FTC Federal Register notice, July 31, 1978, 43 FR 33450

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33450 RULES AND REGULATIONS [6750-01] Title 16— Commercial Practices CHAPTER I— FEDERAL TRADE COMMISSION SUBCHAPTER H— RULES, REGULATIONS, STATEMENTS AN D INTERPRETATIONS UNDER THE HART-SCOTT-RODINO ANTITRUST IM­ PROVEMENTS ACT OF 1976 PREMERGER NOTIFICATION; REPORT- ING AND WAITING PERIOD RE­ QUIREMENTS AGENCY: Federal Trade Commission. ACTION: Promulgation of final rules. SUMMARY: The purpose of this doc­ ument is formally to promulgate final rules implementing title II of the Hart-Scott-Rodino Antitrust Improve­ ments Act of 1976, relating to pre­ merger notification. The document consists of final rules, including a No­ tification and Report Form, and a statement of basis and purpose. Under the statute, the Federal Trade Com­ mission was directed to promulgate, with the concurrence of the Assistant Attorney General in charge of the Antitrust Division of the Department of Justice, rules implementing a pre­ merger notification program. The effect of the final rules is to imple­ ment such a program, by explaining the coverage of the program, certain exemptions from the program, and the means by which persons must comply with their obligations under the pro­ gram.

EFFECTIVE DATE: August 30, 1978. FOR FURTHER INFORMATION CONTACT:

Malcolm R. Pfunder, Associate Di­ rector for Premerger Notification, Bureau of Competition, Room 303, Federal Trade Commission, Wash­ ington, D.C. 20580, telephone: 202- 523-3894.

SUPPLEMENTARY INFORMATION: Section 7A of the Clayton Act, 15 U.S.C. 18a, as added by sections 201 and 202 of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, requires persons contemplating certain mergers or acquisitions to give the Commission and the Assistant Attor­ ney General advance notice and to wait certain designated periods before consummation of such plans. The transactions to which the advance notice requirement is applicable and the length of the waiting periods re­ quired are set out in the act, the com­ plete text of which is reprinted below. The rules are divided into three parts. Part 801 defines a number of the terms used in the act and the rules and explains which acquisitions are subject to reporting and waiting period requirements. Part 802 contains a number of exemptions from these requirements. Part 803 explains the procedures for complying with the act. The Notification and Report Form, which is completed by persons re; quired to file notification, is an appen­ dix to part 803 of the rules. The amendment to the Clayton Act does not change the standards used in de­ termining the legality of mergers and acquisitions, but instead provides the enforcement agencies with advance notice of, and information about, cer­ tain transactions, and with an oppor­ tunity to seek a preliminary injunction in Federal district court to prevent consummation of any such transac­ tions which may, if consummated, vio­ late the antitrust laws. Section 7A of the Clayton Act pro­ vides:

“Sec. 7A. (a) Except as exempted pursuant to subsection (c), no person shall acquire, directly or indirectly, any voting securities or assets of any other person, unless both persons (or in the case of a tender offer, the ac­ quiring person) file notification pursu­ ant to rules under subsection (d)(1) and the waiting period described in subsection (b)(1) has expired, if— “(1) the acquiring person, or the person whose voting securities or assets are being acquired, is engaged in commerce or in any activity affecting commerce:

“(2) (A) any voting securities or assets of a person engaged in manufac­ turing which has annual net sales or total assets of $10,000,000 or more are being acquired by any person which has total assets or annual net sales of $10,000,000 or more;

“(B) any voting securities or assets of a person not engaged in manufac­ turing which has total assets of $10,000,000 or more are being acquired by any person which has total assets or annual net sales of $100,000,000or more; or “(C) any voting securities or assets of a person with annual net sales or total assets of $100,000,000 or more are being acquired by any person with total assets or annual net sales of $10,000,000 or more; and “(3) as a result of such acquisition, the acquiring person would hold— “(A) 15 per centum or more of the voting securities or assets of the ac­ quired person, or “(B) an aggregate total amount of the voting securities and assets of the acquired person in excess of $15,000,000.

