Federal Trade Commission
New Developments in the
Prepared Remarks of
Today I would like to provide an overview of recent developments in the Hart-Scott-Rodino Premerger Notification Program. In the year since I was last before this group, we have had many developments, both procedurally and substantively, at the Premerger Office. This afternoon I want to review some of these developments and discuss some of the important substantive work that the Commission is doing in this area. Most importantly, I will elaborate on some recent civil penalty actions that the Commission has filed involving HSR compliance and close with a discussion of the PNO's new interpretation on the reportability of transactions involving limited liability companies. As always, my remarks today are my own and do not necessarily reflect the views of the Commission or any of its Commissioners.
II. Merger Statistics
Let me begin with a review of some important statistics. The merger wave, which began in 1991, is continuing. We have just finished another record year for HSR filings -- this time topping 4640 filings for fiscal year 1998, approximately 25% greater than fiscal year 1997, and the largest volume of merger filings in history. The value of all mergers for this calendar year now tops one trillion dollars. This is the seventh consecutive yearly increase since 1991, a time when our staffing was almost identical to what it is today. In other words, we are reviewing three times as many filings with roughly the same staffing we had seven years ago.
In order to meet this ever increasing burden, the Premerger Office converted to a new Oracle-based computer system in February of this year, replacing an obsolete computer system that was designed back in the early 1980's. This new system has allowed us to process a greater number of filings more expeditiously and accurately. The system also will give us greater flexibility in the future to receive electronic filings and to integrate the system with our clearance procedures so clearance can be sought and resolved quicker. Through this new system, we are able to place early terminations on the Commission's webpage generally within 36-48 hours after they have been granted.
More filings generally mean more phone calls. During the past year, the Premerger Office has received on average about 800 phone calls a week. We installed an automatic phone answering system to our 3100 telephone line back in January to better handle the volume of calls and, after some initial bugs, it generally has been a success at handling the calls so people can get their questions answered more efficiently and expeditiously. This is a tremendously heavy volume of calls for any staff; but I am particularly proud that the PNO staff is able to handle this volume with a call abandon rate of only 5% on average.
III. Procedural Issues
Payment of Fee by Electronic Wire Transfer
The past year has seen a sharp increase in the use of electronic wire transfers to pay the HSR filing fee. Now more than 70% of all filing fees are paid by wire transfers. Electronic wire transfers have been particularly difficult for my staff to handle in recent years, primarily due to a failure by the filing parties to properly make the wire transfer. In order to address this problem, we have reiterated the position that a filing is not deemed complete until the filing fee is paid(1) -- i.e., until we have confirmed that the wire transfer has been completed into the FTC Treasury account. Of course, we do allow for a day or two grace period after the filing is received to confirm the receipt of the wire transfer. If we are unable to confirm the transfer by the third day, a member of my staff will advise the contact person on the filing. If it is discovered that the payment has not been made, through no fault of the Premerger Office or the Treasury, then the filing will be deemed deficient and the waiting period will not begin until the wire transfer is made and confirmed by my office.
You can help your clients by taking steps to insure that the transfer is completed correctly, and by providing my office with all the necessary information needed to confirm the wire. First, include a copy of the confirmation receipt that your client receives upon payment of the wire. Second, to insure filing fees paid by EWT are attributed to the appropriate payer filing notification, the payer should provide in the Comment Field of the wire transfer, the payer's name and 9-digit Taxpayer Identification Number (TIN). A natural person with no TIN should provide the payer's name and Social Security Number (SSN). If the filing fee is paid by more than one person (e.g., the acquiring and acquired persons each submit $22,500 in payment of the filing fee), all payers must provide their names and TINs.
Additionally, the transmittal letter(2) accompanying the notification of each person submitting all or part of a filing fee should contain the following:
If the Confirmation Number is unavailable at the time the notification is filed, provide this information by letter within one business day of the time notification is filed. If the name used to transmit the EWT differs from the payer's name, the alternative name must be disclosed in the transmittal letter accompanying the filing.
Please adhere carefully to these procedures to ensure that your payment is properly credited which will avoid delays in the start of the waiting period. Failure to provide the necessary information in a timely manner may result in the filing being deemed non-compliant until the filing fee is confirmed.
