[Federal Register Volume 61, Number 61 (Thursday, March 28, 1996)]
[Rules and Regulations]
[Pages 13666-13689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7529]
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FEDERAL TRADE COMMISSION
16 CFR Parts 801 and 802
Premerger Notification; Reporting and Waiting Period Requirements
AGENCY: Federal Trade Commission.
ACTION: Final rule.
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SUMMARY: The Commission amends the premerger notification rules that
require the parties to certain mergers or acquisitions to file reports
with the Federal Trade Commission and the Assistant Attorney General in
charge of the Antitrust Division of the Department of Justice and to
wait a specified period of time before consummating such transactions.
The reporting and waiting period requirements are intended to enable
these enforcement agencies to determine whether a proposed merger or
acquisition may violate the antitrust laws if consummated and, when
appropriate, to seek a preliminary injunction in federal court to
prevent consummation.
These amendments consist of five rules that define or create
exemptions to the requirements imposed by the Hart-Scott-Rodino Act.
These rules clarify the types of transactions that are in the ordinary
course of business of the parties to the transaction and are exempt
under section 7A(c)(1) of the Hart-Scott-Rodino Act. They also provide
several new exemptions under section 7A(d)(2)(B) for certain types of
acquisitions of realty and carbon-based mineral reserves that are not
likely to violate the antitrust laws. These rules are designed to
reduce the compliance burden on the business community by eliminating
the application of the notification and waiting requirements to a
significant number of transactions that are unlikely to violate the
antitrust laws. They will also allow the enforcement agencies to focus
their resources more effectively on those transactions that present the
potential for competitive harm.
EFFECTIVE DATE: April 29, 1996.
[[Page 13667]]
FOR FURTHER INFORMATION CONTACT: John M. Sipple, Jr., Assistant
Director, or Melea R. Epps, Attorney, Premerger Notification Office,
Bureau of Competition, Room 303, Federal Trade Commission, Washington,
DC 20580. Telephone: (202) 326-3100.
SUPPLEMENTARY INFORMATION:
Regulatory Flexibility Act
These amendments to the Hart-Scott-Rodino premerger notification
rules are designed to reduce the burden of reporting on the public. The
Commission has determined that none of the rules is a major rule, as
that term is defined in Executive Order 12291. The amendments will not
result in any of the following: an annual effect on the economy of $100
million or more; a major increase in costs or prices for consumers,
individual industries, Federal, State, or local government agencies, or
geographic regions; or significant adverse effects on competition,
employment, investment, productivity, innovation, or on the ability of
United States-based enterprises to compete with foreign-based
enterprises in the domestic market. None of the amendments expands the
coverage of the premerger notification rules in a way that would affect
small business. Therefore, pursuant to Sec. 605(b) of the
Administrative Procedure Act, 5 U.S.C. 605(b), as added by the
Regulatory Flexibility Act, Pub. L. 96-354 (September 19, 1980), the
Federal Trade Commission has certified that these rules will not have a
significant economic impact on a substantial number of small entities.
Section 603 of the Administrative Procedure Act, 5 U.S.C. 603,
requiring a final regulatory flexibility analysis of these rules, is
therefore inapplicable.
Background
Section 7A of the Clayton Act (``the act''), 15 U.S.C. 18a, as
added by sections 201 and 202 of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, requires parties to certain acquisitions of
assets or voting securities to give advance notice to the Federal Trade
Commission (hereafter referred to as ``the Commission'') and the
Assistant Attorney General in charge of the Antitrust Division of the
Department of Justice (hereafter referred to as ``the Assistant
Attorney General''). The parties must then wait certain designated
periods before the consummation of such acquisitions. The transactions
to which the advance notice requirement is applicable and the length of
the waiting period required are set out respectively in subsections (a)
and (b) of section 7A. This amendment to the Clayton Act does not
change the standards used in determining the legality of mergers and
acquisitions under the antitrust laws.
The legislative history suggests several purposes underlying the
act. Congress wanted to ensure that certain acquisitions were subjected
to meaningful scrutiny under the antitrust laws prior to consummation.
To this end, Congress intended to eliminate the ``midnight merger''
that is negotiated in secret and announced just before, or sometimes
only after, the closing takes place. Congress also provided an
opportunity for the Commission or the Assistant Attorney General (who
are sometimes hereafter referred to as the ``antitrust agencies'' or
the ``enforcement agencies'') to seek a court order enjoining the
completion of those transactions that either agency has reason to
believe would present significant antitrust problems. Finally, Congress
sought to facilitate an effective remedy when a challenge by one of the
enforcement agencies proved successful. Thus, the act requires that the
antitrust agencies receive prior notification of certain acquisitions,
provides tools to facilitate a prompt, thorough investigation of the
competitive implications of these acquisitions, and assures the
enforcement agencies an opportunity to seek a preliminary injunction
before the parties to an acquisition are legally free to consummate it.
The problem of unscrambling the assets after the transaction has taken
place is thereby reduced.
Subsection 7A(d)(1) of the act, 15 U.S.C. 18a(d)(1), directs the
Commission, with the concurrence of the Assistant Attorney General and
in accordance with 5 U.S.C. 553, to require that the notification be in
such form and contain such information and documentary material as may
be necessary and appropriate to determine whether the proposed
transaction may, if consummated, violate the antitrust laws. Subsection
7A(d)(2) of the act, 15 U.S.C. 18a(d)(2), grants the Commission, with
the concurrence of the Assistant Attorney General and in accordance
with 5 U.S.C. 553, the authority to (a) define the terms used in the
act, (b) exempt from the act's notification and waiting period
requirements additional classes of persons or transactions which are
not likely to violate the antitrust laws, and (c) prescribe such other
rules as may be necessary and appropriate to carry out the purposes of
section 7A.
The Commission, with the concurrence of the Assistant Attorney
General, promulgated implementing rules (``the rules'') and the
Notification and Report Form (the ``Form'') and issued an accompanying
Statement of Basis and Purpose, all of which were published in the
Federal Register of July 31, 1978, 43 FR 33451, and became effective on
September 5, 1978.
The rules are divided into three parts which appear at 16 CFR Parts
801, 802, and 803. Part 801 defines a number of the terms used in the
act and rules, and explains which acquisitions are subject to the
reporting and waiting period requirements. Part 802 contains a number
of exemptions from these requirements. Part 803 explains the procedures
for complying with the act. The Form, which is completed by persons
required to file notification, is an appendix to Part 803 of the rules.
Changes of a substantive nature have been made to the premerger
notification rules or Form on eleven occasions since they were first
promulgated: 44 FR 66781 (November 21, 1979); 45 FR 14205 (March 5,
1980); 46 FR 38710 (July 29, 1981); 48 FR 34427 (July 29, 1983); 50 FR
38742 (September 24, 1985); 51 FR 10368 (March 28, 1986); 52 FR 7066
(March 6, 1987); 52 FR 20058 (May 29, 1987); 54 FR 21425 (May 18,
1989); 55 FR 31371 (August 2, 1990); and 60 FR 40704 (August 9, 1995).
The current amendments interpret the act and expand the current
policies of the Commission's Premerger Notification Office regarding
transactions in the ordinary course of business that are exempt from
the notification and waiting requirements of the act. They also include
several new exemptions for acquisitions of certain types of real
property assets and carbon-based mineral reserves.
Comments
These amendments reflect extensive analysis of comments received in
response to the notice of proposed rulemaking published by the Federal
Trade Commission, in consultation with the Assistant Attorney General,
in the Federal Register of July 28, 1995, 60 FR 38930. The notice
contained the current amendments in a proposed form and provided 60
days for interested persons to submit comments on the proposed rules.
During the 60-day period 29 comments were received. In addition, three
new comments and one supplemental comment were received after the
expiration of the comment period. The commenters are identified below.
[[Page 13668]]
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Date of
Number of comment Commenter comment
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1 American Council of Life 9/7/95
Insurance.
2 Heller Ehrman White & McAuliffe.. 9/15/95
3 Pillsbury, Madison & Sutro on 9/26/95
behalf of Chevron Corporation.
4 The Perkin-Elmer Corporation..... 9/21/95
5 Atlantic Richfield Company....... 9/27/95
6 Pillsbury, Madison & Sutro....... 9/25/95
7 General Motors Corporation....... 9/28/95
8 Boult, Cummings, Conners & Berry. 9/28/95
9 Section of Antitrust Law of the 9/29/95
American Bar Association.
10 Federal Express.................. 9/28/95
11 Ford Motor Company............... 9/28/95
12 BellSouth Corporation............ 9/28/95
13 Equipment Leasing Association of 9/29/95
America.
14 Ronald A. Bloch of McDermott, 9/29/95
Will & Emery.
15 Arter & Hadden on behalf of 9/29/95
Kennecott Corporation.
16 U.S. Chamber of Commerce......... 9/29/95
16A U.S. Chamber of Commerce 11/9/95
(Supplemental Comments).
17 Rinehart & Associates, Investment 9/28/95
Forestry.
18 Timberland Investment Services, 9/28/95
LLC.
19 O'Melveny & Myers on behalf of 9/29/95
Marriott International, Inc..
20 American Hospital Association.... 9/29/95
21 Weil, Gotschal & Manges.......... 9/29/95
22 Latham & Watkins................. 9/29/95
23 International Council of Shopping 9/29/95
Centers.
24 Colorado Oil & Gas Association... 9/29/95
25 ITT Corporation.................. 9/27/95
26 American Hotel & Motel 9/29/95
Corporation.
27 American Transport Association of 9/29/95
America.
28 National Independent Energy 9/29/95
Producers.
29 Latham & Watkins on behalf of 10/6/95
Host Marriott Corporation.
30 Forest Investment Associates..... 9/28/95
31 National Association of Real 11/2/95
Estate Investment Trusts.
32 Association of Private Pension 2/1/96
and Welfare Plans.
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The commenters generally favored the adoption of the exemptions but
also advocated the expansion of certain of the proposals to include
exemptions for other types of transactions which, they argued, raise
few competitive concerns. The final amendments contain revisions to the
proposed rule that address certain commenters' concerns and exclude
from the reporting requirements additional transactions that the
Commission and the Assistant Attorney General found were unlikely to
violate the antitrust laws. A few of the comments contained suggestions
that were outside the scope of the proposed rulemaking; these
suggestions may be considered by the Commission in future rulemaking
efforts.
Statement of Basis and Purpose for the Commission's Revisions to the
Premerger Notification Rules
Authority: The Federal Trade Commission, with the concurrence of
the Assistant Attorney General, promulgates these amendments to the
premerger notification rules pursuant to section 7A(d) of the
Clayton Act, 15 U.S.C. 18a(d), as added by section 201 of the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, Pub. L. 94-435, 90
Stat. 1390.
The five amendments to the premerger notification rules--
Secs. 802.1, 802.2, 802.3, 802.4, and 802.5--describe certain types of
acquisitions that are exempt or are not exempt from the notification
requirements of the act. They replace and expand existing Sec. 802.1,
which describes certain applications of the exemption granted by
section 7A(c)(1) of the act for acquisitions of goods or realty
transferred in the ordinary course of business. Revisions to
Sec. 801.15 define when the aggregation rules apply to acquisitions
covered by these rules.
Criteria for the Rules. Section 7A(c)(1) of the act exempts
``acquisitions of goods or realty transferred in the ordinary course of
business.'' Existing Sec. 802.1(a) interprets this statutory language
to apply the exemption to acquisitions of voting securities of entities
holding only realty. Existing Sec. 802.1(b) denies the exemption to the
sale of goods or real property of an entity if they constitute ``all or
substantially all of the assets of that entity or an operating division
thereof'' unless the entity qualifies for the exemption under existing
Sec. 802.1(a) because its assets consist solely of real property and
assets incidental to the ownership of real property.
The reportability of transfers in the ordinary course of business
has long been a frequent source of questions from the public to the
Premerger Notification Office. Amended Sec. 802.1 represents
interpretations of section 7A(c)(1) made by the Premerger Notification
Office over the years, and it also broadens these interpretations to
exempt additional classes of acquisitions of goods that qualify as
transfers in the ordinary course of business and thus are unlikely to
violate the antitrust laws.
Amended Sec. 802.1(a) preserves the concept of existing
Sec. 802.1(b) and makes the exemption unavailable for acquisitions of
all or substantially all of the assets of an operating unit. Operating
unit is defined as ``assets that are operated by the acquired person as
a business undertaking in a particular location or for particular
products or services.'' The sale of all or substantially all of the
assets of a business undertaking is generally equivalent to the sale of
a business. Amended Sec. 802.1(a) recognizes that acquisitions that
transfer the equivalent of a business are not in the ordinary course
and thus are not exempt from the prior notification obligations of the
act.
Amended Sec. 802.1 also defines categories of acquisitions of goods
that are deemed to be in the ordinary course of business and are
therefore exempt from the notification requirements. Individual review
of transactions such as typical acquisitions of new goods and current
supplies is generally unnecessary because buying and selling goods is
the essence of manufacturing, wholesaling, and retailing businesses.
Sales in the ordinary course of business should not in any way diminish
the capacity of the selling firm to compete.
Amended Sec. 802.1 provides that certain acquisitions of used
durable goods qualify for exemption from the reporting requirements as
transfers of goods in the ordinary course of business. These exemptions
for specific types of acquisitions of used durable goods acknowledge
that certain transfers of productive assets that are not the sale of an
operating unit are made in the ordinary course of business. For
example, an equipment leasing company may be acquiring used durable
goods as current supplies, or the seller may be replacing these assets
to increase or upgrade capacity and to improve efficiencies. However,
many used durable goods acquisitions involving productive assets are
not within the ordinary course of business and thus are not exempt
under Sec. 802.1.
New Secs. 802.2 (concerning real property assets) and 802.3
(concerning carbon-based mineral reserves) are based on the
Commission's authority in section 7A(d)(2)(B) of the act to exempt
transactions that are unlikely to violate the antitrust laws. These
sections
[[Page 13669]]
provide exemptions for certain acquisitions of assets that are abundant
and are used in markets that are generally unconcentrated. These two
factors make it unlikely that a transfer of these types of assets will
have anticompetitive effects. It is thus not necessary to examine each
individual transaction to determine if it will violate the antitrust
laws.
To accommodate parties who choose to structure their transactions
as acquisitions of voting securities rather than as acquisitions of the
underlying assets, new Sec. 802.4 exempts acquisitions of voting
securities of issuers holding assets of two types: (1) assets, the
direct acquisition of which is exempted by section 7A(c)(2) of the act
or Secs. 802.2, 802.3 or 802.5 of the rules, and (2) assets, the direct
acquisition of which is not exempt by section 7A(c)(2) of the act or
Secs. 802.2, 802.3 or 802.5 of the rules, that are valued at $15
million or less. The exemption for the acquisition of the voting
securities of an issuer holding assets, the acquisition of which is
exempt under section 7A(c)(2)--bonds, mortgages, deeds of trust and
other obligations that are not voting securities--is designed to
provide the same treatment for the direct acquisition of such assets (
a transaction which is already exempt from the reporting requirements)
and the acquisition of the voting securities of an issuer holding these
assets.
New Sec. 802.5 exempts acquisitions of investment rental property
assets, the acquisition of which is not already exempted by Sec. 802.2.
Section 802.5 is based on the use to which buyers will put the acquired
assets. The Commission believes that the acquisition of investment
rental property assets--defined in Sec. 802.5(b) as real property that,
except for limited circumstances, will be rented only to entities not
included within the acquiring person and will be held solely for rental
or investment purposes--is unlikely to violate the antitrust laws.
Sections 802.1 through 802.5 are based on the Commission's
authority in section 7A(d)(2)(A) of the act to ``define the terms used
in [section 7A]'' and sections 7A(d)(2) (B) and (C) to ``exempt . . .
transactions which are not likely to violate the antitrust laws'' and
to ``prescribe such other rules as may be necessary and appropriate to
carry out the purposes of [section 7A].'' These exemptions, of course,
relate only to premerger reporting, and transactions exempted from the
reporting requirements by the new rules remain subject to the antitrust
laws.
The Commission is aware that even with the significant coverage of
the new rules, the exempt status of many transactions will remain
unaddressed. These rules do not and are not intended to interpret or
apply to the entire statutory exemption created by section 7A(c)(1).
For example, certain acquisitions of credit card receivables may
qualify for exemption as transfers in the ordinary course of business.
Persons who desire advice on the exempt status of any transfer of
goods, realty or other assets may contact the Premerger Notification
Office, Bureau of Competition, Room 303, Federal Trade Commission,
Washington, DC 20580, or phone (202) 326-3100.
I. Section 802.1: Acquisitions of Goods and Realty in the Ordinary
Course of Business
Section 7A(c)(1) of the act exempts ``acquisitions of goods or
realty transferred in the ordinary course of business.'' Amended
Sec. 802.1 provides that an acquisition of all the assets of an
operating unit is not an acquisition in the ordinary course of
business. It also defines certain acquisitions of goods that are in the
ordinary course of business and therefore exempt from the reporting
requirements. This section primarily covers exemptions for certain
acquisitions of goods. Exemptions for the acquisition of certain types
of realty are set out in new Sec. 802.2. The realty exemptions are not
subject to the exclusion for acquisitions of an operating unit.
Amended Sec. 802.1 defines four categories of acquisitions of
goods: acquisitions of an operating unit, acquisitions of new goods,
acquisitions of current supplies, and acquisitions of used durable
goods. The section states whether and under what circumstances each
type of acquisition is exempt. These four categories of asset
acquisitions are not comprehensive. As noted above, some asset
acquisitions may not fit neatly into any of these defined categories.