In the case of a tender offer, the person whose voting securities are sought to be acquired by a person re­ quired to file notification under this subsection shall file notification pur­ suant to rules under subsection (d). “(b) (1) The waiting period required under subsection (a) shall— “(A) begin on the date of the receipt by the Federal Trade Commission and the Assistant Attorney General in charge of the Antitrust Division of the Department of Justice (hereinafter re­ ferred to in this section as the ‘Assist­ ant Attorney General’) of— “(i) the completed notification re­ quired under subsection (a), or “(ii) if such notification is not com­ pleted, the notification to the extent completed and a statement of the rea­ sons for such noncompliance, from both persons, or, in the case of a tender offer, the acquiring person; and “(B) end on the thirtieth day after the date of such receipt (or in the case of a cash tender offer, the fifteenth day), or on such later date as may be set under subsection (e)(2) or (g)(2). “(2) The Federal Trade Commission and the Assistant Attorney General may, in individual cases, terminate the waiting period specified in paragraph (1) and allow any person- to proceed with any acquisition subject to this section, and promptly shall cause to be published in the F ederal R eg ister a notice that neither intends to take any action within such period with respect to such acquisition.

“(3) As used in this section— “(A) The term ‘voting securities’ means any securities which at present or upon conversion entitle the owner or holder thereof to vote for the elec­ tion of dirctors of the issuer or, with respect to unincorporated issuers,, per­ sons exercising similar functions. “(B) The amount of percentage of voting securities or assets of a person which are acquired or held by another person shall be determined by aggre­ gating the amount or percentage of such voting securities or assets held or acquired by such other person and each affiliate thereof. “(c) The following classes of transac­ tions are exempt from the require­ ments of this section— “(1) acquisitions of goods or realty transferred in the ordinary course of business;

“(2) acquisitions of bonds, mort­ gages, deeds of trust, or other obliga­ tions which are not voting securities; “(3) acquisitions of voting securities of an issuer at least 50 per centum of the voting securities of which are owned by the acquiring person prior to such acquisitions;

“(4) transfers to or from a Federal agency or a State or political subdivi­ sion thereof;

“(5) transactions specifically exempted from the antitrust laws by Federal statute;

“(6) transactions specifically exempted from the antitrust laws by Federal statute if approved by a Fed­ eral agency, if copies of all informa- FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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RULES AND REGULATIONS tion and documentary material filed with such agency are contemporane­ ously filed with the Federal Trade Commission* and the Assistant Attor­ ney General;

“(7) transactions which require agency approval under section 18(c) of the Federal Deposit Insurance Act (12 U.S.C. 1828(c)), or section 3 of the Bank Holding Company Act of 1956 (12 U.S.C. 1842);

“(8) transactions which require agency approval under section 4 of the Bank Holding Company Act of 1956 (12 U.S.C. 1843), sections 403 and 408(e) of the National Housing Act (12 U.S.C. 1726 and 1730(a), or section 5 of the Home Owners’ Loan Act of 1933 (12 U.S.C. 1464), if copies of all infor­ mation and documentary material filed with any such agency are con­ temporaneously filed with the Federal Trade Commission and the Assistant Attorney General at least 30 days prior to consummation of the pro­ posed transaction;

“(9) acquisition, solely for the pur­ pose of investment, of voting securi­ ties, if, as a result of such acquisition, the securities acquired or held do not exceed 10 per centum of the outstand­ ing voting securities of the issuer; “(10) acquisitions of voting securi­ ties, if, as a result of such acquisition, the voting securities acquired do not increase, directly or indirectly, the ac­ quiring person’s per centum share of outstanding voting securities of the issuer;

“(11) acquisitions, solely for the pur­ pose of investment, by any bank, bank­ ing association, trust company, invest­ ment company, or insurance company, of (A) voting securities pursuant to a plan of reorganization or dissolution; or (B) assets in the ordinary course of its business; and “(12) such other acquisitions, trans­ fers, or transactions, as may be exempted under subsection (d)(2)(B). “(d) The Federal Trade Commission, with the concurrence of the Assistant Attorney General and by rule in ac­ cordance with section 553 of title 5, United States Code, consistent with the purposes of this section— “(1) shall require that the notifica­ tion required under subsection (a) be in such form and contain such docu­ mentary material and information rel­ evant to a proposed acquisition as is necessary and appropriate to enable the Federal Trade Commission and the Assistant Attorney General to de­ termine whether such acquisitions may, if consummated, violate the anti­ trust laws; and “(2) may— “(A) define the terms used in this section;

