Additional Hart-Scott-Rodino Reforms Announced
 
April 11, 2002
 
John R. Dierking- Orlando

Additional changes to regulations under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the Act), will become effective on April 17, 2002. The Act requires certain parties intending to merge, purchase or sell voting securities or assets or engage in other acquisition transactions to provide the Federal Trade Commission (FTC) and Department of Justice (DOJ) with certain information about their operations and the transaction for review prior to consummation of the transaction. The most significant changes to the regulations under the Act relate to the reportability of certain acquisitions of foreign assets and voting securities of foreign issuers by either U.S. or foreign persons and follow numerous other changes to the Act, which became effective in 2001. Certain regulations determine whether an individual or entity is considered a U.S. or foreign person for purposes of the Act and, in each case, consider the person’s ultimate parent entity. U.S. persons, for purposes of the Act, include entities which are either incorporated or otherwise organized under the laws of the U.S. or which have their principal offices within the U.S. Foreign persons under the Act include entities which are not incorporated or otherwise organized under the laws of the U.S. and which do not have their principal office located within the U.S.

Absolute Exemption Eliminated

Specifically, the additional changes include the elimination of the absolute exemption for an acquisition by a foreign person of assets located outside the United States. Under the revised regulations, such acquisitions remain eligible for exemption from the Act only if the assets to be acquired did not generate sales in or into the U.S. of more than $50 million during the acquired person's most recent fiscal year. This revision significantly narrows the exemption for acquisitions by foreign persons of assets located outside the U.S. that previously were exempt regardless of the amount of sales in the U.S. attributable to such assets and instead focuses on what the FTC characterizes as a “size-of-nexus-with-the-U.S.” test.

Exemptions Available to U.S. Persons

The revision slightly expands the exemption available to U.S. persons for acquisitions of assets located outside the U.S. Such acquisitions were previously exempt provided the assets did not account for $25 million or more of sales in or into the U.S. during the most recent fiscal year. Under the revised regulation, such an acquisition will be exempt provided the assets did not account for more than $50 million of sales in or into the U.S. in the most recent fiscal year.

Threshold Revised for Acquisitions of Voting Securities of Foreign Issuer

Certain threshold amounts in the exemptions for an acquisition by a U.S. person or a foreign person of voting securities of a foreign issuer also will be increased so that such acquisitions now will be exempt unless the acquired foreign issuer (including all entities controlled by it): holds assets, excluding investment assets, with a fair market value of more than $50 million, and which are located in the U.S.; or made sales in or into the U.S. of more than $50 million during its most recent fiscal year. The prior regulation included thresholds of $15 million and $25 million, respectively, and measured U.S. assets based on book value instead of fair market value. This exemption also remains available in the case of an acquisition by a foreign person of voting securities of a foreign issuer where control of the acquired issuer is not conferred pursuant to the acquisition.

Exemption for Acquisitions Between Foreign Persons Narrowed

Without regard to the above exemptions, certain acquisitions between two foreign persons also are exempt from the requirements of the Act if: their aggregate sales in or into the U.S. are less than $110 million in their respective, most recent fiscal years; and the fair market value of their aggregate total assets located in the U.S. also is less than $110 million. While this exemption previously applied to all acquisitions between two foreign persons, the applicable regulation will be amended effective April 17, 2002, to provide that only transactions valued at $200 million or less will be eligible for the exemption.

Acquisition of "Associated Agricultural Assets" No Longer Exempt

The acquisition of "associated agricultural assets" is being eliminated from the agricultural property exemption. The regulations defined this term to include assets that were integral to the agricultural business activities conducted on agricultural property, including inventory (e.g., livestock, poultry, crops, fruit, vegetables, milk, eggs), structures that house livestock raised on the real property, fertilizer and animal feed. While the acquisition of agricultural property remains exempt, the acquisition of associated agricultural assets is no longer exempt from the requirements of the Act as of April 17, 2002.

FTC, DOJ to Allocate Industry Sectors for Merger Review

In addition to the changes to the regulations under the Act, the FTC and DOJ also recently jointly announced an allocation of certain industry sectors between the two agencies for merger review. This is the first formal allocation of primary areas of responsibility on an industrywide basis, but does not limit the jurisdiction of either agency. The stated purposes for the allocation include a rational distribution of responsibility for merger review between the FTC and DOJ and the elimination of time-consuming clearance disputes, which previously had occurred on occasion between the agencies. Merger review of transactions in industries that are not covered in the announcement will continue to be allocated between the agencies based on their historical experience in investigating the relevant commercial sector within the last seven years.

Pursuant to the announcement, the FTC will have primary responsibility for review of transactions in the following industries:

• airframes
• autos and trucks
• building materials
• chemicals
• computer hardware
• energy
• healthcare
• industrial gases
• munitions
• operation of grocery stores and grocery manufacturing
• operation of retail stores
• pharmaceuticals and biotechnology (other than associated with agriculture)
• professional services
• satellite manufacturing and launch vehicles
• textiles

The DOJ will have primary responsibility for review of transactions in the following industries:

• aeronautics
• agriculture and associated biotechnology
• avionics
• beer
• computer software
• cosmetics and hair care
• defense electronics
• financial services/insurance/stock and option, bond and commodity markets
• flat glass
• health insurance
• industrial equipment
• media and entertainment
• metals, mining and minerals
• missiles, tanks and armored vehicles
• naval defense products
• photography and film
• pulp, paper, lumber and timber
• telecommunications services and equipment
• travel and transportation
• waste

For questions or additional information, contact John Dierking, Holland & Knight LLP, Orlando, Florida, (407) 244-5215 or jdierkin@hklaw.com