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Under the Hart-Scott-Rodino (HSR) Act and Rules, determining whether a U.S. entity is a corporation or a non-corporate entity (like an LLC or LP) is relatively clear.  For foreign entities, the answer is often not so clear. Yet this determination can have important implications for HSR reportability and the applicability of certain exemptions (e.g., 16 CFR §§ 802.9, 802.51).

The Premerger Notification Office (PNO) often receives calls asking staff to determine whether a foreign entity is a corporate or non-corporate entity for HSR purposes. In responding to these inquiries, the PNO has indicated whether particular types of foreign entities should be categorically treated as corporate or non-corporate based on how that type of foreign entity typically operates. To that end, we have historically posed the following questions to elicit key information:

  1. Does the entity issue securities of some sort that allow the holders to vote for the election of a board of directors? If the answer is yes, then the entity is treated as a corporate entity for HSR purposes.
  2. If the answer is no, is there a group of managers that functions similarly to a board of directors? If yes, then:
    1. Are the members all officers or employees of the entity? If yes, then the entity is treated as a non-corporate entity (like an LLC or LP).
    2. Are there outside persons in the management group who function like independent directors (and are not employees of the entity)? If yes, then the entity is treated as a corporate entity.

Over time, this approach has proven burdensome – for both the PNO and filing parties – as well as inconclusive, mainly because key facts are typically difficult to ascertain. Requiring a filing party (usually the buyer) to determine whether the foreign target maintains a group of managers that functions similarly to a board of directors and to evaluate the composition of that board can prove nearly impossible, especially in the context of a hostile deal or where the buyer has difficulty reaching or communicating with foreign local counsel.

To reduce the burden and increase clarity, going forward the PNO has determined that a better approach is to evaluate each entity on the basis of one easy-to-answer question:

Does the entity issue securities that allow the holders to vote for the election of a supervisory board of directors?

If the answer is yes, then the entity is treated as a corporate entity for HSR purposes.

If the answer is no, then the entity is treated as a non-corporate entity for HSR purposes.

Under this new test, a filing party will more easily be able to determine whether a foreign entity should be treated as corporate or non-corporate for HSR purposes because it can reference publicly available information without having to conduct an in-depth analysis of the foreign entity’s management. This new test achieves the goal of allowing the entities with the most information and expertise about a particular foreign entity to classify it while minimizing the burden on the parties and their counsel.

A couple of additional notes:

  • Each foreign entity should be evaluated on a case-by-case basis using the new test, even if the PNO has offered informal guidance before on that specific type of entity.
  • Any PNO informal interpretations that discuss whether a particular type of foreign entity is corporate or non-corporate no longer represent the position of the PNO.
  • The new test applies to foreign entities only. This guidance does not bear on or apply to the PNO’s treatment of U.S. corporate and non-corporate entities under HSR rules.

Prior PNO informal interpretations will be updated as necessary to better reflect this new approach. If you have questions about how to apply the new test, contact the PNO.

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