“(B) exempt, from the requirements of this section, classes of persons, ac­ quisitions, transfers, or transactions which are not likely to violate the antitrust laws; and “(C) prescribe such other rules as may be necessary and appropriate to carry out the purposes of this section. *‘(e)(l) The Federal Trade Commis­ sion or the Assistant Attorney General may, prior to the expiration of the 30day waiting period (or in the case of a cash tender offer, the 15-day waiting period) specified in subsection (b)(1) of this section, require the submission of additional information or documen­ tary material relevant to the proposed acquisition, from a person required to file notification with respect to such acquisition under subsection (a) of this section prior to the expiration of the waiting period specified in subsection (b)(1) of this section, or from any offi­ cer, director, partner, agent, or em­ ployee of such person.

“(2) The Federal Trade Commission or the Assistant Attorney General, in its or his discretion, may extend the 30-day waiting period (or in the case of a cash tender offer, the 15-day waiting period) specified in subsection (b)(1) of this section for an additional period of not more than 20 days (or in the case of a cash tender offer, 10 days) after the date on which the Federal Trade Commission or the Assistant At­ torney General, as the case may be, re­ ceives from any person to whom a re­ quest is made under paragraph (1), or in the case of tender offers, the ac­ quiring person, (A) all the information and documentary material required to be submitted pursuant to such a re­ quest, or (B) if such request is not fully complied with, the information and documentary material submitted and a statement of the reasons for such noncompliance. Such additional period may be further extended only by the United States district court, upon an application by the Federal Trade Commission or the Assistant At­ torney General pursuant to subsection (g)(2).

“(f) If a proceeding is instituted or an action is filed by the Federal Trade Commission, alleging that a proposed acquisition violates section 7 of this Act or section 5 of the Federal Trade Commission Act, or an action is filed by the United States, alleging that a proposed acquisition violates such sec­ tion 7 or section 1 or 2 of the Sherman Act, and the Federal Trade Commis­ sion or the Assistant Attorney General (1) files a motion for a preliminary in­ junction against consummation of such acquisition pendente lite, and (2) certifies to the United States district court for the judicial district within which the respondent resides or car­ ries, on business, or in which the action is brought, that it or he believes that the public interest requires relief pen­ dente lite pursuant to this subsec­ tion— 33451 “(A) upon the filing of such motion and certification, the chief judge of such district court shall immediately notify the chief judge of the United States court of appeals for the circuit in which such district court is located, who shall designate a United States district judge to whom such action shall be assigned for all purposes; and “(B) the motion for a preliminary in­ junction shall be set down for hearing by the district judge so designated at the earliest practicable time, shall take precedence over all matters except older matters of the same char­ acter and trials pursuant to section 3161 of title 18, United States Code, and shall be in every way expedited. “(g)(1) Any person, or any officer, director, or partner thereof, who fails to comply with any provision of this section shall be liable to the United States for a civil penalty of not more than $10,000 for each day during which such person is in violation of this section. Such penalty may be re­ covered in a civil action brought by the United States.

“(2) If any person, or any officer, di­ rector, partner, agent, or employee thereof, fails substantially to comply with the notification requirement under subsection (a) or any request for the submission of additional informa­ tion or documentary material under subsection (eXl) of this section within the waiting period specified in subsec­ tion (b)(1) and as may be extended under subsection (e)(2), the United States district court— “(A) may order compliance; “(B) shall extend the waiting period specified in subsection (b)(1) and as may have been extended under subsec­ tion (e)(2) until there has been sub­ stantial compliance, except that, in the case of a tender offer, the court may not extend such waiting period on the basis of a failure, by the person whose stock is sought to be acquired, to comply substantially with such no­ tification requirement or any such re­ quest; and “(C) may grant such other equitable relief as the court in its discretion de­ termines necessary or appropriate. upon application of the Federal Trade Commission or the Assistant Attorney General.

