[Federal Register Volume 60, Number 145 (Friday, July 28, 1995)]
[Proposed Rules]
[Pages 38930-38941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18596]
[[Page 38929]]
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Part V
Federal Trade Commission
_______________________________________________________________________
16 CFR Parts 801 and 802
Premerger Notification; Reporting and Waiting Period Requirements;
Proposed Rule
Federal Register / Vol. 60, No. 145 / Friday, July 28, 1995 /
Proposed Rules
[[Page 38930]]
FEDERAL TRADE COMMISSION
16 CFR Parts 801 and 802
Premerger Notification; Reporting and Waiting Period Requirements
AGENCY: Federal Trade Commission.
ACTION: Notice of Proposed Rulemaking.
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SUMMARY: This notice proposes amendments to 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.
This notice seeks comments on five proposed rules that would define
or create exemptions to the requirements imposed by the act. These
proposed rules have been developed to 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 appear unlikely to violate the antitrust
laws. These proposed 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, in most cases, 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.
DATES: Comments must be received on or before September 29, 1995.
ADDRESSES: Written comments should be submitted to both (1) the
Secretary, Federal Trade Commission, Room 136, Washington, DC 20580,
and (2) the Assistant Attorney General, Antitrust Division, Department
of Justice, Room 3214, Washington, DC 20530.
FOR FURTHER INFORMATION CONTACT:
Melea R. Epps, Attorney, or John M. Sipple, Jr., Assistant Director,
Premerger Notification Office, Bureau of Competition, Room 303, Federal
Trade Commission, Washington, DC 20580. Telephone: (202) 326-3100.
SUPPLEMENTARY INFORMATION:
Regulatory Flexibility Act
The proposed 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 proposed
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 section 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 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''
which 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 determines 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 received 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, 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, 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
[[Page 38931]]
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 in the premerger
notification rules or Form on ten 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)
and 55 FR 31371 (August 2, 1990).
The current set of proposed changes to the rules interprets the act
and expands 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. The proposals also include several new exemptions for
acquisitions of certain types of real property assets and carbon-based
mineral reserves. The Commission, as part of its ongoing review of the
rules, invites interested persons to submit comments on these proposed
rules and the Statement of Basis and Purpose.
Statement of Basis and Purpose for the Commission's Proposed Revisions
to the Premerger Notification Rules
Proposed Secs. 802.1, 802.2, 802.3, 802.4, and 802.5 describe
certain types of acquisitions that would be exempt from the
notification requirements of the act. They would 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 in the ordinary course of business. Proposed revisions
to Sec. 801.15 would define when the aggregation rules apply to
acquisitions covered by these newly proposed rules.
In 1985, the Commission proposed three new provisions under part
802. Previously proposed Sec. 802.1 would have addressed the statutory
``ordinary course of business'' exemption; previously proposed
Sec. 802.2 would have exempted certain acquisitions of unimproved land,
office buildings and residential properties; and previously proposed
Sec. 802.3 would have exempted certain acquisitions of carbon-based
mineral reserves.
In response to the 1985 notice of proposed rulemaking, the
Commission received twenty comments that focused wholly or in part on
the then proposed Secs. 802.1, 802.2, and 802.3. The persons who
commented are listed in the Federal Register of March 6, 1987, 52 FR
7066. The comments are available for public inspection in the Federal
Trade Commission's Public Reference Room, Reference number 223.2.1-1-E
and F.
On March 23, 1995, the Chairman of the Commission and the Assistant
Attorney General for the Antitrust Division of the Department of
Justice jointly announced eight initiatives for review of transactions
under the act. One of the initiatives is a reduction in the number of
filings received pursuant to the act. A draft of several revisions to
the Hart-Scott-Rodino rules under consideration by the staff of the
Commission's Premerger Notification Office (PNO) was made available to
the public. Those revisions would eliminate the necessity to file
premerger notification for certain transactions that are not likely to
violate the antitrust laws. The draft reflected careful consideration
by the staff of the comments received in response to the 1985
proposals, the experience of the PNO during the intervening years in
its determinations of the reportability of a large number of
transactions not specifically exempted by the act or the rules an the
experience of the enforcement agencies in conducting their antitrust
review of premerger filings.
Included in the March 23 draft was a series of questions to be
considered in determining whether the revisions under consideration by
the PNO effectively exempted transactions that were unlikely to violate
the antitrust laws and facilitated uncomplicated application of the
rules. In response to an invitation for comment, the staff of the
Commission received extensive input from the private antitrust bar and
worked closely with the Department of Justice to address the questions
raised in the draft. As a result, the draft revisions were reformulated
significantly to enhance their effectiveness in exempting classes of
transactions that are unlikely to create competitive problems, while
ensuring that the enforcement agencies continue to receive notification
of classes of acquisitions that are more likely to present potential
antitrust concerns. The Commission now formally proposes the following
amendments to the premerger notification 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 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. Proposed
Sec. 802.1 represents interpretations of section 7A(c)(1) made by the
PNO over the years, and it also broadens these interpretations to
exempt additional classes of acquisitions that are unlikely to violate
the antitrust laws.
Proposed 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 operated by the acquired person as a business
undertaking in a particular area or for particular products or
services. The sale of all or substantially all of the assets of a
business is generally equivalent to the sale of a business enterprise.
Although it is possible that the effects of selling capacity might be
to enhance competition, it can also diminish competition, and each
acquisition must be judged individually. The current and proposed rules
therefore require generally that acquisitions that transfer the
equivalent of a business remain subject to the prior notification
obligations of the act.
Proposed 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 such transactions is typically unnecessary because 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.
[[Page 38932]]
Proposed 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 are made in the ordinary
course to increase or upgrade capacity and to improve efficiencies.
