This Hart-Scott-Rodino (HSR) Act alert describes an immediate and significant change in the way the Federal Trade Commission (FTC) treats new debt that is taken on to finance a transaction.
Under the HSR Act, a pre-closing filing may be required if the deal value – or the “size of transaction” – is more than $78.2 million. A basic principle has always been that only debt which is taken on by a buyer (or any entity that is controlled by the buyer, such as a newly formed acquisition vehicle) to finance a transaction is included in the size of transaction. Until yesterday, the FTC was of the view that new debt which is taken on by the target to help finance a transaction would be specifically excluded from the size of transaction. The FTC announced yesterday that this old rule is no longer applicable – and the change in the treatment of debt is effective immediately.
Starting today, all new debt – whether it is taken on by the buyer or the target – must be taken into account in determining whether the $78.2 million size of transaction test is met.
A few examples of how the new rule will apply:
- PE Fund A will acquire Target. PE Fund A will form Newco with $30 million in equity, $10 million of management rollover and $20 million in third-party debt. Newco will use these funds to acquire Target’s voting securities. The size of transaction is $60 million. An HSR Act filing is not required because the size of transaction is less than $78.2 million.
- Assume the same facts as in example 1, but in addition Target will take on $40 million in new debt and use the proceeds to fund a special distribution to Target’s shareholders. The size of transaction is $100 million. An HSR Act filing may be required.
- Company has two founding shareholders and two PE investor shareholders. The founders want to liquidate, but Company hasn’t been able to find a buyer. Company decides to take on $50 million in new debt and use the proceeds to redeem the founders. In addition, one of the PE investors acquires newly issued Company stock for $35 million. The size of transaction is $85 million. An HSR Act filing may be required.
Deductions from the size of transaction in acquisitions of voting securities and LLC/LP interests for existing debt that will be paid off at closing, consideration used to cash out options/warrants, the acquisition of non-voting stock, payment of executive retention bonuses, or seller transaction expenses are still permitted.
This new treatment of debt applies to all transactions going forward – including any transactions that have not closed as of today. As a result, any ongoing transaction that includes new debt to be taken on by the target to finance the acquisition should be carefully analyzed by experienced antitrust counsel to determine whether an HSR Act filing may be required. In light of the FTC’s decision to make this rule change immediately, it is especially important that all pending transactions be carefully vetted because failure to make a required HSR Act filing can result in civil monetary penalties of up to $40,000 per day.
The Goodwin antitrust team is available to answer any questions you may have about the new debt rule or any other antitrust topic.
 The size of transaction threshold, as well as the other jurisdictional monetary thresholds under the HSR Act, are adjusted annually by the FTC.