Competition Bureau Cancels Treatment of Debt as Consideration Under Hart-Scott-Rodino Antitrust Improvements Act | Akin Gump Strauss Hauer & Feld LLP
Key points to remember
- Previous informal interpretations by the Premerger Notification Office have allowed companies to exclude debt paid at close from the legal transaction size test calculation under certain circumstances.
- A recent statement from the Competition Bureau indicates that in the future, debt repayment should be included in the purchase price calculation in all cases where selling shareholders benefit from debt repayment and that As of September 27, 2021, any production defect based on the old rule will be the subject of a recommendation for application by the Competition Bureau. This change will increase the number of transactions subject to the pre-merger reporting requirements of the Hart-Scott Rodino Antitrust Improvements Act.
The Hart-Scott-Rodino Antitrust Improvements Act (“HSR Act”) requires parties to certain mergers and acquisitions to notify the Federal Trade Commission (FTC) and the Antitrust Division of the United States Department of Justice (DOJ) and to observe a period waiting period (generally 30 days) before the parties can conclude their transaction. Typically, the first step in complying with HSR notification requirements is to determine whether the transaction meets the “transaction size test” (the current threshold is $ 92 million).
Changes in debt treatment
Previous informal interpretations made it clear that in an acquisition of a controlling interest, where the target’s existing debt is to be repaid at closing from the cash proceeds paid by the buyer, the amount of that debt can be excluded. calculating the size of the transaction. The Competition Bureau announced on August 26, 2021 that these informal interpretations no longer represent its point of view and that it will interpret the HSR rules to include the assumption of these liabilities in the purchase price.
Here is an illustration of the change. Consider, for example, that Buyer B will acquire all of the voting securities of Target T for $ 100 million in cash. Previously, the FTC and DOJ pre-merger notification bureaus reported that if B’s payment were to be used to pay off T’s debt worth (in this example) greater than $ 8 million, the transaction would not be not to be declared because, after discounting the debt, the size of the transaction would fall below the legal threshold.
According to the Competition Bureau, these earlier informal interpretations were based on an understanding of debt from the early days of the high-speed train program. Due to what it calls “changing transaction and funding structures” and to address transaction structures designed to avoid the reporting requirements of the HSR Act, the Bureau no longer considers this approach to be the correct one. Thus, in our example, as of August 26, 2021, buyer B would no longer have to discount the value of the debt and, in the absence of another exemption, his transaction would require the payment of a filing fee and respecting a waiting period before he can complete his transaction.
Consequences and way forward
Notably, this change has yet to be incorporated into a formal interpretation or rule, but effective September 27, 2021, the Competition Bureau says it will recommend enforcement action for companies that fail to file when the repayment of the debt is part of the consideration of the agreement. HSR violations result in a civil fine of up to $ 43,792 per day of violation.
This change will increase the volume of transactions subject to the HSR Act, the vast majority of which historically have not required thorough investigation. Data from the most recent year (2019) shows that the FTC conducted in-depth investigations (commonly referred to as second requests) in just 1.5% of all reported transactions. The Competition Bureau also said it plans to review the guidelines on other issues, forcing parties considering deals to monitor the pulse of TGV-related developments.