BUREAU OF COMPETITION
January 17, 1979
Laurence T. Sorkin, Esquire
Cahill, Gordon & Reindel
Eighty Pine Street
New York, New York 10005
Dear Mr. Sorkin:
This formal interpretation is issued by the staff of the Federal Trade Commission under 16 C.F.R. § 803.30 in response to your letter of October 11, 1978. You ask whether an acquiring person that has filed a Notification and Report Form ("Form") under § 7A of the Clayton Act ("the Act"), 15 U.S.C. § 18a, stating an intention to acquire holdings in excess of 10% of the voting securities of an issuer may, during the statutory waiting period, acquire holdings of 10% or less of such voting securities (worth more than $15 million) pursuant to the "solely for the purpose of investment" exemption provided by § 7A(c)(9) of the Act 1/ and § 802.9 of the premerger notification rules ("rules") 2/. You suggest that the acquiring person's stated intention to acquire more than 10% of the voting securities of an issuer might be considered inconsistent with the acquisition of any shares during the statutory waiting period solely for the purpose of investment.
An acquisition of voting securities shall be exempt from the requirements of the act pursuant to section 7A(c)(9) if made solely for the purpose of investment and if, as a result of the acquisition, the acquiring person would hold ten percent or less of the outstanding voting securities of the issuer, regardless of the dollar value of voting securities so acquired or held.
The staff has taken the position that the fact of filing by the acquiring person under these circumstances is not necessarily inconsistent with an investment intention. Thus, the "solely for the purpose of investment" exemption should not be withheld solely because the acquiring person has filed a Form stating an intention to acquire sufficient voting securities to exceed the 10% investment threshold.
The exemption provided by § 7A(c)(9) and § 802.9 comprises two elements. First, the acquisition must be solely for the purpose of investment, as defined by § 801.1(i)(1) 3/, which focuses on the intention of the acquiring person vis-a-vis the basic business decisions of the acquired issuer. Whether or not the requisite intention exists will depend largely on the facts surrounding an acquisition (or series of acquisitions) by the acquiring person and must be determined on a case-by-case basis. 4/
Second, the acquiring person's holdings may not exceed 10% of the outstanding voting securities of the issuer. Once such holdings exceed 10%, the intention of the acquiring person becomes immaterial to the acquiring person's obligations under the Act and rules. 5/ The fact that the reporting person has indicated through a filing that it intends to exceed the 10% investment threshold after expiration of the statutory waiting period does not, of itself, constitute an intention inconsistent with that of investment. Thus, acquisitions that do not result in holdings exceeding 10% may be consummated during the statutory waiting period, provided that the intention of the acquiring person remains consistent with § 801.1(i)(1).
The Statement of Basis and Purpose to § 801.1(i)(1) described various types of conduct that the Commission considered inconsistent with an investment intention. The decision to acquire or seek working control of the issuer (regardless of the percentage of voting securities that may actually confer such control) is clearly inconsistent with investment intent under § 803.1(i)(1). Thus, an intention (indicated through a premerger notification filing or otherwise) to acquire shares resulting in holdings of 50% or more of the shares of the issuer would necessarily eliminate the applicability of the exemption. An intention to acquire less than 50% of the shares of the issuer could also preclude the applicability of the exemption, depending on the extent of the acquiring person's anticipated holdings and all other circumstances relating to the acquiring person's intentions regarding the basic business decisions of the acquired issuer. This interpretation should not be construed to impede the abilities of the Commission and the Department of Justice to investigate the acquisition activity of acquiring persons during the statutory waiting period and to seek civil penalties under the Act where evidence exists that acquiring persons have improperly invoked the exemption provided by § 7A(c)(9) and § 802.9.
The Assistant Attorney General in charge of the Antitrust Division has concurred in this interpretation.
Yours truly,
[signature]
Malcolm R. Pfunder
Assistant Director for Evaluation
1/ § 7A(c). The following classes of transaction are exempt from the requirements of this section. {9) acquisition, solely for the purpose of investment, of voting securities if, as a result of such acquisition, the securities acquired or held do not exceed 10 per centum of the outstanding voting securities of the issuer.
2/ § 802.9 Acquisition solely for the purpose of investment.
3/ (i)(l) Solely for the purpose of investment. Voting securities are held or acquired "solely for the purpose of investment" if the person holding or acquiring such voting securities has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.
4/ See Statement of Basis and Purpose, 42 F.R. at 33465 (July 31, 1978).
5/ See Statement of Basis and Purpose, 42 F.R. at 33490 (July 31, 1978).
[Cahill Gordon & Reindel Letterhead]
Eighty Pine Street
New York, N.Y. 10005
October 11, 1978
Re: Request for an Interpretation of the Report and Wait Requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976
Dear Mr. Pfunder:
I am writing to request an interpretation of the report and wait requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("the Act"), with regard to a question which has already risen several times in inquiries made by various clients of my firm.
The typical factual background from which my question arises is as follows:
Company A intends to acquire X% (X% is greater than 10%) of the voting securities of Company B, and states that the acquisition is made "solely for the purpose of investment", pursuant to sub-section (c)(9) of the Act, and § 802.9 of the rules. Company A and Company B each meet at least one of the applicable criteria of the Act with respect to size of parties to the transaction. The purchase of 10% of the voting securities of Company B is, for purposes of the Act, of a value exceeding S15,000,000.
