The Hart-Scott-Rodino statute and rules contain a number of reporting thresholds for transactions subject to premerger notification filing with the FTC and DOJ. In this post, we are going to focus on how to value publicly traded stock in order to determine reportability under the various filing thresholds. Some of the most frequent questions we get involve how to value acquisitions of voting securities in 801.30 transactions, given the volatile nature of the stock market.
What are the HSR notification thresholds for voting securities?
As seasoned HSR practitioners know, the original HSR thresholds - set at $50 million, $100 million, $500 million and $1 billion - are adjusted every January according to changes in the Gross National Product. The thresholds have gone up over the years to their current values of $76.3 million, $152.5 million, $762.7 million and $1,525.3 million. In the context of voting securities, there is one other key threshold: the acquisition of 50% of the voting securities. Even though today’s values are higher, this discussion will use the original threshold values for ease of reference.
Importantly, the notification thresholds are based on the total voting securities that the acquiring person will hold, not just the amount that will be bought in one specific transaction. That is, the acquiring person must calculate her holdings including the proposed purchase of voting securities to determine whether the purchase of additional shares will be HSR reportable. Consequently, an acquiring person must evaluate what she holds plus what she intends to hold, based on each stock acquisition in order to determine whether a particular purchase will cause total holdings to cross a threshold.
Example: Amanda currently holds less than $40 million of YYZ Corp. voting securities. Amanda intends to complete several acquisitions of YYZ voting securities within the next year, resulting in Amanda holding, in the aggregate, more than $50 million of YYZ Corp. Amanda is required to file an HSR notification form before acquiring enough voting securities to cross the $50 million threshold. If she does not do so and wait for early termination or expiration of the HSR waiting period before completing the purchase, she will be in violation of the HSR Act and potentially subject to civil penalties.
One year to meet, five years to buy
The HSR rules provide that an HSR filing expires one year following the expiration or early termination of the HSR waiting period. This means that during the first year, an investor can make the purchase that crosses the notification threshold, as well as any number of additional purchases, without filing another HSR notification, as long as he does not cross a higher notification threshold. In fact, under Rule 802.21, the investor can then acquire additional voting securities in the target issuer for the following four years, for a total of five years after expiration or early termination of the waiting period, as long as the additional stock does not result in meeting or exceeding a greater notification threshold. 16 C.F.R. 802.21.
A note about timing: The one-year period and the five-year period expire at 11:59 PM on the same date of the expiration or early termination of the waiting period, one or five years later. For example, if early termination was granted on October 15, 2015, the acquiring person has until 11:59 PM on October 15, 2016 (whether a business day or not), to meet or exceed a notification threshold. For the initial one-year period, the notification threshold met is the one that was in effect at the time of filing. For example, if the $50 million (as adjusted) threshold was $76.3 million at the time of filing, that is the threshold to meet within one year, even if the threshold was subsequently adjusted higher or lower by the FTC in the course of that one-year period. However, for the remaining four years, the acquiring person may acquire up to the next threshold in effect at the time of the new acquisition. So if in year two the $50 million (as adjusted) threshold is adjusted to $80 million, the acquiring person may hold and acquire up to $80 million, and so on.
Example: Ben files an HSR to cross the $100 million threshold for voting securities of UFP Corp. Within one year from the expiration or early termination of the HSR waiting period, Ben holds UFP Corp. stock valued in excess of $100 million, but less than $500 million. Ben may continue to acquire UFP Corp. stock for the subsequent four years without filing a new HSR, as long as Ben’s total holdings in UFP Corp. do not meet or exceed $500 million (as adjusted) or the 50% notification threshold.
If Ben had only acquired UFP Corp. stock valued in excess of $50 million, but less than $100 million, within the first year, Ben would be able to continue acquiring UFP Corp. stock during the subsequent four years, without refiling, but only up to the $100 million (as adjusted) threshold (unless doing so would trigger the 50% threshold).
