FTC announces major change to HSR treatment of debt, casts doubt on validity of informal interpretations

On Thursday, August 26, a blog post by the Director of the Bureau of Competition at the Federal Trade Commission upended decades of guidance regarding the Hart-Scott-Rodino (“HSR”) Act by questioning well-established guidance from the Premerger Notification Office regarding the inclusion of debt payments in the “size of transaction” test as well as the informal interpretation program writ large. Under the HSR Act, parties may not close deals whose “size of transaction” meets or exceeds certain dollar thresholds (currently $92 million, revised annually). Historically, the payment of debt held or secured by the target was deemed to not contribute to the size of transaction for HSR purposes. For example, if the acquiring person were to pay a total of US$100m in consideration for the acquisition of voting securities but US$15m was reserved to pay off the debts held or secured by the target, the HSR regulations treated the size of transaction as US$85m.

According to the recent announcement, the Bureau of Competition, which administers the Premerger Notification Program under the HSR Act, is suspicious that parties may be disingenuously taking on new debt immediately prior to close such that the size of transaction falls below the reporting threshold when debt payoff is taken into account. This kind of practice was likely already prohibited by the HSR regulations under 16 CFR § 801.90 as a “device for avoidance” of the HSR reporting requirements, so it is unclear why the Bureau has decided to change course on the treatment of debt payoffs.

Moreover, the announcement supplants a clear, easily understandable rule with something far more confusing, at significant cost to both merging parties and agency staff. The announcement indicated that “the Bureau will begin to recommend enforcement action for companies that fail to file when retirement of debt is part of the consideration for the deal,” which seems to suggest that the amount of debt retired must always be included in the “size of transaction” calculation. But, at the same time, the blog post directed readers to another FTC webpage providing “the details of this change,” which suggested that enforcement would only be appropriate “in any instance where selling shareholder(s) benefit from the retirement of that debt.” Additional guidance from the Commission regarding the instances which trigger such benefits would be helpful. In the meantime, merging parties’ only assurance that the HSR filing is proper will be to take the debt into consideration, resulting in more filings to an FTC staff already inundated with a record number of HSR filings.

The Bureau of Competition created further confusion with regard to its long-standing “informal interpretation” program. Due to the complex nature of HSR analysis, the Premerger Notification Office (“PNO”) has historically offered to provide guidance on the correct application of the HSR regulations (and exemptions) to specific fact patterns. The PNO frequently publishes guidance with broad applicability to the FTC website. While the PNO has always cautioned that informal interpretations are not controlling, HSR practitioners have generally been able to comfortably rely on published interpretations or direct guidance from the PNO when counseling clients. The August 26 blog post, by contrast, calls into question the reliability of the informal interpretation program.

HSR analysis is complicated and highly fact-specific. If you have questions about whether your deal may be subject to the reporting requirements of the HSR Act, Norton Rose Fulbright lawyers are prepared to guide you through the ever-changing process.