However, the ordinary course of business exemption generally will not
reach other acquisitions involving productive capacity. The Commission
invites comment regarding other types of transfers of productive
assets, especially those not involving operating units, that may
qualify for the ordinary course of business exemption.
Proposed Sec. 802.2 (concerning real property assets) and proposed
Sec. 802.3 (concerning carbon-based mineral reserves and rights) are
based, for the most part, 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 proposals provide exemptions for
certain acquisitions of assets that are usually abundant and are used
in markets that are 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, proposed Sec. 802.4 exempts acquisitions of voting
securities of issuers whose assets consist solely of the assets
exempted by proposed Secs. 802.2 and 802.3.
Proposed Sec. 802.5 exempts acquisitions by certain investors of
rental real property, the acquisition of which is not already exempted
by Sec. 802.2. Proposed Sec. 802.5 is based on the use to which those
buyers put the acquired assets. It would exempt institutional investors
(as defined in Sec. 802.64) and persons whose sole business is the
acquisition or management of investment rental property from the
requirements of the act when they are acquiring investment rental
property assets. The Commission believes that, so long as the assets
remain as investment rental property assets, the acquisition of these
assets is unlikely to violate the antitrust laws.
Proposed Secs. 802.1, 802.2, 802.3, 802.4 and 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)'' (with the concurrence of the
Assistant Attorney General) 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].''
However, the Commission reserves the right to investigate certain
transactions exempted from the reporting requirements by the proposed
rules if these transactions are characterized by factors that increase
the likelihood that the consummation of the transactions may violate
the antitrust laws.
The Commission is aware that even with the significant coverage of
the proposed rules, the exempt status of many transactions will remain
unaddressed. These proposed rules do not interpret or apply to the
entire statutory exemption created by section 7A(c)(1); there remain
categories of transactions involving goods and realty that are not
expressly treated under the proposed rules. For example, certain
acquisitions of credit card receivables and certain acquisitions of
assets subject to a lease financing arrangement 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. Proposed Section 802.1: Acquisition of Goods 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.'' Proposed
Sec. 802.1 defines some acquisitions of assets that are in the ordinary
course of business and other acquisitions that are not. This proposed
section only covers transfers of goods. Transfers of realty are covered
in proposed Sec. 802.2.
Proposed 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 proposed 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.
Proposed Sec. 802.1 has four paragraphs: Paragraph (a) denies the
ordinary course of business exemption to any transfer of goods 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 the following: acquisitions by or from bona fide dealers and
resellers; transfers by an acquired person that has replaced the
productive capacity of the assets being sold; and transfers by an
acquired person that has outsourced an auxiliary function that was
provided by the goods being sold.
In determining whether a given acquisition of goods is in the
ordinary course of business and is therefore exempt under a provision
of Sec. 802.1, one should first determine if the goods constitute an
operating unit. If the goods being sold make up an operating unit of
the seller, the inquiry ends there, and the transaction is not exempt.
If the goods do not constitute an operating unit, then they should be
classified as either new goods, current supplies or used durable goods,
and the appropriate provisions under Sec. 802.1 should be applied.
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 and sell 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 businesses have
greater potential to concentrate productive capacity and thereby may
diminish competition.
A. Operating Units. Proposed Sec. 802.1(a) excludes the acquisition
of all or substantially all of the assets of an ``operating unit'' from
the ordinary course of business exemption. An ``operating unit'' can be
thought of as a collection of assets that has been operated as a
business undertaking. The assets of an operating unit can include
realty, current supplies and durable goods. Common examples of
operating units include, but are not limited to,
[[Page 38933]]
regional divisions or company branches, international operations, a
financial group, transportation operations, a factory or an oil
processing facility. Factors important in determining whether a group
of asset constitutes an operating unit include the extent to which the
assets being sold are devoted to producing a certain product, or the
extent to which such assets serve one or more specific geographic
markets.
The proposal 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 some 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 ``Tri-State Division.'' Such
usage is designed to serve the needs of the business. The term
``operating unit'' has been proposed in order to make clear that the
application of the rule is not dependent on the terminology used by a
business.
The term ``operating unit'' is defined in the rule as ``assets that
are operated by the acquired person as a business undertaking in a
particular geographic area or for particular products and services,
even though those assets may not be organized as a separate legal
entity.'' Example 1 to Sec. 802.1 illustrates a combination of assets
that is considered to be an operating unit, the acquisition of which
would be excluded from the ordinary course of business exemption. As
further guidance in determining when a collection of assets constitutes
an operating unit, the following factors are relevant: (1) Whether the
seller is terminating a business function as a result of the sale, such
as ceasing to sell in a geographic region or manufacture products for a
particular business segment; (2) whether the industry perceives the
assets as a separate unit; and (3) whether the sale of assets includes
durable goods and the current supplies that are used in the operation
of those durable goods.
The sale of an operating unit is one kind of transfer that the
premerger notification program was intended to review and thus is not
exempt under the ordinary course of business exemption. During review,
the antitrust agencies consider whether, and to what extent,
concentration of productive capacity may be increased by the sale of a
business and whether competition will be adversely affected by the
acquisition of a business.
B. New Goods. Proposed 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 that were produced by the seller for
the purpose of sale or that were held by the seller solely for the
purpose of resale.
Paragraph (b) of proposed Sec. 802.1 focuses on the purpose for
which the seller holds the new goods to determine if the transaction is
in the ordinary course of business and is therefore exempt. The sales
of new goods which the paragraph exempts are routine sales of inventory
by manufacturers, wholesalers or retailers conducted in the ordinary
course of business. As a general matter, there is no difficulty
identifying the goods in the two circumstances in which this exemption
applies. Goods that are ``produced'' mean goods not used by the seller
to which he has added value through processing or manufacture and may
include refurbished goods. ``New goods held at all times by the
acquired person solely for resale'' means inventory held for sale that
is not to be used by the seller or others prior to sale. When the
seller uses goods that are held for sale, the exemption does not apply.
