There are three laws which a foreign company contemplating an acquisition of a United States corporation or other business should be familiar with because they can have a significant impact upon the proposed acquisition. These statutes are:
(1) Section 7 of the Clayton Act;
(2) The Hart-Scott-Rodino Antitrust Improvements Act of 1976, and
(3) The Exon-Florio Amendment to the Defense Production Act of 1950.
This article will provide an overview of each of these key statutes.
1. Section 7 of the Clayton Act
Section 7 of the Clayton Act (15 United States Code (“U.S.C.”) §18) is the key substantive U.S. antitrust law governing mergers and acquisitions. It provides that no person shall acquire, directly or indirectly, the whole or any part of the stock or other share capital or assets of another person “where in any line of commerce . . . in any section of the country, the effect of such acquisition may be substantially to lessen competition or tend to create a monopoly.”
Section 7 applies to a broad range of acquisitions, including:
- Mergers and consolidations;
- The formation of joint ventures;
- The creation of non-corporate entities, such as, limited liability companies;
- The acquisition of certain types of exclusive licenses to intellectual property rights; and
- The acquisition of the securities of a non-U.S. company or of non-U.S. assets, if the company has or the assets generate substantial sales in the U.S.
There are two U.S. Government antitrust enforcement agencies: the Antitrust Division of the U.S. Department of Justice (the “Antitrust Division”) and the Federal Trade Commission (the “FTC”). The enforcement position of these agencies is that Section 7 prohibits acquisitions that create or enhance market power. The Enforcement Agencies define market power as the ability to maintain prices above competitive levels.
In evaluating an acquisition under Section 7, the Enforcement Agencies will initially examine the level of concentration in the relevant market or markets affected by the acquisition, as evidenced by the market shares of the competing firms. Then, they will evaluate the increase in concentration in the relevant market that will result from the acquisition.
A critical, perhaps the most critical, factor in evaluating an acquisition under Section 7, is the definition of the relevant market. It is only in the context of a relevant market that the likely competitive effects of an acquisition can be evaluated. Under Section 7, a relevant market has two aspects, a product market and a geographic market.
A product market consists of those products which customers view as reasonable substitutes for one another and to which they would turn in the event of a price increase in the products of the merging firms. The geographic market is the geographic area in which customers can look for substitute products in the event of a price increase in the products of the merging firms. The relevant geographic market can be as small as a city or as large as the world, depending upon the characteristics of the products involved.
After defining the relevant market or markets that will be affected by the acquisition, the Enforcement Agency will attempt to determine whether the acquisition will result in an unacceptable increase in concentration in any relevant market. If the Enforcement Agency decides that the acquisition raises anticompetitive concerns, it will evaluate whether market conditions are changing, ease of entry into the market, or whether there are any efficiencies that will result from the transaction that will benefit consumers (such as, cost reductions).
If the Enforcement Agency concludes that the acquisition will be anticompetitive, it usually will seek a court order preventing the consummation of the transaction. If the transaction already has closed, it will seek a court order requiring the divestiture of the acquired business (that is, undoing the transaction).
2. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”)
The HSR Act (15 U.S.C. §18A) is not a substantive antitrust law. Rather, it is a procedural “report and wait” statute that, for certain categories of acquisitions, requires (i) pre-acquisition reporting to the Enforcement Agencies, and (ii) observance of a waiting period before the transaction can close. The purpose of the HSR Act is to provide the Enforcement Agencies with advance notice and information about certain categories of acquisitions and the opportunity to evaluate them under substantive antitrust law (e.g., Section 7 of the Clayton Act) before the transaction closes.
In order to be reportable, an acquisition must meet two tests: (1) a Size-Of-Persons Test; and (2) a Size-of-Transaction Test; unless the value of the transaction is greater than U.S. $260.7 million, in which event the transaction is reportable without regard to the size of the persons involved. The Size-Of-Persons Test is met if one person involved in the transaction has total assets or annual net sales of U.S. $13 million or more and another person involved has total assets or annual net sales of U.S. $130.3 million. The Size-Of-Transaction Test is met if the value of the transaction exceeds U.S. $65.2 million.
Two key and rather unique terms under the HSR Act are “person” and “control.” The “person “ required to make a filing may not be a party to the transaction. Under the HSR Act, a “person” is defined as an “ultimate parent entity” and all entities it controls, directly or indirectly. An ultimate parent entity is an entity that is not controlled by any other entity.
“Control” is defined as: (i) holding 50% or more of the outstanding voting securities of an issuer or, (ii) having the contractual power to designate 50% or more of the directors of a corporation or the trustees of a trust. In the case of an unincorporated entity (such as, an LLC or an LLP), “control” means having the right to 50% or more of the profits of the entity or 50% or more of the assets of the entity upon dissolution. It is important to note that the applicable percentage is “50% or more,” not “more than 50%.” Thus, it is possible for an entity to be controlled by two separate persons.
The Notification and Report Form that must be filed with each of the Enforcement Agencies requires a variety of information regarding:
(a) The transaction;
(b) Operations and revenues of the parties;
(e) Certain minority stockholdings; and
(f) Competitive overlaps between parties.
It also requires that copies of certain documents be submitted along with the Form, most significantly, any documents analyzing any competitive aspect of the transaction, such as, competitors, market shares, markets, possible new products, etc.
