So, about that other confused scenario I mentioned. This one doesn’t come up as often, but when it does, it seems to be somewhat frequently missed.
This time, we’re talking about the exemption codified in 16 CFR 802.4, compellingly titled, “Acquisitions of voting securities or non-corporate interests in unincorporated entities holding certain assets the acquisition of which is exempt.”
The current conceptual form of 802.4 is one of the “newer” HSR rules and one that doesn’t seem to have completely sunk in sometimes. Okay, so “newer” means amended into substantially its current form in March 2005, which sounds like it wasn’t that long ago to my ears but is rapidly hurtling toward a full decade in the past. Great, now I feel old.
Anyway, to get back to how people sometimes forget to analyze whether 802.4 applies to their transactions, I remember a former colleague who was unhappy that the client needed to be told that no filing was necessary after all because they had forgotten about 802.4 (which then actually was pretty new). That sounded like good news to me, but the colleague was apparently concerned about looking as though they had made a mistake. Heck, if your only mistakes in life save the client time and money, I think you’re doing pretty well.
So what does 802.4 do and how can it be helpful? At the most basic level, 802.4 lets you look through the equity interests you’re buying, whether that’s voting securities (i.e., stock) or noncorporate interests (i.e., LLC or partnership units), and consider whether any of the assets held by the company you are buying are themselves exempt. If enough of them are such that the fair market value of the total pool of non-exempt assets you’re buying does not cross the lowest size of transaction threshold (currently $75.9 million), then you don’t have to file.
Okay, that was a lot of words that probably don’t make a whole lot of sense, so let’s talk about an example. Let’s say you’re planning to pay $80 million in cash for Snyder’s Retro-Spinning Neon Widget Corp, a privately held company. Because you’re paying $80 million in cash up front, the size of the transaction is $80 million, so at first glance, you’d have to file unless you can up with an exemption. But 802.4 says that we don’t have to stop there. We can look at the target’s assets, and, if acquiring them directly would be exempt, exclude them from the value of the deal. So we have to look at Snyder’s books to determine what its assets are. Then we need to assign a fair market value to all of those assets, add up those values, exclude any exempt assets and then ask whether what’s left is worth more than $75.9 million. (I wasn’t aware of it until I ran a web search, but it seems the FTC even has a helpful little explanation of how to apply the rule.)
So let’s say in our hypothetical that we do that for Snyder’s and discover that it holds $4 million in cash and $2 million in Google stock in addition to all of the business assets that you’re planning to acquire. The cash is super easy to value, obviously. The Google stock is publicly traded too, so that’s easy to get a fair market value on. It’s probably fair to conclude that the business assets aren’t worth any more than the $80 million you’re paying over all. So do we have to file?
Well, the HSR Act says that cash shall not be considered an asset of the person from which it’s acquired (language that’s explicitly cited in 802.4), so we can exclude that as exempt. So now we’re down to non-exempt assets worth no more than $76 million. What about that Google stock?
Well, 802.4 says, “The value of voting or non-voting securities of any other issuer or interests in any unincorporated entity not included within the acquired issuer or unincorporated entity does not count toward the $50 million (as adjusted) limitation for non-exempt assets.”
Google stock is a voting security. It would only be “included within” Snyder’s as the acquired issuer if Snyder’s “controlled” Google, as defined in the HSR rules. Control of a corporation is defined as holding 50% or more of its voting securities or having the right to appoint 50% or more of its board of directors. Last time I checked, Google had a market cap north of $4 million, so as long as we’re sure Snyder’s doesn’t have the power to appoint half of its board (yeah, right), we can exclude that $2 million in stock as well and reach a total value of non-exempt assets of no more than $74 million. We don’t have to file!