At a time when there is significant M&A activity in the energy industry, it is critical for energy companies to understand how the premerger notification filing requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act” or “the Act”),1 and the regulations promulgated under the Act (“HSR Rules” or “Rule(s)”),2 may apply to their transactions. In fact, there are both energy-specific exemptions to the Act and other exemptions of more general application that can be used to exempt broad categories of energy mergers and acquisitions from HSR Act filing requirements. These exemptions are highly technical, however, and include a number of exceptions. As a result, transactions that exceed the Act’s basic jurisdictional thresholds often must be reviewed carefully to determine whether any of these exemptions can be applied to the particular transaction at issue. Moreover, amendments to the HSR Rules and reporting form implemented in 2011 require parties to certain energy transactions, particularly those involving master limited partnerships (“MLPs”), to report additional information where the transaction does not qualify for an exemption. This article provides a brief overview of how these various provisions may apply to energy-related transactions, including the circumstances under which such transactions are and are not exempt.
HSR Act Overview
Under the HSR Act and Rules, parties to acquisitions of assets, voting securities, and equity interests in non-corporate entities (e.g., limited liability companies, partnerships) that meet certain jurisdictional dollar thresholds, are required to file premerger notification forms with the Federal Trade Commission (the “FTC”) and the Department of Justice (the “DOJ”), and observe a waiting period—usually 30 days—before they are permitted to consummate the transaction. There are two basic jurisdictional thresholds. The Size-of-Persons threshold is satisfied where there is a person on one side of the transaction with $141.8 million or more in total assets or annual net sales, and a person on the other side with $14.2 million or more in total assets or annual net sales.3 The Size-of-Transaction threshold is met if the value of the transaction exceeds $70.9 million.4 Transactions valued in excess of $283.6 million meet the jurisdictional threshold regardless of the size of the persons.5 Transactions meeting these thresholds are reportable unless there is an applicable exemption.
Since 1996, the HSR Rules have included Rule 802.3, which provides specific exemptions for acquisitions of carbon-based mineral reserves. Under the Rule, an acquisition of reserves or rights in reserves of oil, natural gas, shale or tar sands, together with associated exploration or production assets, is exempt if the fair market value of such assets to be held as a result of the acquisition does not exceed $500 million.6 Similarly, an acquisition of reserves or rights in reserves of coal together with associated exploration or production assets is exempt if the fair market value of such assets to be held as a result of the acquisition does not exceed $200 million.7 “Associated exploration or production assets” means equipment, machinery, fixtures and other assets that are integral and exclusive to current or future exploration or production activities associated with the carbon-based mineral reserves that are being acquired, but does not include (1) any pipeline and pipeline system or processing facility which transports or processes oil and gas after it passes through the meters of a producing field located within reserves that are being acquired, or (2) any pipeline or pipeline system that receives gas directly from gas wells for transportation to a natural gas processing facility or other destination.8
Significantly, in determining whether the $500 million or $200 million thresholds have been exceeded, the parties do not need to count the value of any nonproducing reserves.9 As a result of this provision, acquisitions of oil and gas reserves with a total value substantially in excess of $500 million may be exempt (e.g., an $800 million acquisition consisting of $400 million in producing oil and gas reserves and $400 million in nonproducing reserves). As noted above, however, the exemption does not apply to transportation or processing assets outside of the production field. In particular, such assets may include natural gas-gathering systems, processing and treatment plants, transportation pipelines, storage facilities and terminals.10 In a transaction in which both exempt assets valued below the Rule 802.3 thresholds and nonexempt assets are being acquired, the parties must determine whether, viewed separately, the aggregate value of the nonexempt assets exceeds the $70.9 million size threshold, in which case a filing will be required for the acquisition of those assets.
Note that parties can take advantage of these exemptions regardless of whether the transaction is structured as an acquisition of assets or an acquisition of voting securities or noncorporate interests. Under Rule 802.4, where a direct acquisition of assets is exempt under Rule 802.3, the acquisition of an equity interest in an entity holding such assets also will be exempt provided that the entity also does not hold nonexempt assets valued in excess of $70.9 million.
Other Exemptions Applicable to Energy Transactions
In addition to the Rule 802.3 exemptions, there are a number of exemptions of more general application that can be applied to exempt transactions involving energy-related assets. A few of the most relevant exemptions are described below.
