Last week, the FTC’s Bureau of Competition announced that it’s walking back an informal interpretive position that some parties have relied upon to avoid HSR filings by reducing the transaction value through repayment of target debt. Here’s an excerpt from the agency’s “Competition Matters” blog addressing the Bureau’s decision:
Under the Hart-Scott-Rodino rules, parties generally need to file if the transaction is valued over a certain dollar-value threshold. However, previous informal interpretations gave the impression that companies could avoid filing by paying off a target company’s debt, instead of paying the company with cash.
It appears that some merging parties have responded by structuring deals in ways that they believe fall outside of the filing requirements. Target companies may be incentivized to take on debt just before an acquisition, so that the acquiring company can retire the debt as part of the deal. These deals then are not being reported to the FTC and the DOJ, which means that merging parties are effectively sidestepping the law and avoiding accountability.
Herein lies the problem of unintended consequences with informal interpretations. Despite the agency’s clearly stated assertion that informal interpretations are not a legal determination, companies appear to rely on them as a substitute or supplement for their own legal analysis. In practice, this means that informal interpretations regarding instances that companies may not have to file are being treated by merging parties as if they are legal exemptions.
That outcome is not aligned with either the statute or the agency’s stated instructions. It is the Commission’s responsibility, with the concurrence of the DOJ, to determine whether and when reporting exemptions are appropriate, through rules or formal interpretations of those rules. As a law enforcement agency, the FTC must be mindful of helping firms avoid accountability, even indirectly.
If you can read the blog’s commentary on the “unintended consequences” of informal agency interpretations without muttering a few expletives under your breath, you’re a better person than I am. But be that as it may, effective September 27, 2021, the Bureau says that it will begin to recommend enforcement action for companies that fail to file when retirement of debt is part of the deal consideration. Here’s the Bureau’s updated position on debt repayment.
– John Jenkins