The paragraph is specifically worded to deny this exemption to any sale
of goods that were purchased for use, even if the goods are
subsequently sold without being used.
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, which owned only an
extensive inventory of hundreds of items from different manufacturers,
sells its entire inventory to one person, 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. Proposed Sec. 802.1(c) described another
category of asset acquisitions--the acquisition of ``current
supplies''--that qualify 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 for resale, raw
materials, components, maintenance supplies and the like. Current
supplies are purchased frequently and are either consumed in the daily
conduct of business or incorporated into a final product. The proposal
states that current supplies do not include used durable goods, which
are discussed in proposed Sec. 802.1(d).
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. Parties are permitted
to claim the exemption even if the goods purchased are not new (so long
as they are not used durable goods), so long as the acquired goods are
to be held for resale, are to be consumed by the buyer, or are
otherwise incorporated in the acquiring person's final product.
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. Proposed Sec. 802.1(d) provides that certain
acquisitions of used durable goods qualify for the ordinary course of
business exemption. 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 not all used durable
goods acquisitions have 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. Therefore, 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: When goods are being acquired
by or from persons holding the goods solely for resale; when the
acquired person is replacing or upgrading the productive capacity
provided by the goods being sold; and when the acquired person is
outsourcing the auxiliary support functions performed by the goods
being sold. Sales of used durable goods that diminish a company's
productive capacity or sales of productive assets that result in a
company's exit from a given product or geographic market are not
included in the ordinary course of business exemption.
Proposed Sec. 802.1(d) defines an acquisition of used durable goods
as a transaction that is in the ordinary course of business if it meets
specific criteria. The term ``used durable good'' is new to the rules
currently in force. It is defined in proposed Sec. 802.1(d) as a used
good
[[Page 38934]]
which was ``designed to be used repeatedly and has a useful life
greater than one year.''
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 a
transfer of an operating unit, defined in paragraph (a) as ``assets
that are operated by the acquired person as a business undertaking in a
particular geographic area or for particular products or services.''
This restriction prevents a company from using Sec. 802.1(d) to
transfer assets that result in the company's exit from a particular
product line or regional market without first observing the reporting
requirements.
The second requirement for exempting an acquisition of a used
durable good is that any one of four criteria set forth in the proposed
rule must be satisfied. The first criterion, that the acquiring person
must hold the goods at all times solely for resale, and the second,
that the acquired person must have held the goods at all times solely
for resale, represent an exemption for dealers whose business is to
purchase and sell used goods. The proposed exemption is unavailable if
the person making the acquisition is in reality an intermediary for
either the seller or another person who intends to use the goods (see
Example 5 to Sec. 802.1). This limitation attempts to forestall abuse
of the dealer exemption by requiring notification in circumstances
where there is any possibility that the dealer might be acting as a
broker or an agent for an acquiring person or a third party. After
considerable assessment of the necessity and applicability of this
exemption, the Commission believes that the exemption should be
included to allow dealers to make transfers within the ordinary course
of their business 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
to circumvent the notification requirements of the act.
The third criterion 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 the productive capacity of these
goods is replaced substantially or upgraded. Such replacements may
result in an increase in the acquired person's productive capacity or
manufacturing efficiencies. The proposed rule allows replacement of the
used durable goods by acquisition or by lease. No minimum lease term is
specified, however, in order for a transfer 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 current productive capacity. Such a period is
industry specific and must be determined in good faith by the acquired
person. Because this proposed provision requires that the productive
capacity must be replaced substantially, the exemption is lost if the
replacement goods result in more than a de minimis decease in the
acquired person's capacity or an exit from a line of business or
specific product or geographic market in which the acquired person
currently operates.
The fourth criterion permits an exemption for sales of used durable
goods if the acquired person is replacing an auxiliary support function
that had been performed internally using the goods being sold by
contracting with the purchaser or a third party to perform
substantially similar functions. This provision essentially provides an
exemption for the transfer of goods by persons that have elected to
outsource certain of their auxiliary support functions. For example, a
company may decide that it would be more cost effective to have a third
party provide its data processing needs. To accomplish this objective,
the company 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
concerns.
Auxiliary support functions include management, accounting, data
processing, legal services, research and development, testing and
warehousing. Although companies will sometimes outsource the
manufacturing of some products they market, the sale of used durable
goods that were used to produce 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 an auxiliary function.
The exemption for the transfer of goods in connection with the
outsourcing of auxiliary functions may include the sale of goods, such
as machinery, that may constitute a discrete business unit. However,
such a transfer does not constitute the acquisition of an operating
unit unless the goods being sold are also used to derive revenues by
providing services to entities not included within the acquired person.
A company division that only provides auxiliary support services to the
company's operating units is not itself an operating unit. A company
unit that provides auxiliary services supports or benefits the
company's operating units. For example, in a company containing a unit
that only provides the company's internal data processing needs, that
unit would be deemed to provide auxiliary support functions. However,
if that unit derived revenues from providing data processing services
to third parties, then the unit would be considered to be an operating
unit. The distinction between an operating unit and a unit providing
auxiliary support functions is, to some extent, industry specific.
The replacement and outsourcing exemptions both require that before
the exemptions apply, the acquired person has already taken definitive
steps to replace the goods being sold or obtain the auxiliary support
functions that the goods being sold formerly provided. 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.
