[Federal Register Volume 85, Number 231 (Tuesday, December 1, 2020)]
[Proposed Rules]
[Pages 77042-77053]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21754]


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FEDERAL TRADE COMMISSION

16 CFR Parts 801, 802 and 803

RIN 3084-AB46


Premerger Notification; Reporting and Waiting Period Requirements

AGENCY: Federal Trade Commission.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Federal Trade Commission (``FTC'' or ``Commission'') is 
issuing this advance notice of proposed rulemaking (``ANPRM'') to 
gather information, related to seven topics, that will help to 
determine the path for future amendments to the premerger notification 
rules (``the Rules'') under the Hart-Scott-Rodino Antitrust 
Improvements Act (``the Act'' or ``HSR'').

DATES: Comments must be received on or before February 1, 2021.

ADDRESSES: Interested parties may file a comment online or on paper, by 
following the instructions in the Invitation to Comment part of the 
SUPPLEMENTARY INFORMATION section below. Write ``16 CFR parts 801-803: 
Hart-Scott-Rodino Rules ANPRM, Project No. P110014'' on your comment. 
File your comment online at https://www.regulations.gov by following 
the instructions on the web-based form. If you prefer to file your 
comment on paper, mail your comment to the following address: Federal 
Trade Commission, Office of the Secretary, 600 Pennsylvania Avenue NW, 
Suite CC-5610, (Annex J), Washington, DC 20580, or deliver your comment 
to the following address: Federal Trade Commission, Office of the 
Secretary, Constitution Center, 400 7th Street SW, 5th Floor, Suite 
5610 (Annex J), Washington, DC 20024.

FOR FURTHER INFORMATION CONTACT: Robert Jones (202-326-3100), Assistant 
Director, Premerger Notification Office, Bureau of Competition, Federal 
Trade Commission, 400 7th Street SW, Room CC-5301, Washington, DC 
20024.

SUPPLEMENTARY INFORMATION:

Invitation to Comment

    You can file a comment online or on paper. For the Commission to 
consider your comment, we must receive it on or before February 1, 
2021. Write ``16 CFR parts 801-803: Hart-Scott-Rodino Rules ANPRM, 
Project No. P110014'' on your comment. Your comment--including your 
name and your state--will be placed on the public record of this 
proceeding, including, to the extent practicable, on the https://www.regulations.gov website.
    Because of the public health emergency in response to the COVID-19 
outbreak and the agency's heightened security screening, postal mail 
addressed to the Commission will be subject to delay. We strongly 
encourage you to submit your comment online through the https://www.regulations.gov website. To ensure the Commission considers your 
online comment, please follow the instructions on the web-based form.
    If you file your comment on paper, write ``16 CFR parts 801-803: 
Hart-Scott-Rodino Rules ANPRM, Project No. P110014'' on your comment 
and on the envelope, and mail your comment to the following address: 
Federal Trade Commission, Office of the Secretary, 600 Pennsylvania 
Avenue NW, Suite CC-5610, (Annex J), Washington, DC 20580, or deliver 
your comment to the following address: Federal Trade Commission, Office 
of the Secretary, Constitution Center, 400 7th Street SW, 5th Floor, 
Suite 5610 (Annex J), Washington, DC 20024. If possible, please submit 
your paper comment to the Commission by courier or overnight service.
    Because your comment will be placed on the publicly accessible 
website, https://www.regulations.gov, you are solely responsible for 
making sure your comment does not include any sensitive or confidential 
information. In particular, your comment should not include sensitive 
personal information, such as your or anyone else's Social Security 
number; date of birth; driver's license number or other state 
identification number, or foreign country equivalent; passport number; 
financial account number; or credit or debit card number. You are also 
solely responsible for making sure your comment does not include any 
sensitive health information, such as medical records or other 
individually identifiable health information. In addition, your comment 
should not include any ``trade secret or any commercial or financial 
information which . . . is privileged or confidential,''--as provided 
by Section 6(f) of the FTC Act, 15 U.S.C. 46(f), and FTC Rule 
4.10(a)(2), 16 CFR 4.10(a)(2)--including in particular competitively 
sensitive information such as costs, sales statistics, inventories, 
formulas, patterns, devices, manufacturing processes, or customer 
names.
    Comments containing material for which confidential treatment is 
requested must be filed in paper form, must be clearly labeled 
``Confidential,'' and must comply with FTC Rule 4.9(c). In particular, 
the written request for confidential treatment that accompanies

[[Page 77043]]

the comment must include the factual and legal basis for the request, 
and must identify the specific portions of the comment to be withheld 
from the public record. See FTC Rule 4.9(c). Your comment will be kept 
confidential only if the FTC General Counsel grants your request in 
accordance with the law and the public interest. Once your comment has 
been posted publicly at www.regulations.gov--as legally required by FTC 
Rule 4.9(b)--we cannot redact or remove your comment, unless you submit 
a confidentiality request that meets the requirements for such 
treatment under FTC Rule 4.9(c), and the General Counsel grants that 
request.
    Visit the FTC website to read this document and the news release 
describing it. The FTC Act and other laws that the Commission 
administers permit the collection of public comments to consider and 
use in this proceeding as appropriate. The Commission will consider all 
timely and responsive public comments it receives on or before February 
1, 2021. For information on the Commission's privacy policy, including 
routine uses permitted by the Privacy Act, see https://www.ftc.gov/site-information/privacy-policy.

Overview

    The Act and Rules require the parties to certain mergers and 
acquisitions to file notifications with the Commission and the 
Assistant Attorney General in charge of the Antitrust Division of the 
Department of Justice (``the Assistant Attorney General'') 
(collectively, ``the Agencies'') and to wait a specified period of time 
before consummating such transactions. The reporting and waiting period 
requirements are intended to enable the Agencies to determine whether 
proposed mergers or acquisitions may violate the antitrust laws if 
consummated and, when appropriate, to seek injunctions in federal court 
to prohibit anticompetitive transactions prior to consummation.
    Section 7A(d)(1) of the Clayton Act, 15 U.S.C. 18a(d)(1), directs 
the Commission, with the concurrence of the Assistant Attorney General, 
in accordance with the Administrative Procedure Act, 5 U.S.C. 553, to 
require that premerger 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. In addition, Section 7A(d)(2) 
of the Clayton 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 define the terms used in the Act, exempt 
classes of transactions that are not likely to violate the antitrust 
laws, and prescribe such other rules as may be necessary and 
appropriate to carry out the purposes of Section 7A.
    Since the enactment of the Act, the Commission has updated and 
refined the Rules many times. Indeed, the Agencies have a strong 
interest in making sure the Rules are as current and relevant as 
possible. Certain rules interpreting and implementing the Act, some of 
which have not been changed since they were first promulgated in 1978, 
may need additional updating. In this ANPRM, the Commission proposes to 
gather information on seven topics to help determine the path for 
potential future amendments to numerous provisions of Parts 801, 802, 
and 803 of the Rules under the Act.

Background

    Although it regularly reviews the Rules and revises them on a 
rolling basis, the Commission is issuing this ANPRM to solicit 
information to support review of the Rules on a more unified basis as 
part of its systematic review of all FTC rules and guides. The 
Commission is aware that market and business practices are constantly 
evolving, and that these changes make it especially important to 
evaluate whether the Rules are still serving their intended purpose or 
if they need to be amended, eliminated, or supplemented.
    To accomplish this, the Commission is publishing in this ANPRM a 
number of questions related to seven different topics about which 
questions frequently arise in discussions of the Rules: Size of 
Transaction, Real Estate Investment Trusts, Non-Corporate Entities, 
Acquisitions of Small Amounts of Voting Securities, Influence outside 
the Scope of Voting Securities, Devices for Avoidance, and Filing 
Issues. Answers to questions on these topics will provide information 
that may facilitate drafting of new or revised rules.
    The Commission welcomes comments on all of these topics, or on any 
sub-topic within them. The Commission, however, does not expect that 
every commenter will address all seven topics, or even every question 
relating to each topic. The Commission notes that comments it receives 
in response to this ANPRM may also inform the Notice of Proposed 
Rulemaking regarding the proposed change in the Sec.  801.1(a)(1) 
definition of ``person'' and proposed exemption Sec.  802.15 published 
in the Federal Register at the same time as this ANPRM.

