The Treatment of Debt as Consideration

The HSR Act provides that “no person shall acquire, directly or indirectly, any voting securities or assets of any other person” without first complying with the notification requirements if certain conditions are met. The first step in complying with the HSR Act’s notification requirements is to determine whether the transaction satisfies the size of transaction test. Section 801.10 of the Rules provides the basis for this determination, which in many cases hinges on the Acquisition Price.

Section 801.10(c)(2) of the Rules states that Acquisition Price “shall include the value of all consideration for such voting securities, non-corporate interests or assets to be acquired.” The original Statement of Basis and Purpose promulgating the Rules (the 1978 SBP) provides useful background on the intent of 801.10, advising that “cash, voting securities, non-voting securities, tangible and intangible assets and assumption of liabilities, if consideration for an acquisition, must all be valued in computing the acquisition price.” 43 FR 33450, 33471 (Jul. 31, 1978) (emphasis added).

The 1978 SBP makes it clear that, under 801.10(c)(2), the assumption of liabilities must be included in the Acquisition Price if it is part of the consideration. Up until now, the Bureau advised that the retirement of debt should never be included in this calculation. This approach was based on the Bureau’s understanding of debt in the earliest days of the HSR program. The Bureau no longer considers this the correct approach because, as a result of developments in deal structures and financing, sometimes the retirement of debt is part of the consideration for a transaction in that it benefits the selling shareholder(s). Therefore, while the Bureau acknowledges that not all debt retired as a part of a proposed transaction is consideration, the full or partial retirement of debt should be included in calculating the Acquisition Price in any instance where selling shareholder(s) benefit from the retirement of that debt. This approach better reflects the intent of the Rule as reflected in the 1978 SBP.

The blog post announcing this change.