Acquisitions of NonControlling Interests in NonCorporate Entities
There are many cases in which energy-related assets such as gathering systems and transportation pipelines are held in noncorporate entities, including limited liability companies (LLCs) and limited partnerships.11 Under the HSR Rules, acquisition of an equity interest in a noncorporate entity is not reportable unless, as a result of the acquisition, the acquiring person will hold a controlling interest in the entity.12 Control of a noncorporate entity is defined under the Rules purely in financial terms as having the right to 50 percent or more of the entity’s profits or 50 percent or more of its assets upon dissolution.13 Thus, an acquisition that will result in the acquiring person holding only a minority interest in a non-corporate entity that holds energy-related assets is exempt regardless of the dollar value of the interest acquired. Further, this exemption applies even where the minority interest being acquired is a general partner or managing member interest that will give the acquiring person management control of the entity and its underlying assets.14
Acquisitions of Non-Corporate Interests in Financing Transactions
Under Rule 802.65, an acquisition of a controlling interest in a non-corporate entity is exempt from HSR Act filing requirements if (a) the acquiring person is contributing only cash to the non-corporate entity, (b) for the purpose of providing financing, and (c) the terms of the financing are such that the acquiring person no longer will control the entity after it realizes a preferred return. In recent years, it has become increasingly common for financial investors to contribute funds to entities that hold renewable energy projects, including solar power and wind projects, under terms that meet the requirements of this rule. Thus, parties to such investments should consider whether their transaction qualifies for the Rule 802.65 exemption.
Acquisitions of Assets and Entities Located Outside the US
In an increasingly global energy industry, it is more likely that both US and non-US companies will be acquiring energy-related assets and entities located outside the US. Even if the parties to such transactions that meet the Act’s jurisdictional thresholds cannot take advantage of the exemptions discussed above, such acquisitions may be exempt under HSR Rules exempting certain acquisitions of non-US assets and interests in non-US entities. In general, the acquisition of assets located outside the US is exempt so long as the non-US assets being acquired from the same acquired person did not account for aggregate sales in or into the US of more than $70.9 million in the acquired person’s most recent fiscal year.15 A similar rule applies to acquisitions of voting securities in non-US corporations and controlling equity interests in non-US non-corporate entities. Where a non-US person acquires a non-controlling (less than 50 percent) voting securities interest in a non-US corporate issuer, the transaction is exempt. Where a non-US person acquires a controlling interest in a non-US corporate or non-corporate entity, or a US person acquires any voting securities interest in a non-US corporation or a controlling interest in a non-US non-corporate entity, the acquisition is exempt unless the target entity, including any of its controlled subsidiaries, holds assets located in the US with a current fair market value of more than $70.9 million, or had sales in or into the US of more than $70.9 million in its most recent fiscal year.16
In transactions involving the acquisition of both US and non-US assets or entities, it may be helpful for the parties first to assess whether the US part of the transaction alone is valued in excess of $70.9 million and, if not, then determine whether the non-US part is exempt; if it is, the transaction is not reportable; if the non-US part is not exempt, the parties then should determine whether the value of the US and non-US parts together exceed the $70.9 million threshold.
Additional Reporting Obligations Relating to Master Limited Partnerships
In 2011, the FTC implemented changes to the HSR Act reporting form and regulations that were designed to obtain additional information in filings made by both private equity funds and MLPs, which frequently are used to hold assets in the oil and gas sector.17 The effect of these new rules can be illustrated with the following, simplified example. Assume GP is the general partner and holds a 5 percent interest in both MLP1 and MLP2, each of which owns natural gas pipelines. MLP1 now plans to acquire another natural gas pipeline in a transaction reportable under the HSR Act. Under the old rules, MLP1 was not required to report anything about MLP2’s pipeline holdings, even if they competed directly with the pipeline MLP1 now is planning to acquire. Under the new rules, GP and MLP2 are considered to be “associates” of MLP1, and MLP1 must include information in its HSR Act filing regarding any entity in which GP or MLP2 holds a 5 percent or greater equity interest that operates in the same industry as the assets or company being acquired by MLP1. In this example, that would include information regarding MLP2’s pipelines, including the geographic areas in which they operate.18 As this example shows, an MLP that is managed by a general partner that also manages one or more other MLPs, and is engaged in a transaction reportable under the HSR Act, needs to identify both relevant associate relationships and the resulting information it may need to report regarding those relationships.
As this discussion shows, there are many energy-related transactions that, while potentially reportable under the HSR Act, may qualify for one or more energy-related or more general exemptions from the Act’s reporting requirements. Parties to transactions of the types discussed above should confer with counsel to determine whether their transaction is exempt, ensure that the transaction does not fall within an exception to the relevant exemption and, particularly if an MLP is involved, for guidance in identifying any associate relationships.
1. 15 U.S.C. §18a.
2. 16 C.F.R. § 801 et seq.
3. 15 U.S.C. § 18a(a)(2)(B)(ii). “Person” for these purposes is the ultimate parent of the entity making the acquisition (acquiring person), or whose assets, voting securities or non-corporate interests are being acquired (acquired person). Rule 801.1(a)(1). Whether the relevant size threshold has been satisfied is determined by reference
to each person’s most recent, fully consolidated balance sheet and statement of annual income. Rule 801.11(c).