II. Proposed Section 802.2: Certain Acquisitions of Real Property
Assets
Proposed Sec. 802.2 identifies six categories of real property
acquisitions that would be exempt from the reporting requirements of
the act. It would exempt certain acquisitions of new facilities,
unproductive real property, office and residential property, hotels and
motels, agricultural property, and rental retail space and warehouses.
Some of these proposed provisions would create entirely new
exemptions, and they result in part from an extensive review by the
enforcement agencies of categories of real property acquisitions that
appear ``not likely to violate the antitrust laws.'' Certain of the
categories expand the exemption provided in current section 7A(c)(1)
for acquisitions of realty in the ordinary course of business. 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.
The exemptions for new facilities, unproductive real property,
office and residential property, hotels and motels,
[[Page 38935]]
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.
A. New Facilities. Proposed 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 reflects the position of the PNO
that transfers of ``turnkey'' facilities, i.e., new facilities capable
of commencing operations immediately, are acquisitions of realty in the
ordinary course of business and thus are exempt under 7A(c)(1).
Although the provision is intended primarily to exempt turnkey
facilities, 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.
The exemption applies only to new facilities 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 holders of the new facilities to be either builders 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.
Proposed 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 exceed $15 million, and no other
exemptions apply, then the purchase of these assets are subject to the
notification requirements.
B. Unproductive property. Proposed Sec. 802.2(b) exempts certain
acquisitions of unproductive real property. The primary purpose of this
exemption is to eliminate filing requirements for acquisitions of
properties that have not generated a significant amount of income
during a certain period of time. The exemption incorporates the
concepts of undeveloped, non-income producing property, the acquisition
of which is in the ordinary course of business, and abandoned property,
which is no longer used to generate revenues.
Unproductive real property is real property that has not produced
revenues of $5 million during the 36 months preceding the transaction
and includes raw land, structures or other improvements and natural
resources. Structures and improvements are additions to the real
property that add value and include, for example, buildings, parking
lots, recreational facilities (e.g., golf courses), orchards and
vineyards. Natural resources refers to any assets growing or appearing
naturally on the land, such as timber and mineral deposits. Proposed
Sec. 802.2(b) excludes from the exemption acquisitions of manufacturing
and non-manufacturing facilities that have not yet begun operations
(turnkey facilities)--these are addressed in Sec. 802.2(a)--as well as
facilities that began operations within twelve months before the
acquisition. Production machinery and equipment are not included in the
definition of structures and improvements.
The revenue test will exempt most wilderness and rural land that is
not used commercially and urban land that is vacant or contains
structures that have generated a minimal amount of income during the
most recent three-year period.
C. Office and residential property. Proposed Sec. 802.2(c) exempts
acquisitions of office and residential property. The definition of
office or residential property has two components: (1) Real property,
the acquisition of which is not exempt under any other provision of the
act; and (2) real property used primarily for office or residential
purposes. Although the proposed rule does not specify the meaning of
``primarily,'' it is contemplated that at least 75 percent of the space
in the qualifying property, excluding common areas and parking
facilities, is used for office or residential purposes. Under this
definition, the total space being measured should consist of non-exempt
property. Therefore, in determining whether a building is being used
primarily for office or residential purposes, any portion of the
building consisting of rental retail space, the acquisition of which is
exempt under Sec. 802.2(f), should be excluded from the determination.
This proposal represents a broader exemption than the current PNO
policy, which exempts office and residential property only if the value
of the retail space being acquired in the same Standards Metropolitan
Statistical Area does not exceed $15 million.
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. The proposed rule
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
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 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 proposed Sec. 802.2(c) of office and
residential property and are exempt assets.
D. Hotels and motels. Proposed Sec. 802.2(d) exempts from the
reporting requirements acquisitions of hotels and motels, except when
these assets are to be acquired in connection with the acquisition of a
ski resort or a casino or other gaming facility. The proposed exemption
is based on the Commission's observation that acquisitions of hotels
and motels, except for those excluded from the exemption, are unlikely
to violate the antitrust laws. 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 market entry appears to be relatively easy.
This exemption would include the acquisition by a national hotel
chain of hotel assets of another hotel chain. However, 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 the notification requirements.
E. Agricultural property. This section exempts acquisitions of
agricultural property and associated assets integral to the
agricultural business activities conducted on the property.
Agricultural property that is intended to be covered by this exemption
is real property that generally derives revenues under Major Groups 01
and 02 of the 1987 Standard Industrial Classification (SIC) Manual.
Associated assets integral to the agricultural business activities
[[Page 38936]]
conducted on the property to be acquired include equipment, structures,
(e.g., barns used to house livestock and other animals), fertilizer,
animal feed inventory (e.g., livestock, poultry, crops, fruits,
vegetables, milk, and eggs),
As described in the proposed rule, the exemption for the
acquisition of agricultural property does not include processing
facilities, even though revenues from processing facilities located on
a farm may be reported under SIC codes starting with 01 or 02. If a
dairy 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 enforcement agencies can determine whether the proposed
acquisition will affect competition adversely.
This exemption reflects the Commission's continuing efforts to
develop exemptions for categories or acquisitions that are not likely
to violate the antitrust laws. In the case of agricultural property
exempted by Sec. 802.2, there is an abundance of real property assets
with widely dispersed ownership. Such acquisitions are unlikely to have
adverse effects on competition.
F. Rental retail space; warehouse. Proposed Sec. 802.2(f) exempts
acquisitions of two other categories of real property, rental retail
space and warehouses. Rental retail space includes structures that
house retail establishments, such as shopping centers, strip smalls,
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 proposed rule provides that if the 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 any purchaser
(including a department store chain) proposed to acquire from any
seller (including another department store chain) several shopping
centers and the stores of the seller located in the shopping centers,
the acquisition of the stores including the portion of the shopping
centers in which the stores were located, would be separately subject
to the notification requirements. However, the acquisition of the
portion of the shopping centers that housed other retail establishments
would be exempt under this proposed rule. Example 8 illustrates that
the exemption for the acquisition of warehouses is lost if warehouses
are being acquired in connection with the acquisition of a wholesale
distribution business.
