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HSR: Do Not Pass FTC, Before You Escrow, Contributed by Matthew P. Hendrickson, Neal R. Stoll, Rita Sinkfield Belin, Brian C. Mohr and Joseph P. Nisa, Skadden, Arps, Slate, Meagher & Flom LLP

Wednesday, August 3, 2011

By Matthew P. Hendrickson, Neal R. Stoll, Rita Sinkfield Belin, Brian C. Mohr and Joseph P. Nisa, Skadden, Arps, Slate, Meagher & Flom LLP

On April 30, 2011, the Premerger Notification Office (PNO) of the Federal Trade Commission (FTC) issued a statement "to provide greater clarity about the use of escrows in connection with transactions" that require notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act or HSR). With this statement, the PNO expands its view that the use of an escrow arrangement, even with an "unwind" provision, is presumed to be a violation of the HSR Act. The PNO statement also makes explicit that, if this presumption is to be rebutted with a showing of "exceptional circumstances," such showing must be made prior to implementing the escrow arrangement and in consultation with the PNO.

Under the HSR Act, a person who acquires a certain amount of voting securities or assets must first file a Premerger Notification and Report Form.1 The HSR Act filing triggers a statutory waiting period (usually 30 days) that must expire or be terminated before the reported transaction can close and beneficial ownership of the stock or assets being acquired can pass to the acquiring person. The statutory waiting period gives the FTC and the Antitrust Division of the Department of Justice (DOJ) the opportunity to review the competitive aspects of the proposed acquisition and determine whether the transaction raises competitive concerns. Under the HSR Act, parties that close a reportable transaction prior to the end of the HSR waiting period violate the statute and risk incurring a potential civil penalty of $16,000 for each day the acquiring person is in violation.

Although there is a clear statutory bar to closing a transaction before the end of the HSR waiting period, there are times when circumstances make it necessary or important to close the transaction or transfer the stock or assets from the acquired person before the HSR waiting period ends. Examples of such circumstances include the following:


  1. The laws of a country with jurisdiction over a foreign tender offer require that shares be tendered and the offeror take up the tendered shares on a date before the HSR waiting period for the offer expires;
  2. An acquisition where the stock of the acquiror (instead of cash) is the consideration and the selling parties are taking back a sufficient amount of the buyer's stock to trigger a separate obligation that they file an HSR notification, which filing results in a different HSR waiting period from the filing for the primary acquisition, and the parties to the primary transaction need to close it before the HSR waiting period for seller's take-back of stock ends;2 or
  3. A transaction involves both a primary acquisition and a "secondary" acquisition, where the HSR waiting period for the primary transaction will end and the parties need to close that transaction before the expiration or termination of the HSR waiting period for the secondary acquisition.3

In such cases, parties have at times closed the primary transaction before the HSR waiting period for the foreign offer, the share take-back, or the secondary acquisition has expired or been terminated. Specifically, the acquiring person utilizes an escrow arrangement as an interim measure to hold the specified stock or assets until the appropriate HSR waiting period ends. After the HSR waiting period concludes, the escrow agent transfers the stock or assets to the acquiring party, at which time beneficial ownership in the stock or assets passes.

The concept of "beneficial ownership" in the HSR Act and its implementing rules overlaps with, but is not identical to, the definition promulgated by the U.S. Securities and Exchange Commission for purposes of section 13(d) of the Securities Exchange Act of 1934. 15 U.S.C. § 78m. Under the HSR rules, beneficial ownership is addressed in terms of who "holds" the securities or assets at issue, 16 C.F.R. § 801.1(a)(c). However, the HSR rules do not define "beneficial ownership." Rather, the Statement of Basis and Purpose published in connection with the promulgation of the HSR rules identifies certain "indicia" of beneficial ownership, which must be analyzed on a case-by-case basis. Such indicia include the right to receive the benefit of gain or risk of loss associated with the stock or assets; the right to vote the stock or to determine who may vote the stock; and investment discretion, including the right to dispose of the stock or assets. 43 Fed. Reg. 33450, 33458 (July 31, 1978). The PNO has long taken the position that an escrow agent does not typically acquirer beneficial ownership, but rather the indicia of beneficial ownership pass to the ultimate acquiror, even while the stock or assets are held in escrow. The recent PNO statement does not modify the previous PNO position about beneficial ownership and escrow arrangements, but emphatically calls into question the legality of such arrangements and creates a presumption that any such arrangements violate the HSR Act.

The FTC and DOJ have never favored, but have permitted, with certain conditions, escrow arrangements to be utilized where the escrow arrangement (i) did not bestow the indicia of beneficial ownership on the ultimate acquiring person; and (ii) had a genuine "unwind" provision that required the escrow agent to dispose of the shares or assets to an unrelated third party, in the event that all relevant HSR waiting periods had not expired or been terminated. Unless the escrow arrangement observed these conditions, the FTC presumed that beneficial ownership passed to the ultimate acquiror and not to the escrow agent and that the escrow arrangement violated the HSR Act.

