On February 23, 2005, the U.S. Federal Trade Commission (FTC) announced that it had accepted new rules that will change the Hart-Scott-Rodino Act (HSR) premerger notification rules for non-corporate entities such as partnerships and limited liability companies (LLCs). The HSR Act generally imposes mandatory premerger notification and waiting period requirements for transactions meeting certain criteria. In general, absent a specific exemption, acquisitions that result in a party holding in excess of $53.1 million (as adjusted for inflation) of assets or voting securities are subject to HSR filing requirements.
The new rules regarding “non-corporate entities” were published in the Federal Register on March 8, 2005 and will apply to transactions that are consummated after April 7, 2005. To view the new rules, please go to http://www.ftc.gov/os/2005/02/050223premergerfrninterp.pdf. The new rules fundamentally change the HSR treatment of partnerships and LLCs, both at the time of formation, as well as for post-formation transfers of interests in those entities. The primary thrust of the new rules is to harmonize the HSR treatment of corporations and non-corporate entities. Under the rules, many transactions involving partnerships and LLCs that have historically not been reportable will become reportable events. Counsel involved in negotiation merger and acquisition transactions need to be aware that transactions involving partnerships and LLCs should be examined in light of the new rules.
In a previous On the Subject, we provided background on the prior treatment of partnerships and LLCs under the HSR Act. http://www.mwe.com/info/news/ots0404c.htm
Below, we summarize some of the main features of the new rules as applied to partnerships and LLCs.
Formation of a new joint venture partnership or LLC will be reportable if any party will hold a controlling interest in the entity and that party’s interest will be valued at $53.1 million or more. Control of a partnership or LLC is defined as having the right to receive 50 percent or more of the profits of the entity, or 50 percent or more of the assets of the entity on dissolution.
Acquisitions of Existing Interests
Acquisitions of interests in an existing non-corporate entity will be reportable under the new rules if the acquiring person will hold a controlling interest valued in excess of $53.1 million following the acquisition.
Acquisitions of additional interests in a partnership or LLC by a person that already controls that entity will be exempt intracompany transactions, and will not be reportable events.
The new HSR rules represent a laudable effort by the FTC to eliminate some of the historical inconsistencies in the HSR rules applied to corporate and non-corporate entities. The rules expand HSR coverage to include a wide range of previously non-reportable transactions involving non-corporate entities. At the same time, the rules eliminate reporting requirements for intracompany transactions involving non-corporate entities. The rules reflect the agency’s understandable desire to subject potentially problematic transactions to HSR review irrespective of the form of entity selected by the parties to bring about a business combination or acquisition.