On January 21, 2016, the Federal Trade Commission announced its annual revisions to the monetary thresholds of the Hart Scott Rodino Antitrust Improvements Act of 1976, as amended, (the “HSR Act”) and Section 8 of the Clayton Act.
The revised thresholds are expected to become effective in late February 2016, 30 days after the date of their publication in the Federal Register. These changes increase the dollar thresholds necessary to trigger the HSR Act’s premerger notification reporting requirements. The FTC also increased the thresholds for interlocking directorates under Section 8 of the Clayton Act.
The HSR Act requires parties to certain transactions to notify the Federal Trade Commission and Department of Justice, and to observe a waiting period prior to consummation. The HSR Act enables antitrust regulators to review transactions, investigate and address potential competitive concerns prior to consummation, and also carries with it monetary penalties for failure to comply.
Section 8 of the Clayton Act prohibits certain interlocking directorates between competing companies to guard against the facilitation of anti-competitive coordination and information exchanges that can arise as a result of simultaneous board membership. As a general rule a person cannot serve on the boards of two competing companies.
Revised HSR Thresholds
The HSR thresholds that trigger the obligation to submit HSR filings will be increased from $76.3 million to $78.2 million.
Unless otherwise exempt, a person or entity that directly or indirectly acquires assets or voting securities (or interests in an unincorporated entity) in excess of the HSR threshold may be required to file notification under the Act and to observe the applicable waiting period before consummating the transaction. Subsequent transactions involving the acquisition of additional interests in the same company typically are exempt from further notification unless a subsequent notification threshold is exceeded.
Under the revised thresholds, transactions valued at $312.6 million or less will be subject to the HSR Act if the parties also meet the size-of-person thresholds. The size-of-person is generally met where a person with annual sales or total assets of $156.3 million acquires a person with annual sales or total assets of $15.6 million, or vice-versa. Transactions valued at more than $312.6 million are subject to the HSR Act without reference to the size of the person, unless otherwise exempt.
Revised Thresholds for Interlocking Directorates
Section 8 of the Clayton Act is particularly relevant for investment funds taking minority positions in competing companies and seeking board representation. Under the statute, no person, or representative of the same person or entity, is permitted to serve simultaneously as a director or officer of competing companies, but there are important carve-outs and exceptions.
The prohibitions of Section 8 are limited to cases in which each of the companies has, under the revised thresholds, capital, surplus, and undivided profits of more than $31,841,000. This is generally read as a net equity test.
Even where the threshold is met, however, the restrictions do not apply where the competitive sales of either company represents less than 2 percent of its total sales, or are less than $3,184,100; or where the competitive sales of each company represent less than 4 percent of its total sales. The statute also permits directors and officers whose appointments were not prohibited at the time of appointment to continue to serve for up to a year after the Section 8 thresholds are exceeded, thus the revised Clayton Act Section 8 thresholds can potentially eliminate an existing violation.
Correct application of the HSR Act and Clayton Act Section 8 can be complex, and requires detailed and careful analysis. Investment funds must consider Section 8 of the Clayton Act when installing board members of potentially competing portfolio companies that are not under common control. During the one grace period, it is a good time to examine whether violations exist and to cure them.