Amended Sec. 802.1 has four paragraphs: Paragraph (a) denies the
ordinary course of business exemption to any transfer of goods and
realty that is equivalent to the sale of a business. The next three
paragraphs define acquisitions of goods that may be exempt. Paragraph
(b) exempts the acquisition of new goods, and paragraph (c) exempts the
acquisition of current supplies. Paragraph (d) defines certain
transfers of used durable goods that are within the ordinary course of
business. These include: (1) transfers to and from bona fide dealers,
resellers or lessors; (2) transfers by an acquired person that has
replaced the productive capacity of the assets being sold; and (3)
transfers by an acquired person that has outsourced the management and
administrative support services provided by the goods being sold.
In determining whether a given acquisition of goods and realty is
in the ordinary course of business and is therefore exempt under a
provision of amended Sec. 802.1, one must first determine if the assets
are substantially all of the assets of an operating unit. If the assets
being sold comprise all or substantially all of the assets of an
operating unit of the seller, the inquiry ends there, and the
acquisition is not exempt as a transfer of goods or realty in the
ordinary course of business. If the assets do not constitute all or
substantially all of the assets of an operating unit, then the goods
should be classified as either new goods, current supplies or used
durable goods.
The organization of Sec. 802.1 is intended to make it easier to
identify routine acquisitions that meet the criteria of section
7A(c)(1) for an exemption as an acquisition of goods transferred in the
ordinary course of business. Sales of new goods and purchases of
current supplies are frequent. The objective of the businesses covered
by paragraphs (b) and (c) is to buy, sell or lease such goods and
supplies; thus such transactions meet the common meaning of transfers
in the ordinary course of business. Exempting these transactions
facilitates acquisitions of new goods that normally expand the supply
of products or expand productive capacity and therefore do not tend to
lessen competition. In contrast, acquisitions of entire operating units
are not within the common meaning of ``ordinary course'' and have the
potential to concentrate productive capacity and thereby diminish
competition.
Proposed Sec. 802.1 addressed only exemptions for acquisitions of
goods in the ordinary course of business. Acquisitions of realty in the
ordinary course of business are also exempted, pursuant to section
7A(c)(1) of the act. Section 802.2 covers certain exemptions for
acquisitions of realty, and it is possible that acquisitions of realty
other than those identified in Sec. 802.2 are transfers of real
property in the ordinary course of business that are exempt. Language
added to Sec. 802.1 concerning realty makes the provision consistent
with the exemption provided in section 7A(c)(1).
A. Operating Unit. Amended Sec. 802.1(a) excludes from the ordinary
course of business exemption any acquisition of all or substantially
all of the assets of an ``operating unit.'' As defined by the amended
provision, an
[[Page 13670]]
operating unit is a collection of assets that has been operated as a
business undertaking and that may include goods, realty and other types
of property. Amended Sec. 802.1(a) also indicates that operating units
are not necessarily separate legal entities. A determination of which
groups of assets constitute an operating unit within a company will
vary significantly among businesses, because the manner in which
businesses are organized is company-specific. Thus, examples of
operating units include, but are not limited to, regional divisions,
company branches, international operations, a hospital, a retail store,
a factory or a processing facility.
The definition of operating unit indicates that the assets that
comprise the unit are operated ``in a particular location or for
particular products or services.'' Proposed Sec. 802.1(a) defined an
operating unit as assets operated ``in a particular geographic area or
for particular products or services.'' The word ``location'' was
substituted for ``geographic area'' since a single location of a
company's business, i.e., a manufacturing plant, a retail store, a
funeral home, constitutes an operating unit. Each location of a
company's operations is viewed as a separate business undertaking, and
the purchase of all of the assets of one of a company's stores or
production facilities is not a transaction within the ordinary course
of business. Because amended Sec. 802.1(a) no longer uses the term
``geographic area,'' the determination of which of the seller's
operations comprise an operating unit is no longer dependent in part
upon whether certain locations are sufficiently proximate to comprise a
business undertaking in a particular geographic area. Example 1 to
Sec. 802.1 illustrates that an operating unit consists of one grocery
store within a company's chain of stores.
A key factor in determining whether a group of assets being sold
constitutes an operating unit is whether the seller, as a result of the
sale, will cease to sell particular products or provide particular
services from a specific location or will exit the business of selling
particular products or providing particular services. The operating
unit definition specifically excludes references to relevant product
markets and relevant geographic markets. Thus, a section 7 antitrust
analysis is unnecessary and inappropriate in determining whether assets
being sold comprise an operating unit for purposes of determining
whether notification is required.
Another probative factor in determining whether a group of assets
constitutes an operating unit is whether the seller derived third party
revenues from the use of the assets. In certain cases, this factor may
distinguish an operating unit from a set of assets that have been used
solely to provide management and administrative support services, such
as in-house accounting or billing services, that generate no third
party revenues directly but support the seller's business operations.
Amended Sec. 802.1(a) uses the term ``operating unit'' rather than
the term ``operating division'' used in existing Sec. 802.1(b). The
latter term has created some uncertainty because certain business
entities use the term ``division'' in a manner that may not be
consistent with this rule. For example, a business might use the term
``division'' to designate an unincorporated administrative segment of
its enterprise, such as the ``East Coast Division'' or the ``Tri-State
Division,'' that provides support functions to the business''
manufacturing activities. Such usage is designed to serve the needs of
the business. The term ``operating unit'' has been adopted in order to
make clear that the application of the rule is not dependent on the
terminology used by a business.
Comment 11 suggested that Sec. 802.1(a) be revised to focus on
whether the seller is exiting a line of business or a geographic area.
However, the wording of amended Sec. 802.1(a) makes no explicit
reference to the seller's exit from a line of business or geographic
area. As discussed above, this provision no longer emphasizes the
operation of a business undertaking in a particular geographic area;
instead, the focus is on the location of a specific business
undertaking. Also, while the seller's exit from a business segment can
be a major indication that certain assets constitute an operating unit,
it is not that only possible indication. The extent to which the assets
are used to generate third party revenues is also an important factor
and may determine that a group of assets comprises an operating unit,
even though there may be disagreement as to whether the seller is
actually exiting a business segment. For example, the sale of revenue
generating assets at a specific location can be the sale of an
operating unit even if the seller is continuing in that line of
business at other locations.
Comment 11 also suggested that the operating unit should be defined
as assets operated by the acquired person as a business undertaking
including all similar products or services offered by the acquired
person, or all operations in a geographic area. Interpretation of the
terminology ``similar products or services'' could require a
complicated analysis of the seller's products to determine whether the
assets being sold were used to manufacture those products of the seller
that were sufficiently different from the seller's other products to
deem that an operating unit was being transferred. Thus, the suggested
language was not adopted in order to avoid the necessity of such an
analysis.
B. New Goods. Amended Sec. 802.1(b) describes the type of
acquisitions of goods that are most commonly referred to as
acquisitions ``in the ordinary course of business.'' This paragraph
exempts acquisitions of new goods, which are typically routine sales of
inventory by manufacturers, wholesalers or retailers conducted in the
ordinary course of business.
Proposed Sec. 802.1(b) exempted acquisitions of new goods
``produced by the acquired person for sale, or * * * held by the
acquired person solely for resale.'' The proposed rule did not exempt
any acquisitions of goods from a seller that purchased or produced the
goods for his own use but decided to sell the goods without using them.
This language was eliminated from amended Sec. 802.1(b) in order to
simplify the rule. Further, the change addresses a concern raised by
Comment 21 that the proposed rule would not exempt acquisitions of new
equipment from companies that ordered the equipment for their own use
but discovered before or upon delivery that they could not use the
equipment. The Commission has concluded that such sales should be
exempt because sales of new equipment that are not part of the sale of
an operating unit are not likely to raise an antitrust concern, even
though the equipment may have been purchased by the seller for use. As
a result of the deletion of this language, the rule no longer focuses
on the purpose for which the acquired person holds the new goods. The
exemption is also available for acquisitions of goods that the seller
in good faith considers to be new, even though he may have used the
goods for demonstration purposes, customer trials or other purposes
that are incidental to the sale of the goods. The term ``new'' implies
that the goods have not been used to generate income.
Comments 9, 13 and 21 suggested that an exemption be included for
acquisitions of new goods produced or held for lease. Amended
Sec. 802.1(b) adopts this suggestion by exempting acquisitions of new
goods regardless of the purpose for which the goods were produced or
acquired. As a result, an equipment leasing company that sells new
inventory that it has been unable to lease may avail itself of the
exemption as long as the inventory of new goods
[[Page 13671]]
does not constitute an operating unit of the company.
The exemption set forth in paragraph (b) does not apply to any
acquisition of new goods which are sold as part of a transaction that
includes all or substantially all of the assets of an operating unit.
This limitation on the exemption of new goods would apply even if all
the assets transferred were new goods held solely for the purpose of
resale. For example, if a marine supply wholesaler purchased the entire
inventory of another marine supply wholesaler which owned only an
extensive inventory of hundreds of items from different manufacturers,
the acquisition would not be exempt, even though the sale is composed
entirely of new goods. The sale of all of its inventory would be
considered the sale of all or substantially all of its business since
the primary assets of such a wholesaling business are inventory.
C. Current Supplies. Amended Sec. 802.1(c) describes another
category of asset acquisitions--the acquisition of ``current
supplies''--that qualifies for the ordinary course exemption. ``Current
supplies'' is a new term to the rules and is described in subparagraphs
(1), (2) and (3). Current supplies include goods bought solely for the
purpose of resale or leasing to an entity not included within the
acquiring person, raw materials, components, maintenance supplies and
the like. Current supplies are generally purchased frequently and are
used for inventory by the purchaser, consumed in the daily conduct of
business or incorporated into a final product. Current supplies may
also consist of used durable goods, discussed in new Sec. 802.1(d),
which, for example, may be purchased as inventory by equipment leasing
companies or used equipment dealers. However, acquisitions of current
supplies are not in the ordinary course of business if they are
acquired as part of an acquisition of all or substantially all the
assets of an operating unit.
In proposed Sec. 802.1(c), the term ``current supplies'' explicitly
excluded used durable goods. Amended Sec. 802.1(c) now redefines
``current supplies'' to eliminate this exclusion, as suggested by
Comments 9 and 21. Although ``used durable goods'' are addressed
explicitly in Sec. 802.1(d), the Commission recognizes that used
assets, as well as new assets, may meet the definition of ``current
supplies'' in Sec. 802.1(c). Parties are permitted to claim the
exemption even if the goods purchased are not new, so long as the
acquired goods are to be held for third-party resale or lease, are to
be consumed by the buyer, or are otherwise incorporated in the
acquiring person's final product.
Amended Sec. 802.1(c)(1) includes additional language to make clear
that the exemption does not apply unless the goods being acquired will
be resold or leased to an entity that is not within the acquiring
person. The addition prevents a buyer from claiming the exemption for
the acquisition from a competitor of used productive equipment which
the buyer in turn resells or leases to a subsidiary.
The used durable goods provision, Sec. 802.1(d), contains a
provision exempting the acquisition of the category of goods described
in proposed Sec. 802.1(c)(1) as goods acquired for the purpose of
resale or leasing. The language of amended Sec. 802.1(c)(1) has been
changed largely to mirror the language of the comparable provision in
the used durable goods exemption, Sec. 802.1(d)(1). Read together, the
amended provisions exempt, with certain exceptions, acquisition of new
goods and used durable and non-durable goods that are acquired and held
solely for the purpose of resale or leasing to entities not within the
acquiring person.
Amended Sec. 802.1(c) also adds goods acquired for lease to the
categories of assets comprising current supplies. These changes, also
suggested in Comments 9 and 21, make the exemption available for
inventory purchases of equipment by leasing companies.
The acquisition of current supplies is unlikely to create or
extinguish a competitive entity and is therefore exempt unless acquired
as part of an acquisition of an operating unit. In applying paragraph
(c), the focus is on the business of the acquiring person to determine
if the exemption is available.
D. Used Durable Goods. Amended Sec. 802.1(d) provides that certain
acquisitions of used durable goods qualify for the ordinary course of
business exemption. The term ``used durable good'' is new to the rules
currently in force. It is defined as a used good which was ``designed
to be used repeatedly and has a useful life greater than one year.''
The Commission recognizes that sales of used durable goods often meet a
common sense definition of transfers of goods in the ordinary course of
business and that some categories of used durable goods acquisitions
lack competitive significance. Sales of such used durable goods may be
routine and considered by parties to be in the ordinary course of their
businesses. Sales of used durable goods may also facilitate the
purchase of a new generation of equipment that will increase the
productive capacity of a business.
Paragraph (d) represents an attempt to identify certain categories
of transfers of used durable goods that meet a common sense definition
of ``ordinary course'' and appear unlikely to violate the antitrust
laws: (1) when the goods are being acquired and held solely for the
purpose of resale or leasing to an entity not within the acquired
person; (2) when the goods are being acquired from an acquired person
holding the goods solely for resale or leasing to an entity not within
the acquired person; (3) when the acquired person is replacing or
upgrading the productive capacity provided by the goods being sold; and
(4) when the acquired person is outsourcing the management and
administrative support services provided by the goods being sold.
An acquisition of used durable goods is exempt as within the
ordinary course of business if two requirements are satisfied. The
first requirement is that they must not be acquired as part of an
acquisition of an operating unit as defined in Sec. 802.1(a). Thus, if
the used durable goods constitute, or are being acquired as part of a
group of assets that constitute, a business undertaking in a particular
location or for particular products or services, the ordinary course
exemption does not apply.
The second requirement for exempting an acquisition of a used
durable good is that any one of four criteria set forth in the amended
rule must be satisfied. The first criterion, that the goods must be
acquired and held solely for the purpose of resale or leasing to an
entity not within the acquiring person (i.e., current supplies as the
term is used in Sec. 802.1(c)(1)), and the second, that the acquired
person must have held the goods at all times solely for resale or
leasing to an entity not within the acquired person, represent an
exemption for dealers whose business is to purchase and sell used goods
and for equipment leasing companies which buy used goods for leasing
purposes. After considerable assessment of the necessity and
applicability of Sec. 802.1(d)(1) and (2), the Commission believes that
the exemption should be included to allow dealers to make transfers
within the ordinary course of their business, in good faith
transactions conducted on their own behalf, without having to observe
the reporting and waiting requirements. However, the Commission will
closely monitor such transactions to ensure that the exemption is not
being used as a ploy by two or more parties acting in concert to
circumvent the notification requirements of the act.
[[Page 13672]]
Comment 9 recommended that proposed Sec. 802.1(d)(1) and (2) apply
even when the acquiring person is an intermediary, since dealers often
search for used equipment at the request of the ultimate buyer. The
Commission declines to adopt this recommendation, which would permit
potentially anticompetitive transfers of used equipment to occur
without a reporting requirement if the dealer brokers the transaction
for the seller or the ultimate buyer. Thus, the exemption is
unavailable if the person making the acquisition is in reality an
intermediary for either the seller or another person who intends to
hold the goods (see Example 6 to Sec. 802.1). This limitation attempts
to forestall abuse of the dealer exemption by requiring notification in
circumstances where the dealer is acting as a broker or an agent for a
purchaser or a seller. In these instances, the dealer generally does
not take beneficial ownership of the goods and thus is not actually
acquiring the goods. The true parties to the acquisition--the seller
and the person that will have beneficial ownership of the goods as a
result of the acquisition--should be subject to the notification
requirements.
In proposed Sec. 802.1(d), the first criterion, (d)(1), limited the
exemption to purchases of goods acquired and held solely for resale,
and the second criterion, (d)(2), exempted acquisitions of goods
purchased from a seller who had acquired and held the goods solely for
resale. Amended Sec. 802.1(d) exempts acquisitions of goods acquired
and held solely for the purpose of resale or leasing and acquisitions
of goods from a seller who had acquired and held the goods solely for
resale or leasing. The provision now exempts inventory purchases and
sales by leasing companies of used durable goods that they have leased
or held for lease to third parties, as long as the goods are not being
purchased or sold as part of the transfer of an operating unit. Such
transactions are within the ordinary course of business of leasing
companies, which typically acquire goods for leasing and sell goods
which they have held for leasing. The revisions address concerns raised
in Comments 6, 11, 13, 16 and 21 about the inclusion in the used
durable goods provisions of exemptions for sales and purchases of
leased goods.
Amended Sec. 802.1 (d)(1) and (d)(2) change the language of the
proposals to clarify that the exemptions within these provisions are
available only if (1) the buyer acquires the goods to resell or lease
to an entity that is not within it, or (2) the buyer acquires goods
that the seller has held only to resell or lease to entities not within
it. As noted above, this change was also made to Sec. 802.1(c)(1), one
of the current supplies provisions.
In proposed and amended Sec. 802.1(d)(2), the exemption applies
only if the goods are acquired from an acquired person who held the
goods solely for resale or leasing. The limitation that the goods be
held solely for resale or lease is designed to guard against transfers
by a seller who has used the goods to maintain a competitive presence
and is now selling productive capacity.
The third criterion in Sec. 802.1(d) recognizes that it is in the
ordinary course of business for a company to replace or upgrade
productive capacity and to sell the capacity it is replacing. Thus, an
exemption is permitted for the sale of used durable goods if all or
substantially all of the productive capacity of these goods is being
replaced. Such replacements may result in an increase in the acquired
person's productive capacity or manufacturing efficiencies. The
exemption will not apply unless the acquired person has already
replaced the capacity or taken definitive steps to replace the capacity
of the goods being sold. In addition, these steps must have been taken
in good faith; this requirement prevents sham contracts that the
acquired person cancels after transferring the productive capacity
without observing the notification requirements and without replacing
the capacity.
Proposed Sec. 802.1(d)(3) imposed no time limit between the
replacement of the capacity and the sale of the capacity being
replaced. However, a key factor in determining whether the goods being
sold represent productive capacity that has been or will be replaced is
whether the sale is sufficiently contemporaneous with the past or
future purchase of replacement goods such that the goods being sold
represent a bona fide sale of replaced capacity. To insure that the
replacement of capacity is sufficiently contemporaneous,
Sec. 802.1(d)(3) has been modified to require either that the capacity
has been replaced within the six months prior to the sale of the goods
being replaced, or that a contract has been executed in good faith to
replace the capacity within six months.
