Corporate & Securities Law

HSR Primer #4: Getting to the Person

By Manfred Gabriel

The last post left off by listing the three steps required to parse an acquisition for HSR purposes: (1) Identify all acquisitions in the transaction, (2) eliminate the non-reportable ones, and (3) find the acquiring and acquired persons. It’s that last step this post is about.

The Rules provide a set of nestled definitions that lay out how you get from the the acquisition to the person. This involves an up-down movement through the corporate hierarchy of entities. Starting with the entity that acquires or is being acquired (remember this means the entity which holds the assets being acquired or the issuer whose voting securities are being acquired), you follow the chain of control up until you reach the peak, or ultimate parent entity (UPE), which is an entity that itself isn’t being controlled in HSR terms. An entity is virtually anything, including individuals and any sort of business entity, except foreign governments (801.1(a)(2) - check this only if you come across something weird). Once the UPE is reached, every entity controlled by the UPE, directly or indirectly, is included in the person (801.1(a)(1)). That’s the down movement. The real work is determining control, which differs from what one might expect in important ways (801.1(b)). Here is a chart showing the nestled definitions:

click chart to enlarge

Corporations can be controlled in two ways: Either holding 50% or more of the outstanding voting securities, 801.1(b)(1)(i), or having the contractual power to appoint 50% or more of the directors, 801.1(b)(2). (To hold means to have beneficial ownership, direclty or indirectly.) Unincorporated entities, like partnerships or LLCs, can only be controlled in one way: Having a right to 50% or more of profits or assets upon dissolution, 801.1(b)(1)(ii). The right to appoint a management board or a similar governing body of an unincorporated entity does not give control over the entity for HSR purposes. That’s a point where HSR diverges from what one would expect if control were defined as the actual ability to affect competitive decisions (as it should for §7 purposes). In fact, a subjective test of control was originally proposed for HSR but ultimately rejected in favor of an imperfect but clear-cut rule. The same reasoning led the FTC to  look to profits/assets-upon-dissolution only when the treatment of unincorporated entities was revised in 2005.

In addition to these rules about control, there are few attribution rules, for example: [1] The holdings of a spouse are attributed to the other spouse. [2] A trust is usually controlled by the trustee(s), unless it isn’t (for example, because the trust is revocable), 801.1(c)(3)-(5). And [3] a person holds all assets or voting securities held by entities included within it—that is another way of expressing the down movement of including everything that the UPE controls, directly or indirectly, within the person.

So here is a little challenge: The graph below shows a corporate structure chart. The voting securities of H Inc. held by F LLC are being acquired. Who is the UPE? What is included in the acquired person?  To answer those to questions, it’s first necessary to identify the UPE in the up movement, tracing lines of control. Then, in a down movement, everything controlled by the UPE is swept into the acquired person. Find the answers in the next post.

click chart to enlarge

Previous posts: §7 and HSR. The Basic Test. Parsing Acquisitions.

Full post as published by Antitrust Review on January 16, 2009 (boomark / email).