Formal Interpretation No. 3

FORMAL INTERPRETATIONS UNDER 16 C.F.R. § 803.30 CONCERNING AFFIDAVITS FILED BY ACQUIRING PERSONS IN CONNECTION WITH PURCHASES OF VOTING SECURITIES IN CERTAIN OPEN MARKET TRANSACTIONS.

Commission staff have recently received several requests for interpretations of § 803.5(a) of the Commission's premerger notification rules implementing Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("the Act"), 15 U.S.C. § 18a, in the context of purchases of voting securities on the open market. These requests relate to the four "notification thresholds" in § 801.1(h) and to the requirement in § 803.5 (a) of an affidavit stating first, that the acquired person has received from the acquiring person written notice inter alia of "(t)he specific classes of voting and nonvoting securities of the issuer, and the number of securities of each such class sought to be acquired" (§ 803.5(a)(1)(iii), and second, that the acquiring person has a "good faith intention . . . to make the acquisition" (§ 803.5(a)(2)). Certain persons have inquired whether § 801.1(h) and § 803.5, read together, require the acquiring person to notify the acquired person of, and to state in the acquiring person's affidavit and response to item 2(e) on the Notification and Report Form ("Form"), the exact number of shares to be acquired and the particular notification threshold with respect to which the filing is made. These persons have suggested that in the context of open market conditions, the acquiring firm cannot know with certainty how many shares (and thus which notification thresholds) will be crossed.

The Commission staff has taken the position that where the exact number of shares to be acquired on the open market is known, the acquiring person must disclose this information in its notice to the acquired person and in its affidavit under § 803.5(a). Where the number of shares to be acquired cannot be determined, the acquiring person's Form must be based on, and the affidavit must attest to, a present good faith intention to acquire a sufficient number of voting securities to meet or exceed at least one of the notification thresholds of § 801.1(h). The precise number of shares to be held as a result of the acquisition need not be stated, but the specific reporting threshold to be crossed must be indicated. Thus, the affidavit may, consistent with § 803.5(a)(2), state that the exact number of shares to be acquired and time of acquisition is subject to market conditions, provided that the affidavit attests to a good faith intention to cross a specific reporting threshold.

A special case exists where the acquiring person crossed a notification threshold prior to the effective date of the rules (§ 801.20(b)), and wishes to acquire additional voting securities of the acquired person. Under such circumstances, the acquiring person's filing for the acquisition of additional shares should indicate the new notification threshold to be crossed. If the acquiring person fails to indicate which new notification threshold the person intends to reach or exceed, the filing will be treated as covering only the highest threshold crossed prior to the effective date of the rules.

Some examples may illustrate:

Example 1

Person "A" currently holds no voting securities (or less than 15% and less than $15 million of voting securities) issued by Person "B" and wishes to acquire such shares on the open market. Person "A" may not file notification unless "A" has the present good faith intention to acquire at least 15% or $15 million worth (whichever is less) of the voting securities of Person "B." It would not be sufficient for Person "A" to send Person "B" a notice that states that Person "A" may, from time to time, purchase shares of Person "B" on the open market, and that the number of shares to be acquired may, at some point, reach 15% or $15 million value. Such a notice would not satisfy the requirement of § 803.5(a)(2) that the acquiring person have a present good faith intention to make a reportable acquisition. A filing containing this notice would be deficient within the meaning of § 803.10(c)(2).

Example 2

Person "C," on the effective date of the premerger notification rules, held 12% of the voting securities of Person "D," with a value of $20 million. Under these circumstances, the acquisition of any additional shares of Person "D" would be reportable, since "C" has already crossed the $15 million threshold (see § 801.20(b)). Person "C" wishes to purchase an undetermined number of additional shares on the open market. Person "C" may satisfy the requirements of § 803.5 by providing "D" with written notice that "C" intends to acquire an undetermined number of shares that will, together with present holdings, result in a reportable acquisition. Because the acquiring person has not indicated an intention to cross a specific threshold, the staff, consistent with information contained in the acquiring person's response to item 2(e) (from which pre-acquisition holdings may be determined), will treat such a filing as a filing for the $15 million threshold of § 801.1(h)(1) alone. Further acquisitions meeting or exceeding the 15% threshold of § 801.1(h)(2) or any greater threshold would require another filing and compliance with another waiting period.

Example 3

Person "E," on the effective date of the premerger notification rules, held 20% of the voting securities of Person "F", with a value of $50 million. Person "E" wishes to purchase an undetermined number of additional shares on the open market. Person "E" may satisfy the requirements of § 803.5 by providing "F" with notice that "E" intends to acquire an undetermined number of shares that will, together with present holdings, result in a reportable acquisition. Such a filing will be treated by the staff as a filing for the 15% threshold of § 801.1(h)(2) alone. Further acquisitions meeting or exceeding the 25% threshold of § 801.1(h)(3) would require another filing and compliance with another waiting period.   Of course, Person "E" could cover the 15%, 25% and 50% notification thresholds in a single filing. Thus, if Person "E" wished to acquire control of Person "F," Person "E" would be required to file notification for the 50% threshold of § 801.1(h)(4), specifically informing the agencies and the acquired person of its intention to meet or exceed that level. After expiration of the waiting period, Person "E" would have one year within which to acquire a sufficient number of voting securities of Person "F" to equal or exceed 50%. If that level had not been reached within one year following expiration of the waiting period, Person "E's" notification would expire under § 803.7 of the rules.

Summary

In conclusion, where the acquiring person has no holdings (or holdings valued at less than $15 million) of voting securities of the acquired person, the acquiring person's notice to the acquired person and affidavit required by § 803.5(a) must describe and attest to a good faith intention to cross a specific notification threshold of § 801.1(h). Where, on the effective date of the rules, the acquiring person had holdings of voting securities of the acquired person in excess of one or more of the notification thresholds, the acquiring person's notice and affidavit must describe and attest to a good faith intention to cross one or more additional thresholds. A filing that does not state the additional notification threshold to be reached will be treated as a filing for the highest threshold crossed prior to the effective date of the rules.

The Assistant Attorney General in charge of the Antitrust Division has concurred in this interpretation.

[signature]
Daniel G. Schwartz
Deputy Director
Bureau of Competition

Date: December 28, 1978