The antitrust agencies have recently brought enforcement actions against financial investors for failing to comply with the
reporting obligations of the HSR Act. For example, the Justice Department recently charged a Connecticut hedge fund manager
with failing to comply with the HSR notification and waiting period requirements before making two acquisitions through an
investment fund he owned. The fund manager agreed to pay a civil penalty of $350,000 to settle the charges. Thus, it is
important for private equity investors to consult with antitrust counsel to determine whether their proposed investments could
trigger HSR reporting obligations.
The HSR Act requires parties, including private equity and other financial investors, to notify the antitrust agencies of
acquisitions of assets or voting securities that meet specified “size of transaction” and “size of person” tests. The parties
must also observe a 30 day initial waiting period (15 days in the case of a cash tender offer or a bankruptcy acquisition)
before consummating reportable transactions. The reporting obligations of the HSR Act may apply to a wide range of transactions,
including the formation of a joint venture and acquisitions of a controlling interest in a partnership, limited liability
company (“LLC”), or other unincorporated entity.
Although parties should consult with counsel to determine if a HSR filing is required for a particular transaction, the HSR
Act “size of transaction” threshold is generally met if the acquiring party will hold voting securities or assets of an acquired
party valued at or above $56.7 million. The “size of person” threshold is generally satisfied if one party to the transaction
has assets or annual sales of $113.4 million or more and the other party has assets or annual sales of $11.3 million or more
(or, if the party is not engaged in manufacturing, assets of $11.3 million or more or annual sales of $113.4 million or more).
The size of person threshold is determined based on the “ultimate parent entity” of the acquiring and acquired parties to
the transaction. In addition, transactions in which the value of the voting securities or assets to be acquired is greater
than $226.8 million are reportable regardless of the size of the parties involved in the transaction, unless an HSR Act exemption
applies.
Finally, certain acquisitions of 10% or less of the voting securities of an issuer made solely for investment purposes may
be exempt. However, this “investment-only” exemption is narrowly construed. Any investor efforts to manage the operations
of the company, such as acquiring the right to designate board seats or influence the company’s business decisions, could
jeopardize the applicability of the exception. Should such management activity be undertaken after the transaction has closed,
the investor could be subject to fines for noncompliance with the HSR Act. The FTC has become increasingly vigilant for violations
in this area, and is said to have opened a number of investigations of hedge funds managers this year for violations of the
investment-only exception.
