Hart-Scott-Rodino Rules Amended to Reconcile Treatment of Unincorporated Entities
Effective April 7, 2005, acquisitions of controlling interests in unincorporated entities, such as partnerships and limited liability companies, will be subject to the reporting requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "H-S-R Act" or the "Act"). Amendments to the premerger notification rules under the Act, 16 C.F.R. Parts 801 – 803 (the "H-S-R Rules" or the "Rules"), will reconcile, as far as practicable, the treatment of unincorporated entities with the treatment of corporate entities under the Rules. These changes will likely result in more filings relating to the formation and acquisition of interests in unincorporated entities.
The H-S-R Act applies to acquisitions of voting securities or assets. Neither the Act nor the H-S-R Rules address whether interests in unincorporated entities are voting securities or assets. By informal interpretation, the FTC has long taken the position that partnership interests, and by extension interests in other types of unincorporated entities, are neither voting securities nor assets. Thus, any acquisition of these interests has not been deemed a reportable event under the H-S-R Act unless 100 percent of the interests are acquired, in which case the acquisition has been treated as an acquisition of all the underlying assets of the partnership or other unincorporated entity. The formation of, and acquisition of, interests in limited liability companies had been the subject of changing interpretations.
These informal staff interpretations of the Rules with respect to unincorporated entities have led to several anomalies that do not occur with corporations, including (1) no filing requirement at the time a controlling, but less than 100 percent, interest in an unincorporated entity is acquired, (2) a filing requirement when the remaining minority interests in an unincorporated entity are acquired by a person who already controls the entity by virtue of its majority ownership, and (3) the inapplicability of certain exemptions to transactions involving unincorporated entities. The amendments to the Rules are intended to eliminate these anomalies and apply the H-S-R Act as consistently as possible to all forms of entities, requiring filings for transactions that are likely to present antitrust concerns and exempting transactions that are not. The central thrust of the amendments is that meaningful antitrust review should occur at the point at which control of an unincorporated entity changes.
Definition of Non-Corporate Interest
Under the amended Rules, a "non-corporate interest" is defined as "an interest in any unincorporated entity which gives the holder the right to any profits of the entity or in the event of dissolution of that entity the right to any of its assets after payment of its debts." Such entities include, but are not limited to, general partnerships, limited partnerships, limited liability partnerships, limited liability companies, cooperatives and certain trusts.
Acquisitions of Non-Corporate Interests
To remedy the current disparate treatment of corporations, partnerships, limited liability companies and other types of non-corporate entities under the Rules, the amended Rules provide that an acquisition of a non-corporate interest occurs at the time non-corporate interests which confer control of an unincorporated entity are acquired. Thus, reporting is shifted from the point when 100 percent of the interest in an unincorporated entity is acquired to the more significant point when control is acquired. In the case of an unincorporated entity, "control" means having the right to 50 percent or more of the profits of the entity, or having the right in the event of dissolution to 50 percent or more of the assets of the entity.
Other amendments to the Rules include clarification that a contribution of assets or voting securities to an existing unincorporated entity is an acquisition by that entity and codification of a long-standing informal FTC position that acquiring the right to designate 50 percent or more of the board of directors of a not-for-profit corporation is an acquisition of all the underlying assets of the entity.
Formation of Unincorporated Entities
Because the formation of an entity presents the same potential antitrust concerns whether the form of the entity is a corporation or a non-corporate entity, the FTC believes that all such formations should be treated as similarly as possible under the H-S-R Rules. The amended Rules include a new section governing the formation of unincorporated entities which provides that the persons contributing to the formation of the unincorporated entity shall be deemed acquiring persons and the unincorporated entity shall be deemed the acquired person. Upon the formation of an unincorporated entity, in a transaction that meets the jurisdictional thresholds of the H-S-R Act, a person acquiring control of the newly formed entity is subject to the reporting requirements of the Act.
Valuation of Non-Corporate Interests
Consistent with the methodology used in valuing voting securities of a non-publicly traded corporation, the amended Rules specify that the value of any non-corporate interests which are being acquired is the acquisition price if determined or, if undetermined, the fair market value of those interests. The value of any non-corporate interests in the same unincorporated entity that are already held prior to the instant acquisition is the fair market value of those interests. However, the FTC provides no specific guidance on the precise valuation techniques to be used in determining the fair market value.
A number of the existing exemptions under the H-S-R Rules apply only to acquisitions of voting securities and thus result in a reporting obligation for transactions involving acquisitions of interests in unincorporated entities that would be exempt if the form of the entity was a corporation. The amended Rules include revisions to these existing exemptions to include unincorporated entities.
For example, the existing exemption for certain intraperson transactions exempts acquisitions in which, "by reason of holdings of voting securities," the acquiring and acquired person are the same. Because of the qualifying phrase "by reason of holdings of voting securities," entities that do not issue voting securities are excluded from the exemption. Thus, if a corporate subsidiary transfers assets to its controlling shareholder, no filing would be required. However, if an unincorporated subsidiary makes the same transfer to its parent, the exemption would not apply. This disparate treatment is eliminated under the amended intraperson transaction exemption, which applies to acquisitions in which the acquiring and at least one of the acquired persons are the same person, regardless of the type of entity.
Other H-S-R Rules Revisions
The FTC is also making other revisions to certain rules to adapt their application to both corporations and unincorporated entities as well as making changes to the H-S-R notification and report form and instructions to include unincorporated entities. In addition, the amended Rules include certain technical corrections to other provisions in the Rules.