed aggregation provisions will help to prevent
acquirers from splitting up transactions into small slices across
multiple investment vehicles under their control to avoid reporting.
The proposal would require investors and other buyers to add
together their stakes across commonly managed funds to determine
whether they need to report a transaction.

Exemption Provisions

By creating a reporting threshold based on the value of a
transaction, the law already exempts most transactions from agency
review. Because of this, it is difficult to systematically track
these transactions, and even harder to detect and deter those that
are anticompetitive.
Now, the FTC is proposing to widen that information gap by
creating a new exemption for minority stakes of 10% or less, subject
to certain conditions. Importantly, the proposal is not exempting
specific aspects of the reporting requirements--it is a total
exemption, so the agency will receive no information whatsoever from
the buyer or the seller that the transaction even occurred. This
adds to the burdens and information asymmetries that the agency
already faces when it comes to detecting potentially harmful
transactions.\4\
---------------------------------------------------------------------------

\4\ The FTC may not be able to rely on other sources of robust
data required by other agencies. For example, the Securities and
Exchange Commission has proposed eliminating reporting for thousands
of registered investment funds that previously detailed their
holdings to the public. See Statement of SEC Comm'r Allison Herren
Lee Regarding Proposal to Substantially Reduce 13F Reporting (July
10, 2020), https://www.sec.gov/news/public-statement/lee-13f-reporting-2020-07-10.
---------------------------------------------------------------------------

Companies and investors purchase minority, non-controlling
stakes in a firm for a number of reasons. Sometimes, buyers might
start with a minority stake, with the goal--or even with a
contractual option--of an outright takeover as they learn more about
the company's operations. Even though they might have a small stake,
they can exert outsized control. In other cases, buyers might look
for minority stakes in multiple, competing firms within a sector or
industry, and some or all of these acquisitions may fall below the
reporting thresholds. Of course, if they are able to obtain seats on
boards of directors of competing companies, this can be illegal.
Investors and buyers can only use the proposed exemption if they
do not currently own stakes in firms that compete or do business
with the company they plan to acquire. Since many investors might
not know about the specific business dealings across companies, this
may be difficult to enforce and puts more burden on the agency.
Even if one believes that transactions involving a minority
stake are less likely to be illegal, there are many potential
alternatives to outright elimination of reporting. Unfortunately,
the rulemaking notice does not outline alternative approaches (such
as tailored, simplified filing requirements or shortened waiting
periods) for minority stakes.

Advance Notice of Proposed Rulemaking

As markets evolve, it is important that the HSR Act and its
implementing rules reflect those developments. The Advance Notice of
Proposed Rulemaking seeks input on a wide array of market-based
issues that may affect the Commission's merger oversight. One topic
of particular interest is whether to include debt as part of the
valuation of a transaction. Since the HSR Act's passage, corporate
debt markets have grown in importance for companies competing in
developed economies. Many major deals involve vast sums of borrowed
money.
However, the Commission has not formally codified a view on the
treatment of certain debt transactions. Instead, existing staff
guidance excludes many debt transactions from the deal's overall
value. This is worrisome, since it means that many potentially
anticompetitive transactions can go unreported, since they may fall
below the size threshold. In addition, this view has been provided
informally, communicated through unofficial interpretations outside
of formal rules or guidance. It will be important to take steps to
collect input and codify the Commission's policies on valuation,
particularly with respect to the treatment of debt, since formal
guidance or rules will offer clarity and will be easier to enforce.
The Advance Notice of Proposed Rulemaking also seeks information
that will lay groundwork for broader reforms to our premerger
notification program. I look forward to the data and written
submissions to this document.

Conclusion

Adequate premerger reporting is a helpful tool used to halt
anticompetitive transactions before too much damage is done.
However, the usefulness of the HSR Act only goes so far. This is
because many deals can quietly close without any notification and
reporting, since only transactions above a certain size are
reportable.\5\ The FTC ends up missing a large number of
anticompetitive mergers every year. In addition, since amendments to
the HSR Act in 2000 raised the size

[[Page 77093]]

thresholds on an annual basis, the number of HSR-reportable
transactions has decreased.
---------------------------------------------------------------------------

\5\ Small transactions can be just as harmful to competition as
large transactions notified under the HSR Act. For example, ``catch
and kill'' acquisitions of an upstart competitor in fast-moving
markets can be particularly destructive. In addition, ``roll-ups,''
an acquisition strategy involving a series of acquisitions of small
players to combine into a larger one, can have very significant
negative effects on competition. See Statement of Fed. Trade Comm'r
Rohit Chopra Regarding Private Equity Roll-ups and the Hart-Scott
Rodino Annual Report to Congress, Comm'n File No. P110014 (July 8,
2020), https://www.ftc.gov/system/files/documents/public_statements/1577783/p110014hsrannualreportchoprastatement.pdf.
---------------------------------------------------------------------------