Proposed Sec. 802.1(d)(3) allowed use of the exemption if the
acquired person had executed either a contract, agreement in principle
or letter of intent to replace the capacity of the goods being sold.
The exemption now requires an executed contract for the purchase of the
replacement equipment, since only the contract imposes a binding
obligation on the seller to acquire the equipment to replace the
capacity of the goods being sold.
Normally companies that intend to remain in a particular business
do not sell capacity prior to replacing that capacity or making
contractual arrangements to replace the capacity. If the replacement of
capacity is not sufficiently proximate to the sale of the goods
representing the capacity replaced, a firm could experience an absence
from the market that would have a detrimental effect on its competitive
position. The six-month windows will permit firms to integrate the new
replacement equipment into its operations for a reasonable period of
time before selling the used equipment. The six-month windows will also
allow a company to operate without the replacement capacity but only
for a brief period of time so as not to affect adversely its
competitive presence in the market.
The rule allows replacement of the productive capacity of the used
durable goods being sold by acquisition or by lease. No minimum lease
term is specified; however, in order for an acquisition of the goods
being replaced to be in the ordinary course of business, the
replacement goods must be leased for a period that is substantially
long enough to maintain or increase the company's productive capacity.
Such a period is industry specific and must be determined in good faith
by the acquired person. Because this provision requires that all or
substantially all of the productive capacity be replaced, the exemption
is lost if the replacement goods result or will result in more than a
de minimis decrease in the acquired person's capacity or an exit from a
line of business in which the acquired person currently operates.
The fourth criterion permits an exemption for sales of used durable
goods if (1) the goods are used by the acquired person solely to
provide management and administrative support services for the acquired
person's business operations, and (2) the acquired person has in good
faith executed a contract to outsource the management and
administrative support services provided by the goods being sold.
Management and administrative support services include services such as
accounting, legal, purchasing, payroll, billing and repair and
maintenance of the acquired person's own equipment. For example, a
company that has equipment in-house to provide its administrative data
processing needs may decide that it would be more cost effective to
have a third party provide these services. To accomplish this
objective, the company
[[Page 13673]]
may enter into a contract with a third party for these services and
sell all of the equipment it used internally to provide this function.
Such transfers appear unlikely to pose any competitive concern.
Proposed Sec. 802.1(d)(4) used the term ``auxiliary functions'' to
describe the services provided by the goods being sold. That term has
been changed in new Sec. 802.1(d)(4) to ``management and administrative
support services.'' This term is more descriptive and conveys more
clearly that these services support the business operations of the
acquired person and are not integral to the person's business
operations.
The rule does not define ``management and administrative support
services'' but instead lists certain services that are included within
that term and other services that are not included.
Although companies will sometimes outsource the manufacturing of
some products they market, the sale of used durable goods that were
used to manufacture those products does not qualify for exemption under
this provision. Manufacturing, including the manufacturing of inputs
for other products produced by the acquired person, is not a management
and administrative support service within the meaning of this
exemption. Thus, if a company decides to sell the equipment it had used
to manufacture a product, even if it had entered into a contract for a
third party to manufacture the product, the sale of that equipment is
not exempt under Sec. 802.1(d)(4). The loss of the company's control
over the manufacturing of the product may raise competitive concerns
warranting investigation by the enforcement agencies.
In the Statement of Basis and Purpose to the proposed rules,
research and development, testing and warehousing were listed as
auxiliary support functions. The Commission does not consider these
activities to be management and administrative support services; they
are integral to a company's product design, development, production and
distribution and thus are tied directly to the competitive business
activities of the company. In an analysis of a given industry, these
activities may have a significant impact on issues involving
innovation, entry and product distribution.
The exemption requires that the goods have been used ``solely'' to
provide the acquired person with management and support services for
its business operations. The transfer of goods that solely provide
internal management and administrative support services does not
constitute the acquisition of an operating unit. A company division
that only provides management and administrative support services to
the company's operating units is not itself an operating unit; it
supports or benefits the company's operating units. For example, in a
company containing a division that only provides the company's internal
data processing needs, that division would be deemed to provide
management and administrative support services. The limitation on the
sale of an operating unit contained in Sec. 802.1(a) would not exclude
from the exemption under Sec. 802.1(d)(4) the sale of all of the
equipment from that division. However, if that division derived
revenues from providing data processing services to third parties, then
the unit would be considered to be an operating unit. Further,
equipment used to derive third party revenues would not have been used
solely to provide management and administrative support services for
the business operations of the acquired person.
Proposed Sec. 802.1(d)(4), like proposed Sec. 802.1(d)(3),
permitted the use of the exemption if the acquired person had a
contract, agreement in principle or letter of intent to obtain the
administrative and management support services provided by the goods
being sold. New Sec. 802.1(d)(4) requires that the acquired person
execute in good faith a contract for the services to be outsourced. The
contract gives rise to a binding obligation on the acquired person to
outsource the services provided by the goods being sold.
Comment 14 suggested that a sale of goods pursuant to the decision
to downsize or discontinue a management and administrative support
service should also be included within the exemption. The
recommendation was not adopted because the Commission does not have
sufficient information and knowledge at this time to conclude that the
elimination--as opposed to the outsourcing--of management and
administrative support services in every business setting is unlikely
to raise competitive concerns.
Comment 7 suggested that examples to Sec. 802.1(d)(4) that
distinguish between goods that perform a management and administrative
support service and goods that are an integral part of operations that
affect competition be changed to reflect a more objective standard,
such as goods that generate third party revenues. This suggestion was
not adopted because of the variation among industries of the factors
that distinguish goods that perform management and administrative
support services from goods that are integral to the business
operations of the company. In a vertically integrated company, for
example, equipment it used for componentry manufacture would not be
considered goods that perform a management and administrative support
service, even though the company derived no third party revenues from
the sale of the components, but used the components in the manufacture
of its final products. Example 12 illustrates a similar application of
Sec. 802.1(d)(4). Therefore, if a company has an internal operation
that also derives third party revenues, that operation will not be
considered a management and administrative support service; however,
the fact that a company's internal operation does not derive third
party revenues does not automatically make the operation a management
and administrative support service.
Comments 10 and 27 recommended an exemption for transfers of used
airplanes that do not qualify for the exemption in Sec. 802.1(d)(3).
Comment 27 presented statistics showing that there may be little
correlation between used equipment sold by air carriers and new
equipment that they purchase. The commenter stated that this absence of
correlation would make the exemption in Sec. 802.1(d)(3) unavailable
for most potentially reportable sales of used aircraft. Comment 10
suggested an exemption for acquisitions of less than 15 percent of an
air carrier's total productive capacity, while Comment 27 stated that
exempt acquisitions of used aircraft and spare parts should be limited
to less than 15 percent of an air carrier's total productive assets.
Although a specific exemption for acquisitions of used aircraft has
not been added to the final rules, the recommendations and concerns
raised by Comments 10 and 27 are still under consideration. In
providing certain limited exemptions for transfers of used durable
goods in this rulemaking, the Commission's primary concern is that the
acquisitions that qualify for these exemptions are ordinary course of
business transactions and do not constitute either significant
downsizing or substantial transfers of productive capacity without
replacement. The recommendations made by Comments 10 and 27 suggest a
less restrictive exemption for sales of aircraft that would not require
replacement and would permit limited downsizing. The Commission has no
experience in implementing HSR exemptions based on the sale of a
limited percentage of the acquired person's capacity or assets or a
basis to conclude that such acquisitions do not pose competitive
[[Page 13674]]
concerns. Moreover, an exemption based on the sale of capacity would
present difficulties in determining the appropriate measure to use in
applying the exemption. However, Comments 10 and 27 have raised issues
that may be unique to the airline industry, and the Commission believes
that further consideration is needed.
Other additions to Sec. 802.1(d) that were suggested by commenters
include a recommendation in Comment 3 to exempt purchases of goods for
the purpose of demolition, disassembly and sale of usable parts (e.g.,
an oil tanker being sold for scrap and parts) and goods that can no
longer lawfully be used for the purpose for which they were used by the
acquired person (e.g., oil tankers no longer allowed to call on U.S.
ports because of hull restrictions that are sold for other lawful
uses). Specific provisions to address these types of transactions were
not adopted. Most purchases of used equipment for scrap and parts
should be exempt as an acquisition of current supplies under
Secs. 802.1(c)(1) and 802.1(d)(1). With regard to the second exemption
suggested, the Commission does not have evidence to show that such
transactions occur with sufficient frequency to warrant the addition of
the exemption, and it is not confident that a clearly-bounded exemption
could be created to cover a category of transactions not likely to
violate the antitrust laws.
II. Section 802.2: Certain Acquisitions of Real Property Assets
New Sec. 802.2 exempts eight categories of real property
acquisitions from the reporting requirements of the act. These include
acquisitions of new facilities, certain used facilities by the original
lessee in a lease financing arrangement, unproductive real property,
office and residential property, hotels and motels, recreational
property, agricultural property, and rental retail space and
warehouses.
This new rule creates new exemptions for several categories of real
property acquisitions that the enforcement agencies, after extensive
review, have concluded ``are not likely to violate the antitrust
laws.'' Section 7A(d)(2)(B) of the act. For the most part, the types of
real property assets that are included within this exemption are
abundant, and their holdings are widely dispersed. Transfers of these
categories of real property are generally small relative to the total
amount of holdings, and entry into regional and local markets for these
types of real property assets is usually easy.
Previously, the Premerger Notification Office had interpreted
section 7A(c)(1) of the act as exempting certain acquisitions of new
facilities, undeveloped realty, office buildings and residential
property as transfers of realty in the ordinary course of business.
Although new Sec. 802.2 is not based on section 7A(c)(1) of the act,
certain acquisitions of realty exempted by this new exemption may also
qualify for exemption as transfers of realty in the ordinary course of
business. The primary difference between new Sec. 802.2, that exempts
the acquisition of certain types of realty, and amended Sec. 802.1,
that exempts the acquisition of goods and realty in the ordinary course
of business, is that the former--because it is not based on the
``ordinary course'' concept--does not limit the exemption to
acquisitions that are not acquisitions of operating units. In fact,
several categories of realty exempted by new Sec. 802.2, e.g., hotels,
motels and agricultural land, may qualify as operating units, but they
are exempt under this provision.
The exemptions for new facilities, certain used facilities,
unproductive real property, office and residential property, hotels and
motels, certain recreational land, agricultural property, rental retail
space and warehouses state that any non-exempt assets that are being
transferred as part of an acquisition of the exempt assets are
separately subject to the requirements of the act and the rules. This
approach to non-exempt portions of acquisitions is also used in
Sec. 802.3. The Commission recognizes that this approach may result, as
Comment 9 has pointed out, in ``a more fragmented analysis * * *
generating value allocation issues.'' However, the Commission believes
that this inconvenience is offset by an approach that results in an
expanded exemption for realty acquisitions.
A. New Facilities. New Sec. 802.2(a) exempts the acquisition of new
facilities, which may include real estate, equipment and assets
incidental to the ownership of the new facility. The term ``new
facility'' is new to the rules, and the Commission has concluded that
acquisitions of new facilities are not likely to violate the antitrust
laws. Although the provision is intended primarily to exempt
``turnkey'' facilities, i.e., new facilities capable of commencing
operations immediately with minimal additional capital investment, it
does not require that the facility be ready for immediate occupancy.
The facility may need additional construction or outfitting at the time
it is purchased and still qualify for the exemption. However, if the
facility requires a substantial amount of additional construction or
outfitting, it may not be classified as a new facility but may qualify
as unproductive real property as defined in new Sec. 802.2(c).
The new exemption is unchanged from proposed Sec. 802.2(a), and it
applies only to new structures that have not produced income. It also
applies only if the acquired person has held the facility at all times
solely for sale. The language of the exemption allows the holder of the
new facility to be either a builder of the facility (``constructed by
the acquired person for sale'') or other persons, such as a creditor,
who take possession of a new facility with the intention of selling it
(``held at all times by the acquired person solely for resale''). These
limitations prevent the sale by an acquired person of capacity
constructed for the acquired person's use, as Example 1 to Sec. 802.2
illustrates.
New Sec. 802.2(a) requires separate valuation of non-exempt assets
being purchased in an acquisition of a new facility. If the value of
the non-exempt assets exceeds $15 million, and no other exemptions
apply, then the purchase of these non-exempt assets is separately
subject to the notification requirements.
B. Used facilities. New Sec. 802.2(b) exempts the acquisition of a
used facility by a lessee that has had sole and continuous possession
and use of the facility since it was first built, from a lessor that
holds title to the facility for financing purposes in the ordinary
course of its business. This provision was not contained in the
proposed rules. It is being adopted in response to Comment 6.
New facilities are often acquired through lease financing
arrangements. In a lease financing arrangement a creditor, in a bona
fide credit transaction entered into in the ordinary course of its
business, acquires a new facility and immediately leases it to a lessee
that will have sole and continuous use and possession of the facility,
usually under a long-term lease. The lessee generally has the option to
purchase the facility from the lessor at or before the end of the lease
term. Currently, there is no exemption for this acquisition even though
the acquisition of the new facility may have been exempt under
Sec. 802.2(a) if the lessee had acquired the facility directly when it
first began operation and had financed the purchase through an
installment sales arrangement.
New Sec. 802.2(b) will effectively treat the subsequent acquisition
by the original lessee of a used facility that the lessee originally
took possession of as a new facility through a lease financing
arrangement the same as the direct
[[Page 13675]]
purchase of a new facility through a more traditional credit
arrangement. This new exemption also will effectively treat this
category of acquisitions the same as an acquisition of a leased
facility by a lessee subject to a sale/leaseback arrangement. In a
sale/leaseback arrangement the owner of a facility sells the facility
to a creditor that acquires it in a bona fide credit transaction in the
ordinary course of its business. The creditor immediately leases the
facility back to the owner, now lessee, under a long-term lease. The
arrangement is often used as method of raising capital. Since the
original owner/lessee held beneficial ownership of the facility prior
to the sale/leaseback arrangement and the lessor typically receives
only title and a security interest in the facility, the Premerger
Notification Office generally has informally interpreted the rules to
require no notification for the subsequent repurchase because the
original owner/lessee did not relinquish beneficial ownership when it
entered into the sale/leaseback arrangement.
C. Unproductive real property. New Sec. 802.2(c) exempts
acquisitions of unproductive real property. Subject to the limitations
of Sec. 802.2(c)(2), unproductive real property is real property,
including raw land, structures or other improvements, associated
production and exploration assets as defined in Sec. 802.3(c), natural
resources and assets incidental to the ownership of the real property,
that has not produced revenues of more than $5 million during the 36
months preceding the transaction. Structures and improvements are
additions to the real property that add value and include, for example,
buildings and parking lots. Production machinery and equipment are not
included in the definition of structures and improvements, and their
acquisition must be analyzed separately to determine whether
notification is required. Natural resources refers to any assets
growing or appearing naturally on the land, such as timber and mineral
deposits.
New Sec. 802.2(c)(2) excludes from the exemption acquisitions of
manufacturing and non-manufacturing facilities that have not yet begun
operations as well as facilities that have been in operation at any
time during the twelve months preceding the acquisition. The exclusion
for manufacturing and non-manufacturing facilities that have not begun
operations is narrow and applies to facilities that are held by a
person who neither constructed the facility for sale nor held the
facility at all times for resale. The acquisition of a new structure
from a person who built the facility to sell or held it solely for
resale is exempt under new Sec. 802.2(a), the exemption for new
facilities. The exclusion in Sec. 802.2(c)(2)(i) is also intended to
apply to ``turnkey'' facilities, i.e., new facilities capable of
commencing operations immediately with minimal additional capital
investment; whether acquisition of a ``turnkey'' facility is exempt is
determined under Sec. 802.2(a). A new facility that is partially
complete, is not ready to commence operation in the immediate future
and requires substantial additional capital investment is not yet a
manufacturing or non-manufacturing facility within the meaning of
Sec. 802.2(c)(2)(i). Such a facility may qualify as unproductive real
property.
New Sec. 802.2(c)(2)(iii) also excludes real property that is
either adjacent to or used in conjunction with real property that does
not qualify as unproductive real property and is part of the
acquisition. This exclusion is intended to make Sec. 802.2(c)
unavailable for the acquisition of vacant land adjoining productive
property, such as a factory, a poultry processing facility or a meat
packing plant, which is also part of the acquisition. This exclusion
was not in the proposed rule. Without this exclusion, it might have
been argued that the acquisition of the vacant land should be exempt
under Sec. 802.2 if income has been derived only from the factory and
not from activities taking place on the vacant land. However, this
exemption is not permitted under Sec. 802.2(c) because the vacant land,
due to its adjacency to the factory, is considered to be part of the
productive property that is being acquired. If the vacant land were not
adjoining the factory but were used in connection with the factory
operations, the Sec. 802.2(c) exemption would still be unavailable for
the acquisition of the vacant land because it was used in conjunction
with the factory. Example 7 illustrates this exclusion from
Sec. 802.2(c).
The primary purpose of new Sec. 802.2(c) is to eliminate filing
requirements for acquisitions of formerly productive property, which is
no longer used to generate revenues, and undeveloped, non-income
producing property. New Sec. 802.2(c) will exempt most wilderness and
rural land that is not used commercially, and urban land that is vacant
or contains facilities that have ceased operations more than twelve
months prior to the acquisition and that have generated a minimal
amount of income during the most recent three-year period.
``Associated production and exploration assets as defined in
Sec. 802.3(c),'' was added to the definition of unproductive real
property in response to Comments 15 and 24. This addition will include
within the exemption for acquisitions of unproductive real property any
machinery or equipment associated with a formerly productive coal mine
or oil and gas reserve that has not been in operation for twelve months
prior to the acquisition and has not generated revenues of more than $5
million during the thirty-six months prior to the acquisition.
