The Hart-Scott-Rodino Act, more commonly known as the HSR Act, is a United States antitrust law that is an amendment to the Clayton Antitrust Act. The HSR Act is named after senators Philip Hart, Hugh Scott, and Peter Rodino, who introduced the law in the US Congress. President Gerald Ford Jr. sighed the HSR Act into law in September 1976.
The Hart-Scott-Rodino Act requires companies to file a pre-merger notification report with the Federal Trade Commission (FTC) and the Department of Justice (DOJ) before a planned merger or acquisition occurs. The notification alerts the two regulatory agencies of an intention to merge so that they can review the planned transaction and decide if it meets all the requirements provided by antitrust laws.
Before the DOJ and the FTC finalize their review, the parties cannot proceed with post-merger or post-acquisition integration or other steps aimed at integrating operations. However, the parties are free to plan the process and even conduct due diligence on each other to determine the viability of the transaction.
Pre-Merger Notification and Filing Fee
The Hart-Scott-Rodino Act requires that before a merger, acquisition, or tender offer can be completed, the parties involved must file the Notification and Report Form for Certain Mergers and Acquisitions. The form is also known as the HSR Form or the Premerger Notification Report. This report is filed with the FTC and the Antitrust Division of the Department of Justice, who then undertake a review of the transaction to determine if it violates any antitrust laws.
After filing, the parties must allow a 30-day waiting period – or 15 days for all-cash tender offers. If the regulators find that the transaction is may be likely to cause an anti-competitive effect in the specified markets, they may request additional information to help them assess the transaction. The waiting period will then be extended or the agencies may file an injunction to stop the transaction.
The Hart-Scott-Rodino Act requires the company making the proposed acquisition to pay a filing fee when filing an HSR form with the FTC and the DOJ. The amount of filing fees charged depends on the size of the transaction and is classified into three tiers. The transaction size is based on the total amount of assets, voting securities, and non-corporate interests being acquired in the transaction. The base filing threshold to determine if a company is required to file an HSR form is $84.4 million.
As of June 2018, transactions ranging between $84.4 million to $168.8 million are charged a filing fee of $45,000. The next filing fee tier ranges between $168.8 million and $843.9 million, which prescribes a filing fee of $125,000. Transactions valued over $843.9 million are charged a filing fee of $280,000. Filing fees are paid to the FTC, and they are managed by the Federal Trade Commission and the Antitrust Division of the Department of Justice.
Failure to file a pre-merger notification
In the event that the parties fail to file the pre-merger notification report with the two government agencies, they are subject to a civil penalty of $41,484 per day for all the days they are in violation of the act. The law allows the FTC and DOJ to obtain an order to divest the assets of the acquiring entity to raise the penalty fee.
First-time violators may apply for a waiver of the penalties if they can demonstrate that the failure to comply with the act was due to simple negligence and that they are willing to make the necessary filings as soon as possible.
Three Tests of the Hart-Scott-Rodino Act
The filing requirements of a merger and acquisition transaction are required if the parties meet the following three tests:
1. Commerce test
For a party to pass the Commerce test, it must be directly engaged in commerce or other activities that affect commerce. The interpretation of this test is broad, and most companies will pass the test in all situations.
2. Size of Person test
The Size of Person test determines if the acquirer or the party being acquired meets a certain threshold in terms of total assets or net sales. The amount of threshold is regularly updated and provided on the FTC website. The value of total assets is obtained by looking at the previous period’s balance sheet while the annual net revenue is obtained by looking at the last period’s annual income statement.
3. Size of Transaction test
The Size of Transaction test measures the number of assets or voting securities being acquired to determine the level of control that the acquirer will have in the acquired entity. As of 2018, a company is deemed to have passed the transaction size test if it acquires 15% or more of the voting securities of a company with total sales or assets of $25 million or more. The thresholds are adjusted annually, and companies should seek professional help from their advisors to know the specific value of their transaction.