I want to commend agency staff for their work in identifying
potential blind spots in the premerger reporting regime. I also want
to thank state legislatures and state attorneys general for enacting
and implementing their own premerger notification laws to fill in
some of these gaps. For example, a new law in State of Washington
has taken effect, which requires advance notice of any transactions
in the health care sector, where many problematic mergers fall below
the radar.\6\
---------------------------------------------------------------------------

\6\ See Healthcare Transaction Notification Requirement, WASH.
STATE OFF. OF THE ATT'Y GEN. (last visited Sept. 16, 2020), https://www.atg.wa.gov/healthcare-transactions-notification-requirement; see
also S.H.B. 1607, 66th Leg., Reg. Sess. (Wash. 2019).
---------------------------------------------------------------------------

As we conduct this examination of the HSR Act, we should
identify areas where laws may need to be changed or updated,
especially when we cannot fill those gaps through amendments to our
rules. For example, we may need to pursue reforms to ensure that
``roll ups'' are reported, where a buyer might acquire a large
number of small companies that may not be individually reportable.
We may also need to look carefully at the length of the waiting
period, to determine if it is long enough to conduct a thorough
investigation. I look forward to reviewing the input to these two
rulemaking notices, so that our approach reflects market realities.

Statement of Commissioner Rebecca Kelly Slaughter

September 18, 2020

Today, the Commission voted to advance two proposals with
respect to our HSR premerger notification rules. I support the broad
solicitation of input in the Advance Notice of Proposed Rulemaking
and the proposed aggregation provisions in the Notice of Proposed
Rulemaking (NPRM). But I oppose provisions in the NPRM that would
broaden the categories of transactions exempt from filing HSR
notice.
I share the concerns Commissioner Chopra articulated, and write
separately only to add a few points. I share the general view that
we should do what we can to right-size our HSR requirements. We
generally benefit when the universe of transactions that are
required to file under HSR matches as closely as possible the
universe of transactions that are competitively problematic. Too
many filings on non-problematic transactions are an unnecessary
resource drain for the agency, and too few filings on problematic
transactions clearly would allow anticompetitive acquisitions to
proceed unnoticed and unchallenged. I also generally agree that
transaction size (the main trigger for HSR filing under current law)
is not the only or even necessarily the best indicator of
competitive significance.
However, I am concerned about the expanded de minimis exemptions
in the proposal released today for two reasons: Its broadening of
the black box of unseen transactions and its effect on corporate
governance.
Commissioner Phillips is correct that, of the filings the agency
has reviewed of sub-10% acquisitions, none have led to enforcement
action. But we cannot conclude that sub-10% acquisitions could never
be problematic, because we do not know if any problematic
transactions were deterred from consummation for fear of disclosures
that are required in a filing, nor do we know how many might fall
into that category. I worry that adding exemptions broadens the
category of transactions outside of the agencies' view, and
therefore share Commissioner Chopra's preference that the agency
consider something other than a full exemption.
My other concern is that expanding the de minimis exemptions
will have profound policy effects primarily in an area outside of
the FTC's particular expertise and jurisdiction: Corporate
governance. Commissioner Phillips in his statement points out the
ways in which the current HSR filing requirement for non-passive
acquisitions can chill investors. He notes the rules around HSR may
lead ``investors to hold off, to keep quiet, and to hide what they
are doing. They are less likely to pressure management, or share
ideas, dampening operational and financial improvement--and,
ultimately, competition.'' Although I have not seen evidence to
support his conclusion about the effect on competition, the evidence
we have seen, even anecdotally, supports his assertions about
investor behavior. It follows, therefore, that expanding HSR
exemptions may likely change investor incentives and behavior.
These changes may ultimately be a good thing as a matter of
public policy, and they might not be; the concern for me is that
they would effect a public policy goal outside the realm of
antitrust, and I am hesitant for the FTC unilaterally to enact rules
outside the scope of our primary authority. I certainly understand
that the rules as they exist today have a public policy effect
outside antitrust, but they are the rules that we have, and
disrupting the status quo is something that should be done only
after careful consideration of and in consultation with experts on
corporate governance, investor behavior, and securities law and
policy.
So, I welcome comments on this NPRM from those in the corporate
governance and securities community, and experts on investor
behavior, to help us better understand the implications of such a
change--including whether it would, as Commissioner Phillips
asserts, actually improve competition.

[FR Doc. 2020-21753 Filed 11-30-20; 8:45 am]
BILLING CODE 6750-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.