The proposed 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.
III. Proposed Section 802.3: Acquisition of Carbon-Based Mineral
Reserves
Proposed Sec. 802.3 adds an exemption for certain acquisitions of
carbon-based mineral reserves, whether such reserves are currently in
production or have ever been in production. The Commission proposes to
exempt acquisitions of carbon-based mineral reserves valued at $200
million or less.
This proposal is designed to exempt acquisitions of producing
reserves. If the reserves being acquired are not yet producing, or are
producing at a level below the income threshold in Sec. 802.2(b), the
acquisition may be exempted by Sec. 802.2(b) as an acquisition of
unproductive real property. If the reserves qualify as unproductive
property, their acquisition is exempt, regardless of the value of the
reserves. Producing reserves are governed by the valuation requirement
of Sec. 802.3 and are not exempt if their value exceeds $200 million.
The Commission's studies of the coal and oil and gas industries
have shown that the value 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 in these industries is inappropriate, because the scale of the
largest acquisitions of reserves warrants an examination of the
potential effects on competition.
The $200 million threshold in proposed Sec. 802.3 applies 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 the
current proposal to include equipment, machinery, fixtures and other
assets that are integral to the exploration or production activities of
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. Excluded from these assets are flow and
gathering pipelines, distribution pipelines, interests in pipelines,
processing facilities and refineries. Acquisitions of these assets in
certain local markets have, from time to time, raised competitive
concerns prompting investigations by the enforcement agencies, and the
Commission does not believe that such acquisitions as a class are not
likely to violate the antitrust laws.
In the coal industry, associated production assets are facilities
and equipment that are dedicated exclusively to production of the
reserves being transferred. For example, in surface mining in the
western U.S., such assets may consist of various load out facilities,
including storage barns and railroad spurs, and heavy equipment such as
draglines. Associated production assets would also include the long-
term coal contracts and federal leases related to the reserves.
It has been suggested that any exemption for carbon-based mineral
reserves be expanded to included all mineral reserves and renewable
natural resources. The perceived need for such an exemption regarding
non-producing reserves may be lessened by the inclusion in these
proposals of Sec. 802.2(b), which would exempt acquisitions of other
such reserves that are either not yet producing or have generated
revenues below the threshold amount. Regarding producing reserves, the
Commission has not included these in Sec. 802.3 because it does not
have an adequate factual basis for determining that these categories of
transactions should be exempt from the requirements of the act or
subject to a threshold higher than the $15 million threshold that is
identified in Sec. 802.20.
[[Page 38937]]
IV. Proposed Section 802.4: Acquisitions of Voting Securities of
Issuers Holding Only Real Property and Carbon-Based Mineral Reserves
Proposed Sec. 802.4 is designed to exempt the acquisition of voting
securities of certain real estate companies that hold real property
assets the direct acquisition of which are exempt from the reporting
requirements pursuant to proposed Secs. 802.2 and 802.3. This provision
derives in part from existing Sec. 802.1(a) which exempts ``an
acquisition of the voting securities of an entity whose assets consist
solely of real property'' and related assets, if a direct acquisition
of those real property and related assets would be exempt.
As the Commission stated when it promulgated existing
Sec. 802.1: (T)he applicability of (existing 802.1(a)) should not
depend upon the form of the acquisition. At least from an antitrust
standpoint, whether real estate is acquired directly or by acquiring
voting securities would seem to make no difference * * *. 43 FR
33488, July 31, 1978.
Proposed Sec. 802.4(a) retains this approach with regard to new
facilities, unproductive real property, office and residential
property, hotels and motels, agricultural property, rental retail space
and warehouses. Proposed Sec. 802.4(b) contains a comparable exemption
for carbon-based mineral reserves.
V. Proposed Section 802.5: Acquisitions of Investment Rental Property
Assets by Certain Investors
Proposed Sec. 802.5 would exempt acquisitions of investment rental
property by institutional investors (as defined by Sec. 802.64 of the
rules) and by persons whose sole business is the acquisition or
management of investment rental property. This exemption is based in
part on section 7A(c)(11) of the act which exempts ``acquisitions,
solely for the purpose of investment, by a bank, bank association,
trust company, investment company, or insurance company, of * * * (B)
assets in the ordinary course of its business.'' It is designed to
exempt most types of real property acquisitions typically made by
institutional investors or real estate development and management
companies that are not exempted by proposed Sec. 802.2. The proposed
rule supplements proposed Sec. 802.2 by recognizing that there may be
additional categories of assets that, when transferred to certain
parties, are not likely to violate the antitrust laws.
Institutional investors, such as financial institutions, insurance
companies, pensions plans and REITs, typically acquire for investment
real property such as hotels and shopping centers. Acquisitions of
these types of assets are exempt under Sec. 802.2(d) and
Sec. 802.2(f)(1), respectively. Proposed Sec. 802.5 is intended to
exempt acquisitions of other types of real estate, such as industrial
parks, that institutional investors and real estate development and
management companies often purchase.
This exemption is applicable only to institutional investors or
persons engaged solely in the business of acquiring or managing
investment rental property. It applies only to acquisitions of real
property that will be held by the purchaser solely for rental or
investment purposes. Thus, the intent of the purchaser at the time of
the acquisition must be considered to determine whether the exemption
is available.
