By: Penny L. Reeves, Esq.
Manning, Leaver, Bruder & Berberich
In the Fall 2000 edition of the Dealer Buy-Sell, we summarized the federal law requiring certain buyers and sellers of an automobile dealership to notify the Federal Trade Commission (“FTC”) of the transaction prior to the completion of the sale. This federal act, known as the Hart-Scott-Rodino Act (“HSR”), was very important to buyers and sellers in large asset or stock sale transactions because it required the filing of a pre-closing notice with the FTC and a 30 day waiting period before the sale transaction could proceed, together with the requirement that a hefty fee accompany the FTC notice. Fortunately for buyers and sellers of automobile dealerships, the HSR has been amended, effective February 1, 2001, in ways that will make it less likely to apply in the case of automobile dealership buy-sell transactions. Nevertheless, it may well have continued applicability in large buy-sell transactions and the following is a brief review and update on the key issues confronting a buyer and seller with respect to the HSR in the context of a sale of an automobile dealership.
Under the previous law, the HSR applied if the following three-prong “test” was met:
(1) Commerce Test: Either the buyer or the seller were engaged in commerce, or any activity affecting commerce;
(2) Size of Person Test: Between the buyer and seller, one had annual net sales or total assets of $10,000,000 or more, and the other had annual net sales or total assets of $100,000,000 or more; and
(3) Size of Transaction Test: After the transaction was completed, the buyer held at least 15% or more of the seller’s voting stock or assets, or the buyer held an aggregate total of the seller’s voting stock or assets in excess of $15,000,000.
As amended, the HSR applies only to transactions over $50,000,000. For transactions in excess of $50,000,000 but not more than $200,000,000, the following new three-prong test must be met in order for the HSR to apply:
(1) Commerce Test: Either the buyer or the seller are engaged in commerce, or any activity affecting commerce;
(2) Size of Person Test: Between the buyer and seller, one has annual net sales or total assets of $10,000,000 or more, and the other has annual net sales or total assets of $100,000,000 or more; and
(3) Size of Transaction Test: After the transaction is completed, the buyer will hold an aggregate total of the seller’s voting stock or assets in excess of $50,000,000.
The amended version of the HSR effectively reduces the number of buyers and sellers who will be subject to the law by increasing the Size of Transaction test from $15,000,000 to $50,000,000. In other words, a line is drawn between transactions that involve over $50,000,000 and those that do not. Specifically, buyers and sellers are now automatically exempt from the HSR so long as the sale involves no more than $50,000,000 of the seller’s voting stock or assets. This change in the law should prove to be extremely beneficial to smaller dealerships with assets ranging from $15,000,000 to $50,000,000. In addition, there is no longer a reference in the Size of Transaction test to the percentage of seller’s assets purchased by the buyer. Previously, transactions involving less than $15,000,000 could still be subject to the HSR if the buyer purchased at least 15% or more of the seller’s voting stock or assets.
For transactions which are in excess of $200,000,000, the Commerce Test is the only test which must be met in order for the HSR to apply.
In order to properly evaluate whether the HSR applies to transactions where the assets being acquired have a value between $50,000,000 and $200,000,000, both the buyer and seller must determine its “annual net sales” and/or “total assets.” The HSR definition of “annual net sales” includes sales, less returns, discounts, excise taxes and other similar items; however, the costs of production or materials may not be deducted from net sales. It is very important to understand that “Total assets” includes all of the combined assets of a person, whether foreign or domestic, including the assets of other entities that are controlled by that person. For example, if buyer corporation has assets of $10,000,000, but buyer also has a controlling interest in two other corporations with assets of $10,000,000 and $20,000,000, respectively, buyer’s total assets will be deemed to be $40,000,000 rather than $10,000,000.
In the event that a natural person, as opposed to a corporation or other organization, is either the seller or buyer, then the HSR limits the calculation of assets to the natural person’s investment assets, voting stock, or other income-producing property, and excludes such items as a personal residence, automobile and other (non-income) producing property. However, a natural person must count the non-excluded assets of his/her spouse and minor children towards his/her “total assets.”
Another important factor in the calculation of “total assets” is that in some circumstances it does not include the cash that a buyer may borrow in order to complete the transaction. By way of example, assume that A, which is a newly-formed company with no sales and no assets, will borrow $105,000,000 in cash, and will purchase assets from B for $100,000,000. In order to determine whether A’s acquisition of B’s assets will have to be reported under the provisions of the HSR, A’s total assets are determined by subtracting the $100,000,000 that it will use to acquire B’s assets from the $105,000,000 that A will have at the time of the transaction. Therefore, A has total assets of $5,000,000, and does not meet the Size of Person test listed above.
However, by way of another example, if we assume that at the time that A will buy B’s assets that A has $85,000,000 in cash and a factory valued at $60,000,000, and that A will exchange the factory and give $80,000,000 in cash to B for its assets, then a different result may occur. In this second example, A would be able to subtract the $80,000,000 in cash that it uses to acquire B’s assets, but A will have to add $60,000,000 for the value of the factory to his total assets. Therefore, in this example A has total assets of $65,000,000.
The revised HSR also provides for inflation adjustment to occur beginning September 30, 2004, whereby the dollar thresholds used for the Size of Person and Size of Transaction tests (as well as the filing fee tiers) will be adjusted to reflect the percentage change in the gross national product
1 If the HSR applies, the buyer and seller must send a statutory notice to the FTC and wait 30 days after the FTC’s receipt of the notice before proceeding forward with the sale. In addition to the statutory notice, the FTC requires the payment of a substantial filing fee. This filing fee has increased in recent years, particularly for transactions involving $100,000,000 or more. The following chart sets forth the amount of the current filing fees:
Amount of Filing Fee Size of Transaction
$ 45,000 Less than $100,000,000
$ 125,000 $100,000,000 to $499,999,999
$ 280,000 $500,000,000 or More
Buyers and sellers should be aware of the severe penalties that may attach for failing to abide by the Act’s provisions. In some cases, non-compliance with the HSR can cost up to $10,000 per day. Due to these penalties, and due to the overall complexity of the HSR, potential buyers and sellers should seek the assistance of legal counsel at the beginning of a buy-sell transaction if they have any questions regarding the Act’s application to their particular transaction.
(Penny L. Reeves is a partner in the law firm of Manning, Leaver, Bruder & Berberich and can be reached at 323-937-4730 or preeves@manningleaver.com)
This article was written in 2003.