The waiting period begins to run after all parties have filed completed notification forms and the applicable filing fee has been paid.  The initial waiting period is 30 days, but it may be shortened if the Enforcement Agencies have no concerns with the transaction and early termination is granted. However, if an Enforcement Agency has competitive concerns, it may serve the parties with a request for additional information and documents (usually referred to as a “Second Request”). Typically this is a very burdensome and time-consuming process which requires the production of a great deal of information. Service of a Second Request stops the running of the waiting period under the HSR Act and “resets the clock.” An additional 30 day waiting period begins to run after the parties have complied with the Second Request.
A failure to comply with the report and wait requirements of the HSR Act subjects the violator to significant penalties. These include a civil penalty of U.S. $16,000 per day for each day the violation continues and a court order either prohibiting consummation of the transaction or requiring divestiture of the acquired business if the transaction already has closed.
3. The Exon-Florio Amendment
The Exon-Florio Amendment (“Exon-Florio”) is not an antitrust law; rather, it is a law designed to protect the national security of the United States. Exon-Florio authorizes the President of the U.S. to suspend, prohibit or rescind any transaction which would result in the control of a U.S. business by a foreign person and which would threaten to impair the national security of the U.S.
Exon-Florio is administered by the Committee on Foreign Investment in the United States (“CFIUS”), which is a high level inter-agency committee authorized to assist the President in carrying out his responsibilities under the law. CFIUS is chaired by the Secretary of the Treasury and includes the heads of the following government departments and offices:
- Homeland Security
- The Director of National Intelligence
The CFIUS notification and review process begins with the filing of a voluntary notice by the parties to a proposed transaction. The review must be completed within 30 days of the filing of the notice and the vast majority of transactions are cleared at the initial review stage.
However, CFIUS may initiate an investigation of the transaction if:
(1) CFIUS or a member agency believes that the transaction threatens the national security and the threat has not been mitigated through an agreement with the parties;
(2)The lead CFIUS agency reviewing the transaction recommends that an investigation be conducted;
(3)The transaction is a “foreign government-controlled transaction;” or
(4)The transaction would result in foreign control of any critical infrastructure of the U.S.
The investigation must be completed within 45 days.
At the end of the investigation, CFIUS may refer the matter to the President if:
- Any CFIUS member recommends that the transaction be prohibited; or
- CFIUS believes that a Presidential determination is appropriate.
The President then has 15 days to make a decision regarding the transaction. CFIUS is authorized to enter into agreements with the parties to mitigate any national security risk that maybe presented by a transaction.
Which U.S. businesses involve national security considerations are not listed in either the statute or the implementing regulations. Rather, CFIUS states that it must analyze the specific facts of a particular transaction. The term “critical infrastructure” is only defined in general terms in the statute as “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems or assets would have a debilitating impact on national security.” Nevertheless, by noting the kinds of transactions that CFIUS has reviewed, we are able to provide some illustrative examples of businesses that involve national security considerations. They include:
- Defense and law enforcement;
- Information technology;
- Advanced technologies;
- Semiconductors and other products that have dual use applications;
- Data protection;
- Internet security;
- Telecommunications; and
- Natural resources and energy
The CFIUS regulations define a foreign government-controlled transaction as “any covered transaction that could result in control of a U.S. business by a foreign government or by a person controlled by or acting on behalf of a foreign government.” (31 C.F.R. 800.214) In reviewing foreign government-controlled transactions, among the factors CFIUS considers are:
- The extent to which the foreign investor’s policies require investment decisions to be based solely on commercial grounds;
- The degree to which the foreign investor’s management and investment decisions are made independently from the controlling government;
- The degree of disclosure of the purpose, investment objectives and financial information of the foreign investor; and
- The degree to which the foreign investor complies with the regulatory and disclosure requirements of the countries in which it invests.
The Exon-Florio review process is one of voluntary disclosure. Nevertheless, there is a significant benefit to complying with Exon-Florio when it is applicable and a significant risk in not doing so. If a transaction has undergone review by CFIUS, it is placed in a “safe harbor” and can never be challenged as violating Exon-Florio. However, if a transaction has not undergone review by CFIUS, it can be challenged as violative of Exon-Florio at any time, even years after the transaction has been completed.
Any non-U.S. company considering making an acquisition in the United States should be familiar with the three statutes discussed in this article. Because each of these laws can have a significant impact upon the proposed acquisition and each has its own particular guidelines or rules, it is strongly suggested that a non-U.S. company engage experienced and knowledgeable U.S. legal counsel early in the acquisition process. Such counsel can provide guidance as to the applicable legal requirements; assist in preparing any necessary filings; and, if necessary, negotiate with governmental authorities to attempt to resolve any competitive or national security issues. Such counsel can be an invaluable aid in achieving a successful result.
For more information, please contact Robert Magielnicki. Mr. Magielnicki is a partner in the Antitrust Practice Group in the firm’s Washington, D.C. office.
 The enforcement policy of the Antitrust Division and the FTC, as well as their approach to analyzing mergers is set forth in their Horizontal Merger Guidelines, which can be found at www.ftc.gov/bc.
 All of the threshold amounts under the HSR Act are subject to revision annually based on the change in the U.S. Gross National Product. The revised figures usually are announced in January and go into effect in February.
 The filing fee ranges from U.S. $45,000 to U.S. $250,000, depending upon the value of the transaction.
 Exon-Florio is an amendment to the Defense Production Act of 1950. It has been further amended by the Foreign Investment and National Security Act of 2007.