Early Terminations of the Waiting Period
Early terminations resolve nearly 70% of all filings that we receive. Recent calls to the PNO, however, indicate that parties may not know what their rights are to withdraw a request for early termination, or to subsequently ask for it when their original filing did not. On the latter point, parties are free to request early termination at anytime during the waiting period, even when they have not originally checked the "ET" box on their filing. All that is needed is a letter to the FTC and the DOJ from the Item 10 person requesting ET. At that point, if both FTC and DOJ staff are finished reviewing the file, they can recommend termination of the waiting period and we can usually quickly accommodate the request.
In the same vein, if parties have originally requested ET in the filing, but subsequently decide for whatever the reason that they do not want ET and the subsequent publication of the ET notice (in the Federal Register, on the Commission's homepage and by way of the PNO's daily recording), they can withdraw that ET request. However, once ET is granted, the request cannot be rescinded -- especially if steps have already been taken to publish that ET. We have had several recent requests by parties to withdraw their ET request after the ET grant has been placed on our phone recording or on the Commission's homepage.(3) In such cases, we will not "pull back" the ET since it is already in the public domain.
Even with so many filings ending up with an ET, parties still ask me what they can do to facilitate the ET process and get it sooner. One of the most frequently asked questions I get from antitrust practitioners after a merger investigation is completed is "what could we have done differently" to facilitate a quicker resolution of the review. Unfortunately, this question usually is asked at the end of the investigation and not at the beginning when it would be most valuable to your clients. But the answer to this question is very simple -- cooperate. Cooperate with staff as much as possible to answer their questions quickly and fully. Have information on products, market share, competitors, and customers ready for staff upon request. Be ready and willing to engage staff in a dialogue on the important and determinative issues raised by the transaction. And be realistic on where the competitive issues may lay and be upfront with staff and deal with them. The worst advice is to try to "hide the ball" and hope that you can "fake" staff into letting the transaction go. Certainly, with the crunch of filings, there may be instances where such a strategy will work, but they are rare. Once staff starts asking questions, it is much more productive to work with them to resolve the hard issues rather than trying to steamroll staff into capitulation.
Reporting of SIC Revenue Data
On April 8, 1997, the Office of Management and Budget (OMB) announced the adoption of a new data collection system to replace the Standard Industrial Classification (SIC) system. The new system -- the North American Industry Classification System (NAICS) -- replaced the SIC system effective January 1, 1998. However, the first data collected by the Bureau of Census under the NAICS system will not be available until early 1999, with data for most programs being introduced under the NAICS system over the following several years. The Bureau of Census has issued an implementation schedule indicating that the 1997 Economic Census Reports, with limited NAICS information, will be published in the first quarter of 1999, while the final report for all trade areas using the NAICS system, including a "bridge table" to facilitate conversion from the current SIC system, will not be available until 2001 at the earliest. OMB has stated that NAICS will not be used by any administrative, regulatory or tax program unless the head of the agency administering that program has first determined that the use of such industry definitions is appropriate to the implementation of the program's objectives.
Although certain companies may have begun converting their internal data over to the new NAICS system immediately, reporting parties will continue to be required to provide data responsive to Items 5 and 7 using the existing SIC system for the foreseeable future due to the unavailability of comprehensive data under the NAICS system. Once reliable and complete NAICS data are readily available, the Commission will evaluate whether the NAICS, or some other system, is appropriate to the implementation of the objectives of the Premerger Notification Program.
Is a transaction by a corporation controlled by a state or state agency reportable?
One reporting issue that has recently been presented to the PNO on more than one occasion is worth discussing today since it may be an issue in a greater number of transactions in the future. This issue deals with the reportability of transactions involving a corporation that is controlled by a state or state agency. The fact situation presented on at least two occasions was this: 100% of the voting securities of a corporation is owned by a state, state agency or other political subdivision. The state then decides to sell those voting securities to a third party. The question presented is whether the sale of that voting security is a potentially reportable event or is it exempt from HSR reporting obligations.