New Sec. 802.2(c)(2) incorporates a suggestion made by Comment 14
that the language of the proposed rule's exclusion for manufacturing
and non-manufacturing facilities ``that began operation within the
twelve (12) months preceding the acquisition'' be modified. Comment 14
pointed out that the proposed exemption excludes from the definition of
unproductive real property facilities that began operation during the
twelve-month period prior to the acquisition but includes operations
that were commenced more than twelve months before the acquisition. One
of the concepts underlying this exemption is to exclude from the
reporting requirements formerly productive facilities, i.e., facilities
whose operations have ceased and are no longer being used to generate
revenues. The exemption was not intended to apply to manufacturing and
non-manufacturing operations begun more than twelve months prior to the
acquisition and continuing to operate during the twelve-month period
prior to the acquisition. The language suggested by Comment 14 excludes
from the exemption manufacturing and non-manufacturing facilities that
were in operation at any time during the twelve months preceding the
acquisition. Because this language is more consistent with the
``formerly used/abandoned facilities concept'' underlying this
exemption, the Commission has decided to adopt this suggestion in the
final rule.
Comment 14 also suggested that language be added to Sec. 802.2(c)
that, for purposes of this provision, no revenues be deemed generated
by any real property used solely to provide management and
administrative support services (formerly ``auxiliary support
functions'') for the business operations of the acquired person. The
commenter expressed concern that while the acquisition of goods used by
the seller to provide these support services would be exempt under
Sec. 802.1(d)(4), the acquisition of a facility used only to house
equipment that provides these support services may not be exempt from
the notification requirements. The
[[Page 13676]]
Commission agrees that if the acquisition of the equipment providing
the management and administrative support service is exempt under
Sec. 802.1(d)(4), then the acquisition of a facility used solely to
house the equipment should be exempt. However, in most cases this type
of facility can be classified as office property, the acquisition of
which is exempt under Sec. 802.2(d).
D. Office and residential property. New Sec. 802.2(d) exempts
acquisitions of office and residential property. ``Office or
residential property'' is defined as real property that is used
primarily for office or residential purposes.
The rule specifies that in determining whether real property is
used primarily for office or residential purposes, the total space
being measured should consist of real property, the acquisition of
which is not exempted by other provisions of the act or rules.
Therefore, in making this determination, any portion of the building
consisting of, for example, rental retail space, the acquisition of
which is exempt under Sec. 802.2(f), should be excluded.
The language of new Sec. 802.2(d)(2) differs somewhat from the
language in the proposed rule in order to make clearer the procedure
for determining whether real property is used primarily for office and
residential purposes. Although new Sec. 802.2(d) does not specify the
meaning of ``primarily,'' it is contemplated that at least 75 percent
of the space in the qualifying property is used for office or
residential purposes. Example 8 applies this threshold to exempt the
acquisition of a multi-use building.
If the acquisition includes assets other than office or residential
property, the acquisition of those assets is separately subject to the
notification requirements. For example, if the acquiring person is also
purchasing a factory for $20 million, the acquisition of the factory is
separately subject to the reporting requirements.
New Sec. 802.2(d)(3) also specifies that if the purchaser is
acquiring a business that is conducted on the office or residential
property, the acquisition of the business, including the space in which
the business is conducted, is separately subject to the notification
requirements of the act. For example, if a company owns an office
building in which it operates a department store and the purchaser of
that building is acquiring not only the space that the store occupies
but also the retail operations of the department store, the acquisition
of the department store business as well as the space that the store
occupies is subject to the notification requirements of the act. If the
value of the business and the space in which the business is conducted
exceeds $15 million, the acquisition of the department store business
is reportable.
The inclusion of ``assets incidental to the ownership of office and
residential property'' is derived from the language of existing
Sec. 802.1. Although incidental assets may have value apart from the
real property, they are often necessary for the continued and
uninterrupted use of the property. Therefore, incidental assets are
included in the description in new Sec. 802.2(d) of office and
residential property and are exempt assets.
Comment 14 suggested that language be added to new Sec. 802.2(d) to
exempt structures that house equipment that provide management and
administrative support services to the seller and owner of the
structure. As mentioned above, the Commission believes that the common
meaning of office space includes space used solely to provide
management and administrative support services to the acquired person.
For example, if an acquired person owns a building that primarily
houses the computer equipment used to provide its administrative data
processing needs, and the acquired person, in good faith, executed a
contract for substantially the same services, the sale of the equipment
would be exempt pursuant to Sec. 802.1(d)(4). The sale of the building
also would qualify for exemption as an acquisition of office property,
since the building is not housing a ``business'' that is being
transferred but office equipment that is being sold.
E. Hotels and motels. New Sec. 802.2(e) exempts from the reporting
requirements acquisitions of hotels and motels, and improvements to
those facilities, such as golf, swimming, tennis, restaurant, health
club or parking facilities (but excluding ski facilities), and assets
incidental to the ownership of those facilities. The exemption,
however, excludes the acquisition of a hotel or motel that includes a
gambling casino.
The exemption is based on the Commission's review of past HSR
notifications and observation that acquisitions of hotels and motels,
except for those excluded from the exemption, are unlikely to violate
the antitrust laws. Several commenters affirmed the Commission's
understanding that these types of assets are plentiful and widely held,
and often they are owned by investor groups that hire management firms
or national chains to operate the facilities. Even in local markets
entry appears to be relatively easy.
The proposed exemption for the acquisition of hotels and motels
excluded hotels ``acquired as part of the acquisition of a ski
resort.'' This exclusion raised questions concerning the treatment of a
ski resort containing a hotel versus a hotel that has ski facilities
along with other recreational improvements. The wording of the new
exemption excludes ski facilities from improvements included with a
hotel or motel which may be acquired without observing the reporting
requirements. As a result, in an acquisition of a hotel with ski
facilities, the acquisition of the hotel is exempt, but the ski
facilities must be valued separately to determine if their acquisition
is subject to the notification requirements.
Ski facilities are not included within the exemption for
acquisitions of hotels and motels because the Commission does not have
a basis for concluding that the acquisition of a ski facility is not
likely to violate the antitrust laws. In addition, ski facilities do
not appear to be characterized by the same ease of entry as hotels
generally. Gambling casinos are also excluded from the exemption
because they involve services other than lodging, and their acquisition
may affect competition in certain local markets. Also, certain areas
may have licensing requirements for gambling casinos that serve as an
impediment to entry.
Comments 9 and 14 suggested that the exemption for hotels and
motels be expanded to included the acquisition of related improvements,
such as golf courses, swimming and tennis facilities and restaurants.
The Commission agrees that the inclusion of these improvements, as well
as health clubs and parking facilities, does not raise antitrust
concerns and, thus, has included such related improvements as
qualifying for the exemption. The Commission also has added language
exempting the acquisition of assets incidental to the ownership of the
hotel or motel being acquired to make clear that all related permits
and tangible personal property used directly in the operation of the
facility are included within the exemption.
In the Statement of Basis and Purpose accompanying the proposed
rule, the Commission made clear that ``this exemption would include the
acquisition by a national hotel chain of hotel assets of another hotel
chain.'' The Statement of Basis and Purpose went on to say that ``if
the acquisition includes assets other than hotels and motels, e.g., the
selling firm's trademark or its hotel management business, these assets
must be separately valued to determine whether their acquisition is
subject to
[[Page 13677]]
the notification requirements.'' Comments 19, 26 and 29 suggested that
the exemption for hotels and motels be expanded to included the
acquisition of trademarks and hotel management businesses. These
comments assert that hotel and motel assets are plentiful and that
entry into the hotel/motel business is relatively easy, justifying a
broader exemption to cover all hotel and motel asset acquisitions. The
Commission has learned that acquisitions of hotel and motel assets
typically include the transfer of the hotel management contracts in
effect at the time of the acquisition as well as licenses to use the
trademarks associated with the hotel or motel being acquired. Thus new
Sec. 802.2(e) explicitly includes these contracts and licenses among
the list of assets incidental to the operation of the hotel or motel.
However, the exemption does not include the acquisition of hotel
management businesses or the purchase of a hotel trademark. Such
acquisitions, even if made in connection with the purchase of a hotel
or motel, are not considered to be transfers of incidental assets
associated with a hotel or motel and are therefore separately subject
to the requirements of the act.
F. Recreational Land. New Sec. 802.2(f) exempts the acquisition of
recreational land, which is defined as real property used primarily as
golf, swimming, or tennis club facilities and assets incidental to the
ownership of such property. If an acquisition includes any property or
assets other than recreational land, the acquisition of these other
assets is separately subject to the notification requirements.
This exemption was not originally included in proposed Sec. 802.2
and is being added to the final rule in response to Comment 14 that
suggested an exemption for certain types of recreational land. The
Commission has received HSR filings for a very small number of
acquisitions of recreational land, primarily golf courses. Based on
this experience, the Commission believes that the acquisition of
certain types of recreational land is not likely to violate the
antitrust laws. This exemption is limited to the types of recreational
realty the acquisition of which is exempt as improvements when acquired
as part of a hotel or motel under Sec. 802.2(e). Recreational land
under Sec. 802.2(f) does not include, for example, ski facilities,
multi-purpose arenas, stadia, racetracks and amusement parks.
G. Agricultural property. New Sec. 802.2(g) exempts acquisitions of
agricultural property, assets incidental to the ownership of the
property and associated assets integral to the agricultural business
activities conducted on the property. Agricultural property that is
covered by this exemption is real property that primarily derives
revenues under Major Groups 01 and 02 of the 1987 Standard Industrial
Classification (SIC) Manual. Associated assets integral to the
agricultural business activities conducted on the property to be
acquired include structures (e.g., barns used to house livestock),
fertilizer, animal feed and inventory (e.g., livestock, poultry, crops,
fruits, vegetables, milk, and eggs). In an acquisition that includes
assets that are covered by this exemption, the transfer of any other
assets is separately subject to the notification requirements.
Associated agricultural assets do not include processing equipment
or facilities. If a meat packing or poultry processing market is
concentrated in a given local area, the transfer of in- house
processing capacity may have a significant effect on the market. For
this reason, the Commission believes that such transfers should be
reviewed prior to consummation so the agencies can determine whether
the proposed acquisition will affect competition adversely.
The proposed rule exempting acquisitions of agricultural property
included within the definition of associated agricultural assets
``equipment dedicated to the income-generating activities conducted on
the real property.'' New Sec. 802.2(g) omits this equipment from the
definition of associated agricultural assets because in certain cases
the equipment may be part of a processing facility, the acquisition of
which is not exempt under Sec. 802.2(g).
The final rule also changes the proposed rule by including a
parenthetical reference to SIC Major Groups 01 and 02 in the definition
of agricultural property. This inclusion is intended to make clear that
acquisitions of agricultural land on which other activities involving
farm products are conducted, e.g., activities included within SIC Major
Groups 20 (e.g., meat packing plants, poultry slaughtering and
processing, milk processing, and corn wet milling), 42 (farm product
storage and warehousing) and 51 (buying and marketing of farm products)
are not included within the exemption.
New Sec. 802.2(g)(2), which has been added to the proposed rule,
provides that ``agricultural property does not include any real
property and assets either adjacent to or used in conjunction with
facilities that are not associated agricultural assets and that are
included in the acquisition.'' This provision excludes from the
exemption, for example, acquisitions of any real property and assets
that are either adjacent to or used in conjunction with poultry or
livestock slaughtering, processing or packing facilities that are also
being acquired. Thus, if a meat packing plant is surrounded by vacant
land that serves as a buffer zone for environmental purposes or as an
area for grazing cattle in connection with the plant operations, and an
acquiring person intends to purchase the plant and the surrounding
property, the acquisition of the vacant land is not exempt either as an
acquisition of agricultural land or an acquisition of unproductive real
property [see discussion of Sec. 802.2(c)(2)]. The vacant land is
considered to be part of the business of the plant, and its
acquisition, along with that of the plant, is subject to the reporting
requirements.
H. Rental retail space; warehouses. New Sec. 802.2(h) exempts
acquisitions of two other categories of real property, rental retail
space and warehouses. Rental retail space includes structures that
house and are rented to retail establishments and include real property
assets such as shopping centers, strip malls, and stand alone
buildings. These types of assets are abundant and widely held by
insurance companies, banks, other institutional investors and
individual investors as investments and rental property. The Commission
believes that acquisitions of these types of real property assets are
unlikely to violate the antitrust laws.
However, the new rule provides that if the retail rental space or
warehouses are to be acquired in an acquisition of a business conducted
on the real property, the acquisition of the retail rental space or
warehouses is not exempt. Thus, if an acquiring person is also
acquiring a business that is conducted on the real property, the
acquisition of that business, including the portion of the real
property on which the business is conducted, is separately subject to
the notification requirement of the act. For example, if a department
store chain proposed to acquire from another department store chain
several shopping centers and the department store business conducted by
the seller in several stores located in these shopping centers, the
acquisition of the seller's department store business and the portion
of the shopping centers in which the stores are located would be
subject to the notification requirements. The acquisition of the
portion of the shopping centers that housed other retail establishments
would be exempt under this rule. Similarly, as illustrated in Example
12, the exemption for the acquisition of warehouses is lost if
[[Page 13678]]
warehouses are being acquired in connection with the acquisition of a
wholesale distribution business.
The new rule also provides that if an acquisition of rental retail
space or a warehouse includes other assets, those other assets are
separately subject to the reporting requirements of the act. New
Sec. 802.2(h) differs from the proposed rule only in the addition to
the exemption of assets incidental to the ownership of retail rental
space or warehouses. Without this addition, it would be necessary to
value separately any incidental assets associated with the ownership of
the property, contrary to the treatment of real property assets
included in other provisions of Sec. 802.2.
III. Section 802.3: Acquisitions of Carbon-Based Mineral Reserves
New Sec. 802.3 adds exemptions for certain acquisitions of carbon-
based mineral reserves. Specifically, Sec. 802.3(a) exempts the
acquisition of reserves of oil, natural gas, shale and tar sands or the
rights to such assets if the value of the reserves, the rights and
associated exploration and production assets to be held as a result of
the acquisition do not exceed $500 million. Similarly, Sec. 802.3(b)
exempts the acquisition of reserves of coal or rights to coal reserves
if the value of the reserves, the rights and associated exploration and
production assets to be held as a result of the acquisition do not
exceed $200 million. Associated exploration and production assets are
defined in new Sec. 802.3(c) to mean, with certain specified
exceptions, equipment, machinery, fixtures, and other assets that are
integral and exclusive to current or future exploration or production
activities associated with the carbon-based mineral reserves that are
being acquired.
The Commission's studies of the coal and oil and gas industries
have shown that the values of the reserves in these industries are
substantial compared with asset holdings in other industries. The
holdings of reserves in these industries are widely dispersed, and
individual acquisitions have had minimal effect on concentration.
However, the Commission believes that an unlimited exemption for
reserves of coal and oil and gas is inappropriate, because acquisitions
of carbon-based mineral reserves above the newly established thresholds
may warrant an examination of their potential effects on competition.
New Sec. 802.3 differs from proposed Sec. 802.3 in that new
Sec. 802.3(a) expands the exemption for oil, natural gas, shale and tar
sands by increasing the value of the reserves that will be held as a
result of the acquisition that qualify for the exemption from $200
million to $500 million. This increase is based on statistical
information provided by Comments 5 and 9 indicating that the ownership
of oil and gas reserves in the United States and worldwide is
relatively unconcentrated. Moreover, the acquisition of $500 million of
crude oil reserves in the United States would amount to about 1/10 of 1
percent of domestic oil reserves. Such an acquisition, if made by the
leading commercial owner of domestic reserves, would result in an
increase in the HHI of about 2 points in an unconcentrated market. The
Commission has concluded that acquisitions of oil and gas reserves
valued at $500 million or less are unlikely to violate the antitrust
laws. However, the $200 million threshold for transactions involving
coal reserves was retained from proposed Sec. 802.3. The Commission
does not have sufficient information to support a higher threshold for
coal reserves acquisitions. Also, because acquisitions of coal reserves
may tend to affect local or regional markets, a higher threshold may
exempt transactions that should be reviewed for their impact on such
markets.
Sections 802.3(a) and 802.3(b) primarily are designed to exempt
acquisitions of producing reserves, but also may exempt some
acquisitions of non-producing reserves that may also be exempt as
unproductive real property under Sec. 802.2(c). Because the exemption
is not based on the ``ordinary course'' concept, the exemptions also
apply if the reserves and associated assets being transferred
constitute all or substantially all of the assets of an operating unit.
If the reserves being acquired are not yet producing, the acquisition
also is likely to be exempt under Sec. 802.2(c) as an acquisition of
unproductive real property. For formerly producing reserves that have
not been in production during the twelve months preceding the
acquisition and have not generated revenues in excess of $5 million
during the 36 months preceding the acquisition, their acquisition would
qualify as unproductive real property. If the reserves qualify as
unproductive property, their acquisition is exempt, regardless of the
value of the reserves. Currently producing reserves are governed by the
valuation requirements of Sec. 802.3. Example 1, which involves an
acquisition consisting of non-producing gas reserves, producing oil
reserves and assets associated with the producing reserves, illustrates
the application of Sec. 802.2(c) and Sec. 802.3 to the separate
components of the acquisition.
The $500 million threshold in Sec. 802.3(a) and the $200 million
threshold in Sec. 802.3(b) apply to reserves, rights to the reserves
and associated exploration or production assets. The acquisition of
these associated assets is not separately reportable because these
assets generally have no competitive significance separate from the
reserves. In many instances, producing reserves contain dedicated
equipment that may have a market value exceeding $15 million but have
no practical value absent the reserves. In addition, the wide
availability of used equipment in the oil and gas and coal industries
makes it unlikely that a servicer of oil fields or coal mines could
purchase reserves to restrict supply of available equipment in a given
region. Thus, the Commission believes that the inclusion of associated
exploration and production assets is necessary to facilitate meaningful
application of the exemption.
