June 13, 2002
Presentation at the Mergers and Acquisitions Conference in New York City
Understanding the Thresholds
As most of you are aware, Congress effected legislation on Feb. 1, 2001, which increased the minimum value of a reportable transaction under HSR to $50 million and established a tiered system of filing fees based on the size-of-transaction. Transactions valued between $50 and $100 million incurred a $45,000 filing fee; $100 - $500 million a $125,000 fee; and $500 million and above, a $280,000 fee. In the PNO's analysis of what changes to the rules would be required to accommodate the statutory changes, it became apparent that retaining the intermediate percentage notification thresholds established in 1978 (15%, 25%) would create problems in determining the appropriate filing fee for incremental acquisitions.
Section 802.21 is an exemption established by the rules which allows a party which has filed notification and acquired sufficient voting securities within the first year to meet or exceed a notification threshold, maneuver up to the next notification threshold over a five year period without another filing requirement. Thus if the 15% threshold were crossed in the first year, the party could acquire up to 24.99% during the five year period without an additional filing.
The problem created by this is illustrated in the following example: A files to acquire 16% of B, valued at $90 million and pays the associated $45,000 filing fee. Section 802.21, however, allows A to now acquire up to 24.99% of B, valued well in excess of $100 million which would have required a $125,000 fee. The PNO was concerned that this created situations where the proper Congressionally-mandated filing fee was not being collected.
A number of options were considered, none of which were completely satisfactory, and some of which appeared to conflict with the language of the statute. The resolution to the problem which was adopted was to create intermediate notification thresholds which mirrored the filing fee thresholds established by Congress. Thus the new notification thresholds became $50 million, $100 million, $500 million, 25% if valued in excess of $1 billion and 50%. The 25%/$1 billion threshold was introduced to provide an additional look to the agencies between $500 million and 50% in incremental acquisitions of the voting stock of very large corporations (approx. $4 billion market cap and larger).
FREQUENTLY ASKED QUESTIONS:
1. What happens if a party files for a particular notification threshold, say $100 million, based on a valuation at the time of filing, and then unforseen events, for example a sharp drop in market price or higher than expected post-closing adjustments, cause the actual value of the transaction to either fall short of or exceed the threshold filed for? Would the party be in violation if it exceeded the threshold, or would it be deemed not to have crossed the threshold for purposes of Section 802.21?
The PNO has taken the position that the value determined in good faith at the time of filing will be the value of voting securities or assets held as a result of the acquisition, regardless of the actual market price at closing or actual consideration paid. Thus if the party determined that the value of the transaction was $102 million and filed for the $100 million threshold, it would hold $102 million as a result of the acquisition. If a sharp drop in the market caused the actual consideration, based on a formula, to be $98 million, the party still would be deemed to have crossed the $100 million notification threshold and could acquire up to $500 million under Section 802.21 without refiling. Conversely, if the party had valued the transaction at $98 million and the ultimate consideration was $102 million, the party would be deemed not to have crossed the $100 million threshold and would have to file again if it made any additional acquisition that resulted in it holding in excess of $100 million.
2. How does the 25% if valued in excess of $1 billion threshold work? Suppose I acquire 30% of an issuer valued at $900 million and file at the $500 million threshold. Obviously 25% was not valued in excess of $1 billion, so can I now acquire up to 49.9% without refiling?
No. The 25% threshold is crossed anytime you make an acquisition which would result in holding 25% or more of an issuer's voting stock, valued in excess of $1 billion. Therefore in your example if you anticipated making an additional acquisition which would result in your holding 40% valued at $1.2 billion, a filing would be required at the 25% threshold.
3. If a fund wants the flexibility during the year following notification to acquire up to 49.9% of an issuer, but is unsure whether the value of stock it will hold will ever exceed $1 billion because of market fluctuations, what is the appropriate notification threshold to indicate on its filing?
The fund should indicate the 25% if valued in excess of $1 billion threshold. If the $500 million threshold were indicated and during the year, the fund determines that it will hold as a result of its next acquisition over 25% valued in excess of $1 billion, it would be required to make another filing. If, however, it indicated the 25% threshold it would be covered during the year whether or not its holdings hit $1 billion. Since the 25% threshold is a higher threshold than $500 million, the filing would allow the fund to cross either of these two threshold on the basis of the filing. So if either over 25% valued in excess of $1 billion or up to 49.9% valued at less than $1 billion is held during the year, the filing would cover the acquisition.
4. What if I file for the $100 million threshold and acquire $105 million in voting securities. In year two, the value of my holdings has dropped to $95 million. If I now plan to acquire an additional $10 million, am I required to file again?
No. Section 802.21, as it always has, allows you to unlimited ability to recross the $100 million threshold during the five year period, as long as you crossed that threshold within the first year.
5. Suppose I acquire $90 million in assets and file for the $50 million notification threshold. Three months later I intend to acquire $20 million more of assets of the same acquired person. Am I required to file again at the $100 million threshold?
No. Section 802.21 applies only to acquisitions of voting securities. The rules relating to aggregation of asset acquisitions remain unchanged. If the original acquisition of assets was subject to notification, only an additional acquisition of assets valued in excess of $50 million would be reportable.
6. What if I acquire $50 million in assets and $60 million in voting securities of the same acquired person? Have I crossed the $100 million threshold for purposes of Section 802.21, enabling me to acquire up to $500 million in voting securities of the acquired person over the next five years?
No. Section 802.21 requires that in order for a subsequent acquisition of voting securities to be exempt the acquisition will not increase the holdings to meet or exceed a notification greater than the greatest notification threshold met or exceeded in the earlier acquisition. The PNO interprets this to mean that the subsequent acquisition cannot exceed a greater threshold than that exceeded by a previous acquisition of voting securities. Therefore, for purposes of Section 802.21, the $50 million threshold was exceeded in the earlier acquisition and the acquiring person can only acquire up to $100 million in voting securities of the acquired person over the five year period without a new filing. This has been the subject of some confusion probably due in part to the use of the expression "aggregate value of assets and voting securities" in the SBP to the interim rule introducing the new thresholds. We have drafted language to clarify this and to amend the Form to make clear that the acquiring person should only indicate the notification threshold that represents the value of voting securities only that it will hold as a result of the acquisition. Since this is only a clarification and not a substantial change, it may be effected with the other ministerial changes that are being considered for the Form.
These views are those of B. Michael Verne of the Premerger Notification Office and do not represent those of the Commission or any Commissioner.