Bureau of Competition Rescinds Treatment of Debt as Consideration Under the Hart-Scott-Rodino Antitrust Improvements Act

Key Takeaways

• Prior informal interpretations from the Premerger Notification Office have permitted companies to exclude debt paid off at closing from the calculation of the statutory size of transaction test, under certain circumstances.
• A recent statement from the Bureau of Competition advises that, going forward, the retirement of debt should be included in calculating the acquisition price in any instance where selling shareholder(s) benefit from the retirement of that debt and that, starting September 27, 2021, any failure to file based on the old rule will be met with a recommendation for enforcement by the Bureau of Competition. This change will increase the number of transactions that are subject to the premerger reporting requirements of the Hart-Scott Rodino Antitrust Improvements Act.

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Background

The Hart-Scott-Rodino Antitrust Improvements Act (“HSR Act”) requires parties of certain mergers and acquisitions to notify the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice (DOJ) and observe a waiting period (typically 30 days) before the parties may consummate their transaction.  Generally, the first step in complying with the HSR Act’s notification requirements is to determine whether the transaction satisfies the statutory “size of transaction test” (the current threshold is $92 million). 

Changes to the Treatment of Debt

Prior informal interpretations made clear that, in an acquisition of a controlling equity interest, when existing debt of the target is to be paid off at closing from cash proceeds paid by the buyer, the amount of that debt may be excluded from the calculation of the size of transaction.  The Bureau of Competition announced August 26, 2021, that these informal interpretations no longer represent its views and it will interpret the HSR Rules to include the assumption of such liabilities in the acquisition price. 

Here is an illustration of the change.  Consider, for example, that Buyer B will acquire all of the voting securities of Target T for $100 million in cash.  Previously, the FTC and DOJ Premerger Notification Offices advised that if B’s payment would go towards paying off T’s debt worth (in this example) more than $8 million, the transaction would not be reportable because, after discounting the debt, the size of the transaction would fall below the statutory threshold. 

According to the Bureau of Competition, these prior informal interpretations relied on an understanding of debt in the earliest days of the HSR program.  Due to what it describes as “developments in deal structures and financing,” and to address deal structures that are designed to avoid the reporting requirements of the HSR Act, the Bureau no longer considers this the correct approach.  Thus, in our example, effective as of August 26, 2021, Buyer B should no longer discount the value of the debt and, absent the availability of another exemption, its transaction would require the payment of a filing fee and observing a waiting period before it can complete its transaction. 

Consequences and the Road Ahead

Notably this change has yet to be embodied in an interpretation or formal rule, but effective September 27, 2021, the Bureau of Competition says that it will recommend enforcement actions for companies that fail to file when retirement of debt is part of the consideration for the deal.  Violations of the HSR Act carry a maximum civil penalty of $43,792 per day of the violation.     

This change will increase the volume of transactions subject to the HSR Act, the vast majority of which have historically not required in-depth investigation.  Data for the most recently reported year (2019) show that the FTC conducted in-depth investigations (commonly known as Second Requests) in just 1.5 percent of all reported transactions.  The Bureau of Competition has also said that it plans to review guidance on other issues, requiring parties considering transactions to monitor the pulse of HSR-related developments.