Associated exploration or production assets are defined in
Sec. 802.3(c) to include equipment, machinery, fixtures and other
assets that are integral to the exploration or production activities of
the reserves. Such assets do not include any intellectual property
rights that may be transferred with the reserves. In the oil and gas
industry, examples of associated exploration or production assets
include proprietary or licensed geological and geophysical data, wells,
pumps, compressors, easements, permits and rights of way.
As in the oil and gas industry, exploration or production assets
associated with coal reserves may include proprietary or licensed
geological and geophysical data, easements, permits and rights of way.
In surface mining in the western U.S., associated production assets may
consist of various load out facilities, including storage barns and
silos, dryer barns and railroad spurs, and heavy equipment such as
draglines and crushers. Such assets would also include the long-term
coal contracts and federal leases related to the reserves.
New Sec. 802.3 also changes the categories of assets that are
excluded from the definition of associated production or exploration
assets as it relates to oil and natural gas reserves. Proposed
Sec. 802.3 excluded from associated production or exploration assets
all flow and gathering pipelines, distribution pipelines, interests in
pipelines, processing facilities and refineries, because acquisitions
of these assets in certain local markets have, from time to time,
raised competitive
[[Page 13679]]
concerns prompting investigations by the enforcement agencies. However,
Comments 3, 5, 9 and 24 recommended including in the definition of
associated exploration or production assets pipeline systems and field
treating facilities that serve a particular producing property and have
no competitive significance apart from the oil and natural gas reserves
being acquired. The Commission has concluded that acquisitions of these
systems and facilities in connection with the reserves to which they
are dedicated are unlikely to violate the antitrust laws because they
do not have the potential for competing in the provision of services to
third parties. Therefore, the definition of associated exploration or
production assets now clearly delineates dedicated facilities from
facilities serving third parties by excluding ``any pipeline and
pipeline system or processing facility which transports or processes
oil and gas after it passes through the meters of a producing field;
and any pipeline or pipeline system that receives gas directly from gas
wells for transportation to a natural gas processing facility or other
destination.''
Comments 17, 18 and 30 proposed an exemption for acquisitions of
timberland, noting that the raw material supply and manufacturing
resources in the forestry industry are abundant, and ownership of
timberland is fragmented. However, because there has been enforcement
interest in a number of transactions involving timberland in the
western United States, the Commission declined to include an exemption
for acquisitions of timberland to insure that the enforcement agencies
continue to receive notification of those acquisitions of timberland
that may present competitive concerns.
Comment 9 noted that the enforcement agencies, as they obtain
additional experience and information about other natural resources,
will perhaps identify ways of expanding Sec. 802.3 to include other
types of producing reserves without posing undue risk to competition.
For non- producing reserves of other minerals and renewable natural
resources, Sec. 802.2(c) will exempt acquisitions of these reserves if
they qualify as unproductive real property. Regarding producing
reserves, the Commission has not included these in Sec. 802.3 at this
time because it does not have an adequate factual basis for determining
that acquisitions of other types of mineral reserves and renewable
natural resources should be exempt from the requirements of the act or
subject to a reporting level higher than the statutory $15 million
threshold. However, the Commission will continue to collect information
about other minerals and renewable natural resources and determine at a
later date if expansion of Sec. 802.3 to include acquisition of
reserves of these resources is warranted.
IV. Section 802.4: Acquisitions of Voting Securities of Issuers Holding
Certain Assets the Direct Acquisition of Which Is Exempt
New Sec. 802.4 exempts the acquisition of voting securities of
issuers that hold certain assets the direct acquisition of which is
exempt under the act or the rules. New Sec. 802.4(a) exempts the
acquisition of voting securities of an issuer whose assets, together
with those of all entities controlled by the issuer, consist of assets
whose direct purchase is exempt from the notification requirements
pursuant to section 7A(c)(2) of the act or Secs. 802.2, 802.3 and 802.5
of the rules. New Sec. 802.4(b) defines ``issuer'' as used in
Sec. 802.4 to mean a single issuer, or two or more issuers controlled
by the same person. The exemptions provided by new Sec. 802.4 are
available so long as the acquired issuer or issuers do not in the
aggregate hold exempt assets that exceed the threshold limitations of
the cited rules and non-exempt assets with a fair market value of more
than $15 million. New Sec. 802.4(c) states that fair market value as
determined in accordance with Sec. 801.10 (c)(3) of the rules is the
standard to apply in determining the value of assets held by an issuer
whose voting securities are being acquired pursuant to Sec. 802.4. New
Sec. 802.4 applies to acquisitions resulting in the holding of a
minority interest as well as a controlling interest in the acquired
issuer's outstanding voting securities.
Section 802.4 derives in part from original Sec. 802.1(a) which
exempted ``an acquisition of the voting securities of an entity whose
assets consist solely of real property'' and related assets, if a
direct acquisition of that real property and those related assets would
be exempt. The rationale for original Sec. 802.1(a) and new Sec. 802.4
is that the applicability of an exemption should not depend on the form
of the acquisition. The antitrust analysis would seem to be the same
whether assets or voting securities are acquired. See Statement of
Basis and Purpose to Sec. 802.1(a), 43 FR 33488 (July 31, 1978).
Proposed Sec. 802.4(a) extended this approach by exempting
acquisitions of voting securities of issuers whose assets consist
solely of assets exempt under proposed Sec. 802.2: new facilities,
unproductive real property, office and residential property, hotels and
motels, agricultural property, rental retail space and warehouses.
Proposed Sec. 802.4(b) contained a comparable exemption for issuers
whose assets consist solely of carbon-based mineral reserves exempt
under proposed Sec. 802.3.
New Sec. 802.4 differs in five respects from the proposal. First,
new paragraph (a) no longer requires that the issuer whose voting
securities are being acquired hold solely exempt assets. New
Sec. 802.4(a) provides that the issuer also may hold up to $15 million
of non-exempt assets in addition to the exempt assets. Second, proposed
paragraph (b) has been merged into new paragraph (a). In the proposed
exemption, the aggregation principles of Sec. 801.15(b) applied only to
Sec. 802.4(b), while Sec. 801.15(a) applied to Sec. 802.4(a). Because
of the new provision that an issuer whose voting securities are being
acquired pursuant to Sec. 802.4 also may hold up to $15 million of non-
exempt assets, Sec. 801.15(b) applies to all transactions under
Sec. 802.4. New Sec. 802.4(a) now describes all classes of acquisitions
that are exempt pursuant to Sec. 802.4.
Third, new Sec. 802.4(a) has been expanded and now provides an
exemption for voting securities acquisitions of issuers that hold
assets the direct acquisition of which are exempt pursuant to section
7A(c)(2) of the act and Sec. 802.5 of the rules. Fourth, new
Sec. 802.4(b) has been added to the rule to make clear that the term
``issuer'' as used in Sec. 802.4(a) means a single issuer or two or
more issuers controlled by the same person. Lastly, new Sec. 802.4(c)
has been added to make clear that the value of assets held by an issuer
whose voting securities are being acquired pursuant to Sec. 802.4 is
the fair market value determined in accordance with Sec. 801.10(c)(3)
of the rules.
The first change responds to Comments 2, 5 and 9, which noted that
the requirement in proposed Sec. 802.4 that the acquired issuer could
hold solely assets exempt under Secs. 802.2 and 802.3 was very limiting
and caused the proposed exemption to fall short of the goal of treating
voting securities acquisitions the same as asset purchases. Proposed
Secs. 802.2 and 802.3 provided an exemption for asset acquisitions
involving the purchase of certain types of realty and carbon-based
mineral reserves and required that the acquisition of any non-exempt
assets be separately analyzed to determine whether notification was
required prior to their purchase. Thus, under proposed Secs. 802.2 and
802.3, a person could acquire certain exempt assets and non- exempt
assets valued at $15 million or
[[Page 13680]]
less and would not be required to file. However, in contrast, the
requirement in proposed Sec. 802.4 that the acquired issuer hold solely
exempt assets precluded the exemption if the issuer held any assets not
exempt under Secs. 802.2 and 802.3.
The Commission agrees that this limitation seemed to undercut the
rationale underlying Sec. 802.4 to reduce the extent to which the form
of the transaction affects the requirement to file notification. For
this reason, as noted previously, the Commission has modified proposed
Sec. 802.4 to exempt acquisitions of issuers that hold assets exempt
under section 7A(c)(2) of the act and new Secs. 802.2, 802.3, and
802.5, and non-exempt assets with a fair market value of $15 million or
less.
Comment 2 also suggested that proposed Sec. 802.4 be amended to
exempt acquisitions of voting securities of issuers that hold
``incidental assets,'' i.e., assets incidental to the ownership of the
exempt assets, in addition to the assets that are exempt pursuant to
proposed Secs. 802.2 and 802.3. The commenter pointed out that since
incidental assets were not included in every provision of the proposed
rules as exempt assets, the ownership of incidental assets by an
acquired issuer would limit the application of Sec. 802.4. As noted
previously, the Commission has modified the language of proposed
Sec. 802.4 to include within the exemption acquisitions of voting
securities of issuers holding assets exempt under the cited rules and
non-exempt assets with a fair market value of $15 million or less. The
Commission also has included within the various subsections of
Secs. 802.2 and 802.3 language that will include within the exemptions,
assets incidental to the ownership of the exempt assets. The Commission
believes that since the ownership of incidental assets has little
effect on competition, the value of incidental assets should not be
included in the determination of whether the acquired issuer holds non-
exempt assets with a fair market value exceeding $15 million. The
Commission believes that these modifications adequately address the
concerns raised by this comment.
The second change was made because the provisions of Sec. 801.15(b)
that address aggregation of previous acquisitions now govern all voting
securities acquisitions of issuers holding assets exempt under the
sections included within new Sec. 802.4(a). Proposed Sec. 802.4(a)
contained exemptions that did not require aggregation because the
exemptions were not based on the holding of assets valued at less than
a set threshold amount. For instance, the exemption for certain types
of realty provided in Sec. 802.2 is applicable regardless of the value
of the exempt assets to be acquired. However, since new Sec. 802.4(a)
has eliminated the restriction that an issuer whose voting securities
are to be acquired hold solely exempt assets and now permits the
acquired issuer to hold non-exempt assets valued at $15 million or
less, the principles of Sec. 801.15(b) apply, and aggregation is
required to determine whether this limitation will be exceeded.
The third change from the proposed rules reflects a suggestion by
Comment 9 that section 7A(c)(2) of the act be included within
Sec. 802.4. Section 7A(c)(2) exempts acquisitions of ``bonds,
mortgages, deeds of trust, and other obligations which are not voting
securities.'' The Commission agrees that the acquisition of these types
of assets are of little antitrust concern, whether acquired in the form
of an asset or voting securities acquisition, and has added section
7A(c)(2) of the act to new Sec. 802.4(a).
Similarly, an exemption for acquisitions of voting securities of
issuers holding assets the direct acquisition of which would be exempt
under Sec. 802.5 is now included in Sec. 802.4(a) as a result of
revisions to Sec. 802.5 (see discussion, below). Because proposed
Sec. 802.5 included a limitation on the type of purchaser that
qualified for the exemption, comparable voting securities acquisitions
could not be included within Sec. 802.4 and thus were exempted within
proposed Sec. 802.5. New Sec. 802.5 has been revised to remove the
limitation, and the exemption for the equivalent voting securities
acquisition has been moved to Sec. 802.4. Therefore, acquisitions of
the voting securities of issuers holding investment rental property
plus non-exempt assets valued at $15 million or less will be exempt
pursuant to Sec. 802.4(a).
The addition of Sec. 802.4(b) stems from the rationale underlying
this exemption that voting securities acquisitions and asset purchases
be treated similarly for purposes of Sec. 802.4. The first step toward
achieving similar treatment was to modify proposed Secs. 802.4(a) and
(b) to include within the exemption the acquisition of issuers that
hold exempt assets and non-exempt assets valued at $15 million or less.
The Commission believes that, in addition to this modification,
purchasers should be required to aggregate acquisitions of voting
securities of different issuers controlled by the same acquired person.
Otherwise, the form of the transaction will affect the notification
requirement. For this reason, new Sec. 802.4(b) defines issuer, for
purposes of Sec. 802.4, to mean a single issuer or multiple issuers
controlled by the same acquired person. Thus, when the voting
securities of more than one issuer controlled by the same person are
being acquired, aggregation of the non-exempt assets held by these
issuers and aggregation of the carbon-based mineral reserves for which
there are threshold limitations is required. For example, if ``A''
proposed to acquire the voting securities of three subsidiaries of
``B'' and each subsidiary held $200 million of oil and gas reserves,
the acquisition would not be exempt under Sec. 802.4(a) because the
acquired issuers hold in the aggregate $600 million of oil and gas
reserves. If the acquisition were structured as an asset acquisition
with ``A'' purchasing the oil and gas reserves held by ``B's'' three
subsidiaries, the acquisition would not qualify for exemption under new
Sec. 802.3(a) since the value of the reserves to be acquired exceeds
$500 million.
Similarly, if ``A'' proposed to acquire the voting securities of
three of ``B's'' subsidiaries and each held, respectively, (1) two
hotels and $10 million of non-exempt assets, (2) two hotels and $7
million of non-exempt assets and (3) three hotels and $3 million of
non-exempt assets, ``A'' would be required to aggregate the value of
the non-exempt assets to determine whether the acquired issuers hold in
the aggregate non-exempt assets exceeding $15 million in value. Since
the value of the non-exempt assets exceeds $15 million, ``A's''
proposed acquisition would not be exempt under Sec. 802.4(a). If the
acquisition were structured as an asset acquisition with ``A''
purchasing the hotels and the non-exempt assets directly, ``A's''
acquisition of the hotels would be exempt under Sec. 802.2(e) but ``A''
would be required to file notification for the acquisition of the non-
exempt assets. The Commission recognizes that in this situation the
holdings of non-exempt assets exceeding $15 million in the voting
securities acquisition negated the availability of the exemption for
the entire acquisition, whereas in the asset acquisition filing would
be required only for the acquisition of the non-exempt assets. However,
since voting securities acquisitions are by their nature different than
asset acquisitions because voting securities represent an interest in
the undivided totality of the underlying assets, this difference in
outcome is unavoidable but reasonable.
New Sec. 802.4(c) has been added to make clear that the value of
the exempt and non-exempt assets held by the issuer is fair market
value determined in
[[Page 13681]]
accordance with Sec. 801.10(c)(3). The Commission recognizes that this
requirement may be difficult to meet when the acquisition is hostile or
the acquiring person proposes to acquire a minority interest through
the acquisition of voting securities from third party holders, e.g.,
open market purchases. However, Sec. 801.10(c)(3) requires that the
acquiring person make a good faith determination of the fair market
value of the assets of the issuer whose voting securities are to be
acquired. The acquired person cannot rely on the absence of data to
make a good faith determination that the fair market value of the
assets held by the acquired issuer(s) does not exceed threshold
limitations.
The modifications that have been made to proposed Sec. 802.3,
providing different thresholds for oil and gas reserves and coal
reserves, and proposed Sec. 802.4, expanding the exemption to include
issuers holding non-exempt assets with a fair market value of $15
million or less, complicate the application of the rules requiring
aggregation of acquisitions of voting securities of different issuers
controlled by the same acquired person. The previous discussion
addressed the issue of aggregation when the voting securities of
different issuers are acquired in the same transaction. The following
discussion addresses some of the intricacies of aggregation involving
subsequent acquisitions from the same acquired person of voting
securities of the same issuer (and of different issuers) holding assets
exempt under Secs. 802.2, 802.3 and 802.5 and section 7A(c)(2) of the
act.
To address the issue of aggregation involving subsequent
acquisitions from the same issuer of voting securities governed by the
exemptions provided by Sec. 802.4, Sec. 801.15(b) has been revised to
include Secs. 802.3 and 802.4. Section 801.15(b) provides that voting
securities, the acquisition of which was exempt under certain
identified exemptions, are not held as a result of an acquisition
unless in a subsequent acquisition the limitations contained in those
specified exemptions are exceeded. For example, ``A'' acquires for $40
million, in an exempt transaction, 20 percent of the voting stock of B,
which holds petroleum reserves valued at $300 million and subsequently
plans to acquire an additional five percent of the B's voting
securities for $10 million. ``A'' would be required to determine
whether its subsequent acquisition of B's stock qualifies for the
exemption under Sec. 802.4(a). If B's holdings of oil and gas reserves
have increased and the value of its reserves exceeds $500 million,
``A's'' subsequent acquisition of B's stock would not be exempt under
Sec. 802.4(a). Under Sec. 801.15(b), ``A'' is considered to hold 20
percent of the voting stock of B, and ``A's'' subsequent acquisition is
not exempt under Sec. 802.4(a).
Another situation in which aggregation is required under
Sec. 801.15(b) involves an acquisition of a minority interest in the
voting securities of an issuer exempt under Sec. 802.4(a) followed by a
subsequent acquisition of either a minority or a controlling interest
in the voting securities of another issuer included within the same
acquired person. For example, assume that ``A'' acquired 30 percent of
the voting securities of C, an issuer controlled by ``B,'' for $40
million and that the acquisition was exempt under Sec. 802.4(a) because
C held oil and gas assets valued at $300 million and non-exempt assets
valued at $7 million. Six months later, ``A'' proposes to acquire from
``B'' all (or a minority) of the voting securities of D and E, issuers
controlled by ``B,'' for $20 million each. D has oil and gas reserves
valued at $150 million and non-exempt assets valued at $2 million, and
E has oil and gas reserves valued at $150 million and non-exempt assets
valued at $2 million. Under Sec. 801.15(b), ``A'' is required to
aggregate its current proposed acquisitions of D and E with its
previous exempt acquisition of C's voting securities to determine
whether the limitations set forth in Sec. 802.4(a) will be exceeded as
a result of the subsequent acquisition. In this situation, since the
value of the oil and gas reserves held by the C, D, and E exceed $500
million, the acquisition of the voting securities of D and E is not
exempt under Sec. 802.4(a).
