Corporate & Securities Law

HSR Primer #2: The Basic Test

By Manfred Gabriel

Continuing my series of posts about the Hart-Scott-Rodino Act, here is a discussion of the basic test of reportability under HSR.

§7A Clayton Act contains this magic language:

Except as exempted, no person shall acquire, directly or indirectly, any voting securities or assets of any other person, unless both persons file notification and the waiting period has expired, if [the commerce, size-of-transaction, and size-of-person tests are met].

The following is a graphic representation of this relatively simple structure.

The graph shows the basic steps in the analysis: (1) Acquistion of voting securities or assets, (2) Size of Transaction test (SOT), (3) Size of Person test (SOP), and (4) Exemptions. SOT and SOP require an application of the annually-adjusted jurisdictional thresholds (and I’ll post about them in more detail in the future). The basic structure shows that SOT and SOP are linked in such a way that SOP only applies to “medium” size transaction, and is inapplicable if the size of the transaction is either equal to or less than the lowest threshold (of currently $63.1 million) or exceeds the largest threshold (of currently $252.3 million).

The problem with applying this basic structure in determining reportability is that the actual tests are trivial, but the steps required to arrive at a point where the tests can be applied is difficult. HSR terms such as acquisition, acquiring and acquired person, voting securities, or assets are loaded; the rules to determine the size of a transaction are complicated and often require parsing through insanely convoluted aggregation rules to determine what must be included. The different issues also don’t always appear at a logically consistent point in the analysis. For example, the acquisition of debt bonds is not reportable, but is that because bonds aren’t “voting securities or assets” or because bonds are exempted under §7A(c)(2), or both? As a result, reportability is more akin to a complex web than to a flow chart. Sometime it makes sense to start with the SOT, sometimes an exemption is the best starting point (like §7A(c)(3)/802.30, intraperson transfers). Still, it is helpful to recall that there is a basic structure that underlies the analysis.

There is one test I don’t suggest you waste time on, and that I didn’t give equal space in the graph above: the commerce test of §7A(a)(1). It is so broad as to apply virtually always (if you have seen an acquisition of more than $50 million that doesn’t meet the commerce test, please drop a line). HSR applies not only to persons engaged in commerce (which means interstate commerce or foreign commerce, see §12 Clayton Act or §4 FTC Act, alternatively referenced in Rule 801.1(l)), but also to persons engaged in activities affecting commerce. This is stretching the Commerce Clause to its limits. There is no court guidance an what a person might look like that isn’t engaged in interstate commerce, but that affects it. HSR’s commerce test is also broader than other such tests in antitrust law: the Sherman Act requires that the prohibited activity affect commerce, Robinson-Pattman that the “sale” be in commerce, and §7 Clayton Act at least requires that both persons must be engaged in commerce or activities affecting commerce. Under HSR it is sufficient that either acquiring or acquired person, or any entity included in them, are so engaged, as §7A(a)(1) and Rule 801.3 make clear. The HSR commerce test wasn’t exactly designed to restrict the Act’s applicability, and the following graph showing the structure of the HSR commerce test is the last time I’ll mention it.

Previous post: HSR and §7

Full post as published by Antitrust Review on January 09, 2009 (boomark / email).