The question which has repeatedly arisen with regard to the factual situation described above is as follows:
After Company A has formed its intention to purchase X% of the voting securities of Company B, and has filed a report and notification form, may Company A purchase shares of voting securities of Company B, so long as its holdings do not exceed 10% of the outstanding voting securities of Company B? Or, must Company A desist from making any further purchases until the end of the waiting period?
It would appear that there is no clear answer to the question in the Act, or in the regulation promulgated thereunder. Arguments of more or less equal weight can be made in support either of allowing continued purchases prior to the end of the waiting period (so long as the acquiring company's holdings do not exceed 10%), or of prohibiting them. They are set forth below.
One factor which may influence your interpretation is the percentage of outstanding voting securities of Company B which is sought by Company A in any particular case. The higher that percentage is, the more suspect the claim of "investment purpose" may be.
Arguments that Further Purchases Should be Stopped Until the Termination of the Waiting Period
(a) The provisions of the Act and the regulations with regard to acquisitions "solely for the purpose of investment" require, by implication, that purchases be stopped until the end of the applicable waiting period, once an intention to purchase X% of the voting securities has been formed. The regulations clearly impose two mutual independent requirements on the availability of the exemption for acquisitions which are "solely for the purpose of investment": (a) that the acquiring person hold 10% or less of the outstanding voting securities of an issuer; and (b) that the acquisition be solely for the purpose of investment. See § 802.9, and Statement of Basis and Purpose for § 802.9.
There is no express presumption or determination in the Act or the regulations that the intention to hold more than 10% of the outstanding voting securities of an issuer is or is presumed to be not made solely for the purpose of investment. Unless there is such a determination or presumption, however, the Commission's requirement that the acquisition be "solely for the purpose of investment" will be utterly unenforceable, since the determination of investment purpose must be made on a case-by-case basis, thus necessitating a factual inquiry into the intent of the acquiring person. Such an inquiry is likely to be made only in those cases in which someone strongly objects to the availability of the exemption, or in those cases in which the acquiring person clearly acts in a manner contradictory to its expressed purpose of making an acquisition solely for the purpose of investment.
There are obvious examples of situations in which declaration that an acquisition is solely for the purpose of investment can and should be disregarded. As an extreme example, if a company has expressed an intention to acquire 49% of the outstanding voting securities of an issuer, the claim that the purchase of the first 10% of the issuer's securities is made solely for the purpose of investment would seem incredible and should probably be disregarded.
(b) It would be contrary to the basic policy underlying the Act to allow Company A to increase its holdings of the voting securities of Company B to the 10% level, pending review by FTC and the Department of Justice.
The filing of a notification and report form with regard to the proposed acquisition of X% of the shares of the outstanding voting securities of Company B triggers the operation of the Act, and initiates review by the FTC and Department of Justice. An unfavorable determination will result in the institution of an injunctive proceeding, which may seek the divestiture of all of Company A's holdings. To allow Company A to increase its holdings in Company B may provide a basis for Company A to argue in the injunctive proceeding that it has changed its position and purchased 10% of Company B, and that it would be inequitable to require it to divest itself of holding acquired under these circumstances.
In addition, the interests of shareholders in Company B (other than Company A) should be taken into account. The larger the holding owned by Company A which will be "in limbo" during the waiting period, the larger the block of stock which Company A may be required to divest. Such a large block of available stock may well "hang" over the market, and tend to depress the price which other prospective sellers of the security may obtain, until well after that large block has been sold.
Arguments in Favor of Allowing Continued Purchases
{a) The Act and the regulations clearly operate only at particular threshold levels. There is a sufficient number of opportunities for review at those thresholds to provide a meaningful analysis of the antitrust aspects of any proposed transaction. To prohibit continued purchases up to the 10% level, merely because of an ex- pressed intention to acquire more than 10% of that security, would ignore the plain and clear fact that purchases beyond the 10% level can be made, only if the regulatory authorities decide to forego any challenge to such purchases. Thus, although the ownership of, for example, a 30% block of the voting securities of a widely-held issuer may be inconsistent with an intention to acquire shares solely for the purpose of investment, the holding of a 10% block -- and only a 10% block -- of such stock by Company A which is prohibited from increasing its holding is in no way inconsistent with its expressed intention to hold that 10% block solely for the purpose of investment.
(b) Prior draft regulations would have required acquisitions made for investment purposes to be reported, even if they did not reach the 10% level, provided that they crossed an otherwise applicable notification threshold. The deletion of that requirement is clear evidence that there is little concern that acquisitions of the voting securities of large companies up to the 10% level, under the guise of the investment exemption, pose a significant threat to competition.
The contentions set forth above are representative of arguments which might be made, although they clearly do not exhaust the limits of imagination. No particular resolution of the question appears to be compelled by policy considerations, but it does seem important for there to be a clear answer to this question.
Sincerely,
[signature]
Laurence T. Sorkin
Malcolm R. Pfunder, Esq.
Associate Director for Premerger Notification
Bureau of Competition
Room 303
Federal Trade Commission
Washington, D. C. 20580