I. Size of Transaction

    Section 7A(a)(2) of the Clayton Act mandates an HSR filing when a 
transaction meets the Size of Transaction (``SOT'') test, subject to 
other provisions of the Rules, including exemptions.\1\ To determine 
whether a transaction meets the SOT test, filing parties must look to 
Acquisition Price (``Acquisition Price'') under 16 CFR 801.10 or, in 
some cases, Fair Market Value (``FMV'') under 16 CFR 801.10(c)(3). As 
it is the filing parties' responsibility to conduct these calculations, 
the Commission would benefit from additional information on how filing 
parties engage in the calculation for both Acquisition Price and FMV.
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    \1\ Steps for Determining Whether an HSR Filing is Required, 
FTC.GOV, https://www.ftc.gov/enforcement/premerger-notification-program/hsr-resources/steps-determining-whether-hsr-filing (last 
visited July 07, 2020).
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A. Acquisition Price (16 CFR 801.10)

    Under 16 CFR 801.10(c)(2), the Acquisition Price ``shall include 
the value of all consideration for such voting securities, non-
corporate interests, or assets to be acquired.'' \2\ The FTC's 
Premerger Notification Office (``the PNO'') has long taken the position 
that, when a transaction has a determined Acquisition Price, debt may 
be excluded from the Acquisition Price in certain circumstances. For 
example, if a buyer pays off a target's debt as part of the 
transaction, the buyer may deduct the amount of the retired debt from 
the Acquisition Price. This position dates from the earliest days of 
interpreting the HSR Rules in the late 1970s and early 1980s and is 
based, in part, on the analysis of a target's balance sheet liabilities 
in the context of an acquisition of voting securities.
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    \2\ 16 CFR 801.10(c)(2).
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    The PNO has also allowed the deduction of certain expenses when 
calculating the Acquisition Price. For example, where the purchase 
price in the parties' transaction agreement includes funds earmarked to 
pay off the seller's transaction expenses, the PNO has permitted the 
parties to deduct that amount when calculating the Acquisition Price 
based on the view that such payments do not reflect consideration for 
the target.
    The Commission is aware that these informal PNO staff positions can 
have a significant impact on the calculation of the Acquisition Price 
and, in turn, on whether a transaction is reportable under the Act. 
Given the potential for these positions to affect the structure of a 
transaction, the Commission believes

[[Page 77044]]

these informal PNO staff positions may need revision. As a result, the 
Commission aims to understand the decision-making involved in the 
deduction of retired debt or other amounts or categories of expenses 
from the Acquisition Price through responses to the following 
questions:
    1. When negotiating a transaction, does a buyer ever offer to pay 
off or retire debt as part of the deal? Under what circumstances? How 
have these circumstances evolved since the late 1970s/early 1980s?
    a. Why might a buyer offer to pay off or retire debt as part of the 
deal now as opposed to in the late 1970s/early 1980s? Have the 
competitive implications of the deal ever been a factor in this 
decision?
    b. Why might a buyer decline to pay off or retire debt as part of 
the deal now as opposed to in the late 1970s/early 1980s? Have the 
competitive implications of the deal ever been a factor in this 
decision?
    c. Does a seller prefer a buyer that is willing to pay off or 
retire debt as part of the deal? Why or why not? Are seller preferences 
different now than in the late 1970s/early 1980s?
    d. In a multiple bid situation, is a buyer's willingness to pay off 
or retire debt as part of the deal ever a factor in the seller's 
selection of the winning bid? Was it a factor in the late 1970s/early 
1980s? And if it is evaluated differently today versus the 1970s/early 
1980s, why is it evaluated differently?
    e. Do sellers ever reject a buyer's offer to pay off or retire debt 
as part of the deal? Under what circumstances? How have these 
circumstances evolved since the late 1970s/early 1980s? Have the 
competitive implications of the deal ever been a factor in this 
decision?
    f. Are there any limitations (legal or otherwise) on a buyer's 
ability to pay off or retire debt as part of the deal? If so, what are 
they? How do these limitations differ from limitations in place in the 
late 1970s/early 1980s?
    g. Are buyers more or less likely to pay off or retire debt as part 
of the deal now than they were in the late 1970s/early 1980s? Why or 
why not?
    2. When negotiating a transaction, does a buyer ever offer to pay 
other expenses of or within the seller (e.g., legal or banking fees, 
change of control payments, etc.) as part of the deal? Under what 
circumstances? How have these circumstances evolved since the late 
1970s/early 1980s?
    a. Why might a buyer offer to pay such expenses as part of the deal 
now as opposed to in the late 1970s/early 1980s? Have the competitive 
implications of the deal ever been a factor in this decision?
    b. Why might a buyer decline to pay such expenses as part of the 
deal now as opposed to in the late 1970s/early 1980s? Have the 
competitive implications of the deal ever been a factor in this 
decision?
    c. Does a seller prefer a buyer that is willing to pay such 
expenses as part of the deal? Why or why not? Are seller preferences 
different now than in the late 1970s/early 1980s?
    d. In a multiple bid situation, is a buyer's willingness to pay 
such expenses as part of the deal ever a factor in the seller's 
selection of the winning bid? Was it a factor in the late 1970s/early 
1980s? If it is evaluated differently today versus the 1970s/early 
1980s, why is it evaluated differently?
    e. Do sellers ever reject a buyer's offer to pay such expenses as 
part of the deal? Under what circumstances? How have these 
circumstances evolved since the late 1970s/early 1980s? Have the 
competitive implications of the deal ever been a factor in this 
decision?
    f. Are there any limitations (legal or otherwise) on a buyer's 
ability to pay such expenses as part of the deal? If so, what are they? 
Do these limitations differ from limitations in place in the late 
1970s/early 1980s? If they differ, how do they differ?
    g. Are buyers more or less likely to pay such expenses as part of 
the deal now than they were in the late 1970s/early 1980s? Why or why 
not?
    3. How do parties currently calculate the Acquisition Price? How 
has the calculation changed since the late 1970s/early 1980s?
    a. Under what conditions is the Acquisition Price different from 
the purchase price or consideration identified in the transaction 
agreement? Have these conditions changed since the late 1970s/early 
1980s? If they have changed, how have they changed?
    b. Do transaction agreements ever lack a firm or certain purchase 
price? Under what conditions? Have these conditions changed since the 
late 1970s/early 1980s? If they have changed, how have they changed?
    i. Why would parties negotiate a deal without a firm or certain 
purchase price? What factors have affected such a decision or deal 
structure? Have these factors evolved since the late 1970s/early 1980s? 
If they have changed, how have they changed? Have the competitive 
implications of the deal ever been a factor in this negotiating a deal 
without a firm or certain purchase price?
    ii. What are the limits on the scope of the undetermined payments 
or deductions? Have these limits changed since the late 1970s/early 
1980s? If they have changed, how have they changed?
    c. Can an Acquisition Price be subject to undeterminable deductions 
or deductions of undeterminable value? Under what conditions? Have 
these conditions evolved since the late 1970s/early 1980s? If they have 
changed, how have they changed? What are some examples of each kind of 
deduction and how have they changed since the late 1970s/early 1980s?
    d. Are there certain categories of consideration that are commonly 
deducted or added when calculating the Acquisition Price? Have these 
categories changed since the late 1970s/early 1980s? If they have 
changed, how have they changed?
    e. Is the ultimate recipient of a payment ever a factor in whether 
such payment is included when calculating the Acquisition Price? Why or 
why not? In what circumstances? Has this determination changed since 
the late 1970s/early 1980s? If it has changed, how has it changed?
    f. Is employee compensation (e.g., bonus payments, retention 
payments, payments for contingent employee compensation) ever included 
when calculating the Acquisition Price? Why or why not? In what 
circumstances? Has this determination changed since the late 1970s/
early 1980s? If it has changed, how has it changed?
    g. Does the form of employee compensation affect whether it is 
included in the Acquisition Price? Under what circumstances? Has this 
determination changed since the late 1970s/early 1980s? If it has 
changed, how has it changed?
    h. Is the value of employee compensation ever deducted from the 
Acquisition Price? Why or why not? Under what circumstances? Has this 
determination changed since the late 1970s/early 1980s? If it has 
changed, how has it changed?
    i. Is there a ``control premium'' associated with the acquisition 
of control? How does an Acquiring Person determine that ``control 
premium''? Has this determination changed since the late 1970s/early 
1980s? If it has changed, how has it changed?
    4. When calculating the Acquisition Price, do parties include all 
consideration paid for the target? How has this approach changed since 
the late 1970s/early 1980s?
    a. How do parties define ``consideration?'' Has this changed since 
the late 1970s/early 1980s? If it has changed, how has it changed?
    b. Do parties rely on a standard legal definition for 
``consideration?'' If so,

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what is it and from what is it derived? Has this changed since the late 
1970s/early 1980s? If it has changed, how has it changed?
    c. Is consideration defined any differently for the purposes of 
calculating Acquisition Price than it is for non-HSR purposes? Why or 
why not? Has this changed since the late 1970s/early 1980s? If it has 
changed, how has it changed?
    d. Are any categories of payments excluded from the above 
definition of ``consideration?'' Why or why not? Has this changed since 
the late 1970s/early 1980s? If it has changed, how has it changed?
    e. Is the ultimate recipient of the payment ever a factor in 
whether such payment is included as consideration? Why or why not? Has 
this changed since the late 1970s/early 1980s? If it has changed, how 
has it changed?
    5. When calculating the Acquisition Price, how does debt affect the 
calculation? How has this approach changed since the late 1970s/early 
1980s?
    a. Does the debt reported on the target's balance sheet affect the 
calculation of the Acquisition Price? Why or why not? In what 
circumstances? Should it? Why or why not? Has this changed since the 
late 1970s/early 1980s? If it has changed, how has it changed?
    b. Does the buyer's pay off or retirement of debt affect the 
calculation of the Acquisition Price? Why or why not? In what 
circumstances? Should it? Why or why not? Has this changed since the 
late 1970s/early 1980s? If it has changed, how has it changed?
    c. Does the treatment of debt (either reported on a balance sheet 
or being paid off or retired by the buyer) differ based on whether the 
acquisition is of (1) voting securities, (2) non-corporate interests, 
or (3) assets? Why or why not? Should it? Why or why not? Has this 
changed since the late 1970s/early 1980s? If it has changed, how has it 
changed?
    d. Should the calculation of Acquisition Price focus on the total 
amount paid by the Acquiring Person (including debt that is paid off or 
retired) or the net amount received by the Acquired Person (excluding 
debt that is paid off or retired)? Why? Has this changed since the late 
1970s and early 1980s? If it has changed, how has it changed?
    6. Where an acquisition is of voting and non-voting securities, how 
is the Acquisition Price allocated between the voting securities and 
the non-voting securities? How has this approach changed since the late 
1970s/early 1980s?
    a. Are the voting securities and non-voting securities separately 
valued? Why or why not? Has this changed since the late 1970s/early 
1980s? If it has changed, how has it changed?
    b. Are each of the voting securities and the non-voting securities 
valued? Why or why not? Has this changed since the late 1970s and early 
1980s? If it has changed, how has it changed?