Acquisitions of real property by institutional investors and real
estate development and management companies are typically made solely
for investment. These investors play no active role in the business
conducted on these properties and seek only to profit from their
investment in the real estate. 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. In many cases, these properties are purchased from persons who
already maintain them as investment rental property. Given the size and
unconcentrated nature of the real estate market, such acquisitions are
not likely to violate the antitrust laws.
The requirement that real property, in order to come within the
definition of ``investment rental property assets,'' be held solely for
rental or investment purposes is designed to exclude from the exemption
acquisitions of rental property that may reduce competition. In one
such scenario, the acquiring person purchases property that is leased
to a competitor of an entity within the same person as the
institutional investor, and then chooses not to renew the competitor's
lease in order to disadvantage the competitor. Since the purchaser
intends to use its ownership of the property to disadvantage a
competitor, the property will not be held solely for rental or
investment purposes, and the Sec. 802.5 exemption is not available. The
requirement that property will be rented only to entities not included
within the acquired person is also designed to assure that the
exemption will not be available for any acquisition that is designed to
achieve business objectives that are not related to the real estate
market.
For some acquisitions, in order to determine prior to the
acquisition whether the buyer's use requirement will be fulfilled post-
acquisition, 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) the property will be
transferred to an entity within the acquiring person which would not
qualify for an exemption under Sec. 802.5; (4) prior to the
acquisition, the property is being leased to or used by entities
included within the acquiring person; (5) a portion of the acquired
property is being leased at the time of the acquisition to a competitor
of the acquiring person; and (6) the purchase price reflects the value
of a business operated on the property rather than the investment
rental value of the property.
The investment rental property exemption may apply to real
property, such as office or residential property, hotels and motels,
that is also exempt under proposed Sec. 802.2. However, the important
distinction between Sec. 802.2 and Sec. 802.5 is that Sec. 802.2
exempts acquisitions of specific classes of assets by any acquiring
person and does not incorporate the intent-based test of Sec. 802.5.
Proposed Sec. 802.5 exempts any type of asset that can be classified as
investment rental property, but it is available only to institutional
investors and real estate development and management companies. 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; proposed Sec. 802.5 permits the acquiring person to use
the acquired investment rental property assets only to manage or
operate real property.
VI. Aggregation Rules
Section 801.15 states that the aggregation rules of Sec. 801.13 do
not apply to specified classes of transactions. At present,
transactions exempted by section 7A(c)(1) of the act fall within one of
the classes listed. As a result of Sec. 801.15(a), in determining
[[Page 38938]]
whether the more than $15 million size-of-transaction criterion of
section 7A(a)(3) is met, the value of assets acquired in the ordinary
course of business is never counted. Because proposed Sec. 802.1 merely
declares that certain acquisitions are and are not considered in the
ordinary course of business under section 7A(c)(1), it does not appear
necessary to list proposed Sec. 802.1 separately in Sec. 801.15(a).
However, to eliminate possible confusion, proposed Sec. 802.1 is listed
in proposed Sec. 801.15(a), along with 7A(c)(1), to make clear that
assets exempted pursuant to Sec. 802.1(a), (b) and (c)(1) are not
deemed to be held as the result of an acquisition for aggregation
purposes. Therefore, a acquisition of current supplies valued at $8
million is not aggregated with later acquisitions from the same person
to determine if a proposed acquisition would 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(b).
The other proposed exemptions based on section 7A(c)(1) and other
sections of the act, e.g., section 7A(d)(2)(B), are listed separately
in Sec. 801.15 to make clear whether and under what circumstances the
assets they describe must be aggregated pursuant to Sec. 801.13.
Proposed Sec. 802.2, which would exempt acquisitions of new facilities,
unproductive real property, office and residential property, hotels and
motels, agricultural property, rental retail space and warehouses, is
also listed in Sec. 801.15(a), because Sec. 802.2 sets no dollar limit
on the amount of exempt assets that may be acquired without prior
notification. Proposed Sec. 802.4(a), which exempts acquisitions of
voting securities of issuers holding assets whose purchase would be
exempt under Sec. 802.2, and proposed Sec. 802.5, which exempts
acquisitions of investment rental property by certain investors, also
appear in proposed Sec. 801.15(a).
Proposed Sec. 802.3, which exempts acquisitions of carbon-based
mineral reserves, and proposed Sec. 802.4(b), which exempts
acquisitions of voting securities of issuers holding exempt assets
under Sec. 802.3, 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 $200 million carbon-based
mineral reserves limitation in Sec. 802.3 which was not reached in an
earlier acquisition may be exceeded by a subsequent acquisition of
reserves.
Example 4 of 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, proposed 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.
List of Subjects in 16 CFR Parts 801 and 802
Antitrust.
Proposals
The Commission proposes to amend title 16, chapter I, subpart H,
the Code of Federal Regulations as follows:
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, 802.4(a), 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(b), 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 Example 5 is 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 in 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 of all three plants before acquiring the third plant.
5. ``A'' acquires $100 million in coal rights 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 require aggregating the previously exempt acquisition of
coal rights with the second acquisition. If the two acquisitions,
when aggregated, exceed the $200 million limitation on the exemption
for carbon-based mineral reserves in Sec. 802.3, ``A'' and ``B''
would 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 $200 million, both acquisitions are exempt
from the notification requirements.
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 in the ordinary course of business.
Acquisitions of goods in the ordinary course of business are,
pursuant to section 7A(c)(1), 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 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. An operating unit means assets that are operated by
the acquired person as a business undertaking in a particular
[[Page 38939]]
geographic area 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 produced by the acquired
person for sale, or of new goods held by the acquired person solely for
resale, is in the ordinary course of business, except when 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 assets:
(1) Goods acquired for the purpose of resale (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).
