Seeing the whole picture on avoidance devices

Under the Hart-Scott-Rodino (HSR) Act and Rules, parties cannot use a transaction structure for the purpose of avoiding or delaying their premerger filing obligation.  If they do, the Commission must ignore the structure and review the substance of the transaction as a whole to determine whether an HSR filing is required. Premerger Notification Office (PNO) staff have recently rethought some prior advice, and today PNO is withdrawing a 2003 informal interpretation relating to special dividends. Our 2003 guidance excluded special dividends categorically from consideration as an avoidance device. Today, we announce that PNO will no longer take the view that such dividends can never be avoidance devices.

First, some background. The HSR Act provides that “no person shall acquire, directly or indirectly, any voting securities or assets of any other person” without first complying with the notification requirements if certain conditions are met. If an acquisition satisfies the size of transaction test and, in certain cases, the parties meet the size of person test (and assuming an exemption does not apply), an acquirer must file an HSR notification and observe a waiting period prior to executing the activities that transfer beneficial ownership. Sometimes, parties mistakenly fail to file; other times, parties purposely fail to file.

Section 801.90 of the HSR Rules states that parties cannot use a transaction structure for the purpose of avoiding or delaying their filing obligation. As noted in a blog post from last fall, restructuring a deal to avoid or delay an HSR filing may subject the merging parties to substantial penalties if the restructured transaction still results in an acquisition.  

Under 801.90, the Commission determines whether there was a purpose to avoid or delay by applying a “but for” test: but for the requirement to file and observe the waiting period, would the parties have selected this form of transaction? Put another way: was the transaction structure motivated by some benefit from avoiding or delaying filing? If the answer is yes, the structure is an avoidance device under the Rule.

Whether 801.90 applies to a particular situation is highly fact-dependent. As a result, PNO staff have for a number of years declined to give case-by-case advice about whether 801.90 applies to a specific scenario. The determination of whether an HSR filing is required rests squarely with the parties, who have access to all relevant facts and information to make such determinations.

However, PNO understands that counsel may be relying on past informal advice related to 801.90 that is inconsistent with PNO’s current views. In 2003, the PNO took the position that if a target, prior to its acquisition, makes a payout in the form of an extraordinary dividend, such a payment would not, under any circumstances, trigger 801.90 if, as a result of the dividend, the target no longer meets the size of person test. (Premerger Notification Practice Manual 96.)

Recognizing that circumstances and context matter in avoidance analysis, the PNO has recently determined that this prior advice should be withdrawn, and filing parties should no longer rely on it. A bright-line rule is inappropriate because, in some situations, the purpose of a payout may be more complicated—for example, when the payout involves more than the distribution of cash on hand. As with other aspects of the deal structure that may affect reportability, the issuance of an extraordinary dividend or similar payment must be carefully analyzed in conjunction with other deal details to ensure the payment is not being employed as a device for avoidance under § 801.90. To be clear, that special dividends will now be subject to scrutiny under § 801.90 does not indicate that PNO will assume they are an avoidance device.

No particular aspect of a deal structure—including the payment of a special dividend—should be viewed as per se justified by a purpose other than avoidance. Going forward, the Commission and its staff will conduct a more holistic review of special dividends, along with other features of the transaction, to determine whether the parties structured the deal to avoid or delay an HSR filing.