Of course, the Act conveys an exemption to transfers to or from a federal agency or a state or political subdivision.(4) In addition, Section 801.1(a)(2) sets forth a definition of entity for purposes of HSR which excludes governments of foreign nations, the United States and the several states, as well as their agencies and political subdivisions, from qualifying as entities. However, the SBP for this section of the Rules goes on to state that "corporations controlled by such units and engaged in commerce are entities, and may be subject to the requirements of the Act."(5)
The SBP goes on to state that although asset acquisitions from States are excluded from the Act, stock acquisitions are not, since in those situations the issuer of the stock, not the state or government, would be the acquired person. Thus, the Rules provide, and the PNO has so advised parties, that sales by states or their agencies of voting securities in a corporation (or assets held by such corporation) are not exempt from the Act. In such cases, the state is not considered the ultimate parent entity, even if it controls the corporation, and, therefore, does not make an HSR filing, but the corporation itself is the entity that reports. Under this advice, if the corporation, through enabling legislation or court decision, is a state agency or political subdivision in and of itself, then the sale of that voting security or asset would be exempt.
When is an entity a domestic or foreign firm?
Another issue that was presented recently involved the question of what is considered a domestic or foreign entity for HSR purposes. The facts presented were this: a corporation was established in Bermuda, incorporated under the laws of Bermuda, with its headquarters (as reported in all official documents, including filings it made with the SEC) located on the island. The headquarters, however, consisted of nothing more than a mailbox. All of the corporation's operations were in the United States, at the offices of a wholly-owned subsidiary. Indeed, the parties represented to us that if any officer was asked where the headquarters for the company was, they would identify the US operations, despite the representations made by the company in its official documents.
Although the company's operations might have been located in the US in this fact pattern, the Rules and the SBP distinguish between principal place of business and a company's principal operations and states that the two are not necessarily the same.(6) The principal place of business is that which the company considers its headquarters and we look to what the company reports as its headquarters in its annual report, SEC filings, and any other official statements. Thus, in the question presented, we advised the party that the Bermuda company was not a domestic firm for purposes of HSR.
Amendment to Rule 802.70
In July of this year, the Commission amended Rule 802.70 to exempt from the HSR reporting requirements, acquisitions of stock or assets required to be divested by an FTC order or order of any federal court in an action brought by the Commission or the Department of Justice.(7) Rule 802.70 already exempts from reporting obligations transactions that satisfy divestiture requirements under Commission final orders, and this amendment extends the exemption to transactions entered into before the order has been made final. This amendment was sought to address the situation where, in order to remedy competitive concerns, a party to a merger finds a buyer-up-front to divest assets to, but that buyer wishes to purchase those assets immediately after the Commission or court accepts the proposed consent for public comment. The amended rule will exempt such acquisitions from HSR reporting requirements, even though they are pursuant to an order that has not yet been made final. These transactions are adequately reviewed for potential antitrust concerns during the approval process under the consent agreement. This amendment should lessen the burden of complying with the HSR Rules in these circumstances and improve the program's overall effectiveness.
HSR Form Changes
Many practitioners continue to ask me where we stand on the proposed form changes, that were first proposed in 1994. One of my top priorities is to finally reach closure on these changes and we are almost there (finally). We plan to repropose these changes for public comment in the near future and are likely to propose implementing many of the changes first proposed in 1994.
V. HSR Compliance Issues
When will an inadvertent failure to file be subject to civil penalties?
In March of this year, at the request of the Commission, the Department of Justice filed a civil penalty action and settlement to resolve charges that The Loewen Group Inc. and Loewen Group International, Inc. (Loewen) failed to file their HSR forms before Loewen acquired stock in a competitor.(8) The complaint alleged that in May and June of 1996 Loewen had structured an acquisition of stock in Prime Succession, Inc. (Prime). The deal was originally structured such that the acquisition of $10 million of Prime voting securities was not reportable and Loewen confirmed this with HSR counsel. However, before the stock was actually purchased, the structure of the deal was changed. Under the new structure, the Prime voting stock was purchased for $16 million, a price that made the transaction reportable.