The term ``current supplies'' does not include used durable goods
(see paragraph (d) of this section.
(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 by the acquiring person solely
for resale; or
(2) The goods are acquired from an acquired person who acquired and
has held the goods solely for resale; or
(3) The productive capacity of the goods being sold has been
replaced substantially by the acquired person, by acquisition or lease,
or the acquired person has in good faith executed a contract, agreement
in principle or letter of intent to replace substantially, by
acquisition or lease, the productive capacity of the goods being sold;
or
(4) The goods have been used by the acquired person to provide
auxiliary functions, such as management services, accounting, data
processing, and legal services, that support its primary business
functions, and the acquired person has in good faith executed a
contract, agreement in principle or letter of intent to obtain
substantially similar auxiliary functions as were provided by the goods
being sold.
Examples: 1. Stereo Corporation, which manufacturers cassette
and compact disc players, decides to sell all of the assets of its
Customer Service Division to ``X'' for $16 million. This division
repairs the company's products and products manufactured by others.
The division's assets include a repair facility valued at $10
million and an inventory of replacement parts valued at $6 million.
The combined assets constitute an operating unit of Stereo
Corporation. Thus, no part of the acquisition is exempt as an
acquisition in the ordinary course of business.
2. ``A,'' a manufacturer of airplane engines, agrees to pay $20
million to ``B,'' a manufacturer of airplane parts, for certain
engine components to be used in the manufacture of the 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 as an acquisition of reserves of
carbon-based minerals 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 as an acquisition of agricultural property.
5. ``A,'' a major passenger airline, proposes to sell two of its
used aircraft for $15.5 million to ``B,'' a used airplane dealer who
purchases planes from the major U.S. airline companies. ``B's''
acquisition of the used airplanes is exempt under Sec. 802.1(d)(1)
provided that ``B'' is not acting as a broker or as the agent for
the seller or the ultimate purchaser of the used airplanes.
6. ``A,'' a passenger airline, plans to sell for $18 million two
of its used airplanes to ``B,'' a cargo airline. ``A'' will also
sell three of its used airplanes for $25 million to ``C,'' a
regional passenger air carrier. ``A'' has, in good faith, executed a
contract to acquire planes with essentially the same capacity from
an airplane manufacturer to replace the planes it is selling to
``B'' and ``C.'' Since ``B'' and ``C'' are acquiring goods that the
seller, ``A,'' has contracted to replace, both acquisitions are
exempt under Sec. 802.1(d)(3).
7. ``A,'' a manufacturing company, has acquired several new
machines that will replace equipment on one of its production lines.
``A's'' capacity to produce the same products will increase modestly
when the integration of the new equipment is 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'' is replacing. Since ``A'' is
replacing with new machinery the productive capacity of the used
equipment it is selling, the acquisition by ``B'' is exempt under
Sec. 802.1(d)(3).
8. ``A'' will sell to ``B'' for $16 million all of the equipment
``A'' uses to perform ``A's'' data processing requirements. ``A''
and ``B'' also entered into a contract which requires ``B'' to
perform ``A's'' data processing requirements. Although the assets
``B'' will acquire make up essentially all of the assets of one of
``A's'' auxiliary support services divisions, the acquisition
qualifies for the exemption in Sec. 802.1(d)(4) because auxiliary
support functions, however organized, are not an operating unit as
defined by Sec. 802.1(a). Auxiliary functions are not a ``business
undertaking'' as that term is used in Sec. 802.1(a). Rather,
auxiliary functions provide support and benefit to the company's
operating units and support the company's primary business
activities. However, if the assets being sold also derived revenues
from providing data processing services to third parties, then the
transfer of these assets would not be exempt under Sec. 802.1(d)(4),
since the equipment is being used in connection with a business
undertaking of ``A,'' in addition to providing auxiliary functions
to ``A''.
In this example, the acquisition by ``B'' is exempt under
Sec. 802.1(d)(4) because ``A'' has entered into a contract for the
provision of the auxiliary functions provided by the goods being
sold. The exemption would apply even if ``A'' were contracting for
the provision of these services with a party other than ``B.''
9. ``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)(4). ``A's'' sale of production lines is
not the transfer of goods that provide auxiliary functions to
support the primary business activities of ``A''; this manufacturing
equipment is an integral part of ``A's'' production operations and
thus comprises an operating unit.
3. Part 802 is amended by adding Secs. 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 is exempt as a
transfer of realty in the ordinary course of business. A new facility
is a structure that has not produced income and was
[[Page 38940]]
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 associated with the operation 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) 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) Unproductive real property is any real property, including raw
land, structures or other improvements and natural resources, 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 manufacturing and
non-manufacturing facilities that have not yet begun operation or
manufacturing or non-manufacturing facilities that began operation
within the twelve (12) months preceding the acquisition.
(c) 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, the
acquisition of which is not exempt under another provision of the act,
that is used primarily for office and residential purposes and
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.
(d) Hotels and motels. (1) An acquisition of a hotel or motel 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 shall be subject to the requirements of the act and
these rules as if they were being acquired in a separate acquisition.
(2) An acquisition of a hotel or motel that includes a casino, or a
hotel or motel that is being acquired as part of the acquisition of a
ski resort, shall be subject to the requirements of the act and these
rules.
(e) Agricultural property. An acquisition of agricultural property
and associated agricultural assets shall be exempt from 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.
(1) Associated agricultural assets are assets integral to the
agricultural business activities conducted on the property. Associate
agricultural assets include, but are not limited to, inventory (e.g.,
livestock, poultry, crops, fruit, vegetables, milk, eggs); equipment
dedicated to the income-generating activities conducted on the real
property; structures that house livestock and other animals raised on
the real property; and fertilizer and animal feed. Associated
agricultural assets do not include processing facilities, such as
poultry slaughtering and processing facilities.
