Under the HSR Act, parties to certain acquisitions of voting shares, non-corporate interests, and assets are required to file HSR notifications with the FTC and the Antitrust Division of the Department of Justice (“DOJ”) and observe a waiting period before they can close on reportable acquisitions.  The FTC’s new plan to stop accepting HSR filings during a government shutdown has important timing and other implications for merging parties. The key implications of the FTC’s announcement include the following:

• If parties cannot make required HSR filings, then they cannot “start the pre-closing clock” on their transactions under the statute and cannot close on their transactions. 

• Parties planning an acquisition that will require an HSR filing on or after a government shutdown should develop contingency plans now.

• The impact of a shutdown will extend further than just mergers and acquisitions between companies.  A variety of other transactions that satisfy HSR threshold tests and do not qualify for an HSR exemption could require HSR filings that could not be completed during the period.  For example, acquisitions that result from previously awarded restricted stock units (“RSUs”) to an individual could require a filing before vesting.  Another triggering event could be an increase in certain stockholders’ voting percentage ownership in certain companies  resulting from a company buy-back or redemption.

• Companies and individuals that run afoul of the HSR Act (by closing on an HSR reportable  transaction before the expiration of the required HSR waiting period) risk civil penalties of up to $51,744 for each day they are in violation of the HSR Act. 

• Parties should contact counsel to consider all of their options to mitigate the impact of the FTC’s new approach.

What is happening?

As November’s short-term continuing resolution draws to a close, there is yet again the possibility the FTC’s and DOJ’s funding will run out on March 8.  If that happens, the DOJ’s  Contingency Plan and the FTC’s Shutdown Plan will activate, dictating how the agencies operate absent funding. 

The FTC’s latest Shutdown Plan contains a single sentence regarding HSR filings amongst its 12 pages of protocols:

“The Commission’s Premerger Notification Office (PNO) will be closed during the shutdown, and the Commission will not receive accept, or process premerger notification filings under HSR, or respond to questions or requests for information or advice from outside parties.”  

This sentence represents a sea change from prior FTC practice during shutdowns.  Previously, the FTC has continued to accept HSR filings with a skeleton staff, allowing parties to “start the pre-closing clock” on their transactions under the statute.  If parties cannot make HSR filings, then parties cannot start the clock and their transactions could be delayed indefinitely.     

Why the change?

At this point we only can speculate.  A spokesperson for the FTC asserts the change allows the FTC to complete its mission and “do right by our staff.”  However, the FTC’s new shutdown plan may be motivated in part by a desire to stop deal activity.  This motivation finds support with advocates of more robust merger enforcement, including some who have since joined the agency staff.

Who will this change affect?

The most obvious impact of this new policy will be on parties looking to merge, to acquire, or to sell voting shares, non-corporate interests, or assets through deals that are HSR reportable.  However, there are also less obvious victims.  For example, officers or directors who received RSUs could have a filing obligation before such RSUs vest if they would satisfy HSR threshold tests and no exemption would apply.  In addition, certain current company stockholders could have an advance HSR filing obligation even if they do not acquire any additional company voting shares.  This case could occur if, among other things, their percentage of company voting shares increases as result of (i) a company buy-back or redemption or (ii) certain amendments to the company’s articles of incorporation which change how directors are elected by the holders of multiple classes of company securities.

What can my business do?

You should contact counsel to discuss your options, as the best path forward will depend on the circumstances of your unique situation.  The options include among other things the following:

• Accelerate Your Filing: If you were planning to file on or after a government shutdown, consider whether the filing can be moved up.  Even if the primary deal documents are not yet ready, you could file on a non-binding letter of intent if a shutdown appears imminent.
• Delay Your Filing: If your timing is flexible, you can delay your filing and wait until the government shutdown is over.  However, it is difficult to predict if a shutdown will occur and how long it will last.  The last two shutdowns occurred in 2018, with the first lasting three days in January and the second lasting over 30 days, running between December 2018 and January 2019.
• Consider the Risks of Filing: Parties that believe they should file during the shutdown if possible need to discuss the logistics and risks with counsel.  At a minimum, moving forward with an HSR reportable transaction during this period could expose parties to an HSR violation.
• Consult with Counsel to Address the Impact in Your Transaction Agreements: Parties should work with counsel to make sure the acquisition or merger agreement takes into account issues related to the possible HSR clearance delays that could be caused by a government shutdown.  These delays could be relevant to agreement provisions regarding the parties’ obligations on when to file HSR, the proper outside date, and the termination provisions.
• Consult with Counsel about Possible Alternatives.  In the case of the vesting of RSUs, stock option exercises, and other circumstances in which an acquiring person acquires additional company voting shares, even if HSR threshold tests would be satisfied, an HSR exemption could apply.  For example, on the day of the “acquisition,” the acquiring person could sell or transfer the same or a greater number of company voting shares as it would acquire as a result of the “acquisition” to an entity not under common HSR control with such person.  In this case, the acquiring person’s percentage of company voting shares would not increase on the day of an “acquisition,” qualifying the acquiring person for an HSR exemption.

Authored by Robert Baldwin, Logan Breed, Ken Field, Michele Harrington, Ilana Kattan, and Eric Sega.