Nevertheless, and apparently without recontacting HSR counsel to determine if the new structure would make the acquisition reportable, Loewen went ahead with the deal. By acquiring the voting securities without filing, Loewen avoided the risk of losing its $20 million down payment, which it might have forfeited if the deal had not been consummated by September 20 because of delay caused by any antitrust investigation. Indeed, Loewen knew the HSR Rules and knew that its acquisition of stock in a key competitor would raise serious antitrust concerns. In fact, when Loewen subsequently made its HSR filing, the Commission issued a second request to investigate the transaction. Although the Commission did not conclude that this failure was intentional,(9) nevertheless, given the nature of the negligence in this case, the Commission sought and Loewen agreed to pay a $500,000 civil penalty.
This is just one of a number of recent failure to file cases the Commission has investigated recently and underscores the seriousness with which we examine even inadvertent failures to file. In this case, Loewen was a sophisticated company with past HSR experience and knowledge. Nevertheless, Loewen had some real considerations for going forward with the re-structured transaction without recontacting HSR counsel to confirm whether the transaction was still non-reportable. Although this failure may have been unintentional, it was serious enough to warrant civil penalties. The message to parties should be this -- even unintentional failures to file may lead staff to seek civil penalties. The line I believe we need to draw in inadvertent cases is between simple negligence (by a party unfamiliar and inexperienced with the HSR Act and its obligations) and that of gross negligence (by a sophisticated buyer who is knowledgeable of HSR obligations but who exercises a reckless disregard for such obligations). Such failures will not be excused by the simple explanation "I forgot to check" or, as in the Loewen case, "I forgot to check again."
In addition, this case illustartes that one check with HSR counsel to determine reportability may not be enough, especially if it is early in negotiations or before the deal is substantially re-structured. Furthermore, this case reiterates the long-standing PNO position that the so-called "one bite of the apple" rule(10) is not an automatic free pass for a company's first inadvertent failure to file. We will seek civil penalties in appropriate cases even in instances of a party's first time failure to file.
What are the potential risks of violating Hart-Scott?
In August, the Commission announced a complaint and proposed consent order against Commonwealth Land Title Insurance Company (Commonwealth) to resolve competitive concerns raised by Commonwealth's proposed consolidation with its only competitor in the Washington, D.C. market, First American Title Insurance Company.(11) According to the complaint, prior to the consolidation Commonwealth engaged in a form of gun-jumping, consolidating offices, terminating existing contracts with customers of First American, and causing those customers to pay substantially higher prices for title plant services under interim supply contracts pending completion of the consolidation.
The parties ultimately abandoned their proposal after it was questioned by FTC staff -- the proposed consolidation would have created a monopoly for title plant services in the D.C. market. However, the Commission's order requires Commonwealth to re-establish separate offices, to rescind all interim contracts entered into with customers, and to make refunds to those customers who were charged higher prices under these interim contracts.
Although this transaction was not reportable under HSR, it does raise some analogous concerns. Consummating a merger or acquisition, or taking steps to integrate the companies before the end of the waiting period is a serious concern, and often civil penalties may not be enough of an economic incentive to dissuade a company from violating the HSR Act.(12) The Commonwealth case provides an example of potential relief --- refunds to the customers harmed -- that could be used in the HSR context. Indeed, Section 7(A)g of the HSR Act authorizes civil penalties as well as "such other equitable relief as the court in its discretion determines necessary or appropriate." An equitable remedy, such as disgorgement, may remove the potential economic incentive that firms may have to evade HSR compliance. Certainly, we recognize that such an approach should be used cautiously, but if a violation causes harm to consumers or the market generally, and benefits the violator in an amount far in excess of any maximum penalty amount, then this relief is available and will be considered seriously.
What constitutes an adequate search for 4(c) documents?
We also continue to grapple with compliance issues concerning Item 4(c). We continue to have repeated instances of failure to produce all responsive 4(c) documents, many times due to an inadequate search. Former Deputy Director George Cary highlighted in 1996 that part of the problem with 4(c) compliance then was inadequate searches for responsive documents.(13) Nevertheless, the issue of the adequacy of the search continues to haunt many compliance cases today.