(2) If an acquisition of agricultural property includes processing
facilities and other assets that are not associated agricultural
assets, these facilities and assets are subject to the requirements of
the act and these rules as if they were being acquired in a separate
acquisition.
(f) Retail rental space; warehouses. An acquisition of retail
rental space (including shopping centers) 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 of 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 to ``B,'' another automobile
manufacturer. This acquisition is not exempt as an acquisition of an
new facility, even though the facility has not produced any income,
since ``A'' did not construct the facility for sale. Also, the
acquisition is not exempt as an acquisition of unproductive property
since manufacturing facilities that have not yet begun operations
are explicitly excluded from that exemption.
2. ``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. ``A's''
acquisition of the wilderness land from ``B'' is exempt as an
acquisition of unproductive real property because the property did
not generate annual 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.
3. ``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 other assets other
than the unproductive property is not exempt and is separately
subject to the notification requirements of the act.
4. ``A'' proposes to purchase two downtown lots, Parcels 1 and
2, from ``B'' for $40 million. Parcel 1 contains no structures or
improvements. A hotel is located on Parcel 2 and has generated $9
million in revenues during the past 3 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(d) as the acquisition of a hotel.
5. ``A'' intends to purchase a poultry farm from ``B.'' The
acquisition of the poultry farm is a transfer of agricultural
property that is exempt pursuant to Sec. 802.2(e). If, however,
``B'' has a poultry slaughtering and processing facility on his
farm, ``A'' would be required to file notification for the
acquisition of the processing facility if the higher of the
acquisition price or the fair market value of the facility exceeds
$15 million.
6. ``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
[[Page 38941]]
wholesale distribution business, the acquisition of the warehouses in
not exempt.
Sec. 802.3 Acquisitions of carbon-based mineral reserves.
(a) An acquisition of carbon-based mineral reserves (oil, natural
gas, coal, shale or tar sands) or rights to carbon-based mineral
reserves, whether such reserves are presently in production or have
ever been in production, and associated exploration or production
assets shall be exempt from the requirements of the act if the value of
the carbon-based mineral 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 carbon-based mineral reserves, rights to carbon-based mineral
reserves 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) Associated exploration or production assets means equipment,
machinery, fixtures and other assets that are integral 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 any pipeline system or processing
facility.
Example: 1. ``A'' proposes to purchase from ``B'' for $250
million gas reserves that are not yet in production and have not
generated any income. ``A'' will also acquire from ``B'' for $180
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(b). The acquisition of the oil reserves and associated
assets is exempt pursuant to Sec. 802.3, since the acquisition price
does not exceed the $200 million limitation.
2. ``A,'' an oil company, proposes to acquire oil reserves
currently in production, several associated processing facilities
and a gathering pipeline system for $180 million. The acquisition of
the reserves is exempt. However, ``A'' must determine the value of
the processing facilities and the gathering pipeline system, since
these assets are excluded from the exemption in Sec. 802.3 for
transfers of associated exploration or production assets. If their
value exceeds $15 million, and their acquisition is not otherwise
exempt, ``A'' must file with respect to the transfer of the
facilities and the pipeline system.
3. ``A,'' an oil company, proposes to acquire a coal mine and
associated production assets for $90 million from ``B,'' an oil
company. ``A'' will also purchase from ``B'' 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 the refinery is excluded 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.
Sec. 802.4 Acquisitions of voting securities of issuers holding
certain real property assets.
(a) An acquisition of voting securities of an issuer whose assets
consist solely of assets whose purchase would be exempt from the
requirements of the act pursuant to Sec. 802.2 is exempt from the
reporting requirements.
(b) An acquisition of voting securities of an issuer whose assets
consist or will consist solely of assets whose purchase would be exempt
from the requirements of the act pursuant to Sec. 802.3 is exempt from
the reporting requirements.
Example 1. ``A,'' a real estate investment company, proposes to
purchase 100 percent of the voting securities of Company 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 hotel qualifies as a new
facility under Sec. 802.2(a), and is also exempt under
Sec. 802.2(d). Therefore, the acquisition of the voting securities
of C is exempt pursuant to Sec. 802.4(a).
Sec. 802.5 Acquisitions of investment rental property assets by
certain investors.
(a) Acquisitions of investment rental property assets, or of voting
securities of an entity the assets of which consist solely of
investment rental property assets, by an institutional investor (as
defined by Sec. 802.64) or by any person whose sole business is the
acquisition or management 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:
(1) Will be rented only to entities not included within the
acquiring person; and
(2) Will be held solely for rental or investment purposes.
Investment rental property assets include:
(i) Property currently rented,
(ii) Property held for rent but not currently rented,
(iii) Common areas on the property,
(iv) Assets incidental to the ownership of property, which may
include cash, prepaid taxes or insurance, rental receivables and the
like, and
(v) Space occupied by the acquiring person for the sole purpose of
maintaining, managing, or supervising the operation of real property.
Example: 1. Insurance Company ``A'' proposes to acquire a
hospital currently leased to and operated by ``B,'' a major for-
profit hospital corporation. ``A'' intends to continue ``B's'' lease
with the exception of one floor of the hospital, which ``A'' will
lease to an independent radiology clinic which the hospital will use
for its outpatient radiology needs. This acquisition is an exempt
acquisition of investment rental property assets since ``A'' intends
to rent the facility to the hospital and an independent clinic and,
thus, is holding the hospital solely for rental and investment
purposes.
By direction of the Commission.
Donald S. Clark,
Secretary.
[FR Doc. 95-18596 Filed 7-27-95; 8:45 am]
BILLING CODE 6750-01-M