Value of previously acquired stock is calculated using market price
Please note that the policy outlined below is a change. In the past, the PNO has given informal advice that an acquiring person could “lock in” a value of voting securities at the time of filing and continue to use that value to determine whether the threshold was met throughout the one-year period. After some consideration, the PNO believes that the HSR rules do not support such an interpretation, and that its prior position was inconsistent with the valuation methods required by the HSR rules.
With each acquisition, no matter how small, the acquiring person has to determine the current value of what she already holds, and the value of what she intends to buy, and combine the two to determine whether a new threshold is met. 16 C.F.R. 801.13. The value determined at the time of filing can no longer be locked in for all purchases within the first year.
For publicly traded voting securities, the value of stock held prior to the acquisition will be the "market price." 16 C.F.R. 801.13(a)(2)(i). The market price is generally the lowest closing price within the 45 calendar days before providing notice to the target per 16 C.F.R. 803.5(a) (i.e., when a transaction is reportable) or 45 days before the consummation of the acquisition (i.e., when a transaction is not reportable). 16 C.F.R. 801.10(c)(1). The value of the stock to be acquired will be the higher of the acquisition price, if determined, or the market price. 16 C.F.R. 801.10(a)(1).
Example: Cathy currently holds 75,000 voting securities of UNIT Corp., and intends to acquire additional UNIT voting securities. The lowest market price of UNIT Corp. stock, looking back 45 days, is $500 per share. The value of Cathy's holdings is 75,000 shares x $500 = $37.5 million, which is below any notification threshold. Cathy now intends to acquire 75,000 additional shares on the open market. The value of the stock to be acquired is likewise the market price: 75,000 shares x $500 = $37.5 million. Combined, she will hold $75 million, which is in excess of the $50 million threshold, and therefore Cathy must provide an 803.5(a) notice to the target and file an HSR notification prior to acquiring the additional stock.
Ten months after the expiration or early termination of the HSR waiting period for that notification, Cathy acquires 25,000 more UNIT shares, for a total holding of 100,000 shares of UNIT Corp. The market price at the time of this additional purchase, looking back 45 days, has dropped to $400 per share. Therefore, the market price value of Cathy’s current holdings is 100,000 shares x $400 = $40 million. Cathy is now below the notification threshold. Cathy has two more months to cross the $50 million threshold she filed for, in order for the one-year period of §803.7 to be met, which would then allow her to take advantage of §802.21 and acquire additional shares during the following four years without submitting a new filing.
In the eleventh month, Cathy sees that UNIT Corp.'s stock continues to decrease in value. At 45 days before the expiration of the one-year period, the stock is valued at a new low of $350 per share. At this market price, Cathy 's current holdings are 100,000 shares x $350 = $35 million. If Cathy wants to satisfy the threshold that was filed for in the HSR notification, she must acquire enough shares at the current market price to exceed the $50 million threshold. If Cathy fears the price will further drop but still wants to continue buying stock without making additional HSR filings, she should make her acquisition now, with the market price of $350 per share.
Cathy only needs to satisfy the threshold once within one year to obtain the benefit of buying for four more years without refiling, even if the value of the shares subsequently falls below the threshold. She could even sell shares and fall below the threshold, and still maintain the ability to acquire additional shares up to the next threshold over the next four years. Also note that a threshold must be met via an acquisition – an increase in value alone will not satisfy the rule; the acquisition of at least one share must be made.
- Acquiring persons must meet or exceed the relevant notification threshold within one-year-to-the-date of the expiration or early termination of the HSR waiting period in order to utilize the five-year buying period.
- Acquiring persons can cross, and then fall below, the notification threshold and still benefit from the one-year and five-year periods.
- An increase in value, without any acquisition, is not sufficient to cross a threshold.
- The value of voting securities held, and to be acquired, must be determined at the time of each planned acquisition.
- Market price is based on the 45-day look-back period relevant to the next planned acquisition.
As always, if you have questions about HSR filings, contact the PNO.