The PNO's April 2011 statement reaffirms its view that the transfer of beneficial ownership before expiration or termination of the HSR waiting period is the touchstone for determining whether the parties have violated the HSR Act, but does not explain why the PNO presumes that beneficial ownership is transferred to the ultimate acquiror when an escrow arrangement is used. Rather, the PNO concludes that any escrow arrangement gives the acquiring party the ability to exercise or otherwise enjoy the benefits of such ownership prior to the end of the HSR waiting period. Notwithstanding the absence of analysis on the transfer-of-beneficial-ownership issue, the statement does provide examples of circumstances in which the PNO will presume that beneficial ownership has passed to the ultimate acquiror and thus indirectly informs transacting parties how to avoid violating the HSR Act. The examples provided, however, involve the very type of escrow arrangements and circumstances described above, that previously were permitted. According to the PNO, it is presumptively illegal to use an escrow arrangement for transactions that involve:


  1. Primary and secondary acquisitions, with different closing time tables and HSR waiting periods;
  2. A tender offer in a foreign jurisdiction, where the jurisdiction's statutory or other legal requirements for tendering and taking up shares is in conflict with the HSR waiting period; and
  3. Certain types of executive compensation involving certain time exigencies, such as the need to exercise stock options within a certain time frame, prior to the expiration or termination of the HSR waiting period.

While the PNO states its willingness to consult with parties in advance of the establishment of an escrow arrangement and that it may, in "exceptional circumstances," recommend that an HSR enforcement action not be pursued in a particular acquisition using an escrow, the PNO also indicates that the exceptional circumstances that merit escrow closings will have to be more persuasive than those previously permitted. Thus, for example, it will not be enough to rebut the presumption that an escrow violates the HSR Act, if the waiting periods of primary and secondary acquisitions do not coincide, or if a foreign jurisdiction's tender offer rules provide a different time frame for when shares must be tendered or taken up, or when a corporation's by-laws require that stock options have to be exercised, or not at all, both prior to the expiration of the HSR waiting period.

In part due to reasons of comity, the PNO has previously permitted parties to use an escrow arrangement when a foreign jurisdiction's regulatory requirements in a tender offer were in conflict with HSR. The PNO's recent statement departs from this position by stating that conflicting legal requirements in other jurisdictions will “generally not [be] sufficient reason to allow the use of an escrow.” However, the extent to which the PNO will dismiss any such legitimate comity concern out-of-hand is an open question, if the parties discuss them and the specific factual circumstances of the transaction with PNO staff in advance.

In sum, the PNO has recently restated and emphasized its view that escrow arrangements presumptively violate the HSR Act because escrows generally do not shield an ultimate acquiring party from obtaining beneficial ownership of escrowed voting securities or assets, pending expiration or termination of all relevant HSR waiting periods. Accordingly, an acquiring party should be very cautious about relying on an escrow arrangement to close all or part of a transaction prior to the complete satisfaction of its HSR obligations and should not enter into any escrow arrangement without first consulting with counsel and then, potentially, the PNO.

Finally, it should be noted that there may be other ways to reconcile differing legal requirements for certain transactions and the PNO statement, that do not involve the use of escrow arrangements. For example, one could use a "springing" preferred non-voting stock, which automatically becomes voting upon the expiration or termination of the HSR waiting period. However, this solution may not always be available, given the at-times onerous corporate law requirements involved in creating a new class of a corporation's stock.

Matthew P. Hendrickson is a partner in Skadden, Arps, Slate, Meagher & Flom LLP's Antitrust and Competition practice, resident in the firm's New York office. Mr. Hendrickson represents parties involved in mergers and acquisitions in proceedings before the FTC and DOJ. He also handles antitrust litigation and provides counseling on U.S. competition laws and the HSR Act.

Neal R. Stoll is a partner in Skadden's New York office and represents clients in connection with investigations conducted by staff of the DOJ; Part 2 investigations conducted by staff of the FTC's Bureau of Competition and Bureau of Consumer Protection; and Part 3 administrative proceedings and appeals. He also has federal trial and appellate experience in cases involving monopolization, distribution practices, the Robinson-Patman Act and acquisitions.

Rita Sinkfield Belin is a counsel in the New York office of Skadden. She advises clients on a variety of issues arising from and related to the application of the HSR Act and the review process required to obtain federal antitrust approval before consummating proposed mergers, acquisitions and other business combinations

Brian C. Mohr is counsel to the antitrust department of Skadden, Arps, Slate, Meagher & Flom, LLP, resident in the Washington, D.C. office. For more than 30 years, Mr. Mohr has concentrated on antitrust, trade regulation and litigation matters, and is nationally known for his work on mergers and acquisitions, focusing on HSR premerger notifications and dealing with U.S. government agency investigations, and coordinating responses to their information requests and subpoenas.

Joseph P. Nisa is a counsel in the New York office of Skadden. His practice has focused on advising clients on HSR matters for over 20 years, and he has prepared hundreds of HSR premerger notifications. He is currently co-author of the Axinn, Fogg, Stoll, Prager and Nisa HSR treatise, Acquisitions Under The Hart-Scott-Rodino Antitrust Improvements Act, 3d edition.

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