B. Fair Market Value (16 CFR 801.10(c)(3))

    Sometimes a transaction does not have a determined Acquisition 
Price. This is often due to the fluctuation in stock prices or the 
inability to calculate the exact amount of contingent future payments. 
As a result, the Fair Market Value (``FMV'') of the transaction becomes 
critical to determining reportability under the Act.
    Per Sec.  801.10(c)(3), FMV ``shall be determined in good faith by 
the board of directors of the ultimate parent entity included within 
the Acquiring Person, or, if unincorporated, by officials exercising 
similar functions; or by an entity delegated that function by such 
board or officials.'' Once the Acquiring Person, or its delegate, has 
determined the FMV, there is no requirement to share with the Agencies 
the details of how that FMV was determined. The Commission would like 
to understand better the determination of FMV through responses to the 
following questions:
    1. When an Acquiring Person is evaluating the potential acquisition 
of voting securities, non-corporate interests, or assets, what 
methodologies does that Acquiring Person use to support valuation in 
the ordinary course of due diligence and negotiation of the 
acquisition? How have these methodologies changed since the late 1970s/
early 1980s?
    a. If an acquisition involves the acquisition of non-voting 
securities, what methodologies does the Acquiring Person use to value 
the non-voting securities? Have these methodologies changed since the 
late 1970s/early 1980s? If they have changed, how have they changed?
    b. In an acquisition of both voting securities and non-voting 
securities, does the Acquiring Person ever use one methodology to value 
the voting securities and a different methodology to value the non-
voting securities? Why or why not? Have these methodologies changed 
since the late 1970s/early 1980s? If they have changed, how have they 
changed?
    c. Where the Acquiring Person receives board appointment or board 
designation rights (or their non-corporate equivalent) in conjunction 
with the acquisition of voting (or non-voting) securities, do those 
rights affect the FMV of the voting (or non-voting) securities 
acquired? Has this changed since the late 1970s/early 1980s? If this 
has changed, how has it changed?
    2. How does the determination of FMV under 16 CFR 801.10(c)(3) 
differ from the Acquiring Person's determination of value in the 
ordinary course of due diligence and negotiation of an acquisition? How 
has this determination changed since the late 1970s/early 1980s?
    a. What factors go into determining FMV? Do these factors vary by 
industry, type of acquisition (asset, non-corporate interest, 
intellectual property), size of the target, or for other reasons? 
Describe each of the ways these factors vary and how each one varies. 
How have these factors changed since the late 1970s/early 1980s? Are 
there difficulties involved in performing FMV analyses? If so, what are 
those difficulties? Have these difficulties changed since the late 
1970s/early 1980s? If they have changed, how have they changed? What 
additional guidance, if any, might the Commission provide to eliminate 
these difficulties?
    b. How often and for what purposes do boards of directors rely on 
third-party bankers and other appraisers to provide FMV analysis? Do 
boards of directors evaluate the accuracy of those results compared to 
their own calculations? If so, how does the board of directors evaluate 
the accuracy of those results? Has this process changed since the late 
1970s/early 1980s? If it has changed, how has it changed?
    c. Should the Commission require an independent FMV analysis for 
some transactions to ensure consistency with standard valuation 
practices? If so, for what type of transactions should the Commission 
require independent FMV analysis? If the Commission requires an 
independent analysis, who should conduct the FMV analysis?
    3. When calculating the FMV because the Acquisition Price is not 
determined as a result of future or uncertain payments, what financial 
or valuation concepts are used to determine the value of those future 
or uncertain payments? Have these concepts changed since the late 
1970s/early 1980s? If they have changed, how have they changed?
    4. How does an Acquiring Person determine the present FMV of assets 
that are not yet commercialized? For example, how does an Acquiring 
Person determine the present FMV of

[[Page 77046]]

intellectual property surrounding a product that currently is under 
development? Has this determination changed since the late 1970s/early 
1980s? If it has changed, how has it changed?
    5. In determining the FMV, how does the Acquiring Person account 
for the value of any assumed liabilities (or liabilities of the 
Acquired Entity)? What impact do such liabilities have on the FMV? Has 
this determination changed since the late 1970s/early 1980s? If it has 
changed, how has it changed?
    6. Should the Commission require the Acquiring Person to provide 
the basis for its FMV determination? If so, why? If not, why not?

II. Real Estate Investment Trusts (Section 7A(c)(1) of the Clayton Act)

    Congress created real estate investment trusts (``REITs'') in 1960 
to allow for the pooling of funds from many small investors to invest 
in real estate, and gave REITs preferential tax treatment. The 
legislative history indicates that REIT status was meant to be limited 
to ``clearly passive income from real estate investments, as contrasted 
to income from the active operation of businesses involving real 
estate,'' and those real estate trusts engaging in active business 
operations would not be afforded REIT tax status.\3\
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    \3\ H.R. Rep. No. 86-2020, pt. 2, at 3-4 (1960).
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    As a result, the PNO has long taken the informal staff position 
that when a REIT acquires real property (and assets incidental to the 
real property), the acquisition is exempt from HSR reporting under 
section 7A(c)(1) of the Clayton Act, the statutory ordinary course of 
business exemption. This position is based on the presumption that 
REITs are solely buying, owning, leasing, and selling real property, 
and therefore any acquisition of real property is exempt because it is 
done in the ordinary course of the REIT's business and is unlikely to 
violate the antitrust laws.
    The Commission is aware that the Internal Revenue Service (``IRS'') 
subsequently made changes in tax law to remove restrictions on REITs 
and expand the beneficial tax treatment. As a result, many REITs are no 
longer solely buying, owning, leasing, and selling real property.\4\ In 
fact, many REITs are now engaged in the active operation of businesses. 
For instance, REITs operate assisted living and other healthcare 
businesses, as well as companies that own cell towers and billboards, 
located on REIT-owned real property. Due to these changes, the 
Commission believes it is possible that a REIT's acquisition of real 
property may no longer be suitable for the blanket exemption offered 
under section 7A(c)(1) of the Act. The Commission would like to 
understand in more detail the current structure and operation of REITs 
through responses to the following questions:
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    \4\ Proposed Rulemaking, 79 FR 27508 (May 14, 2014); Correction 
to Proposed Rulemaking, 79 FR 38809 (July 9, 2014); Final 
Regulations, 81 FR 59849 (Aug. 31, 2016).
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    1. Have REITs evolved from entities that own only real property to 
entities that can hold operating companies?
    a. If so, what has led to the evolution of REITs becoming entities 
that can hold operating companies?
    b. How have changes in tax laws or regulations influenced this 
evolution?
    2. How does an operating company convert to a REIT?
    a. Do REIT structures involve one Ultimate Parent Entity (``UPE'')? 
Two UPEs? How often is each type used? Why?
    b. If a REIT has more than one UPE, what is the relationship 
between those UPEs?
    c. If a REIT has more than one UPE, is there an entity above the 
UPEs that makes decisions for both of them?
    3. Is there a way to distinguish REITs that own only real property 
from those that hold operating companies? If yes, what are the ways to 
distinguish REITs that own only real property and those that hold 
operating companies? For instance, are there differences in how they 
are structured? How else are they different?
    4. Assume the PNO's informal staff position exempting REITs did not 
exist and REITs had to rely solely on the real property exemptions, 
Sec. Sec.  802.2 and 802.5.
    a. Are there situations in which REIT transactions would no longer 
be exempt? If so, what kinds of situations?
    b. How often would the Sec. Sec.  802.2 and 802.5 exemptions come 
into play?
    c. Would it be easy for REITs to apply Sec. Sec.  802.2 and 802.5 
to transactions? If so, why? If not, why not?