4. In an acquisition of assets, whether the $70.9 million threshold has been exceeded is determined by looking at the greater of the acquisition price or the fair market value. The acquisition price includes the amount of consideration being paid and the value of any assumed, accrued liabilities. The fair market value must be determined by the buyer acting in good faith and using a commercially reasonable valuation method. See Rule 801.10(b), (c)(1)(iii). Acquisitions of voting securities that are publicly traded are valued at the greater of the market price or the price agreed upon by the parties. Voting securities that are not publicly traded and equity interests in non-corporate entities are valued at the acquisition price agreed upon by the parties, or if there is no acquisition price, the fair market value determined as described above. Rule 801.10(a). Note that since 2004, these jurisdictional thresholds have been adjusted annually based on the rate of growth in the US Gross National Product. 15 U.S.C. §18a(a)(2)(A). The current thresholds described above were announced in February 2013. See 78 Fed. Reg. 2406, 2406 (Jan. 11, 2013), available at http://www.ftc.gov/os/2013/01/130110claytonact7afrn.pdf.
5. 15 U.S.C. § 18a(a)(2)(A).
6. Rule 802.3(a).
7. Rule 802.3(b).
8. Rule 802.3(c).
9. Rule 802.3, Exs. 1 & 4 (the value of reserves meeting the definition of unproductive real property in Rule 802.2(c) does not count towards the Rule 802.3 exemption thresholds). Rule 802.2(c) exempts the acquisition of real property—including raw land, structures or other improvements (but excluding equipment), associated production and exploration assets as defined in Rule 803.2(c), and natural resources and assets incidental to the ownership of the real property—that has not generated total revenues in excess of $5 million during the thirty-six (36) months preceding the acquisition.
10. Acquisitions of these types of non-exempt assets repeatedly have been the subject of antitrust enforcement actions by the DOJ and FTC in which the parties have been required to divest assets to obtain antitrust clearance. See, e.g., In re Kinder Morgan, Inc., Dkt. No. C-4355 (F.T.C. June 12, 2012) (Decision and Order), http://www.ftc.gov/os/caselist/1210014/120614kindermorgando.pdf (requiring Kinder Morgan to divest pipeline assets to acquire El Paso Corporation); In re Enter. Prods. Partners LP, Dkt. No. C-4123 (F.T.C. Nov. 23, 2004), http://www.ftc.gov/os/caselist/0410039/041126do0410039.pdf (requiring Enterprise to divest interests in a natural gas pipeline and propane storage and terminal assets to acquire GulfTerra Energy Partners, L.P.). Note that this exception to the Rule 802.3 exemptions also would apply to any assets being acquired in the transaction not related to energy production, processing or transportation, such as a manufacturing plant. See Rule 802.3(a) and (b).
11. See, e.g., Anthony Reale, Master Limited Partnerships—Understanding an Evolving Asset Class, http://www.jpmorgan.com/tss/General/Master_Limited_Partnerships_Understanding_an_Evolving_Asset_Class/1320477769983 (last visited July 17, 2013) (“MLP’s are significant owners of America’s energy infrastructure, controlling substantial assets involved in the transportation, processing, refining, marketing and storage of the nation’s energy resources.”).
12. Am. Bar Ass’n, Premerger Notification Practice Manual, Interpretation No. 102 (4th ed. 2007).
13. Rule 801.1(b)(1)(ii).
14. On the other hand, if the target entity is a corporation, acquisition of a minority voting securities interest is reportable if it will result in the acquiring person holding voting securities valued at more than $70.9 million, unless there is another applicable exemption.
15. Rule 802.50.
16. Rule 802.51. When the acquiring person is acquiring interests in multiple subsidiaries of the same acquired person, the value of those subsidiaries’ US assets and sales is aggregated for purposes of the Rule 802.51 $70.9 million thresholds. See Rule 802.51(a)(2) and (b)(2).
17. See 75 Fed. Reg. 57110, 57112 (Sept. 17, 2010) (proposed rule changes), available at http://ftc.gov/os/fedreg/2010/september/100917premerger.pdf (failure to capture competitive information under then-current rules “frequently arises in the energy industry with Master Limited Partnerships, where potentially crucial overlaps among LPs with the same general partner may go undetected.”).
18. The definition of “associate” under Rule 801.1(d) is “an entity that is not an affiliate of [a filing firm] but: (A) has the right, directly or indirectly, to manage the operations or investment decisions of an acquiring entity (a ‘managing entity’); or (B) has its operations or investment decisions, directly or indirectly, managed by the acquiring person; or (C) directly or indirectly controls, is controlled by, or is under common control [has a common parent] with a managing entity; or (D) directly or indirectly manages, is managed by, or is under common operational or investment decision management with a managing entity.” Under this definition, in the example above, both GP and MLP2 are associates of MLP1. Note that while the rules regarding associates were enacted primarily to address reporting gaps in transactions involving private equity funds and MLPs, the definitions are not limited to those entities and can apply to other types of entities that meet the “associate” definition.