Private equity firms are looking at increased exposure to antitrust review under a proposal that would subject more mergers and acquisitions to extensive reporting requirements.
The proposed rule from the Federal Trade Commission and Justice Department’s Antitrust Division would expand the meaning of a “person” that must report a transaction for antitrust review under the Hart-Scott-Rodino Act.
The new definition would include the acquiring company’s associated entities, such as affiliates. That would enlarge the size of many prospective acquirers, one of the considerations in whether a deal gets antitrust scrutiny.
The tweak in particular would push more private equity-driven deals over the threshold that triggers regulatory reporting requirements for antitrust review prior to closing.
Many private equity firms use special purpose entities for acquisitions. And under such a structure, most deals don’t have a large enough transaction size—which is based on the acquirer’s size and deal price, among other things—that would trigger a reporting requirement.
“This would add an additional layer of analysis in determining whether a filing is required, and it would potentially increase and lead to additional reportable transactions for private equity funds,” said Vishal Mehta of Morrison & Foerster LLP.
‘Increase the Burden’
The proposed rule “would increase the burden for many private equity groups” because of the way they’ve been structuring their acquisitions under the current rules, said David Brenneman of Morgan, Lewis & Bockius LLP.
Currently, acquiring funds only have to report their own information, including revenue and other competitive data, without disclosing details about the broader fund family.
In many cases, the special purpose vehicles that private equity funds use to make acquisitions are new, don’t hold any assets, and haven’t made any sales, and therefore wouldn’t traditionally trigger antitrust review, Brenneman said.
Such a structure would be less likely to avoid antitrust review under the FTC and DOJ’s proposal, as all entities under common investment management—along with their assets and sales—would factor into determining whether the deal must be reviewed.
Sales, Assets Considered
Mergers and acquisitions whose deal size is less than $94 million aren’t subject to federal reporting requirements.
Generally, companies proposing deals whose transaction size is between $94 million and $376 million have to disclose some information, such as the merging parties annual sales or total assets. The government and merging parties take into account such information to determine if antitrust review is needed.
Companies proposing deals above $376 million, regardless of assets or sales, must make HSR filings, containing more detailed information, that are weighed by regulators for deciding if an in-depth review should proceed.
If a deal does trigger an HSR filing, parties can’t close a transaction until either the DOJ or FTC has had at least 30 days to review the merger for potential antitrust concerns. If there’s no government action or in-depth investigation, the deal can close.
“A lot of private equity groups don’t have to submit filings until the deal value gets above $376 million” Brenneman said.
By proposing to broaden the scope of the term “person,” the agencies would subject a lot more private equity-backed deals to the federal antitrust review process that normally wouldn’t warrant scrutiny, said Kara Kuritz, an antitrust attorney at Goodwin Procter LLP.
“With the new rule you would have to look a lot more broadly, so that is going to make filings more likely for deals that previously wouldn’t meet the thresholds,” she said.
“We are talking about listing revenues for other entities that the broader fund family controls, who their subsidiaries are, and just a lot more information that would go into the HSR forms about those associate entities,” she said.
Both the proposed rule and another draft rule that would exempt certain minority stake purchases of 10% or less from HSR filings are subject to a public comment period. The agencies announced the proposals in September, but they haven’t yet appeared in the Federal Register.
But absent major modifications to the proposal, private equity firms should expect a more time- and resource-intensive process to comply with the government’s merger review requirements, Kuritz said.