III. Non Corporate Entities (16 CFR 801.1f(1)(ii))

    The Act applies to acquisitions of voting securities or assets. The 
rise of non-corporate entities, such as partnerships and limited 
liability companies, has presented challenges under the Act because the 
PNO had long taken the position that interests in unincorporated 
entities were neither voting securities nor assets. Thus, any 
acquisition of interests in such entities had not been a reportable 
event unless 100% of the interests was acquired, in which case the 
acquisition was deemed to be that of all of the underlying assets of 
the partnership or other unincorporated entity.'' \5\
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    \5\ 69 FR 18686, 18687 (Apr. 8, 2004).
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    At first, this approach did not present significant issues, because 
non-corporate entities were created as acquisition vehicles and used to 
effectuate transactions, not to separately hold operating 
businesses.\6\ But the role of non-corporate entities evolved. As the 
Commission noted in its 2004 Notice of Proposed Rulemaking, ``[t]he use 
of unincorporated entities is expanding, and such entities are 
increasingly engaging in acquiring interests in other corporate and 
unincorporated entities. For example, the number of corporate income 
tax filings increased from 4,630,000 to 5,711,000 (23%) between 1994 
and 2002, while the number of partnership returns, including LLCs taxed 
as partnerships, increased from 1,550,000 to 2,236,000 (44%) during the 
same period. In addition, a number of states have amended their 
statutes in recent years to allow limited liability companies to merge 
with other types of legal entities.'' \7\ As a result, the Commission 
determined in its 2005 Final Rule that the acquisition of control, 50% 
or more of the non-corporate interests (``NCIs'') in a non-corporate 
entity (``NCE''), would henceforth be reportable.\8\
---------------------------------------------------------------------------

    \6\ Formal Interpretation 15, 63 FR 54713 (Oct. 13, 1998) 
(amended 1999) (amended 2001).
    \7\ 69 FR at 18688.
    \8\ 70 FR 11502, 11504 (Mar. 8, 2005).
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    The Commission is aware that NCEs have continued to evolve. For 
instance, acquisitions of NCIs are often captured in Securities 
Purchase Agreements, which imply that NCIs are now deemed to be more 
like voting securities. Thus, the Commission believes that it is 
appropriate to re-evaluate the nature of NCEs and NCIs to determine 
whether NCEs are the equivalent of corporate entities and NCIs function 
more as voting securities. To that end, the Commission would like to 
understand in more detail the evolution of NCEs and NCIs since its 2005 
Final Rule,\9\ through responses to the following questions:
---------------------------------------------------------------------------

    \9\ 70 FR 11502 (Mar. 8, 2005).
---------------------------------------------------------------------------

    1. Have NCEs evolved in form and substance since 2005? If they have 
evolved, what significant changes have occurred to shape the evolution 
of NCEs between 2005 and now?
    a. Have the distinctions between NCEs and corporate entities 
evolved since 2005? If they have evolved, what significant changes have 
occurred to make NCEs and corporate entities more or less distinct 
between 2005 and now?

[[Page 77047]]

    b. Have the distinctions between NCIs and voting securities evolved 
since 2005? If they have evolved, what significant changes have 
occurred to make NCIs and voting securities more or less distinct 
between 2005 and now?
    c. Are NCIs currently the same as voting securities? If so, how? If 
not, how are they different? Is this different from 2005? If so, how? 
What has changed between 2005 and now?
    d. Does any category of NCIs currently carry a right equivalent to 
the right to vote for the election of the board of directors of a 
corporate entity? Is this different from 2005? If so, how? What has 
changed between 2005 and now?
    e. Should the reporting obligations for the acquisition of an 
interest in a corporate entity and non-corporate entity differ? Is this 
different from 2005? If so, how? What has changed between 2005 and now?
    2. Have the benefits and drawbacks of becoming an NCE evolved since 
2005? If they have evolved, have the incentives to become an NCE 
changed since 2005? If so, how? If not, why not? What has changed 
between 2005 and now?

IV. Acquisitions of Small Amounts of Voting Securities (16 CFR 801.1, 
802.9, 802.64)

    Since the implementation of the HSR program, there has been a 
significant expansion of the holdings of investment entities, including 
investment funds and institutional investors, as well as expanded 
interest and ability of such shareholders to participate in corporate 
governance.\10\ In addition, changes in investment behavior have 
resulted in some investment entities holding small stakes in a large 
number of firms, including competitors. This has caused some to raise 
concerns about the competitive effects of common ownership--that is, 
the competitive effect of an investor holding small minority positions 
in issuers that operate competing lines of business.\11\
---------------------------------------------------------------------------

    \10\ See, e.g., Edward Rock, Adapting to the New Shareholder-
Centric Reality, 161 U. Pa. L. Rev. 1907 (2013).
    \11\ Matthew Backus, Christopher Conlon, & Michael Sinkinson, 
Common Ownership in America: 1980-2017, forthcoming, American 
Economic Journal (forthcoming 2020) https://chrisconlon.github.io/site/common_owner.pdf. (These concerns (and their validity) were 
discussed at the Federal Trade Commission's Hearings on Competition 
and Consumer Protection in the 21st Century, Hearings on Common 
Ownership (Dec. 6, 2018). The transcript of that session is 
available on the FTC's website, here: https://www.ftc.gov/system/files/documents/public_events/1422929/ftc_hearings_session_8_transcript_12-6-18_0.pdf, and the slide 
presentations of the participants are available here, https://www.ftc.gov/system/files/documents/public_events/1422929/cpc-hearings-nyu_12-6-18.pdf.).
---------------------------------------------------------------------------

    In light of these developments, the Commission is using this ANPRM 
to take a fresh look at the rules that apply to acquisitions of voting 
securities by investment entities to determine whether updates may be 
necessary. The Commission seeks information on the following rules:

A. Definition of ``Solely for the Purpose of Investment'' (16 CFR 
801.1, 802.9)

    Section (c)(9) of the HSR Act exempts from the requirements of the 
Act ``acquisitions, solely for the purpose of investment, of voting 
securities, if, as a result of such acquisition, the securities 
acquired or held do not exceed 10 per centum of the outstanding voting 
securities of the issuer.'' To implement this statutory limitation, 16 
CFR 802.9 exempts from the requirements of the Act an acquisition of 
voting securities if made solely for the purpose of investment and if, 
as a result of the acquisition, the Acquiring Person would hold 10% or 
less of the outstanding voting securities of the issuer, regardless of 
the dollar value of the voting securities so acquired or held. Under 16 
CFR 801.1(i)(1), ``[v]oting securities are held or acquired `solely for 
the purpose of investment' if the person holding or acquiring such 
voting securities has no intention of participating in the formulation, 
determination, or direction of the basic business decisions of the 
issuer.'' \12\
---------------------------------------------------------------------------

    \12\ 16 CFR 801.1(i)(1).
---------------------------------------------------------------------------

    In light of changing investor engagement with issuers, the 
Commission is interested in knowing if it is appropriate to rethink the 
definition of ``solely for the purpose of investment'' in 16 CFR 
801.1(i)(1) and the exemption in 16 CFR 802.9. To that end, the 
Commission seeks to understand the incentives involved in applying the 
exemption in 16 CFR 802.9 through responses to the following questions:
    1. The ability to rely on 16 CFR 802.9 depends on whether a 
potential filing person ``has no intention of participating in the 
formulation, determination, or direction of basic business decisions of 
the issuer.'' \13\
---------------------------------------------------------------------------

    \13\ 16 CFR 801.1(i)(1).
---------------------------------------------------------------------------

    a. Are there benefits to this approach? If so, what are the 
benefits?
    b. Are there drawbacks to this approach? If so, what are the 
drawbacks?
    c. How could this approach be changed? How would such a change 
impact investors and issuers?
    d. What are the ``basic business decisions'' of the issuer?
    i. Is it clear what decisions comprise the ``basic business 
decisions'' of the issuer?
    ii. Are there activities that clearly do not relate to the basic 
business decisions?
    iii. Are there activities that clearly do relate to the basic 
business decisions?
    iv. Is there uncertainty about whether an activity relates to the 
basic business decisions? If so, why is there uncertainty? To what 
extent is there uncertainty about whether an activity relates to the 
basic business decisions?
    e. Should the Commission define the ``basic business decisions of 
the issuer'' as used in the existing Rule?
    i. What should the definition include?
    ii. Should specific items be excluded from the definition? Which 
items?
    iii. What are the benefits of providing a definition?
    iv. What are the risks of providing a definition?
    f. Is it clear what is meant by ``no intention of participating'' 
in the formulation, determination, or direction of the basic business 
decisions?
    i. What type of activity related to determining whether to 
participate in business decisions currently takes one out of the 
exemption, or at what point in the process of deciding whether to 
participate in business decisions is one no longer within the 
exemption?
    ii. What type of activity related to determining whether to 
participate in business decisions should result in the exemption no 
longer applying, or at what point in the process of deciding whether to 
participate in business decisions should one no longer be within the 
exemption?
    iii. Should the language be changed to allow reliance on the 
exemption until the Acquiring Person has made an affirmative decision 
to participate in the basic business decisions? If so, what would 
constitute an affirmative decision to participate in the basic business 
decisions?
    2. In general, for HSR purposes, what differentiates the activities 
of investors who invest solely for the purpose of investment and 
investors who do not invest solely for the purpose of investment? Have 
these activities changed since 1978? If so, how?
    a. In what activities do investors who invest solely for the 
purpose of investment engage? Have these activities changed since 1978? 
If so, how?
    b. What categories of interaction with management indicate an 
investor's intention is not to hold voting securities solely for the 
purpose of investment? For example, would those categories include 
things like discussions of governance issues, discussions of

[[Page 77048]]

executive compensation, or casting proxy votes? Have these categories 
changed since 1978? If so, how?
    c. Does the market capitalization of the issuer affect the 
determination of whether an investment is solely for the purpose of 
investment or not solely for the purpose of investment? Has this 
changed since 1978? If so, how?
    3. How does the Commission's interpretation of ``solely for the 
purpose of investment'' compare to the Securities and Exchange 
Commission's (``SEC'') approach to ``passive'' investors? \14\
---------------------------------------------------------------------------