“(h) Any information or documen­ tary material filed with the Assistant Attorney General or the Federal Trade Commission pursuant to this section shall be exempt from disclo­ sure under section 552 of title 5, United States Code, and no such infor­ mation or documentary material may be made public, except as may be rele­ vant to any administrative or judicials action or proceeding. Nothing in this section is intended to prevent disclo­ sure to either body of Congress or to FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33452 any duly authorized committee or sub­ committee of the Congress. “(i)(l) Any action taken by the Fed­ eral Trade Commission or the Assist­ ant Attorney General or any failure of the Federal Trade Commission or the Assistant Attorney General to take any action under this section shall not bar any proceeding or any action with respect to such acquisition at any time under any other section of this Act or any other provision of Law. “(2) Nothing contained in this sec­ tion shall limit the authority of the Assistant Attorney General or the Federal Trade Commission to secure at any time from any person documen­ tary material, oral testimony, or other information under the Antitrust Civil Process Act, the Federal Trade Com­ mission Act, or any other provision of law.

“(j) Beginning not later than Janu­ ary 1, 1978, the Federal Trade Com­ mission, with the concurrence of the Assistant Attorney General, shall an­ nually report to the Congress on the operation of this section. Such report shall include an assessment of the ef­ fects of this section, of the effects, purpose, and need for any rules pro­ mulgated pursuant thereto, and any recommendations for revisions of this section.”

S ta tem ent o f B a sis and P u r po se o f R u les I m plem en tin g T it l e II of t h e H art-Sco tt-R o d in o A n t it r u s t I m ­ pr o v em en ts A ct of 1976 On September 30, 1976, President Gerald Ford signed into law the Hart- Scott-Rodino Antitrust Improvements Act of 1976, PUb. L. 94-435, 90 Stat. 1390. Section 201 of that statute added a new section 7A to the Clayton Act, 15 U.S.C. 18A (referred to in this Statement of Basis and Purpose as ‘‘the act”), relating to premerger noti­ fication.

The act creates a requirement that ‘‘persons” of specified size or larger, which intend to make voting securities or asset acquisitions of specified size or larger, must report their intentions in advance and provide information relevant to the transaction to the Antitrust Division of the Department of Justice and to the Federal Trade Commission. After reporting, those persons must wait a prescribed period of time before consummating the re­ ported transaction.

That waiting c period may be extended by either en­ forcement agency by means of a re­ quest for additional information or documentary material. The " act also contains 11 specific types of exemp­ tions, along with a grant of rulemak­ ing authority to define any terms used in the act, to create additional exemp­ tions, and generally to carry out the purposes of the act.

The act provides for expedited con- RULES AND REGULATIONS sideration by a Federal district court in the event that either agency seeks a preliminary injunction to prevent con­ summation of an acquisition. It also contains penalty and enforcement pro­ visions, a requirement that informa­ tion filed by reporting persons not be made public except under certain cir­ cumstances, provisions clarifying the relationship between the act and cer­ tain substantive and procedural as­ pects of other antitrust laws, and the requirement of an annual report to the Congress.

Rulemaking authority under section 7A(d) of the act is conferred upon the Federal Trade Commission, and that provision requires that the Assistant Attorney General in charge of the Antitrust Division of the Department of Justice (referred to hereafter as the “Assistant Attorney General”) concur in the rules. That section also makes applicable the informal rulemaking procedures of the Administrative Pro­ cedure Act, 5 U.S.C. 553, and requires that any rules issued must be consist­ ent with the purposes of the act. Section 553 of the Administrative Procedure Act requires that an agency that intends to promulgate rules must first publish a “general notice of pro­ posed rulemaking” in the F ederal R e g is t e r. After giving notice, the agency is required to “give interested persons an opportunity to participate in the rulemaking through submission of written data, views, arguments with or without opportunity for oral pres­ entation.” Thereafter the agency may adopt and issue final rules; incorporat­ ed in those rules must be “a concise general statement of their basis and purpose.” The statute also requires that final rules of a substantive nature normally be published or served upon affected persons not less than 30 days before their effective date. On December 15, 1976, the Federal Trade Commission, with the informal concurrence of the Assistant Attorney General, issued proposed rules and a proposed Notification and Report Form (sometimes referred to hereafter as the “form”) to implement the act. The proposed rulemaking was pub­ lished in the F ederal R eg ister of De­ cember 20, 1976, 41 FR 55488, and is hereafter referred to as the “original” rules and form. The 30-day comment period was extended by the Commis­ sion on January 12, 1977, and expired on February 18, 1977. One hundred thirty-three comments became part of the rulemaking record in connection with the original rules and form. A list of these comments, and of those re­ ceived during the later comment period, appears at the end of the Statement of Basis and Purpose. Each comment has been assigned a number, and throughout this statement indi­ vidual comments are referred to by these numbers.