This search requirement should be treated seriously. But often parties ask us how far should they go in conducting their search? My advice is simple -- be complete and use some reasonable judgement on what should be sufficient. A "telephone" search, where HSR counsel reads the general counsel the literal definition of 4(c), is woefully inadequate but I understand still is often performed. The search should be coordinated by HSR counsel and conducted at the offices of the party by individuals knowledgeable with what the PNO considers to be 4(c) documents. The call on questionable documents should be made by HSR counsel after review of the document, and not by a company official who has little experience with the HSR process. The search should not be left to an individual officer or director to search his or her own files and to make decisions on what does and does not satisfy the requirement.
Often, we are discovering that the person certifying the form does not have first hand knowledge about the search for 4(c) documents but simply relies upon the search of subordinates. However, the certifying person must be in the position to inquire specifically as to what was done and make an independent certification that a complete search was actually made. The certifying person should not take this obligation lightly. Section (g)(1) of the HSR Act specifies that "any person, or any officer, director or partner thereof, who fails to comply" with the requirements of the Act is subject to civil penalties. Therefore, personal liability is possible and, although there has been no case yet in which an individual was found personally liable, this is an option that is available to us if we see the search obligations taken lightly.
The HSR Form requires certification by the person who supervised the preparation. Note the requirements is to supervise, not to delegate. The standard that should be applied to the responsibility of the certifier is one of the "reasonable person." Such a standard allows variation, depending on the particular circumstances in each case, but should not allow certifiers to completely delegate or ignore the responsibilities they assume when signing the certification of the Report Form. If the certifier understands what information is required, has concluded that the search procedures are sufficient to produce the required information, and has a basis for believing that the personnel preparing responses to the Form are experienced, competent and reliable, then the certifier could reasonably sign the certification after cursory examination of the completed Form and some discussion with those that completed the form. If, on the other hand, the certifier has little understanding of the requirements of the Form, or the procedures used to obtain the necessary information, or the qualifications of the personnel that completed the form, then the certifier has a duty to carefully examine those who have completed each item of the Form to determine the accuracy of the completed Form.
We have had several investigations recently questioning the methods used by parties to conduct the search for 4(c) documents. We are finding that parties are coming very close to the line of an inadequate search, if not crossing it. We will continue to investigate situations that call into question the sufficiency of the search performed and vigorously pursue enforcement actions where appropriate. Indeed, you will be hearing more from us on this issue in the near future.
VI. The Reportability of Limited Liability Companies
For the last several months, the Premerger Office staff has evaluated our position on the reportability of transactions involving limited liability companies (LLCs). Since late 1994, the staff of the PNO has followed an informal interpretation governing the reportability of the formation of LLCs, or of acquisitions of membership interests in existing LLCs. Under this informal interpretation, reportability was based on whether the membership interest being acquired was more like a partnership interest or a voting security interest.
Although this approach may have been adequate to determine the reportability of LLCs formed for start-up businesses, it has become apparent that the use of LLCs has shifted more toward uniting existing independent businesses rather than starting up new ones. Several recent Bureau of Competition investigations have involved the combination of part or all of the businesses of two or more companies into a new LLC. In each case, the transaction was not reportable under the PNO's current informal interpretation.(14) These transactions have led the PNO to reanalyze its current approach to LLCs to determine whether the intent and purposes of the HSR Act are being met. This analysis has led us to conclude that for those situations where two independently owned businesses are brought under common control through an LLC, it is more consistent with the purposes of the HSR Act that some of these transactions be reportable. The PNO staff has therefore decided to change its approach to the formation of LLCs by issuing a Formal Interpretation. This Interpretation, the fifteenth Formal Interpretation to be issued under the HSR Rules, will be published in the Federal Register next Tuesday but I would like to give you some highlights today.
Under this Interpretation, the formation of an LLC which brings two or more pre-existing independently owned businesses under common control (i.e. an interest entitling one party to 50 percent of the profits of the LLC or 50 percent of the assets of the LLC upon dissolution) is now reportable if the HSR size-of-person and size-of-transaction requirements are met. The formation of all other LLCs (those in which independent businesses will not be brought under common control) will be treated like the formation of a partnership and their reportability will be determined according to existing interpretations of the PNO. The current analysis used to determine whether an LLC interest acquired is more like a voting security or a partnership interest will no longer be used once the formal interpretation goes into effect.