    \14\ Under SEC Rule 13d-1(c), certain beneficial owners may file 
a short form statement on Schedule 13G in lieu of a 13D statement if 
that person ``has not acquired the securities with any purpose, or 
with the effect, of changing or influencing the control of the 
issuer, or in connection with or as a participant in any transaction 
having that purpose or effect, including any transaction subject to 
17 CFR 240.13d-3(b), other than activities solely in connection with 
a nomination under 17 CFR 240.14a-11.'' 17 CFR 240.13d-1(c). The SEC 
relies on a ``control purpose'' test to identify ``passive'' 
investments; that is, beneficial owners that acquired shares ``not 
with the purpose nor with the effect of changing or influencing the 
control of the issuer.'' The SEC has a broad view of the types of 
activities that could show such a ``control purpose,'' and that 
determination is assessed based on a totality of the circumstances. 
For instance, a shareholder that fails to qualify as an investor 
solely for the purpose of investment under the HSR Act may 
nonetheless be eligible to use Schedule 13G depending on various 
factors, such as the subject matter of the shareholder's discussions 
with the issuer's management. See Exchange Act Sections 13(d) and 
13(g) and Regulation 13D-G Beneficial Ownership Reporting, 
Compliance and Disclosure Interpretations (``C&DIs''), Question 
103.11 (July 14, 2016) https://www.sec.gov/divisions/corpfin/guidance/reg13d-interp.htm#103.11.
---------------------------------------------------------------------------

    a. Assuming no change in the SEC approach, could the Commission 
adopt the SEC approach? If yes, why? If no, why not?
    b. What would be the benefits of adopting the SEC approach? Why?
    c. What would be the drawbacks of adopting the SEC approach? Why?
    d. Does the different role of each agency justify different 
approaches for investors who hold positions solely for the purpose of 
investment? If yes, why? If no, why not?
    4. How does the Commission's interpretation of ``solely for the 
purpose of investment'' compare to the elements that must be disclosed 
in Item 4 of Schedule 13D filed with the SEC? \15\
---------------------------------------------------------------------------

    \15\ Item 4 of Schedule 13D requires filers to state the purpose 
or purposes of the acquisition of securities of the issuer and to 
describe any plans or proposals which they might have. 17 CFR 
240.13d-10117 CFR 240.13d-101.
---------------------------------------------------------------------------

    a. Assuming no change to the SEC rule, could the Commission adopt 
the SEC elements? If yes, why? If no, why not?
    b. What would be the benefits of adopting the SEC elements?
    c. What would be the drawbacks of adopting the SEC elements?
    d. Does the different role of each agency justify different 
approaches for investors who hold positions solely for the purpose of 
investment?
    5. How do the activities of investment firms differ from those of 
operating companies?
    a. Should the Commission treat different types of acquirers 
differently for the purpose of the exemption? If yes, why? If no, why 
not?
    b. Should the Commission treat different types of investment 
companies differently for the purpose of the exemption (for example, 
mutual fund companies versus hedge fund companies)? If yes, why? If no, 
why not?
    6. Should the Commission preclude parties from using the exemption 
only if they have taken certain specified actions? If yes, why? If no, 
why not?
    a. What actions should disqualify an Acquiring Person from being 
able to use the exemption?
    i. Should the actions be limited to actions that facilitate or 
encourage coordination among competitors?
    ii. Should actions that affect competition, even if aimed only at a 
single competitor, preclude the use of the exemption? If yes, why? If 
no, why not?
    iii. Should actions that change the incentives to compete, even if 
aimed only at a single competitor, preclude the use of the exemption? 
If yes, why? If no, why not?
    iv. What other actions should preclude utilizing the exemption?
    b. Would allowing the Acquiring Person to acquire 9.9% of the 
voting securities of the Issuer prior to taking the specified action 
undercut the ability to obtain filings early enough to ascertain 
potential competitive harm before a transaction is consummated? If yes, 
why? If no, why not?
    c. Would such a conditioning of the loss of the exemption be 
consistent with the wording of the statute, including ``solely'' and 
the ``purpose'' of the acquisition? If yes, why? If no, why not?
    i. Is the acquisition solely for investment if the Acquiring Person 
is considering taking action inconsistent with the exemption, but has 
not yet taken the action?
    ii. Is the acquisition for the purpose of investment if the 
Acquiring Person has determined to take action inconsistent with the 
exemption, but has not yet taken the action?
    d. Should the Commission require an HSR filing for past 
acquisitions once the specified actions have been taken? If yes, why? 
If no, why not?
    i. Would this be consistent with the HSR Act's requirement to make 
the filing prior to the acquisition? If yes, why? If no, why not?
    ii. Would this be consistent with the requirement that the 
Acquiring Person certify that it has a good faith intent to make an 
acquisition requiring notification? If yes, why? If no, why not?

B. Definition of Institutional Investors (16 CFR 802.64)

    Under Sec.  802.64, institutional investors are exempt from HSR 
reporting when making acquisitions of 15% or less of voting securities 
in the ordinary course of business and solely for purpose of 
investment. During the initial HSR rulemaking in 1978, entities were 
identified as institutional investors because they were viewed as 
constrained by law (e.g., non-profits) or fiduciary duty (e.g., pension 
trusts, insurance companies, etc.), or generally uninterested in 
``affecting management of the companies whose stock they buy'' (e.g., 
broker-dealers).\16\ The list identifying what type of entity is 
considered an institutional investor has never been updated.
---------------------------------------------------------------------------

    \16\ 43 FR 33450, 33503 (July 31, 1978).
---------------------------------------------------------------------------

    It is unclear to the Commission whether this exemption should be 
maintained and implemented in the same manner in which it was first 
promulgated in 1978. In light of changes in the investor landscape 
since that time, the Commission may need to update the list of 
institutional investors that are presumed to engage in acquisitions 
solely for the purpose of investment. Thus, the Commission aims to 
understand the current institutional investor landscape in order to 
make that determination through responses to the following questions:
    1. Given that 16 CFR 802.64 has not changed since 1978, does it 
need to be updated?
    a. Does 16 CFR 802.64 accurately reflect the universe of entities 
that make investments in the ordinary course of business solely for the 
purpose of investment? Are there entities currently listed in the 
exemption that should be removed? If so, why?
    b. Are there entities not currently listed that should be treated 
as institutional investors? If so, why and what are they? Explain the 
justification for treating the entity as an institutional investor: 
Does it fit within the paradigm identified by the Commission in first 
promulgating 16 CFR 802.64 (i.e., (i) constrained by law; (ii) 
constrained by fiduciary duty; or (iii) uninterested in affecting 
management of the companies whose stock they buy)? Are there other 
reasons the entity should be treated as an institutional investor?

[[Page 77049]]

    c. Should the Commission provide a list of indicia that an investor 
must meet to qualify as an institutional investor for purposes of the 
HSR Act, instead of a list of entities considered to be institutional 
investors? If yes, why and what should these indicia be? If no, why 
not?
    d. Is the 15% level for the Commission's exemption still consistent 
with the purpose of the HSR Act? What evidence is there that the level 
should be higher or lower?
    The SEC has also promulgated a definition of ``institutional 
investors'' as part of its beneficial ownership disclosure 
requirements. When a person or group of persons acquires beneficial 
ownership of more than five percent of a voting class of a company's 
equity securities registered under the Securities Exchange Act, they 
are required to file a Schedule 13D with the SEC.\17\ Depending upon 
the facts and circumstances, the person or group of persons may be 
eligible to file the more abbreviated Schedule 13G in lieu of Schedule 
13D.\18\ One of the exemptions relates to acquisitions of securities in 
the ordinary course of business by a ``qualified institutional 
investor'' under Rule 13d-1(b).\19\
---------------------------------------------------------------------------

    \17\ Securities Exchange Act of 1934, 15 U.S.C. 78a et seq., and 
17 CFR 240.13d-101.
    \18\ Section 13(g) was added to the Exchange Act as part of the 
Domestic and Foreign Investment Improvement Disclosure Act of 1977. 
Public Law 95-214, sec. 203, 91. Stat. 1494.
    \19\ Under SEC Rule 13d-1(b)(1)(i)-(ii)(A)-(K), certain 
beneficial owners may file a short form statement on Schedule 13G in 
lieu of a 13D statement under certain conditions.
---------------------------------------------------------------------------

