The U.S. Federal Trade Commission (FTC) recently published a notice of a proposed rulemaking (Notice)1 that would change the definitions of U.S. and foreign persons and issuers in the premerger notification rules (Rules)2 under the Hart-Scott-Rodino Act (HSR Act).3 These amendments may limit the existing exemptions for acquisitions of non-U.S. companies, particularly those made by other non-U.S. companies. Comments on the proposal are due December 30, 2019.
The HSR Act requires that parties to certain acquisitions of voting securities, non-corporate interests, and/or assets make filings with the FTC and the Antitrust Division of the U.S. Department of Justice in advance and complete a waiting period (usually 30 days) before consummating the acquisition. Currently, acquisitions resulting in holdings valued at more than $90 million are potentially reportable. The HSR Act and Rules provide a variety of exemptions from the filing requirements, including exemptions that apply to certain foreign entities and foreign assets. The proposed rule does not change the definition of foreign assets.
Currently, determination of whether an entity qualifies as “foreign” depends in part on the location of its “principal offices.” The Rules do not define “principal offices,” but the Statement of Basis and Purpose (SBP) published with the original 1978 Rules explained that the principal office should be “that single location which the person regards as the headquarters office of the ultimate parent entity. This location may or may not coincide with the location of its principal operations.”4 As the FTC explains in the Notice, identifying an entity’s “principal offices” can be “difficult [for] modern globalized businesses.”5
The proposed rule introduces a definition for “principal offices.” Unlike the SBP, this definition does not reference “headquarters.” According to the Notice, “[t]he Commission now believes that ‘principal offices’ should, in fact, relate to the location of an entity’s principal operations.”6 Thus, the proposed rule introduces a test based on the residency of officers and directors (or, for entities that do not have officers or directors, the individuals who exercise similar functions) and the location of the entity’s assets. Under the proposed rule, if 50 percent or more of an entity’s officers or directors or assets (by fair market value) reside in the U.S., that entity would be considered a U.S. entity.
Under the proposed rule, some corporations currently treated as “foreign” would be deemed U.S. entities. For example, an entity incorporated and organized outside the U.S., with headquarters abroad, is currently considered a foreign entity even if its manufacturing facilities are in the U.S. Under the proposed rule, this entity would be considered a U.S. entity if 50 percent or more of its assets are in the U.S. or if 50 percent or more of its officers or directors are residents of the U.S.
The proposed change would also affect private equity funds and other non-corporate entities. Past guidance has indicated that the location of a general partner or investment manager is not relevant to determining whether a non-corporate entity should be considered a U.S. entity.7 In contrast, under the proposed rule, a fund organized and headquartered outside the U.S. would be a U.S. entity if its general partner or investment manager is organized or incorporated in the U.S. or is a resident of the U.S.
Potential Impact of the Proposal
According to the Notice, FTC staff believes that the proposed amendment will not increase, and may reduce, the burden on potential filers because “the proposed amendments should make it easier for entities to evaluate whether a given transaction will qualify for the foreign exemptions.”8
Although the proposed rule will in some ways reduce the ambiguity in the definition of foreign persons and issuers, the new definition of “principal offices” could be burdensome to apply because it would require an acquirer to compare the aggregate fair market values of a target issuer’s U.S. and non-U.S. assets. Such determinations are not always made in the ordinary course of deal negotiations and can require extensive analysis (e.g., where intangible assets such as goodwill or intellectual property account for much of a business’s value). Further, because the Rules require acquirers to determine fair market value, an acquirer’s judgment may be dispositive in determining whether a target should be considered a U.S. or foreign entity. Thus, a target might be deemed a U.S. entity based on one acquirer’s fair market valuation but a foreign entity based on another’s.
Additionally, the proposed definition of “principal offices” would require analysis of information that is unlikely to be public. This could affect the ability of potential acquirers to determine the reportability of nonconsensual transactions such as open-market purchases or hostile acquisitions. Under the current Rules, potential acquirers may have access to enough information from public sources to determine appropriately where a target issuer’s headquarters office is located. In contrast, under the proposed amendments, a potential acquirer would have to make detailed determinations regarding the residency of the issuer’s officers and/or directors, the nature and fair market value of assets of the issuer located in and outside the U.S., or both. Even for public companies, such details are unlikely to be fully available from public sources.
Finally, because the proposed definition narrows the scope of entities that will be treated as foreign under the Rules, fewer transactions may be eligible for certain exemptions for foreign persons and entities. This change may be borne most heavily by foreign entities that acquire less than 50 percent of the voting securities of other foreign entities, as the narrower definition of foreign issuer may make more such minority acquisitions reportable.
Although certain of the transactions affected by the proposed rules may be eligible for other exemptions, the proposed changes would expand the coverage of, and limit the exemptions currently available under, the Rules.
The FTC has invited public comments on the proposed rule changes. The FTC must receive comments by December 30, 2019. Our lawyers are available to assist clients with the preparation and submission of such comments. For those wishing to review the full set of materials issued by the FTC, they may be found here.
1 Notice of Proposed Rulemaking, 84 Fed. Reg. 58,348 (Oct. 31, 2019); FTC and DOJ Approve Procedural Amendments to HSR Rules for Foreign Entities, FTC Press Release (Nov. 8, 2019).
2 16 C.F.R. Parts 801, 802, and 803.
3 15 U.S.C. § 18a.
4 Premerger Notification; Reporting and Waiting Period Requirements Final Rule, 43 Fed. Reg. 33,450 (July 31, 1978) at 33,461.
5 Notice of Proposed Rulemaking, 84 Fed. Reg. 58,348 (Oct. 31, 2019) at 58,350.
7 See, e.g., Informal Interpretation 1003002, Sept. 11, 2010, available here; Informal Interpretation 0709017, Sept. 27, 2007, available here.
8 Notice of Proposed Rulemaking, 84 Fed. Reg. 58,348 (Oct. 31, 2019) at 58,350.
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