The combination of businesses into a new LLC under common control is the functional equivalent of a merger or consolidation. Such combinations, like other unions of businesses under common control, are subject to the Act. Section 801.2(d)(1)(i) of the Rules states that "[m]ergers and consolidations are transactions subject to the Act . . ."(15) Although combinations of businesses in LLCs are not mergers or consolidations in the strictest sense because they do not involve corporations,(16) they are substantively similar. As it was originally promulgated in 1978, § 801.2(d)(1)(i) stated that "[a] merger, consolidation, or other transaction combining all or any part of the business of two or more persons shall be an acquisition subject to the Act..." (emphasis added).(17) Imposing a filing requirement on the parties to such transactions promotes the basic purpose of the Act and the Rules, namely, to give the antitrust enforcement agencies advance notice of, and an opportunity to oppose, transactions which may violate the antitrust laws.
Furthermore, when a person contributes a business to an LLC to be controlled by another, such transfer is the functional equivalent of an acquisition of the assets of that business and should be so treated for HSR purposes under Rule 801.2. Reportable acquisitions of non-profit corporations are also reported as asset acquisitions for the same reason. Consequently, assuming the size-of-person and size-of-transaction tests are met, contributors to combinations of businesses in LLCs should report as if they were acquiring the assets to be contributed to the LLC by the other contributor(s).
The application of this Interpretation will depend on two things: one, whether each member of the LLC is engaged in a "business", and second, whether one or more contributors take back a controlling interest in the business of the other. A "business" is defined for purposes of this Interpretation the same as an "operating unit" is defined for purposes of § 802.1(a) of the Rules, namely, "...assets that are operated ... as a business undertaking in a particular location or for particular products or services, even though those assets may not be organized as a separate legal entity."(18) For purposes of this Formal Interpretation, the contribution to an LLC of an interest in intellectual property, such as a patent, a patent license, know-how, and so forth, which is exclusive against all parties including the grantor, is the contribution of a business, whether or not the intellectual property has generated any revenues.
An example of what would and would not qualify as a business under this interpretation may be helpful. Suppose "A" and "B" are both regional grocery store chains which do their data processing in-house. "A's" data processing unit does work only for "A" and "B's" only for "B." "A" and "B" decide to contribute the assets used in their data processing operations to a new jointly-controlled LLC which will provide data processing services to "A" and "B." Assume the size tests are met. This would not be reportable because the assets used to provide such management and administrative support services do not constitute businesses since they were used solely for internal purposes.(19) This would be the case even if the new LLC intends to begin offering data processing services to third parties, since this would be beginning a new business rather than uniting existing businesses. However, the result would be different if "A" or "B" had used its equipment to provide data processing services to others prior to contributing it to the new LLC for then it would be an existing business. The result would also be different if "A" and "B" were engaged in manufacturing and the assets to be contributed to the new LLC were used in part of a manufacturing process.
The second element key to this interpretation is whether any member of the LLC takes back a controlling interest in the LLC. A controlling interest is defined as an interest entitling one party to 50 percent or more of the profits of the LLC or 50 percent or more of the assets of the LLC upon dissolution. This will be a key element, since without control in at least one person, there has been no functional transfer of assets from one party to another that would be subject to the Act. Accordingly, if three parties each took back an equal 1/3 interest in an LLC, no one party would be taking control of the assets contributed to the LLC and, therefore, there would be no reporting requirement.
Although § 801.40(20) of the Rules is not directly applicable to combinations of businesses in an LLC, the principles embodied in § 801.40 -- especially in § 801.40(c) -- are applicable here. The value of the assets of the new LLC for size-of-person test purposes should be determined in accordance with § 801.40(c). Parties required to file should complete Item 5(d) of the Notification and Report Form for Certain Mergers and Acquisitions. Like a new corporation under § 802.41 of the Rules, 16 CFR § 802.41, the new LLC need not file notification (but each contributor who meets the size-of-person test may need to do so). Typically, there would be no acquired person filing, as in the case of the formation of corporate joint ventures. The waiting period will not begin until all parties required to file have filed and are in compliance.(21)
A few examples, contained in the Interpretation, should shed some light on the potential application of this Interpretation. First, the simplest: "A" and "B" both plan to contribute their widget businesses to a new LLC in which each will acquire a 50 percent interest. This acquisition would be reportable if A is a $100 million person and B is a $10 million person and the value of assets contributed to the LLC is more than $15 million.