    2. How does the Commission's definition of institutional investor 
compare to the definition used by the SEC in identifying a person able 
to file a Schedule 13G?
    a. Assuming no change in the SEC rule, should the Commission adopt 
the SEC definition of a person who acquires voting securities in the 
ordinary course of business and not with the purpose nor with the 
effect of changing or influencing the control of the issuer? If yes, 
why? If no, why not?
    b. What would be the benefits of adopting the SEC definition?
    c. What would be the drawbacks of adopting the SEC definition?
    d. Does the different role of each agency justify different 
definitions for institutional investors?
    3. What are the activities of institutional investors and how have 
they changed since 1978?
    a. What activities do institutional investors engage in with the 
issuers whose shares they hold? Have these activities changed since 
1978? If so, how have these activities changed?
    i. What is the scope of ``shareholder engagement'' that 
institutional investors undertake? Has this changed since 1978? If so, 
how has it changed?
    ii. What topics or issues are the subject of such engagement? Have 
these topics or issues changed since 1978? If so, how have they 
changed?
    iii. How often does such engagement occur? Has this changed since 
1978? If so, how has this changed?
    iv. Does the amount, degree, or type of issue discussed vary by 
issuer, or are there consistent themes of discussion and engagement? 
Has this changed since 1978? If so, how has this changed?
    v. When do institutional investors participate in the formulation, 
determination, or direction of the basic business decisions of issuers? 
Has this changed since 1978? If so, how has it changed?
    b. How do index funds fit within the portfolios of institutional 
investors? Have index funds evolved since 1978? If so, how have they 
evolved?
    i. Why do intuitional investors choose to create an index fund, 
exchange-traded fund, or the like? What are the benefits and drawbacks 
of creating such a fund?
    ii. How does the acquisition of voting securities held by an index 
fund, exchange-traded fund, or the like occur? Do acquirors use an 
algorithm or some other automated mechanism to facilitate acquisitions?
    iii. Who oversees an index fund, exchange-traded fund, or the like? 
Is there one person or entity within an investment organization tasked 
with overseeing such a fund? More than one? How often is it one versus 
more than one?
    4. How do institutional investors manage holdings in the same 
issuer? How has this changed since 1978?
    a. Do institutional investors jointly manage holdings in the same 
issuer? Do they separately manage holdings in the same issuer? Both? 
Has this changed since 1978? If so, how has it changed?
    b. How do institutional investors make the decision to jointly or 
separately manage holdings in the same issuer? Has this changed since 
1978? If so, how has this changed?
    c. Do answers to any of the above questions depend on the type of 
issuer or the type of institutional investor or other factors? If so, 
what factors are relevant? How does each factor influence the actions 
of institutional investors? Have the factors changed since 1978? If so, 
how have they changed?
    5. How do institutional investors apply the concept of solely for 
the purpose of investment? Has this changed since 1978? If so, how has 
it changed?
    a. Do the entities listed in 16 CFR 802.64 currently hold the 
voting securities of issuers solely for the purpose of investment? How 
does this differ from institutional investor behavior in 1978? What 
significant changes in institutional investor behavior have occurred 
between 1978 and 2020?
    b. What kinds of entities not listed in 16 CFR 802.64 currently 
hold the voting securities of issuers solely for the purpose of 
investment? How does the current behavior of these entities differ from 
their behavior in 1978?
    c. If institutional investors make certain acquisitions solely for 
the purpose of investment and other acquisitions not solely for the 
purpose of investment, is it appropriate to provide a status exemption 
for all of their activities? If yes, why? If no, why not?
    d. Do institutional investors rely on 16 CFR 802.64 to exempt 
acquisitions in or by index funds, exchange-traded funds or the like? 
If so, how?

V. Influence Outside the Scope of Voting Securities (16 CFR 801.1, 
802.31)

    The HSR Act applies to the acquisition of assets and voting 
securities. ``The term voting securities means any securities which at 
present or upon conversion entitle the owner or holder thereof to vote 
for the election of directors of the issuer, or of an entity included 
within the same person as the issuer.'' \20\ The acquisition of a 
voting security carries with it the right to influence the business of 
a company through the ability to vote for the directors of that 
company, among other things.
---------------------------------------------------------------------------

    \20\ 16 CFR 801.1(f)(1)(i).
---------------------------------------------------------------------------

    The Commission is aware, however, that there are ways to gain 
influence over a company without the acquisition of the right to vote 
for the election of directors inherent in voting securities. For 
instance, the acquisition of convertible voting securities or the use 
of board observers could each result in the ability to influence a 
company's business decisions. Currently, neither the acquisition of 
convertible voting securities nor rights to be a board observer are 
reportable events under the Act. The Commission, therefore, needs to 
ascertain whether the acquisition and exercise of these rights provide 
opportunities to influence an issuer's business decisions, and thus 
should be reportable events.

[[Page 77050]]

A. Convertible Voting Securities (16 CFR 802.31)

    The acquisition of convertible debentures (convertible into common 
stock), options, warrants, or preferred shares, even with no present 
right to vote for directors, may result in the ability to influence the 
business of a company. The Rules capture these kinds of stakes in the 
concept of a convertible voting security. ``The term convertible voting 
security means a voting security which presently does not entitle its 
owner or holder to vote for directors of any entity.'' \21\ Section 
802.31 exempts the acquisition of convertible voting securities.
---------------------------------------------------------------------------

    \21\ 16 CFR 801.1(f)(2).
---------------------------------------------------------------------------

    The PNO has taken the informal position that the acquisition of 
convertible voting securities, when accompanied by the right to 
designate or appoint individuals to the board of directors of the 
issuer equal to the percentage of voting securities that would be held 
upon conversion, is reportable under the Act. The Commission is 
considering revising Sec.  802.31 to explicitly require compliance with 
the HSR Act's reporting requirements when the acquisition of 
convertible voting securities is coincident with the Acquiring Person 
having or obtaining the right to designate or appoint any individuals 
to the board of the issuer. The Commission aims to understand the 
potential benefits and burdens of such a change through responses to 
the following questions:
    1. Is the acquisition of convertible voting securities, when 
accompanied with the right of appointment or designation of individuals 
to the issuer's board of directors, equivalent to the acquisition of 
voting securities with the present right to vote for election of the 
issuer's board of directors? In what ways are they the same and in what 
ways are they different? What provisions could accompany the right to 
appoint that would make the acquisition the most like an acquisition of 
voting securities? What provisions make them different for competition 
purposes? Have these provisions changed since 1978? If so, how have 
they changed?
    2. Why would an Acquiring Person choose one alternative over the 
other? Have the benefits of one alternative over another changed since 
1978?
    a. Is there a benefit of acquiring convertible voting securities 
while holding or obtaining the right to appoint or designate 
individuals to an issuer's board of directors, as compared to the 
acquisition of securities that have the present right to vote? If so, 
what is the benefit? Has the benefit changed since 1978? If so, how has 
it changed?
    b. Under what situations does such a benefit arise? Have these 
situations changed since 1978? If so, how have they changed?
    3. What are the reasons the Commission should or should not require 
a filing whenever the acquirer of convertible non-voting securities 
receives a right to designate one or more directors prior to 
conversion?
    a. Should issuers that have cumulative voting be subject to the 
same requirements as issuers that do not have cumulative voting? Why 
should they be subject to different requirements? Is there a difference 
in how much influence an acquirer would have based on whether the 
issuer has cumulative voting? Why? How would the Commission be able to 
distinguish when it is a problem and when it is not?
    4. What would be the burden associated with this possible change?
    a. Would the burden fall most on an identifiable class of 
transactions? How would such a change affect how an identifiable class 
of transactions is structured?
    b. Would such a change introduce significant inefficiencies into 
the market for corporate control? What would be the effect of that 
change in the market?

B. Board Observers

    Another potential way to gain influence over a company, beyond the 
scope of acquiring voting securities, is through board observers. The 
Commission understands that it is becoming increasingly common for 
issuers and NCEs to include board observers as part of their governance 
structure. Issuers and NCEs often grant rights to select and appoint 
board observers to investors with significant equity, in addition to or 
in lieu of providing investors with board seats. Even though board 
observers lack the ability to vote on matters that come before the 
issuer's board, they may nevertheless have significant influence over 
the outcome of matters submitted to the board for approval.\22\ At the 
very least, board observers gain insight into an issuer's strategic 
decision-making, which is not only useful to the investor sponsoring 
the board observer, but may also be useful to competitors in the 
market, especially when those board observers also serve as officers or 
directors of a competitor.\23\ Companies likely benefit from 
interacting with board observers because company management can obtain 
additional investor insight without having to alter the composition or 
voting balance on the board.
---------------------------------------------------------------------------

    \22\ Obasi Investment Ltd. et al. v. Tibet Pharmaceuticals, Inc. 
et al., 931 F.3d 179, 183 (3d Cir. 2019).
    \23\ See Complaint, In re Altria Group/JUUL Labs, Dkt. 9383, ] 
9, at https://www.ftc.gov/system/files/documents/cases/d09393_administrative_part_iii_complaint-public_version.pdf.
---------------------------------------------------------------------------

    Given the opportunities that board observers have to interact with 
corporate officers, directors, and other managers, and to gain access 
to confidential information related to strategic and operational 
decisions, the Commission would like to better understand the role of 
board observers. In particular, the Commission would like to know how 
investors might use board observers' rights to influence competitive 
decision-making of issuers and NCEs to ascertain whether the 
acquisition of rights that provide opportunities to wield this kind of 
influence should be reportable under the Act. To that end, the 
Commission seeks responses to the following questions:
    1. What types of information are available to an issuer/NCE board 
observer?
    a. With what frequency is a board observer invited to all meetings? 
Is a board observer always entitled to all info provided to board 
members? Is a board observer permitted to request additional 
information beyond what is presented at a board meeting? If so, with 
what frequency?
    b. Are board observers subject to any restrictions on how they can 
use the information they obtain in their capacity as board observers? 
Are these restrictions based on contract, bylaws or regulations?
    c. Do issuers/NCEs create formal review processes for information 
scheduled to be sent to a board observer? If so, with what frequency? 
Are outside counsel involved in monitoring compliance? If so, with what 
frequency?
    d. Is the information scheduled to be sent to a board observer 
subject to a non-disclosure agreement that limits its dissemination to 
others, including officers and directors of competitors or investors in 
competitors?
    e. Do issuers/NCEs draft formal guidance for their boards as to 
what topics should not be discussed in the presence of board observers? 
If so, with what frequency? Are outside counsel involved in monitoring 
compliance? If so, with what frequency?
    2. What means does an issuer/NCE board observer have to influence 
board policies or the strategic or operational direction of the firm?

