By: Timothy Robinett, Esq.
Manning, Leaver, Bruder & Berberich
Federal law requires that in certain situations, a buyer and seller of an automobile dealership 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”), only applies if certain criteria is met. Specifically, the three “tests” which must be met for the HSR to apply are as follows:
(1) either the buyer or the seller must be engaged in commerce, or any activity affecting commerce;
(2) between the buyer and seller, one must have annual net sales or total assets of $10,000,000 or more, and the other annual net sales or total assets of $100,000,000 or more; and
(3) after the transaction is completed, the buyer must hold at least 15% or more of the seller’s voting stock or assets, or the buyer must hold an aggregate total of the seller’s voting stock or assets in excess of $15,000,000.
The FTC does provide exemptions for certain transactions, even if each of the three “tests” stated above are met. Some of the more common exemptions are: sale of goods or realty in the ordinary course of business; sale of bonds, mortgages, deeds of trust and other obligations that are not voting securities; sale between a Federal agency or a State or political subdivision; sales specifically exempted from antitrust laws by Federal law; and any sale determined by the FTC, on a case by case basis, that is not likely to violate antitrust laws
In order to properly evaluate whether the HSR applies to a transaction, both the buyer and sell 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. “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 million, but buyer also has a controlling interest in two other corporations with assets of 10 million and 20 million, respectively, buyer’s total assets will be deemed to be 40 million dollars rather than 10 million dollars.
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.”
The calculation of “total assets” in some circumstances also 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 million in cash, and will purchase assets from B for $100 million. 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 million that it will use to acquire B’s assets from the $105 million that A will have at the time of the transaction. Therefore, A has total assets of $5 million, and does not meet the criteria listed above.
However, by way of another example, if we assume in a new hypothetical that at the time that A will buy B’s assets that A has $85 million in cash and a factory valued at $20 million, and that A will exchange the factory and give $80 million 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 million in cash that it uses to acquire B’s assets, but A will have to add $20 million for the value of the factory to his total assets. Therefore, in this example A has total assets of $25 million.
If the transaction meets all three of the qualifying factors, and none of the HSR’s exemptions apply, the buyer and seller must send a statutory notice to the FTC and await 30 days after the FTC’s receipt of the notice before proceeding forward with the transaction. In addition to the statutory notice, the FTC requires the payment of a filing fee of $45,000 per transaction, which is typically the buyer’s responsibility. The HSR provides for penalties of up to $10,000 per day in the event that the parties to a qualifying transaction fail to follow the reporting guidelines. Since the HSR is specific to each transaction, and since the penalties may be very severe for failure to abide by the Act, potential buyers and sellers should seek the assistance of legal counsel if they have any questions regarding its application to a particular transaction.
(Tim Robinett is a partner in the law firm of Manning, Leaver, Bruder & Berberich and can be reached at 323-937-4730 or trobinett@manningleaver.com)
This article was written in 2000.