Aggregation is not required in a subsequent acquisition of voting
stock of an issuer included within the same acquired person if the
acquiring person acquired control of that issuer in an earlier
transaction, i.e., holds 50 percent or more of the issuer's outstanding
voting securities. In such case, the issuer is now included within the
acquiring person, and the aggregation requirements of Sec. 801.13(a) do
not apply since control has passed to the acquiring person. (In a
situation in which the acquiring person acquires exactly 50 percent of
an issuer's voting stock and the acquired person has retained 50
percent, the Premerger Notification Office has long treated the issuer
as within the acquiring person alone in applying the aggregation
requirements of Secs. 801.13 and 801.14 for subsequent voting stock and
asset purchases from the same acquired person.) Therefore, if an
acquiring person has acquired 50 percent or more of the voting stock of
an issuer and proposes to acquire additional voting stock from the same
issuer or another issuer controlled by the same acquired person, the
acquiring person is not required to aggregate the assets of the issuer
in the first acquisition with assets of the issuer in the second
acquisition to determine if any limitations have been exceeded.
Section 802.4 contains three examples that illustrate the
application of the rule, including an example involving simultaneous
acquisitions. Examples illustrating the aggregation principles of
Sec. 802.4 in sequential transactions are included in the examples to
Sec. 801.15. Section 802.4 represents the Commission's first major
effort to accord the same treatment to asset acquisitions and
comparable voting securities acquisitions. The aggregation principles,
though necessary, complicate the application of the exemption. If the
complexity of the aggregation principles makes applying the Sec. 802.4
exemption overly burdensome for parties, the Commission will review the
provision to determine if any changes to the exemption are necessary.
Proposed Section 802.5: Acquisitions of Investment Rental Property
Assets
Section 802.5 exempts acquisitions of investment rental property
assets. It is intended to exempt certain acquisitions of real property
that are not exempt under new Sec. 802.2. The exemption applies only to
acquisitions of real property assets that will be held by the acquiring
person solely for rental or investment purposes and that will be rented
only to entities not included within the purchaser (except for the sole
purpose of maintaining, managing or supervising the operation of the
investment rental property assets). Thus, the intent of the purchaser
at the time of the acquisition must be considered to determine whether
the exemption is available. Although the application of new Sec. 802.5,
unlike proposed Sec. 802.5, is no longer limited to certain types of
acquiring persons such as institutional investors, the Commission
believes that this provision will exempt most real property
acquisitions typically made by institutional investors, real estate
investment trusts (``REITs''), or real estate development and
management companies that are not exempted by new Sec. 802.2.
New Sec. 802.5 is designed to supplement new Sec. 802.2 by
recognizing that there may be additional categories of real property
assets, such as industrial parks and multi-purpose sports and
entertainment facilities, that,
[[Page 13682]]
when acquired as investment rental property, are not likely to violate
the antitrust laws. Acquisitions of these types of real property are
often made solely for rental investment purposes. In such instances,
investors in such property play no active role in the business
conducted on these properties and seek only to profit from their
investment in the real estate. Moreover, in order to reduce risk of
loss in the value of the real estate they hold, purchasers of numerous
properties generally do not concentrate their investments in a single
geographic market. Given the size and unconcentrated nature of the real
estate market, such acquisitions are not likely to pose a competitive
concern. The limitations in new Sec. 802.5 on the intent of the
acquiring person and the use of the qualifying real property are
designed to insure that the exemption will not be available for any
acquisition intended to achieve business objectives that are not
related to the rental or investment objectives.
Although the investment rental property exemption may apply to real
property, such as office or residential property, hotels/motels and
rental retail space, that is also exempt under Sec. 802.2, there will
be no need to apply new Sec. 802.5 to the acquisition of these
categories of real property assets. The important distinction between
Sec. 802.2 and Sec. 802.5 is that Sec. 802.2 exempts acquisitions of
specific classes of real property assets and does not incorporate the
intent-based test of Sec. 802.5, while Sec. 802.5 exempts any type of
real property assets that meet the rule's requirements for investment
rental property. In addition, the exemptions for acquisition of real
property under Sec. 802.2 apply even if the acquiring person occupies
the property for any purpose while Sec. 802.5 permits the acquiring
person to use the acquired investment rental property assets only to
manage or operate the real property assets being acquired.
Proposed Sec. 802.5 limited the availability of the exemption for
acquisitions of investment rental property to institutional investors
as defined by Sec. 802.64 and persons whose sole business is the
acquisition or management of investment rental property assets. Comment
2 recommended that the limitation on qualified purchasers be eliminated
because the definition of investment rental property assets in proposed
Sec. 802.5(b) would be sufficient to prevent purchasers from conducting
business on the property being acquired. Comment 31 suggested that the
exemption should be available to persons other than investors whose
sole business consists of acquiring or managing investment rental
property assets. REITs, the commenter pointed out, are permitted to own
certain assets such as temporary stock and bond investments that are
not investment rental property and thus, under the proposed rules, may
not qualify as entities whose sole business is acquiring and managing
investment rental property assets.
The Commission has determined that the dual restrictions in
proposed Sec. 802.5 which made the exemption available only to (1)
certain types of investors for (2) acquisitions of investment rental
property were too limiting. The Commission believes that eliminating
the first restriction will not compromise the efficacy of the
exemption. Thus, new Sec. 802.5 is available to all types of purchasers
so long as the acquisition qualifies as investment rental property
assets.
New Sec. 802.5 includes a provision, found in other sections of
Part 802 and omitted from proposed Sec. 802.5, stating that in an
acquisition that includes investment rental property, the transfer of
any other property shall be separately subject to the requirements of
the act. Thus an investor can purchase property, the acquisition of
which is exempt under Sec. 802.5, and non-exempt assets valued at $15
million or less and still qualify for the exemption.
In addition, the provision included in proposed Sec. 802.5
exempting acquisitions of voting securities of an entity holding assets
that consist solely of investment rental property assets has been
modified and moved to new Sec. 802.4. Thus, the exemption for
acquisitions of voting securities of issuers holding Sec. 802.5 assets
will be governed by Sec. 802.4. This change results in greater
comparability between the direct acquisition of Sec. 802.5 assets and
the acquisition of voting securities of issuers holding these assets.
Proposed Sec. 802.5 included within the definition of investment
rental property assets any space occupied by the acquiring person for
the sole purpose of maintaining, managing or supervising the operation
of real property and real property rented only to entities not included
within the acquired person. The proposal incorrectly implied that an
investor could not lease a portion of the acquired rental property to a
subsidiary or other affiliated entity which would, in turn, manage the
property on behalf of the investor. The language in new Sec. 802.5 has
been changed and explicitly permits the investor to establish this
arrangement with a subsidiary solely to maintain, manage or supervise
the purchased property.
For some acquisitions, in order to determine prior to the
acquisition whether the buyer will use the investment rental property
in accordance with the requirements of Sec. 802.5, it may be necessary
to examine the acquisition intent of the acquiring person, particularly
if that investor is controlled by a person that also controls entities
engaged in other businesses. The acquisition intent can be inferred
from the context of the transaction and from actions by the acquiring
person before the acquisition. Circumstances or conduct such as the
following may be scrutinized separately or in combination to determine
whether the acquiring person has an intent that is fully consistent
with holding property solely as investment rental property assets: (1)
the acquiring person undertook, prior to the acquisition, a study of
the cost of converting the property for use by one of its businesses;
(2) the property is to be converted for use by the acquiring person;
(3) prior to the acquisition, the property is being leased to or used
by entities included within the acquiring person; (4) a portion of the
acquired property is being leased at the time of the acquisition to a
competitor of the acquiring person; and (5) the purchase price reflects
the value of a business operated on the property rather than the
investment rental value of the property.
Because Sec. 802.5 covers a broad range of non-specific assets and
places no limits on who may acquire the assets, the Commission has
declined to adopt the suggestion in Comment 7 to eliminate the
requirement that the property to be acquired will be rented only to
entities not included within the acquiring person. The Commission also
declined to adopt the suggestions in Comments 7 and 9 to eliminate the
restrictions on the acquiring person's use of any space on the property
for the sole purpose of maintaining, managing and supervising the
operation of the property. Limits on the use of the property provide
additional safeguards to insure that the property is being acquired for
investment or rental purposes, since other safeguards such as limits on
the type of investment rental property that can be acquired and the
type of investor that qualifies for exemption are absent from new
Sec. 802.5.
Currently, HSR notifications are not required for acquisitions of
realty made by REITs under the ordinary course of business exemption.
REITs acquire real estate in the ordinary course of their business, and
the fiduciary nature of their investment activities and the
restrictions imposed upon them by the Internal Revenue Code safeguard
against improper use of property they acquire.
[[Page 13683]]
New Sec. 802.5 is not intended to narrow the exemption from the
reporting requirements that is currently available to REITs.
Comment 9 noted that the language of proposed Sec. 802.5 excluded
the acquisition of a REIT by a non-REIT, because of the restriction on
the type of investor that qualified for the exemption. Acquisitions of
REITs by non-REITs are currently subject to the notification
requirements, because the fiduciary restraints that govern acquisitions
by REITs do not generally apply to non-REITs. However, under new
Sec. 802.5, the acquisition by a non-REIT of all of the assets of a
REIT may be exempt from the reporting requirements if the transaction
meets the requirements of the exemption. The acquisition of all of the
assets of a REIT by another REIT is currently an exempt transaction,
even though the acquired REIT may hold certain non-real estate assets,
and new Sec. 802.5 does not supersede this exemption.
VI. Aggregation Rules
Section 801.15 states that, notwithstanding Sec. 801.13, certain
assets and voting securities acquired in exempt transactions are not
considered to be ``held as a result of an acquisition.'' These rules
and concepts govern whether certain acquisitions must be aggregated to
determine if a proposed acquisition requires notification. As the
Statement of Basis and Purpose makes clear (43 FR 33479), Sec. 801.15
is applicable to simultaneous acquisitions in which both exempt and
non-exempt assets or voting securities are being acquired from the same
acquired person and to acquisitions of non-exempt assets or voting
securities after the person has previously acquired exempt assets or
voting securities from the same acquired person.
Section 801.15(a) provides that assets and voting securities exempt
at the time of acquisition under certain provisions of the act and
rules are not held as a result of the acquisition. Acquisitions
exempted by section 7A(c)(1) of the act are among the classes listed.
As a result, in determining whether an assets acquisition meets the
more than $15 million size-of-transaction criterion of section
7A(a)(3), the value of assets acquired in the ordinary course of
business is not counted. Because Sec. 802.1 declares that certain
acquisitions are and that others are not considered to be transfers in
the ordinary course of business under section 7A(c)(1), it is not
necessary to list Sec. 802.1 separately in Sec. 801.15(a). However, to
eliminate possible confusion, Sec. 802.1 is listed in Sec. 801.15(a),
along with section 7A(c)(1), to make clear that assets exempted
pursuant to Sec. 802.1(b), (c) and (d) are not deemed to be held as the
result of an acquisition for aggregation purposes. Therefore, an
acquisition of current supplies valued at $8 million is not aggregated
with subsequent acquisitions from the same person to determine if a
proposed acquisition will exceed the $15 million size-of-transaction
notification threshold, since the current supplies are exempt pursuant
to section 7A(c)(1) and Sec. 802.1(c).
New Sec. 802.2, which provides an exemption for the acquisition of
certain types of real property assets (new facilities, used facilities,
unproductive real property, office and residential property, hotels and
motels, recreational land, agricultural property, rental retail space
and warehouses) is also listed in Sec. 801.15(a) since the exemption
sets no dollar limit on the amount of exempt assets that may be
acquired without prior notification. Since new Sec. 802.2 is listed in
Sec. 801.15(a), assets exempt under this provision are never held as a
result of an acquisition. Section 802.5, which exempts acquisitions of
investment rental property also appears in Sec. 801.15(a). However, it
is important to note that new Secs. 802.2 and 802.5 provide that the
acquisition of any other assets not exempted by new Secs. 802.2 and
802.5 are subject to the requirements of the act and the rules as if
they were being acquired in a separate acquisition. Consequently, in an
acquisition that includes these exempt assets, the acquisition of other
non- exempt assets are subject to the aggregation requirements of
Sec. 801.13(b).
Sections 802.3 (exempting certain acquisitions of carbon-based
mineral reserves) and 802.4(exempting acquisitions of voting securities
of issuers holding exempt assets under section 7A (c)(2) of the act,
Secs. 802.2, 802.3 and 802.5, plus non-exempt assets valued at $15
million or less), appear in Sec. 801.15(b). This provision requires
parties to aggregate the value of otherwise exempt assets that are
transferred in separate acquisitions. Section 801.15(b) provides that
the aggregation rules of Sec. 801.13 are to be applied if, as a result
of a proposed subsequent transaction, the assets from that transaction
and an earlier transaction will exceed a quantitative limitation on the
exemption of assets of that kind. Thus, the $500 million limitation for
oil and gas reserves and the $200 million limitation for coal reserves
in Sec. 802.3, that were not reached in an earlier acquisition, may be
exceeded by a subsequent acquisition of reserves.
Example 4 to Sec. 801.15 amends the current Example 4, in which the
acquiring person is purchasing two mines. The existing example does not
indicate whether the mines contain carbon-based minerals. Based on the
value of the mines stated in the example, Sec. 802.3 would exempt their
acquisition if they are carbon-based mineral reserves. To avoid
possible confusion, the acquired assets have been changed to
manufacturing plants.
In response to a suggestion in Comment 9, language has been added
to Example 5 regarding valuation of assets in sequential acquisitions
to determine if the limitation in Sec. 802.3 has been exceeded. In such
acquisitions, the buyer is not required to determine the current fair
market value of the assets of the first acquisition, but he may use the
value of those assets at the time of their prior acquisition pursuant
to Sec. 801.10(b). However, in applying Sec. 802.4, if in the first
acquisition the buyer had purchased a minority share of the voting
securities of an issuer that held the exempt oil reserves assets and
proposed to buy additional voting securities from the same issuer, the
buyer is required to revalue the total holdings of the issuer at the
time of the second acquisition to determine if the issuer's holdings of
oil and gas rights and reserves exceed the limitation in Sec. 802.3.
In proposed Sec. 801.15, only Sec. 802.4(b) appeared in
Sec. 801.15(b) because only that provision of Sec. 802.4 exempted
acquisitions of voting securities of issuers holding assets that, if
acquired directly, were exempt subject to certain dollar limitations.
Paragraphs (a) and (b) of proposed Sec. 802.4 have now been
consolidated into new Sec. 802.4(a) since the exemption has been
expanded to exempt issuers holding exempt assets and non-exempt valued
at $15 million or less. New Sec. 802.4 now appears in amended
Sec. 801.15(b) to reflect the provision contained in Sec. 802.4(a)
limiting the value of the non-exempt assets that the issuer whose
voting securities are being acquired can hold. Also, three new examples
have been added to Sec. 801.15 to illustrate the aggregation principles
of Sec. 802.4 (see discussion of new Sec. 802.4, above).
List of Subjects in 16 CFR Parts 801 and 802
Antitrust.
Amended Rules
The Commission amends Title 16, Chapter 1, Subpart H, of the Code
of Federal Regulations as follows:
[[Page 13684]]
PART 801--COVERAGE RULES
1. The authority citation for Part 801 continues to read as
follows:
Authority: Sec. 7A(d), Clayton Act, 15 U.S.C. 18a(d), as added
by sec. 201, Hart-Scott-Rodino Antitrust Improvements Act of 1976,
Pub. L. 94-435, 90 Stat. 1390.
2. Section 801.15(a)(2) and (b) are revised to read as follows:
Sec. 801.15 Aggregation of voting securities and assets the
acquisition of which was exempt.
* * * * *
(a) * * *
(2) Sections 802.1, 802.2, 802.5, 802.6(b)(1), 802.8, 802.31,
802.35, 802.50(a)(1), 802.51(a), 802.52, 802.53, 802.63, and 802.70;
(b) Assets or voting securities the acquisition of which was exempt
at the time of acquisition (or would have been exempt, had the act and
these rules been in effect), or the present acquisition of which is
exempt, under section 7A(c)(9) and Secs. 802.3, 802.4, 802.50(a)(2),
802.50(b), 802.51(b) and 802.64 unless the limitations contained in
section 7A(c)(9) or those sections do not apply or as a result of the
acquisition would be exceeded, in which case the assets or voting
securities so acquired will be held; and
* * * * *
3. Section 801.15, Example 4 is revised, and Examples 5, 6, 7 and 8
are added to read as follows:
Sec. 801.15 Aggregation of voting securities and assets the
acquisition of which was exempt.
* * * * *
Examples: * * *
4. Assume that acquiring person ``B,'' a United States person,
acquired from corporation ``X'' two manufacturing plants located
abroad, and assume that the acquisition price was $40 million. In
the most recent year, sales into the United States attributable to
the plants were $15 million, and thus the acquisition was exempt
under Sec. 802.50(a)(2). Within 180 days of that acquisition, ``B''
seeks to acquire a third plant from ``X,'' to which United States
sales of $12 million were attributable in the most recent year.
Since under Sec. 801.13(b)(2), as a result of the acquisition, ``B''
would hold all three plants of ``X,'' and the $25 million limitation
in Sec. 802.50(a)(2) would be exceeded, under paragraph (b) of this
rule, ``B'' would hold the previously acquired assets for purposes
of the second acquisition. Therefore, as a result of the second
acquisition, ``B'' would hold assets of X exceeding $15 million in
value, would not qualify for the exemption in Sec. 802.50(a)(2), and
must observe the requirements of the act and file notification for
the acquisition of all three plants before acquiring the third
plant.
