There is antitrust legislation in both the United States and the European Union that prevent some acquisitions from being completed if they are expected to result in an excessive reduction of competition within an industry. In this article, we focus in particular on the filing requirements and antitrust analyses mandated by the Hart-Scott-Rodino Act, which applies to many acquisitions in the United States. Though few acquisitions are halted due to antitrust concerns, the government must be notified of larger acquisitions so that it can engage in an obligatory antitrust examination.
The Hart-Scott-Rodino Antitrust Improvement Act
Some larger acquisitions are subject to the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR). This Act mandates that the Federal Trade Commission (FTC) and the Justice Department review certain acquisitions prior to their closing dates to see if they cause antitrust issues. The Act contains a waiting period requirement while this review takes place. Consequently, any acquirer needs to know the terms of HSR, to see if a proposed deal will be subject to it, and file the proper paperwork in a timely manner in order to avoid delaying completion of a deal.
An HSR filing is based on minimum thresholds that are updated by the FTC at the beginning of each year, based on changes in the gross national product. An HSR filing is triggered by a transaction where the value of the voting securities exceeds a certain threshold level, and the sales or assets of one party exceeds another threshold level.
The Merger Notification Form
The form used to notify the government under HSR is available on the Federal Trade Commission website at ftc.gov. The main blocks of text within the form are:
- Identification information for the individual filing the document, the acquirer, and the acquiree
- The type of acquisition contemplated, the value and percentage of voting securities already held by the acquirer, and the same information regarding voting securities once the acquisition is complete
- Description of the acquisition transaction
- Index of available annual reports, analyses, and other documents
- Dollar revenues by non-manufacturing industry code and by manufactured product code
- Holdings of the person filing the form, and for related parties
- The amount of overlapping revenues between the two businesses
- Identification of prior acquisitions by the acquirer
An additional section of the form only applies if the acquisition is in the form of a joint venture.
The Herfindahl-Hirschman Index
When reviewing a proposed transaction for its impact on market concentration, the Department of Justice uses the Herfindahl-Hirschman Index (HHI). In essence, the HHI is the sum of the squares of the market shares of each company in an industry. A low HHI indicates a high level of competition, while a high HHI indicates the reverse.
For example, if an industry contains five competitors whose market shares are 5%, 15%, 20%, 25%, and 35%, then its HHI is calculated as:
52 + 152 + 202 + 252 + 352 =
25 + 225 + 400 + 625 + 1,225 = 2,500
The score of 2,500 designates the industry as being at the upper end of the moderate level of industry concentration. Interestingly enough, if the same five companies simply shared the market equally, the HHI score would drop, as noted below:
202 + 202 + 202 + 202 + 202 =
400 + 400 + 400 + 400 + 400 = 2,000
Thus, the presence of a single competitor with significant market share in an industry can designate the entire industry as having a high HHI score, which makes it more difficult to complete an acquisition in that industry. However, the situation is not so grim for smaller acquirers making smaller acquisitions.
The Failing Company Doctrine
The government can approve an acquisition even if it results in an HHI increase, if the company to be acquired would otherwise fail. This doctrine only applies under all of the following circumstances:
- The failing firm is not expected to meet its financial obligations in the near future;
- It is not expected to reorganize successfully in bankruptcy; and
- It has tried to obtain alternative offers to keep its assets in the market and pose a reduced danger to competition than the proposed transaction.
The failing company doctrine can be applied to a failing division, but only if both of the following conditions apply:
- The division has persistently negative operating cash flow; and
- The owner of the division has tried to obtain alternative offers to keep its assets in the market and pose a reduced danger to competition than the proposed transaction.