Suppose "A" will contribute its widget business and "B" will contribute cash for operating capital to a new LLC. This would not be reportable if "A" will be the only controlling person because it does not unite two or more businesses. If "B" is also to be a controlling person and is engaged in a business, it will be reportable by "B."
Now, suppose that "A" proposes to consolidate its widget business, which it has conducted in two subsidiaries and a division, into a newly-formed LLC in which it will hold a 60 percent membership interest. This would not be reportable because, although separate businesses are being combined, they were not under separate control prior to the transaction. The Formal Interpretation contains several additional examples that will amplify its potential application to LLCs.
This new treatment of LLCs also affects the reportability of the acquisition of membership interests in existing LLCs. The acquisition of existing membership interests will be potentially reportable in two situations. Any person which acquires (or, as a result of an acquisition, will hold) a controlling interest in an existing LLC (i.e., an interest entitling it to 50 percent of the profits or 50 percent of the assets upon dissolution) may be required to file because such a transaction may bring two or more separate businesses under common control. Whether a filing is necessary when a person acquires a controlling interest in an existing LLC would depend on whether the acquiring person also has a business and whether the size of person and size of transaction criteria of the Act are met. In situations where the acquisition of a membership interest in an LLC does not result in the combination of existing businesses under common control, the acquisition of such membership interest will be treated like the acquisition of a partnership interest. If any person subsequently acquires (or, as a result of an acquisition, will hold) 100 percent of the interests in that LLC, and has not previously filed for and consummated the acquisition of control of that LLC, that person will then be deemed to be acquiring the assets of that LLC and so may be required to file at that time.
In the notice, the PNO staff will request comments from the public on two issues which are related to the Formal Interpretation. The first is whether the position taken in the Formal Interpretation imposes any undue burden on any party or class of parties. Although Bureau staff have had limited contact with LLCs to date, there has been some indication by the private bar that LLCs are the "flavor of the month" and are being used very frequently. Consequently, PNO staff would like to ascertain what, if any, burden this filing requirement will place on filing parties.
Secondly, the notice will seek comment on whether partnerships should be treated the same way LLCs will be under this Formal Interpretation. Currently, the acquisition of partnership interests is only reportable when the acquisition results in one person holding 100% of the partnership interests. This partnership interpretation has been in place since the early 1980's. In 1987, when the Commission promulgated § 801.1(b)(1)(ii) of the Rules which allows a partnership to be controlled by another entity, the Commission reiterated this position on the reportability of acquisitions of partnership interests. It stated, however, that the Commission would reconsider this issue from time to time to see whether any revision in this position would be appropriate.(22) The new Formal Interpretation on LLCs raises some of the same issues as our current position on partnerships. Accordingly, the PNO is asking for comments on whether partnerships should be treated the same as LLCs with regard to their formation, acquisition, or both.
During our review of LLCs, we did consider reverting back to the original position of the PNO that LLCs be treated the same as a corporation and any acquisition of an interest in an LLC would be treated as the acquisition of voting securities. However, such a position does not seem justified nor does it reflect the true nature of the LLC. We believe that the position reflected in the Formal Interpretation is more consistent with the intent and purposes of the HSR Act and will be easier for parties to follow than has been the current advice.
The Formal Interpretation calls for a thirty-day comment period, which will expire on November 12, 1998. The interpretation will take effect on December 14, 1998, which will give staff adequate time to analyze the comments received before it takes effect.
As you can see, the past year has been extremely busy at the Premerger Office. We have worked hard to increase our efficiency and remain responsive to parties seeking advise and answers to questions ranging from the simple to the complex. We have strived to continue the great tradition the PNO has carried throughout its history to help filing parties get it right the first time.
