So many of our members are either acquiring manufacturing companies, or seeking to be acquired! If you are on either end of the acquisition process, make sure you remain in compliance with the new Hart-Scott-Rodino interpretations. These interpretations have changed the way that companies are valued for disclosure purposes!!!
The Hart-Scott-Rodino Act requires that acquisitions over a certain threshold must typically be disclosed to the U.S. Government before they can be consummated.
Hart-Scott-Rodino (Short) Summary
Typically, if the metrics of the transaction exceed a certain amount, then the parties must notify the government (and wait) before they consummate the transaction. This is called a pre-merger notification. The pre-merger notification gives the government an opportunity to ensure that competition is not adversely affected by the proposed transaction.
The law generally requires a pre-merger notification if the acquirer is valued over $368 million. In addition, the law generally requires notification if the acquirer is valued over $92 million AND one of these is true (this is NOT a complete list):
- The acquiring business is a manufacturer with total assets or annual net sales in excess of $184 million, and
- The acquired business is a manufacturer with total assets or annual net sales in excess of $18.4 million;
[Note all of these threshold are based on the February 2021 adjustments]
These thresholds are found in the Pre-Merger Notification and Waiting Period Law. But the original thresholds get adjusted periodically by the government to account for inflation. Interestingly, the most recent adjustments (earlier this year) were downward adjustments (they usually adjust upwards).
What Changed?
Up until now, the FTC advised that the retirement of debt should never be included in this calculation. This approach was based on the FTC’s understanding of debt when the notification law was first promulgated in the 1970s. The FTC has changed its approach, concluding that sometimes the retirement of debt is part of the consideration for a transaction that benefits the selling shareholder(s). Therefore, while the FTC acknowledges that not all debt retired as a part of a proposed transaction is consideration, it now advises that the full or partial retirement of debt should be included in calculating the value of the transaction in any instance where selling shareholder(s) benefit from the retirement of that debt.
For example, let’s say that a PMA company has assets worth $15 million. The PMA company also has debt worth $5 million. Because it is a small business, the owner co-signed and is personally responsible for the debt. Under the proposed transaction, the acquiring company would fully assume the debt. If the business is being acquired by a manufacturer with total assets or annual net sales in excess of $184 million, then it appears that the debt may cause the transaction to be subject to pre-merger notification requirements.
What are the Consequences?
The FTC’s Bureau of Competition has announced that “Effective September 27, 2021, the Bureau will begin to recommend enforcement action for companies that fail to file when retirement of debt is part of the consideration for the deal.” So you need to assess whether retirement of debt now needs to be considered in your Hart-Scott-Rodino analysis.
As a practical matter, this means that some transactions that would not have needed pre-merger notifications in the past, will start to require pre-merger notifications in the future.
A Note
As always, our blog is not legal advice. Our law firm supports pre-merger diligence investigations of aerospace businesses (as well as post-merger compliance efforts), but we typically refer Hart-Scott-Rodino filings to one of the other firms with which we’ve worked. So if you think that the changes described in this article may affect your transaction, then feel free to contact us so we can make sure you get the right advice.
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