[[Page 77051]]

    a. Does a board observer ever enjoy any special right of notice or 
consultation regarding major capital expenditures or strategic 
decisions?
    b. Does a board observer have access, outside of board meetings, to 
managers in the corporation, to investment committee members in an NCE, 
or to persons with similar decision-making roles regarding the 
operations of the business? If so, with what frequency?
    c. Do board observers have the ability to request a meeting of the 
issuer's/NCE's board? If so, with what frequency?
    d. Do issuers/NCEs impose restrictions on a board observer's 
speaking role during board meetings? If so, with what frequency? How 
common are ``silent'' board observers?
    e. How frequently do board observers move into senior executive 
roles at issuers/NCEs?
    3. What are the parameters of the board observer role?
    a. Is a board observer's relationship with the issuer/NCE always 
explicitly defined in a written agreement between the issuer and the 
investor? How common are informal board observer arrangements?
    b. Are board observers (or those who sponsor their observation of 
board matters) covered by conflict of interest rules or black-out 
periods such as those that limit investments by board members?
    4. Are there any protocols on selection/approval of board observers 
and/or processes in place to ensure that observers are not in a 
position to facilitate sharing of competitively sensitive information 
among competitors?
    5. For all of the questions above, do rules or practices regarding 
board observer rights to obtain confidential information differ 
substantially between issuers and NCEs? What factors account for any 
such differences?

VI. Transactions or Devices for Avoidance (16 CFR 801.90)

    16 CFR 801.90 provides that the Commission must disregard the 
structure of transactions or devices used by the parties for the 
purpose of avoiding the HSR Act requirements and review the substance 
of the transaction as a whole to determine whether an HSR filing is 
required. The PNO often receives questions about whether specific 
scenarios would be violations under Sec.  801.90, and the PNO has 
occasionally offered informal staff positions on Sec.  801.90. For 
instance, the PNO has an informal staff position that says if a target 
makes a payout prior to its acquisition in the form of an extraordinary 
dividend, such a payment would not trigger 16 CFR 801.90 if, as a 
result of the dividend, the target no longer meets the size of person 
test.\24\ The PNO's informal staff position is based on the idea that 
if an extraordinary dividend reduces the target's cash on hand, it is 
unlikely to present a 16 CFR 801.90 issue.
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    \24\ Am. Bar Ass'n., Premerger Notification Practice Manual, 
Interpretation 96 (5th ed.).
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    But there are situations where the purpose of such a payout may be 
more complicated. For instance, if the payout involves more than the 
distribution of cash on hand, this could present an issue under 16 CFR 
801.90. Each issuance of an extraordinary dividend or like payment must 
be carefully analyzed to make sure that it is not a device for 
avoidance under Sec.  801.90. The Commission has questions about 
whether filing parties are engaging in this analysis or, instead, 
assuming that every extraordinary dividend is not a device for 
avoidance under Sec.  801.90. In order to determine which are and are 
not devices for avoidance, the Commission would therefore like to 
understand the mechanisms by which targets engage in these and other 
kinds of practices through responses to the following questions:
    1. What mechanisms do targets use to pay out extraordinary 
dividends and what are the reasons for such dividends?
    a. Is the focus on the reduction of cash on hand or are there other 
motivations for issuing such dividends? If so, what are the other 
motivations?
    b. Are there other ways of structuring extraordinary dividends? If 
so, what are they? If not, why not?
    c. How often do targets issue extraordinary dividends in advance of 
being acquired? What are the reasons that targets issue such dividends?
    d. Is the buyer ever involved in the target's decision to issue an 
extraordinary dividend in advance of an acquisition? Why or why not?
    2. Do targets use mechanisms other than extraordinary dividends to 
reduce cash on hand?
    a. If so, what are they and how are they structured? If not, why 
not?
    b. Is the buyer involved? If yes, why and with what frequency? If 
not, why not?
    3. What other actions should the Commission scrutinize as possible 
devices for avoidance?

VII. Filing Issues (16 CFR 802.21, 16 CFR Part 803 Appendix A and B)

    The Commission has a strong interest in an HSR filing process and 
an HSR Form that garners competitively significant information to 
assist the Agencies in their review of transactions. To that end, the 
Commission intends to explore amending (a) the 16 CFR 802.21 five-year 
period during which a party may acquire additional voting securities 
without refiling, and (b) the requirement in Item 8 of the HSR Form to 
disclose certain prior acquisitions.

A. Acquisitions of Voting Securities That Do Not Cross the Next 
Threshold (16 CFR 802.21)

    Under 16 CFR 802.21, filing parties have five years from the end of 
the waiting period to acquire additional voting securities without 
making another filing, as long as the additional acquisitions do not 
exceed the next threshold. For instance, Party A files to cross the 
$100 million threshold (as adjusted) on January 1 and receives early 
termination on January 20, which ends the waiting period. Party A then 
has five years from January 20 to continue to acquire voting securities 
of the same issuer up to the next threshold, in this case $500 million 
(as adjusted), as long as it crosses the $100 million threshold (as 
adjusted) within one year.
    The time period in proposed Sec.  802.21 was 180 days, but numerous 
comments persuaded the Commission this time period was too short.\25\ 
In the final rules, the Commission chose a period of five years, both 
as a result of these comments and because it made sense to correlate 
the timing of the exemption with the timing of the Census and resulting 
updated data.\26\ Given the changes in worldwide economic activity 
since 1978, Commission is now concerned that the Sec.  802.21 five-year 
period may be too long. At the time of the initial filing, the 
transaction may not present competition concerns, but such concerns 
could develop as a result of changes in the lines of business of the 
Acquiring Person and Acquired Person during the five-year period, but 
those changes would not require a new filing. As a result, the 
Commission seeks to understand the impact of shortening the Sec.  
802.21 five-year period through responses to the following questions:
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    \25\ 43 FR 33450, 33493 (July 31, 1978).
    \26\ Id.
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    1. Have there been changes in economic activity significant enough 
to raise concerns that the Commission may miss important competitive 
effects if it does not shorten the five-year term?
    2. If there are reasons to believe that the Sec.  802.21 five-year 
period is too long, what period would address concerns that additional 
acquisitions of the Acquired Entity present competitive

[[Page 77052]]

concerns because the lines of business of the Acquiring Person and/or 
Acquired Person have changed? Why would another period be more 
appropriate?
    3. Is there is a class of Acquiring Persons for whom the decrease 
in the exemption period would cause significant burden? If not, why 
not? If so, how?

B. Prior Acquisitions

    When the Acquiring Person and the Acquired Person report in the 
same or ``overlapping'' NAICS revenue code in Item 5 of the HSR Form, 
the Acquiring Person must report certain prior acquisitions in Item 8: 
(1) The acquisition of 50% or more of the voting securities of an 
issuer or 50% or more of non-corporate interests of an unincorporated 
entity (subject to $10 million limitation) and (2) any acquisition of 
assets valued at or above the statutory size-of-transaction test at the 
time of their acquisition. Item 8 limits the Acquiring Person's 
disclosure to those acquisitions within the overlapping NAICS code over 
the last five years.
    The Commission is concerned that Item 8 does not capture all 
competitively significant acquisitions. There are several reasons why 
this might be the case. For instance, the Acquiring Person does not 
have to disclose prior acquisitions when it and the Acquired Person 
report revenue in different NAICS codes. Nevertheless, overlapping 
NAICS codes are imperfect predictors of whether the acquisition 
presents competitive concerns that need review. For instance, an 
Acquiring Person is not subject to the disclosure requirement if a 
prior acquisition involved a potential competitor with no revenue in an 
overlapping NAICS code at the time of the acquisition. Similarly, an 
Acquiring Person need not disclose a prior acquisition that involved a 
vertical relationship when companies at different levels of the 
distribution chain report in different NAICS codes. As a result, the 
Commission is considering eliminating the overlapping NAICS code 
limitation in Item 8 so that the Acquiring Person would have to list 
all its acquisitions of 50% or more of the voting securities of an 
issuer or 50% or more of non-corporate interests of an unincorporated 
entity (subject to the $10 million limitation) and any acquisition of 
assets valued at or above the statutory size-of-transaction test at the 
time of their acquisition in the five years prior to filing. The 
Commission seeks comment on this potential change through responses to 
the following questions:
    1. What would be the benefit or burden associated with this 
possible change? Are there any classes of transactions for which the 
benefit or burden would be greater? If there are classes of 
transactions for which the benefit is greater, why is the benefit 
greater? If there are classes of transactions for which the burden is 
greater, why is the burden greater?
    2. Is there any way to distinguish prior acquisitions that might 
have competitive significance from those that do not, such that the 
Commission would not need to require a list of all prior acquisitions?
    In addition to the topics outlined above, commenters are welcome to 
provide input on any other HSR Rule. As part of that input, identify 
the changes in investor behavior or competitive dynamics that would 
justify a change in the Commission's current approach.

    By direction of the Commission.
April Tabor,
Acting Secretary.

Statement of Commissioner Rohit Chopra

September 21, 2020.