But the next year promises to be even busier. The current merger wave does not appear to be letting up. In the next year, we will be using more avenues, including the internet, to get information out and into the hands of people that need it so that practitioners and companies all over the US will have access to clearly articulated policies and positions of the PNO. We will continue to work to revise and update our publications, and make more information available through the Commission's homepage. We will also work to find ways to reduce the burden of HSR on parties while still obtaining the information necessary for us to do our antitrust review. All of these efforts will be directed toward increasing the "user friendly" tradition of the Premerger Office, always the source of a great deal of unsolicited praise from the bar and industry. We will continue to work to help you get it right in the future.
1. See, Fed. Reg., Vol. 57, No. 201 (October 16, 1992) pp. 47466-468 at 47467.
2. An additional copy of the transmittal letter should also be included with the filing to better facilitate my staff's processing of the fee information.
4. See Section 7A(c)(4).
5. See Federal Register, Vol. 43, No. 147 (July 31, 1978) at p. 33456.
6. Id. at 33461.
7. See Fed. Reg. Vol. ___, No. __ (June 25, 1998); July 8, 1998, Federal Trade Commission Press release.
8. United States v. The Loewen Group Inc., 1998-1 Trade Cas. (CCH) ¶ 72,151 (D.D.C. 1998).
9. Compare to the Mahle/Metal Leve case, U.S. v. Mahle GMBH, Civil Action No. 1:97CV01404 (filed June 19, 1997, D.D.C.), where the parties consummated the transaction (an acquisition of 50.1% of the voting securities) before filing their HSR forms. The complaint alleged that the parties knew that their deal posed serious antitrust problems and knew they were violating the HSR Act. This resulted in civil penalties being assessed against Mahle in the amount of $5.6 million -- the largest HSR civil penalty ever.
10. See Prepared Remarks of John M. Sipple, Jr., Chief, Premerger Notification Office, Before the 113th Annual Meeting, New York State Bar Association, Antitrust Law Section, January 16, 1990, p. 14.
11. In the Matter of Commonwealth Land Title Insurance Company, FTC File No. 981-0127 (accepted for public comment, August 26, 1998).
12. See for example, Mahle/Metal Leve, where the complaint alleged that the parties considered ignoring the HSR requirements and treated their obligations as "a tradeoff between the costs of compliance with the Act and the risks of noncompliance."
13. G. Cary, Failure to Comply with the Hart-Scott-Rodino Act: Braveheart or Dead Man Walking? (March 28, 1996) (http://www.ftc.gov/speeches/other/cary328.htm).
14. In one of these matters, the Commission accepted a consent agreement resolving the competitive concerns. In the Matter of Shell Oil Company and Texaco, Inc., Docket No. 3803 (final issuance April 22, 1998). In the more recent matter, the Commission filed an administrative complaint seeking to undo the competitive harm caused by the creation of the LLC. In the Matter of Monier Lifetile LLC, Docket No. ___ (complaint issued Sept. 22, 1998).
15. 16 CFR § 801.2(d)(1)(I)
16. See, e.g., 19 W. Fletcher, Cyclopedia of the Law of Private Corporations § 3:141 (perm. ed.1994). Mergers and consolidations are defined as transactions in which all constituent corporations (in the case of consolidations) or all but one (in the case of mergers) lose their separate legal identities as part of the transaction. When two or more businesses are united in an LLC, they do not lose their legal identities in this sense, but they do cease to be separate and independent.
17. 16 CFR § 801.2(d)(1)(i); 43 Fed Reg 33539, July 31, 1978. This language does not appear in the current version of § 801.2(d). In 1983, this provision was changed to clarify and change the treatment of mergers and consolidations under the Rules and this particular wording was eliminated. According to the Statement of Basis and Purpose to the 1983 changes, 48 Fed Reg 34430, July 29, 1983, the Commission sought to make clear that mergers and consolidations are treated as acquisitions of voting securities and to change § 801.2(d) to enable the parties to a merger to determine which is the acquiring person and which is the acquired person. There is no indication that this change was intended to narrow the scope of § 801.2(d), however.
18. 16 CFR § 802.1(a).
19. Cf § 802.1(d)(4) of the Rules and Examples 10 and 11, 16 CFR § 802.1(d)(4).
20. 16 CFR § 801.40.
21. Cf. § 803.10(a)(2) of the Rules, 16 CFR § 803.10(a)(2).
22. See 52 Fed Reg 20058, 20061 (May 29, 1987).