FTC Premerger Notification Office Issues Formal Interpretation Under Hart-Scott-Rodino Act

The Premerger Notification Office of the Federal Trade Commission, with the concurrence of the Antitrust Division of the Department of Justice, has issued a Formal Interpretation under the Hart-Scott-Rodino Act (HSR) and rules setting forth the conditions under which the creation, or acquisition of an interest in, a Limited Liability Company (LLC) will be reportable under the HSR Act. Under this Formal Interpretation, the15th issued under the HSR Rules, the creation of an LLC which unites two or more independently-owned businesses under common control may be subject to the reporting requirements of the HSR Act, if the size thresholds of the HSR Act are met. The Formal Interpretation becomes effective on December 14, 1998.

According to the Federal Register Notice published today, LLCs are a relatively new form of business organization which are neither partnerships nor corporations, but hybrids which combine certain desirable features of both. While at first LLCs were used primarily as a vehicle for start-up enterprises, the use of LLCs appears to have changed to a mechanism for combining competing businesses.

Under the Formal Interpretation, the formation of an LLC which brings two or more pre-existing, separately controlled businesses under common control (i.e. an interest entitling one party to 50 percent of the profits of the LLC or 50 percent of the assets of the LLC upon dissolution) would now be reportable if the HSR size-of-person and size-of-transaction requirements are met. The formation of all other LLCs would be treated like the formation of a partnership and their reportability would be determined accordingly. The current position of the Premerger Notification Office bases reportability on whether an acquired LLC interest is more like a voting security or a partnership interest. This approach will no longer be used.

As stated in the notice, imposing a filing requirement on the parties to such transactions promotes the basic purpose of the [HSR] act and rules, namely, to give the antitrust enforcement agencies advance notice of, and an opportunity to oppose, transactions which may violate the antitrust laws. Furthermore, when a person contributes assets to an LLC to be controlled by another, such transfer is the functional equivalent of an acquisition of those assets and should be so treated for HSR purposes.

The Notice asks for public comment on whether the antitrust agencies treatment of partnerships, which remains unchanged, should be altered to be the same as its treatment of LLCs. In addition, public comment is being sought about the burden of compliance with the new interpretation. Comments must be submitted by November 12, 1998. They should be addressed to Joseph G. Krauss, Assistant Director for the Premerger Notification Office, Bureau of Competition, Room 301, Federal Trade Commission, Washington, D.C. 20580.

Copies of the Federal Register Notice are available from the FTC's web site at http://www.ftc.gov  and also from the FTC's Consumer Response Center, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-FTC-HELP (202-382-4357); TDD for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

(FTC File No. P98 9316)