5. ``A'' acquires producing oil reserves valued at $400 million
from ``B.'' Two months later, ``A'' agrees to acquire oil and gas
rights valued at $75 million from ``B.'' Paragraph (b) of this
section and Sec. 801.13(b)(2) require aggregating the previously
exempt acquisition of oil reserves with the second acquisition. If
the two acquisitions, when aggregated, exceed the $500 million
limitation on the exemption for oil and gas reserves in
Sec. 802.3(a), ``A'' and ``B'' will be required to file notification
for the latter acquisition, including within the filings the earlier
acquisition. Since, in this example, the total value of the assets
in the two acquisitions, when aggregated, is less than $500 million,
both acquisitions are exempt from the notification requirements. In
determining whether the value of the assets in the two acquisitions
exceed $500 million, ``A'' need not determine the current fair
market value of the oil reserves acquired in the first transaction,
since these assets are now within the person of ``A.'' Instead ``A''
may use the value of the oil reserves at the time of their prior
acquisition in accordance with Sec. 801.10(b).
6. ``X'' acquired 55 percent of the voting securities of M, an
entity controlled by ``Z,'' six months ago and now proposes to
acquire 50 percent of the voting stock of N, another entity
controlled by ``Z.'' M's assets consist of $150 million worth of
producing coal reserves plus $7 million worth of non-exempt assets
and N's assets consist of a producing coal mine worth $100 million
together with non-exempt assets with a fair market value of $6
million. ``X's'' acquisition of the voting securities of M was
exempt under Sec. 802.4(a) because M held exempt assets pursuant to
Sec. 802.3(b) and less than $15 million of non-exempt assets.
Because ``X'' acquired control of M in the earlier transaction, M is
now within the person of ``X,'' and the assets of M need not be
aggregated with those of N to determine if the subsequent
acquisition of N will exceed the limitation for coal reserves or for
non-exempt assets. Since the assets of N alone do not exceed these
limitations, ``X's'' acquisition of N also is not reportable.
7. In Example 6, above, assume that ``X'' acquired 30 percent of
the voting securities of M and proposes to acquire 40 percent of the
voting securities of N, another entity controlled by ``Z.'' Assume
also that M's assets at the time of ``X's'' acquisition of M's
voting securities consisted of $90 million worth of producing coal
reserves and non-exempt assets with a fair market value of $9
million, and that N's assets currently consist of $60 million worth
of producing coal reserves and non-exempt assets with a fair market
value of $8 million. Since ``X'' acquired a minority interest in M
and intends to acquire a minority interest in N, and since M and N
are controlled by ``Z,'' the assets of M and N must be aggregated,
pursuant to Sec. 801.15(b) and Sec. 801.13, to determine whether the
acquisition of N's voting securities is exempt. ``X'' is required to
determine the current fair market value of M's assets. If the fair
market value of M's coal reserves is unchanged, the aggregated
exempt assets do not exceed the limitation for coal reserves.
However, if the present fair market value of N's non-exempt assets
also is unchanged, the present fair market value of the non-exempt
assets of M and N when aggregated is greater than $15 million. Thus
the acquisition of the voting securities of N is not exempt. If
``X'' proposed to acquire 50 percent or more of the voting
securities of both M and N in the same acquisition, the assets of M
and N must be aggregated to determine if the acquisition of the
voting securities of both issuers is exempt. Since the fair market
value of the aggregated non- exempt assets exceeds $15 million, the
acquisition would not be exempt.
8. ``A'' acquired 49 percent of the voting securities of M and
45 percent of the voting securities of N. Both M and N are
controlled by ``B.'' At the time of the acquisition M held rights to
producing coal reserves worth $90 million and N held a producing
coal mine worth $90 million. This acquisition was exempt since the
aggregated holdings fell below the $200 million limitation for coal
in Sec. 802.3(b). A year later, ``A'' proposes to acquire an
additional 10 percent of the voting securities of both M and N. In
the intervening year, M has acquired coal reserves so that its
holdings are now valued at $140 million, and the value of N's assets
remained unchanged. ``A's'' second acquisition would not be exempt.
``A'' is required to determine the value of the exempt assets and
any non-exempt assets held by any issuer whose voting securities it
intends to acquire before each proposed acquisition (unless ``A''
already owns 50 percent or more of the voting securities of the
issuer) to determine if the value of those holdings of the issuer
falls below the limitation of the applicable exemption. Here, an
assessment shows that the holdings of M and N now exceed the $200
million limitation for coal reserves in Sec. 802.3.
PART 802--EXEMPTION RULES
1. The authority citation for Part 802 continues to read as
follows:
Authority: Sec. 7A(d), Clayton Act, 15 U.S.C. 18a(d), as added
by sec. 201, Hart-Scott-Rodino Antitrust Improvements Act of 1976,
Pub. L. 94-435, 90 Stat. 1390.
2. Section 802.1 is revised to read as follows:
Sec. 802.1 Acquisitions of goods and realty in the ordinary course of
business.
Pursuant to section 7A(c)(1), acquisitions of goods and realty
transferred in the ordinary course of business are exempt from the
notification requirements of the act. This section identifies certain
acquisitions of goods that are exempt as transfers in the ordinary
course of business. This section also identifies certain acquisitions
of goods and realty that are not in the ordinary course of business
and, therefore, do not qualify for the exemption.
(a) Operating unit. An acquisition of all or substantially all the
assets of an operating unit is not an acquisition in the ordinary
course of business. ``Operating unit'' means assets that are operated
by the acquired person as a
[[Page 13685]]
business undertaking in a particular location or for particular
products or services, even though those assets may not be organized as
a separate legal entity.
(b) New goods. An acquisition of new goods is in the ordinary
course of business, except when the goods are acquired as part of an
acquisition described in paragraph (a) of this section.
(c) Current supplies. An acquisition of current supplies is in the
ordinary course of business, except when acquired as part of an
acquisition described in paragraph (a) of this section. The term
``current supplies'' includes the following kinds of new or used
assets:
(1) Goods acquired and held solely for the purpose of resale or
leasing to an entity not within the acquiring person (e.g., inventory),
(2) Goods acquired for consumption in the acquiring person's
business (e.g., office supplies, maintenance supplies or electricity),
and
(3) Goods acquired to be incorporated in the final product (e.g.,
raw materials and components).
(d) Used durable goods. A good is ``durable'' if it is designed to
be used repeatedly and has a useful life greater than one year. An
acquisition of used durable goods is an acquisition in the ordinary
course of business if the goods are not acquired as part of an
acquisition described in paragraph (a) of this section and any of the
following criteria are met:
(1) The goods are acquired and held solely for the purpose of
resale or leasing to an entity not within the acquiring person; or
(2) The goods are acquired from an acquired person who acquired and
has held the goods solely for resale or leasing to an entity not within
the acquired person; or
(3) The acquired person has replaced, by acquisition or lease, all
or substantially all of the productive capacity of the goods being sold
within six months of that sale, or the acquired person has in good
faith executed a contract to replace within six months after the sale,
by acquisition or lease, all or substantially all of the productive
capacity of the goods being sold; or
(4) The goods have been used by the acquired person solely to
provide management and administrative support services for its business
operations, and the acquired person has in good faith executed a
contract to obtain substantially similar services as were provided by
the goods being sold. Management and administrative support services
include services such as accounting, legal, purchasing, payroll,
billing and repair and maintenance of the acquired person's own
equipment. Manufacturing, research and development, testing and
distribution (i.e., warehousing and transportation) are not considered
management and administrative support services.
Examples: 1. Greengrocer Inc. intends to sell to ``A'' all of
the assets of one of the 12 grocery stores that it owns and operates
throughout the metropolitan area of City X. Each of Greengrocer's
stores constitutes an operating unit, i.e., a business undertaking
in a particular location. Thus ``A's'' acquisition is not exempt as
an acquisition in the ordinary course of business. However, the
acquisition will not be subject to the notification requirements if
the acquisition price or fair market value of the store's assets
does not exceed $15 million.
2. ``A,'' a manufacturer of airplane engines, agrees to pay $20
million to ``B,'' a manufacturer of airplane parts, for certain new
engine components to be used in the manufacture of airplane engines.
The acquisition is exempt under Sec. 802.1(b) as new goods as well
as under Sec. 802.1(c)(3) as current supplies.
3. ``A,'' a power generation company, proposes to purchase from
``B,'' a coal company, $25 million of coal under a long-term
contract for use in its facilities to supply electric power to a
regional public utility and steam to several industrial sites. This
transaction is exempt under Sec. 802.1(c)(2) as an acquisition of
current supplies. However, if ``A'' proposed to purchase coal
reserves rather than enter into a contract to acquire output of a
coal mine, the acquisition would not be exempt as an acquisition of
goods in the ordinary course of business. The acquisition may still
be exempt pursuant to Sec. 802.3(b) as an acquisition of reserves of
coal if the requirements of that section are met.
4. ``A,'' a national producer of canned fruit, preserves, jams
and jellies, agrees to purchase from ``B'' for $25 million a total
of 10,000 acres of orchards and vineyards in several locations
throughout the U.S. ``A'' plans to harvest the fruit from the
acreage for use in its canning operations. The acquisition is not
exempt under Sec. 802.1 because orchards and vineyards are real
property, not ``goods.'' If, on the other hand, ``A'' had contracted
to acquire from ``B'' the fruit and grapes harvested from the
orchards and vineyards, the acquisition would qualify for the
exemption as an acquisition of current supplies under
Sec. 802.1(c)(3). Although the transfer of orchards and vineyards is
not exempt under Sec. 802.1, the acquisition would be exempt under
Sec. 802.2(g) as an acquisition of agricultural property.
5. ``A,'' a railcar leasing company, will purchase $20 million
of new railcars from a railcar manufacturer in order to expand its
existing fleet of cars available for lease. The transaction is
exempt under Sec. 802.1(b) as an acquisition of new goods and
Sec. 802.1(c), as an acquisition of current supplies. If ``A''
subsequently sells the railcars to ``C'', a commercial railroad
company, that acquisition would be exempt under Sec. 802.1(d)(2),
provided that ``A'' acquired and held the railcars solely for resale
or leasing to an entity not within itself.
6. ``A,'' a major oil company, proposes to sell two of its used
oil tankers for $15.5 million to ``B,'' a dealer who purchases oil
tankers from the major U.S. oil companies. ``B's'' acquisition of
the used oil tankers is exempt under Sec. 802.1(d)(1) provided that
``B'' is actually acquiring beneficial ownership of the used tankers
and is not acting as an agent of the seller or purchaser.
7. ``A,'' a cruise ship operator, plans to sell for $18 million
one of its cruise ships to ``B,'' another cruise ship operator.
``A'' has, in good faith, executed a contract to acquire a new
cruise ship with substantially the same capacity from a ship
builder. The contract specifies that ``A'' will receive the new
cruise ship within one month after the scheduled date of the sale of
its used cruise ship to ``B.'' Since ``B''is acquiring a used
durable good that ``A'' has contracted to replace within six months
of the sale, the acquisition is exempt under Sec. 802.1(d)(3).
8. ``A,'' a luxury cruise ship operator, proposes to sell to
``B,'' a credit company engaged in the ordinary course of its
business in lease financing transactions, its fleet of six passenger
ships under a 10-year sale/leaseback arrangement. That acquisition
is exempt pursuant to Sec. 802.1(d)(1), used durable goods acquired
for leasing purposes. The acquisition is also exempt under
Sec. 802.63(a) as a bona fide credit transaction entered into in the
ordinary course of ``B's'' business. ``B'' now proposes to sell the
ships, subject to the current lease financing arrangement, to ``C,''
another lease financing company. This transaction is exempt under
Sec. 802.1(d)(1) and Sec. 802.1(d)(2).
9. Three months ago ``A,'' a manufacturing company, acquired
several new machines that will replace equipment on one of its
production lines. ``A's'' capacity to produce the same products
increased modestly when the integration of the new equipment was
completed. ``B,'' a manufacturing company that produces products
similar to those produced by ``A,'' has entered into a contract to
acquire for $18 million the machinery that ``A'' replaced. Delivery
of the equipment by ``A'' to ``B'' is scheduled to occur within
thirty days. Since ``A'' purchased new machinery to replace the
productive capacity of the used equipment, which it sold within six
months of the purchase of the new equipment, the acquisition by
``B'' is exempt under Sec. 802.1(d)(3).
10. ``A'' will sell to ``B'' for $16 million all of the
equipment ``A'' uses exclusively to perform its billing
requirements. ``B'' will use the equipment to provide ``A's''
billing needs pursuant to a contract which ``A'' and ``B'' executed
30 days ago in conjunction with the equipment purchase agreement.
Although the assets ``B'' will acquire make up essentially all of
the assets of one of ``A's'' management and administrative support
services divisions, the acquisition qualifies for the exemption
under Sec. 802.1(d)(4) because a company's internal management and
administrative support services, however organized, are not an
operating unit as defined by Sec. 802.1(a). Management and
administrative support services are not a ``business undertaking''
as that term is used
[[Page 13686]]
in Sec. 802.1(a). Rather, they provide support and benefit to the
company's operating units and support the company's business
operations. However, if the assets being sold also derived revenues
from providing billing services for third parties, then the transfer
of these assets would not be exempt under Sec. 802.1(d)(4), since
the equipment is not being used solely to provide management and
administrative support services to ``A''.
11. ``A,'' a manufacturer of pharmaceutical products, and ``B''
have entered into a contract under which ``B'' will provide all of
``A's'' research and development needs. Pursuant to the contract,
``B'' will also purchase all of the equipment that ``A'' formerly
used to perform its own research and development activities. The
sale of the equipment is not an exempt transaction under
Sec. 802.1(d)(3) because ``A'' is not replacing the productive
capacity of the equipment being sold. The sale is also not exempt
under Sec. 802.1(d)(4), because functions such as research and
development and testing are not management and administrative
support services of a company but are integral to the design,
development or production of the company's products.
12. ``A,'' an automobile manufacturer, is discontinuing its
manufacture of metal seat frames for its cars. ``A'' enters into a
contract with ``B,'' a manufacturer of various fabricated metal
products, to sell its seat frame production lines and to purchase
from ``B'' all of its metal seat frame needs for the next five
years. This transfer of productive capacity by ``A'' is not exempt
pursuant to Sec. 802.1(d)(3), since ``A'' is not replacing the
productive capacity of the equipment being sold. The acquisition is
also not exempt under Sec. 802.1(d)(4). ``A's'' sale of production
lines is not the transfer of goods that provide management and
administrative services to support the business operations of''A'';
this manufacturing equipment is an integral part of ``A's''
production operations.
3. Part 802 is amended by adding Sections 802.2, 802.3, 802.4 and
802.5 to read as follows:
Sec. 802.2 Certain acquisitions of real property assets.
(a) New facilities. An acquisition of a new facility shall be
exempt from the requirements of the act. A new facility is a structure
that has not produced income and was either constructed by the acquired
person for sale or held at all times by the acquired person solely for
resale. The new facility may include realty, equipment or other assets
incidental to the ownership of the new facility. In an acquisition that
includes a new facility, the transfer of any other assets shall be
subject to the requirements of the act and these rules as if they were
being acquired in a separate acquisition.
(b) Used facilities. An acquisition of a used facility shall be
exempt from the requirements of the act if the facility is acquired
from a lessor that has held title to the facility for financing
purposes in the ordinary course of the lessor's business by a lessee
that has had sole and continuous possession and use of the facility
since it was first built as a new facility. The used facility may
include realty, equipment or other assets associated with the operation
of the facility. In an acquisition that includes a used facility that
meets the requirements of this paragraph, the transfer of any other
assets shall be subject to the requirements of the act and these rules
as if they were acquired in a separate transaction.
(c) Unproductive real property. An acquisition of unproductive real
property shall be exempt from the requirements of the act. In an
acquisition that includes unproductive real property, the transfer of
any assets that are not unproductive real property shall be subject to
the requirements of the act and these rules as if they were being
acquired in a separate acquisition.
(1) Subject to the limitations of (c)(2), unproductive real
property is any real property, including raw land, structures or other
improvements (but excluding equipment), associated production and
exploration assets as defined in Sec. 802.3(c), natural resources and
assets incidental to the ownership of the real property, that has not
generated total revenues in excess of $5 million during the thirty-six
(36) months preceding the acquisition.
(2) Unproductive real property does not include the following:
(i) Manufacturing or non-manufacturing facilities that have not yet
begun operation;
(ii) Manufacturing or non-manufacturing facilities that were in
operation at any time during the twelve (12) months preceding the
acquisition; and
(iii) Real property that is either adjacent to or used in
conjunction with real property that is not unproductive real property
and is included in the acquisition.
(d) Office and residential property.
(1) An acquisition of office or residential property shall be
exempt from the requirements of the act. In an acquisition that
includes office or residential property, the transfer of any assets
that are not office or residential property shall be subject to the
requirements of the act and these rules as if such assets were being
transferred in a separate acquisition.
(2) Office and residential property is real property that is used
primarily for office or residential purposes. In determining whether
real property is used primarily for office or residential purposes, all
real property, the acquisition of which is exempt under another
provision of the act and these rules, shall be excluded from the
determination. Office and residential property includes:
(i) Office buildings,
(ii) Residences,
(iii) Common areas on the property, including parking and
recreational facilities, and
(iv) Assets incidental to the ownership of such property, including
cash, prepaid taxes or insurance, rental receivables and the like.
(3) If the acquisition includes the purchase of a business
conducted on the office and residential property, the transfer of that
business, including the space in which the business is conducted, shall
be subject to the requirements of the act and these rules as if such
business were being transferred in a separate acquisition.
(e) Hotels and motels.
(1) An acquisition of a hotel or motel, its improvements such as
golf, swimming, tennis, restaurant, health club or parking facilities
(but excluding ski facilities), and assets incidental to the ownership
and operation of the hotel or motel (e.g., prepaid taxes or insurance,
management contracts and licenses to use trademarks associated with the
hotel or motel being acquired) shall be exempt from the requirements of
the act. In an acquisition that includes a hotel or motel, the transfer
of any assets that are not a hotel or motel, its improvements such as
golf, swimming, tennis, restaurant, health club or parking facilities
(but excluding ski facilities) and assets incidental to the ownership
of the hotel or motel, shall be subject to the requirements of the act
and these rules as if they were being acquired in a separate
acquisition.
