Question
(redacted)
October 15, 1987
BY HAND
Joseph H. Widmer,
Director of Operations,
Antitrust Division,
Department of Justice,
9th & Pennsylvania Ave., N.W.,
Room 3218,
Washington, D.C. 20530
John M. Sipple, Esquire,
Senior Attorney,
Premerger Notification Office,
Federal Trade commission,
7th & Pennsylvania Ave., N.W.,
Room 303,
Washington, D.C. 20850
Dear Sirs:
Pursuant to 16 C.F.R. 803.30, I request a formal interpretation concerning the application of the Hart-Scott-Rodino Antitrust Improvements Act (the HSR Act) and the regulations promulgated thereunder to the transaction described below.
Description of the Transaction
A, the acquiring company, seeks to acquire more than 10% of the voting securities of B, a bank holding company that owns an FDIC-insured bank and has a class of securities subject to the registration requirements of the Securities and Exchange Commission. As a result, the transaction will be subject to the Change in Bank Control Act (the CIBCA), which requires that the appropriate federal banking agency be given prior notice and opportunity to review and ultimately disapprove an acquisition of control. 12 U.S.C. 1817(j)(1). In this case, the appropriate federal banking agency would be the Board of Governors of the Federal Reserve System (the Board).
Under the CIBCA, control is defined as the power, directly or indirectly, to direct the management or policies of an insured bank or to vote 25 per centum or more of any class of voting securities of an insured bank. 12 U.S.C. 1817(j)(8)(B). However, the regulations promulgated by the federal banking agencies pursuant to the CIBCA provide that nay proposed transaction that would result in A owning, controlling, or having the power to vote 10 percent or more of any class of Bs voting securities is presumed to result in the power to direct the management or policies of an insured bank or bank holding company if any of bs securities are subject to the registration requirements of the Securities Exchange Act of 1934 or no other person will own a greater proportion of that class of voting securities immediately after the transaction. 12 C.F.R. 125.41(b)(2) (regulations of the Board), 5.50(d)(1) (regulations of the Comptroller of the Currency), and 303.4(a) (regulations of the FDIC). Since B has securities registered under the Exchange Act, As acquisition of 10 percent or more of bs common stock would fall within the presumption of control. As a matter of practice, this presumption of control is virtually irrefutable.
Accordingly, A intends to purchase 9.9% of Bs outstanding voting securities, and then to notify the Board that it proposes to acquire additional voting securities of B. Any such additional acquisitions of B would take place only after board review under the CIBCA.
Application of the HSR Act
A and B both meet the HSR Acts size-of-person test, and the $15 million size-of-transaction test will be satisfied once A acquires approximately four percent of Bs outstanding voting securities. Accordingly, A must file HSR notification and observe a waiting period prior to acquiring $15 million worth of Bs voting securities unless an exemption is available.
Pursuant to 16 C.F.R. 802.8(b)(1), transactions that require agency approval under the CIBCA are exempt from the requirements of the HSR Act if copies of the information and documentary material filed with the bank regulatory agency are filed with the Federal Trade commission and the Assistant Attorney General at least 30 days prior to consummation of the proposed acquisition. However, the staff has suggested that because the initial 9.9% acquisition of Bs voting securities would exceed $15 million but would not require board approval under the CIBCA, the exemption provided by 802.8(b)(1) is not available to A.
I respectfully request that the staff reconsider this view. Under the facts as described above, Congress (through its enactment of the CIBCA) and the federal banking agencies (through their promulgation of regulations) have made the judgment that banking agency approval is not required until A proposes to acquire 10 percent or more of Bs common stock. By promulgating 802.8(b)(1), the Federal Trade Commission has determined that review by the appropriate federal banking agency substitutes for the HSR review process. It is entirely anomalous, therefore, for the staff to require HSR notification for transactions that do not cause As holding to rise to the level that requires review by the federal banking authorities.
If you believe, however, that 802.8(b)(1) does not exempt this transaction, I request your views as to whether A may claim the investment exemption, 16 C.F.R. 802.9, for its purchases of up to 9.9% of Bs outstanding voting securities. In this context, it is essential to recognize that A does not have, and cannot have, a present intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer. 16 C.F.R. 801.1(i)(1). In fact, it would be prevented by law from doing so. As interpreted by the board, the first definition of control under the CIBCA (power to direct the management or policies of an insured bank) would prohibit any such participation and thus any conduct by A that would be inconsistent with an investment intent under the HSR Act. Moreover, the very broad definition of controlling influence applied by the board under Section 2(c) of the Bank Holding company Act (the BHCA) (12 U.S.C. 1841 et seq.) Would have a similar impact. In short, not only does A have a present investment intention, it is prevented by the CIBCA and the BHCA from engaging in conduct inconsistent with an investment intent.
As conduct would change if, and only if, it receives federal banking agency approval to acquire control of B. In our view, the rules should permit an acquiring person to claim the investment exemption under these circumstances, because they focus on present intentions and clearly contemplate that a persons intent may change. According to the Statement of Basis and Purpose,
If a person makes an exempt acquisition solely for the
purpose of investment and later decides to participate in the management
of the issuer, this change in intent does not require filing with respect to
the exempt purchase, because the act applies only at the time of an
acquisition. 43 Fed. Reg. 33,466 (July 31, 1978) (emphasis added).
Please do not hesitate to contact me at (redacted) if you have questions about this matter.
Sincerely,
(redacted)
(redacted)