Summary

     Premerger notification is a critical data source, but 
the Commission faces enormous information gaps when seeking to 
detect and halt anticompetitive transactions.
     While the proposed rule closes a loophole when it comes 
to investment manager holdings, the proposed approach to exempt a 
wide swath of minority stakes is concerning and adds to existing 
information gaps.
     The Commission needs to update the treatment of certain 
debt transactions when determining deal size for the purpose of 
premerger notification. The current approach allows dealmakers to 
structure anticompetitive transactions in ways that can go 
unreported.
    In September 1976, Congress gave the Federal Trade Commission an 
important tool enabling it to block harmful mergers. The Hart-Scott-
Rodino Antitrust Improvements Act of 1976 (``HSR Act'') requires 
prior notification to the antitrust agencies in advance of closing 
certain mergers and acquisitions.\1\
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    \1\ Clayton Act section 7A, 15 U.S.C. 18a.
---------------------------------------------------------------------------

    Prior to the HSR Act's enactment, companies could quickly 
``scramble the eggs'' of assets and operations, or even shut down 
functions. This made it extremely difficult for the antitrust 
agencies to remedy competitive harms through divestitures of assets. 
Years of protracted litigation to stop further damage and 
distortions were often the result.\2\
---------------------------------------------------------------------------

    \2\ For example, in United States v. El Paso Natural Gas Co., 
376 U.S. 651 (1964), it took seventeen years of litigation before a 
divestiture finally took place.
---------------------------------------------------------------------------

    The HSR Act fundamentally changed the process of merger review 
by giving the antitrust agencies time to halt anticompetitive 
transactions before these deals closed. Today, the FTC focuses a 
substantial portion of its competition mission on investigating and 
challenging mergers reported under the HSR Act. Importantly, only a 
small set of transactions--the ones with the highest valuations--are 
subject to premerger notification. The HSR Act specifies the 
valuation threshold, currently set at $94 million, which is 
typically adjusted upward each year. Since there are many ways to 
determine a deal's valuation, Congress gave the FTC broad authority 
to implement rules so that buyers know if they need to report their 
transactions and what they are required to submit with their filing. 
The Commission can also exempt classes of transactions and tailor 
filing requirements.
    While premerger notification filings provide the Commission with 
certain nonpublic information,\3\ gathering and analyzing market 
intelligence on transaction activity and competitive dynamics is a 
major challenge. We need to continuously assess how we can enhance 
our market monitoring techniques and evolve our analytical 
approaches.
---------------------------------------------------------------------------

    \3\ I agree with Commissioner Slaughter that current filing 
requirements, including for minority stakes, can have the beneficial 
effect of deterring certain anticompetitive transactions.
---------------------------------------------------------------------------

    Today, the Commission is soliciting comment on two rulemakings 
regarding our policies to implement the HSR Act's premerger 
notification protocols. The first publication, a Notice of Proposed 
Rulemaking, proposes specific rules and exemptions. While some of 
the proposals are helpful improvements, I respectfully disagree with 
our approach to exempting a broad swath of transactions from 
reporting. The second publication, an Advance Notice of Proposed 
Rulemaking, requests comment on a broad range of topics to set the 
stage for modernizing the premerger notification program to align 
with market realities. I support soliciting input to rethink our 
approach. I discuss each of these rulemakings below.

Notice of Proposed Rulemaking

    The Notice of Proposed Rulemaking outlines specific amendments 
that the Commission is proposing to the HSR rules. The aggregation 
and exemption provisions are particularly noteworthy. The 
aggregation provisions are worthwhile, since they close a loophole 
and align with market realities. However, I am concerned about the 
exemption provisions, since we will completely lose visibility into 
a large set of transactions involving non-controlling stakes.

Aggregation Provisions

    The financial services industry is well known for using an 
alphabet soup of small entities, like shell companies, partnerships, 
and other investment vehicles, to structure deals. Even though they 
may be under common management by the same person or group, like a 
private equity fund or a hedge fund, these smaller legal entities 
are all treated separately under the existing rules.
    The proposed aggregation provisions will help to prevent 
acquirers from splitting up

[[Page 77053]]

transactions into small slices across multiple investment vehicles 
under their control to avoid reporting. The proposal would require 
investors and other buyers to add together their stakes across 
commonly managed funds to determine whether they need to report a 
transaction.

Exemption Provisions

    By creating a reporting threshold based on the value of a 
transaction, the law already exempts most transactions from agency 
review. Because of this, it is difficult to systematically track 
these transactions, and even harder to detect and deter those that 
are anticompetitive.
    Now, the FTC is proposing to widen that information gap by 
creating a new exemption for minority stakes of 10% or less, subject 
to certain conditions. Importantly, the proposal is not exempting 
specific aspects of the reporting requirements--it is a total 
exemption, so the agency will receive no information whatsoever from 
the buyer or the seller that the transaction even occurred. This 
adds to the burdens and information asymmetries that the agency 
already faces when it comes to detecting potentially harmful 
transactions.\4\
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    \4\ The FTC may not be able to rely on other sources of robust 
data required by other agencies. For example, the Securities and 
Exchange Commission has proposed eliminating reporting for thousands 
of registered investment funds that previously detailed their 
holdings to the public. See Statement of SEC Comm'r Allison Herren 
Lee Regarding Proposal to Substantially Reduce 13F Reporting (July 
10, 2020), https://www.sec.gov/news/public-statement/lee-13f-reporting-2020-07-10.
---------------------------------------------------------------------------

    Companies and investors purchase minority, non-controlling 
stakes in a firm for a number of reasons. Sometimes, buyers might 
start with a minority stake, with the goal--or even with a 
contractual option--of an outright takeover as they learn more about 
the company's operations. Even though they might have a small stake, 
they can exert outsized control. In other cases, buyers might look 
for minority stakes in multiple, competing firms within a sector or 
industry, and some or all of these acquisitions may fall below the 
reporting thresholds. Of course, if they are able to obtain seats on 
boards of directors of competing companies, this can be illegal.
    Investors and buyers can only use the proposed exemption if they 
do not currently own stakes in firms that compete or do business 
with the company they plan to acquire. Since many investors might 
not know about the specific business dealings across companies, this 
may be difficult to enforce and puts more burden on the agency.
    Even if one believes that transactions involving a minority 
stake are less likely to be illegal, there are many potential 
alternatives to outright elimination of reporting. Unfortunately, 
the rulemaking does not outline alternative approaches (such as 
tailored, simplified filing requirements or shortened waiting 
periods) for minority stakes.

Advance Notice of Proposed Rulemaking

    As markets evolve, it is important that the HSR Act and its 
implementing rules reflect those developments. The Advance Notice of 
Proposed Rulemaking seeks input on a wide array of market-based 
issues that may affect the Commission's merger oversight. One topic 
of particular interest is whether to include debt as part of the 
valuation of a transaction. Since the HSR Act's passage, corporate 
debt markets have grown in importance for companies competing in 
developed economies. Many major deals involve vast sums of borrowed 
money.
    However, the Commission has not formally codified a view on the 
treatment of certain debt transactions. Instead, existing staff 
guidance excludes many debt transactions from the deal's overall 
value. This is worrisome, since it means that many potentially 
anticompetitive transactions can go unreported, since they may fall 
below the size threshold. In addition, this view has been provided 
informally, communicated through unofficial interpretations outside 
of formal rules or guidance. It will be important to take steps to 
collect input and codify the Commission's policies on valuation, 
particularly with respect to the treatment of debt, since formal 
guidance or rules will offer clarity and will be easier to enforce.
    The Advance Notice of Proposed Rulemaking also seeks information 
that will lay groundwork for broader reforms to our premerger 
notification program. I look forward to the data and written 
submissions to this document.

Conclusion

    Adequate premerger reporting is a helpful tool used to halt 
anticompetitive transactions before too much damage is done. 
However, the usefulness of the HSR Act only goes so far. This is 
because many deals can quietly close without any notification and 
reporting, since only transactions above a certain size are 
reportable.\5\ The FTC ends up missing a large number of 
anticompetitive mergers every year. In addition, since amendments to 
the HSR Act in 2000 raised the size thresholds on an annual basis, 
the number of HSR-reportable transactions has decreased.
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    \5\ Small transactions can be just as harmful to competition as 
large transactions notified under the HSR Act. For example, ``catch 
and kill'' acquisitions of an upstart competitor in fast-moving 
markets can be particularly destructive. In addition, ``roll-ups,'' 
an acquisition strategy involving a series of acquisitions of small 
players to combine into a larger one, can have very significant 
negative effects on competition. See Statement of Fed. Trade Comm'r 
Rohit Chopra Regarding Private Equity Roll-ups and the Hart-Scott 
Rodino Annual Report to Congress, Comm'n File No. P110014 (July 8, 
2020), https://www.ftc.gov/system/files/documents/public_statements/1577783/p110014hsrannualreportchoprastatement.pdf.
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    I want to commend agency staff for their work in identifying 
potential blind spots in the premerger reporting regime. I also want 
to thank state legislatures and state attorneys general for enacting 
and implementing their own premerger notification laws to fill in 
some of these gaps. For example, a new law in State of Washington 
has taken effect, which requires advance notice of any transactions 
in the health care sector, where many problematic mergers fall below 
the radar.\6\
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    \6\ See Healthcare Transaction Notification Requirement, WASH. 
STATE OFF. OF THE ATT'Y GEN. (last visited Sept. 16, 2020), https://www.atg.wa.gov/healthcare-transactions-notification-requirement; see 
also S.H.B. 1607, 66th Leg., Reg. Sess. (Wash. 2019).
---------------------------------------------------------------------------

    As we conduct this examination of the HSR Act, we should 
identify areas where laws may need to be changed or updated, 
especially when we cannot fill those gaps through amendments to our 
rules. For example, we may need to pursue reforms to ensure that 
``roll ups'' are reported, where a buyer might acquire a large 
number of small companies that may not be individually reportable. 
We may also need to look carefully at the length of the waiting 
period, to determine if it is long enough to conduct a thorough 
investigation. I look forward to reviewing the input to these two 
rulemakings, so that our approach reflects market realities.

[FR Doc. 2020-21754 Filed 11-30-20; 8:45 am]
BILLING CODE 6750-01-P