(2) Notwithstanding paragraph (1) of the section, an acquisition of
a hotel or motel that includes a gambling casino shall be subject to
the requirements of the act and these rules.
(f) Recreational land. An acquisition of recreational land shall be
exempt from the requirements of the act. Recreational land is real
property used primarily as a golf course or a swimming or tennis club
facility, and assets incidental to the ownership of such property. In
an acquisition that includes recreational land, the transfer of any
property or assets that are not recreational land shall be subject to
the requirements of the act and these rules as if they were being
acquired in a separate acquisition.
(g) Agricultural property. An acquisition of agricultural property,
assets incidental to the ownership of such property and associated
agricultural assets shall be exempt from
[[Page 13687]]
the requirements of the act. Agricultural property is real property and
assets that primarily generate revenues from the production of crops,
fruits, vegetables, livestock, poultry, milk and eggs (activities
within SIC Major Groups 01 and 02).
(1) Associated agricultural assets are assets integral to the
agricultural business activities conducted on the property. Associated
agricultural assets include, but are not limited to, inventory (e.g.,
livestock, poultry, crops, fruit, vegetables, milk, eggs); structures
that house livestock raised on the real property; and fertilizer and
animal feed. Associated agricultural assets do not include processing
facilities such as poultry and livestock slaughtering, processing and
packing facilities.
(2) Agricultural property does not include any real property and
assets either adjacent to or used in conjunction with processing
facilities that are included in the acquisition.
(3) In an acquisition that includes agricultural property, the
transfer of any assets that are not agricultural property, assets
incidental to the ownership of such property or associated agricultural
assets shall be subject to the requirements of the act and these rules
as if such assets were being transferred in a separate acquisition.
(h) Retail rental space; warehouses. An acquisition of retail
rental space (including shopping centers) or warehouses and assets
incidental to the ownership of retail rental space or warehouses shall
be exempt from the requirements of the act, except when the retail
rental space or warehouse is to be acquired in an acquisition of a
business conducted on the real property. In an acquisition that
includes retail rental space or warehouses, the transfer of any assets
that are neither retail rental space nor warehouses shall be subject to
the requirements of the act and these rules as if such assets were
being transferred in a separate acquisition.
Examples. 1. ``A,'' a major automobile manufacturer, builds a
new automobile plant in anticipation of increased demand for its
cars. The market does not improve and ``A'' never occupies the
facility. ``A'' then sells the facility, which is fully equipped and
ready for operation, to ``B,'' another automobile manufacturer. The
acquisition of this plant, including any equipment and assets
associated with its operation, is not exempt as an acquisition of a
new facility, even though the facility has not produced any income,
since ``A'' did not construct the facility for sale or hold it at
all times solely for resale. Also, the acquisition is not exempt as
an acquisition of unproductive property, because manufacturing
facilities that have not yet begun operations are explicitly
excluded from that exemption.
2. B, a subsidiary of ``A,'' a financial institution, acquired a
newly constructed power plant, which it leased to ``X'' pursuant to
a lease financing arrangement. ``A's'' acquisition of the plant
through B was exempt under Sec. 802.63(a) as a bona fide credit
transaction entered into in the ordinary course of ``A's'' business.
``X'' operated the plant as sole lessee for the next eight years and
now proposes to exercise an option to buy the plant for $62 million.
``X's'' acquisition of the plant is exempt pursuant to
Sec. 802.2(b). The plant is being acquired from B, the lessor, which
held title to the plant for financing purposes, and the purchaser,
``X,'' has had sole and continuous possession and use of the plant
since its construction.
3. ``A'' proposes to acquire a $100 million tract of wilderness
land from ``B.'' Copper deposits valued at $17 million and timber
reserves valued at $20 million are situated on the land and will be
conveyed as part of this transaction. During the last three fiscal
years preceding the sale, the property generated $50,000 from the
sale of a small amount of timber cut from the reserves two years
ago. ``A's'' acquisition of the wilderness land from ``B'' is exempt
as an acquisition of unproductive real property because the property
did not generate revenues exceeding $5 million during the thirty-six
months preceding the acquisition. The copper deposits and timber
reserves are by definition unproductive real property and, thus, are
not separately subject to the notification requirements.
4. ``A'' proposes to purchase from ``B'' for $40 million an old
steel mill that is not currently operating to add to ``A's''
existing steel production capacity. The mill has not generated
revenues during the 36 months preceding the acquisition but contains
equipment valued at $16 million that ``A'' plans to refurbish for
use in its operations. ``A's'' acquisition of the mill and the land
on which it is located is exempt as unproductive real property.
However, the transfer of the equipment and any assets other than the
unproductive property is not exempt and is separately subject to the
notification requirements of the act.
5. ``A'' proposes to purchase two downtown lots, Parcels 1 and
2, from ``B'' for $40 million. Parcel 1, located in the southwest
section, contains no structures or improvements. A hotel is located
in the northeast section on Parcel 2, and it has generated $9
million in revenues during the past three years. The purchase of
Parcel 1 is exempt if it qualifies as unproductive real property,
i.e., it has not generated annual revenues in excess of $5 million
in the three fiscal years prior to the acquisition. Parcel 2 is not
unproductive real property, but its acquisition is exempt under
Sec. 802.2(e) as the acquisition of a hotel.
6. ``A'' plans to purchase from ``B,'' a manufacturer, a newly-
constructed building that ``B'' had intended to equip for use in its
manufacturing operations. ``B'' was unable to secure financing to
purchase the necessary equipment and ``A'', also a manufacturer,
will be required to invest approximately $50 million in order to
equip the building for use in its production operations. This
building is not a new facility under Sec. 802.2 (a), because it was
not constructed or held by ``B'' for sale or resale. However, the
acquisition of the building qualifies for exemption as unproductive
real property pursuant to Sec. 802.2(c)(1). The building is not yet
a manufacturing facility since it does not contain equipment and
requires significant capital investment before it can be used as a
manufacturing facility.
7. ``A'' proposes to purchase from ``B,'' for $20 million, a 100
acre parcel of land that includes a currently operating factory
occupying 10 acres. The other 90 adjoining acres are vacant and
unimproved and are used by ``B'' for storage of supplies and
equipment. The factory and the unimproved acreage have fair market
values of $12 million and $8 million, respectively. The transaction
is not exempt under Sec. 802.2(c) because the vacant property is
adjacent to property occupied by the operating factory. Moreover, if
the 90 acres were not adjacent to the 10 acres occupied by the
factory, the transaction would not be exempt because the 90 acres
are being used in conjunction with the factory being acquired and
thus is not unproductive property.
8. ``X'' proposes to buy a five-story building from ``Y.'' The
ground floor of this building houses a department store, and ``X''
currently leases the third floor to operate a medical laboratory.
The remaining three floors are used for offices. ``X'' is not
acquiring the business of the department store. Because the ground
floor is rental retail space, the acquisition of which is exempt
under Sec. 802.2(h), this part of the building is excluded from the
determination of whether the building is used primarily for office
purposes. The laboratory is therefore the only non-office use, and,
since it makes up 25 percent of the remainder of the building, the
building is used 75 percent for offices. Thus the building qualifies
as an office building and its acquisition is therefore exempt under
Sec. 802.2(d).
9. ``A'' intends to acquire three shopping centers from ``B''
for a total of $80 million. The anchor stores in two of the shopping
centers are department stores, the businesses of which ``A'' is
buying from ``B'' as part of the overall transaction. The
acquisition of the shopping centers is an acquisition of retail
rental space that is exempt under Sec. 802.2(h). However, ``A's''
acquisition of the department store business, including the portion
of the shopping centers that the two department stores being
purchased occupy, are separately subject to the notification
requirements. If the value of these assets exceeds $15 million,
``A'' must comply with the requirements of the act for this part of
the transaction.
10. ``A'' wishes to purchase from ``B'' a parcel of land for $30
million. The parcel contains a race track and a golf course. The
golf course qualifies as recreational land pursuant to
Sec. 802.2(f), but the race track is not included in the exemption.
Therefore, if the value of the race track is more than $15 million,
``A'' will have to file notification for the purchase of the race
track.
11. ``A'' intends to purchase a poultry farm from ``B.'' The
acquisition of the poultry farm is a transfer of agricultural
property that is
[[Page 13688]]
exempt pursuant to Sec. 802.2(g). If, however, ``B'' has a poultry
slaughtering and processing facility on his farm that is included in
the acquisition, ``A's'' acquisition of the farm is not exempt as an
acquisition of agricultural property because agricultural property
does not include property or assets adjacent to or used in
conjunction with a processing facility that is included in an
acquisition.
12. ``A'' proposes to purchase the prescription drug wholesale
distribution business of ``B'' for $50 million. The business
includes six regional warehouses used for ``B's'' national wholesale
drug distribution business. Since ``A'' is acquiring the warehouses
in connection with the acquisition of ``B's'' prescription drug
wholesale distribution business, the acquisition of the warehouses
is not exempt.
Sec. 802.3 Acquisitions of carbon-based mineral reserves.
(a) An acquisition of reserves of oil, natural gas, shale or tar
sands, or rights to reserves of oil, natural gas, shale or tar sands
together with associated exploration or production assets shall be
exempt from the requirements of the act if the value of the reserves,
the rights and the associated exploration or production assets to be
held as a result of the acquisition does not exceed $500 million. In an
acquisition that includes reserves of oil, natural gas, shale or tar
sands, or rights to reserves of oil, natural gas, shale or tar sands
and associated exploration or production assets, the transfer of any
other assets shall be subject to the requirements of the act and these
rules as if they were being acquired in a separate acquisition.
(b) An acquisition of reserves of coal, or rights to reserves of
coal and associated exploration or production assets, shall be exempt
from the requirements of the act if the value of the reserves, the
rights and the associated exploration or production assets to be held
as a result of the acquisition does not exceed $200 million. In an
acquisition that includes reserves of coal, rights to reserves of coal
and associated exploration or production assets, the transfer of any
other assets shall be subject to the requirements of the act and these
rules as if they were being acquired in a separate acquisition.
(c) Associated exploration or production assets means equipment,
machinery, fixtures and other assets that are integral and exclusive to
current or future exploration or production activities associated with
the carbon-based mineral reserves that are being acquired. Associated
exploration or production assets do not include the following:
(1) Any pipeline and pipeline system or processing facility which
transports or processes oil and gas after it passes through the meters
of a producing field located within reserves that are being acquired;
and
(2) Any pipeline or pipeline system that receives gas directly from
gas wells for transportation to a natural gas processing facility or
other destination.
Examples: 1. ``A'' proposes to purchase from ``B'' for $550
million gas reserves that are not yet in production and have not
generated any income. ``A'' will also acquire from ``B'' for $280
million producing oil reserves and associated assets such as wells,
compressors, pumps and other equipment. The acquisition of the gas
reserves is exempt as a transfer of unproductive property under
Sec. 802.2(c). The acquisition of the oil reserves and associated
assets is exempt pursuant to Sec. 802.3(a), since the value of the
reserves and associated assets does not exceed the $500 million
limitation.
2. ``A,'' an oil company, proposes to acquire for $180 million
oil reserves currently in production along with field pipelines and
treating and metering facilities which serve such reserves
exclusively. The acquisition of the reserves and the associated
assets are exempt. ``A'' will also acquire from ``B'' for $16
million a natural gas processing plant and its associated gathering
pipeline system. This acquisition is not exempt since Sec. 802.3(c)
excludes these assets from the exemption in Sec. 802.3 for transfers
of associated exploration or production assets.
3. ``A,'' an oil company, proposes to acquire a coal mine
currently in operation and associated production assets for $90
million from ``B,'' an oil company. ``A'' will also purchase from
``B'' producing oil reserves valued at $100 million and an oil
refinery valued at $13 million. The acquisition of the coal mine and
the oil reserves is exempt pursuant to Sec. 802.3. Although
Sec. 802.3(c) excludes the refinery from the exemption in Sec. 802.3
for transfers of associated exploration and production assets,
``A's'' acquisition of the refinery is not subject to the
notification requirements of the act because its value does not
exceed $15 million.
4. ``X'' proposes to acquire from ``Z'' coal reserves which,
together with associated exploration assets, are valued at $230
million. Since the value of the reserves and the assets exceeds the
$200 million limitation in Sec. 802.3(b), this transaction is not
exempt under Sec. 802.3. However, if the coal reserves qualify as
unproductive property under the requirements of Sec. 802.2(c), their
acquisition, along with the acquisition of their associated assets,
would be exempt.
Sec. Section 802.4 Acquisitions of voting securities of issuers
holding certain assets the direct acquisition of which is exempt.
(a) An acquisition of voting securities of an issuer whose assets
together with those of all entities it controls consist or will consist
of assets whose purchase would be exempt from the requirements of the
act pursuant to section 7A(c)(2) of the act, Sec. 802.2, Sec. 802.3 or
Sec. 802.5 of these rules is exempt from the reporting requirements if
the acquired issuer and all entities it controls do not hold other non-
exempt assets with an aggregate fair market value of more than $15
million.
(b) As used in paragraph (a) of this section, ``issuer'' means a
single issuer, or two or more issuers controlled by the same acquired
person.
(c) In connection with paragraph (a) of this section and
Sec. 801.15 (b), the value of the assets of an issuer whose voting
securities are being acquired pursuant to this section shall be the
fair market value, determined in accordance with Sec. 801.10(c).
Examples: 1. ``A,'' a real estate investment company, proposes
to purchase 100 percent of the voting securities of C, a wholly-
owned subsidiary of ``B,'' a construction company. C's assets are a
newly constructed, never occupied hotel, including fixtures,
furnishings and insurance policies. The acquisition of the hotel
would be exempt under Sec. 802.2(a) as a new facility and under
Sec. 802.2(d). Therefore, the acquisition of the voting securities
of C is exempt pursuant to Sec. 802.4(a) since C holds assets whose
direct purchase would be exempt under Sec. 802.2 and does not hold
non-exempt assets exceeding $15 million in value.
2. ``A'' proposes to acquire 60 percent of the voting securities
of C from ``B.'' C's assets consist of a portfolio of mortgages
valued at $20 million and a small manufacturing plant valued at $6
million. The manufacturing plant is an operating unit for purposes
of Sec. 802.1(a). Since the acquisition of the mortgages would be
exempt pursuant to section 7A(c)(2) of the act and since the value
of the non-exempt manufacturing plant is less than $15 million, this
acquisition is exempt under Sec. 802.4(a).
3. ``A'' proposes to acquire from ``B'' 100 percent of the
voting securities of each of three issuers, M, N and O,
simultaneously. M's assets consist of oil reserves worth $160
million and coal reserves worth $40 million. N has assets consisting
of $130 million of gas reserves and $100 million of coal reserves.
O's assets are oil shale reserves worth $140 million and a coal mine
worth $80 million. Since ``A'' is simultaneously acquiring the
voting securities of three issuers from the same acquired person, it
must aggregate the assets of the issuers to determine if any of the
limitations in Sec. 802.3 is exceeded. As a result of aggregating
the assets of M, N and O, ``A's'' holdings of oil and gas reserves
are below the $500 limitation for such assets in Sec. 802.3(a).
However, the aggregated holdings exceed the $200 million limitation
for coal reserves in Sec. 802.3(b). ``A's'' acquisition therefore is
not exempt, and it must report the entire transaction.
Sec. 802.5 Acquisitions of investment rental property assets.
(a) Acquisitions of investment rental property assets shall be
exempt from the requirements of the act.
(b) Investment rental property assets. ``Investment rental property
assets'' means real property that will not be
[[Page 13689]]
rented to entities included within the acquiring person except for the
sole purpose of maintaining, managing or supervising the operation of
the real property, and will be held solely for rental or investment
purposes. In an acquisition that includes investment rental property
assets, the transfer of any property or assets that are not investment
rental property assets shall be subject to the requirements of the act
and these rules as if they were being acquired in a separate
transaction. Investment rental property assets include:
(1) Property currently rented,
(2) Property held for rent but not currently rented,
(3) Common areas on the property, and
(4) Assets incidental to the ownership of property, which may
include cash, prepaid taxes or insurance, rental receivables and the
like.
Example: 1. ``X'', a corporation, proposes to purchase a sports/
entertainment complex which it will rent to professional sports
teams and promoters of special events for concerts, ice shows,
sporting events and other entertainment activities. ``X'' will
provide office space in the complex for ``Y'', a management company
which will maintain and manage the facility for ``X.'' This
acquisition is an exempt acquisition of investment rental property
assets since ``X'' intends to rent the facility to third parties and
is providing space within the facility to a management company
solely to maintain, manage or supervise the operation of the
facility on its behalf. If, however, ``X'' controls Z, a concert
promoter to whom it also intends to rent the complex, the
acquisition would not be exempt under Sec. 802.5, since the property
would not meet the requirements of Sec. 802.5(b)(1).
2. ``X'' intends to buy from ``Y'' a development commonly
referred to as an industrial park. The industrial park contains a
warehouse/distribution center, a retail tire and automobile parts
store, an office building, and a small factory. The industrial park
also contains several parcels of vacant land. If ``X'' intends to
acquire this industrial park as investment rental property, the
acquisition will be exempt pursuant to Sec. 802.5. If, however,
``X'' intends to use the factory for its own manufacturing
operations, this exemption would be unavailable. The exemptions in
Sec. 802.2 for warehouses, rental retail space, office buildings,
and undeveloped land may still apply and, if the value of the
factory is $15 million or less, the entire transaction may be
exempted by that section.
By direction of the Commission,
Donald S. Clark,
Secretary.
[FR Doc. 96-7529 Filed 3-27-96; 8:45 am]
BILLING CODE 6750-01-P