Because of the extensiveness of public comment, it became clear to the Commission that some substantial re­ visions would have to be made in the original rules. On July 25, 1977, the Commission determined that addition­ al public comment on the rulbs would be desirable and approved revised pro­ posed rules and a revised proposed No­ tification and Report Form (hereafter referred to as the "revised” rules and form). The revised rules and form were published in the F ederal R e g is­ te r of August 1, 1977, 42 FR 39040, and a 30-day comment period began on that date. In response to numerous re­ quests for additional time for com­ ment, the Commission on August 23, 1977, extended the comment period by 30 days, through September 30, 1977. A total of 116 comments were received on the revised rules and form. Additional changes in the revised rules and form were made after the close of the comment period, and on February 14, 1978, the Commission gave its interim approval to final ver­ sions of the rules and form (referred to hereafter as the “final” rules and form). The Notification and Report Form was then transmitted .to the General Acounting Office for review under the Federal Reports Act, 44 U.S.C. 3502. The General Accounting Office submitted its report to the Commission on May 12, 1978. The Commission formally promulgated the final rules and form and issued this Statement of Basis and Purpose on July 10, 1978. The Assistant Attorney General gave his formal concurrence on July 18, 1978. The final rules and form and this Statement of Basis and Purpose were published in the F eder­ al R e g ist e r of July 31, 1978, 43 FR 33451, and will become effective on Au­ gust 30, 1978.

T h e T r a n sit io n a l R u le Section 202 of the Antitrust Im­ provements Act of 1976 specified that section 201, containing new section 7A of the Clayton Act, would become ef­ fective 150 days after enactment, except for the rulemaking provisions contained in section 7A(d), which became effective upon enactment. Be­ cause final rules could not be promul­ gated prior to the effective date of the act (February 27, 1977), the Commis­ sion on January 27, 1977, with the con­ currence of the Assistant Attorney General, promulgated a final rule, des­ ignated the Transitional Rule, which was published in the F ederal R eg ister of February 2, 1977, 42 FR 6365. The Transitional Rule created an exemp­ tion for all transactions consummated prior to the effective date of the final rules and specified the manner in which the final rules will be imple- FEDERAL REGISTER, VOL. 43, N O . 147— M O N D AY, JULY 31, 1978

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merited during the first 30 days follow­ ing the effective date of the rules. Under the Transitional Rule, any ac­ quisition which is consummated before the effective date of these rules is exempt from all requirements of the act. Any cash tender offer which is consummated on or within 15 calendar days after the effective date of the rules and any other acquisition which is consummated on or within 30 calen­ dar days after the effective date of the rules is exempt from the waiting period requirement of section 7A(a), subject to two other conditions. First, ail persons required by the act and the rules to file notification with respect to the acquisition (or, for an acquisi­ tion subject to section 801.30, just the acquiring person) must file on or before the effective date of the rules. Second, if prior to consummation of the acquisition either enforcement agency makes a request for additional information or documentary material under section 7A(e) and section 803.20, then the waiting period normally de­ riving from such a request takes effect, and its expiration, termination or extension thereafter* is governed by the act and the rules.

It should be emphasized that the Transitional Rule does not apply to any transaction that will be consum­ mated more than 30 days (15 in the case of a cash tender offer) after the effective date of the rules; nor does it apply to any acquisition with respect to which the required notifications are not received on or before the effective date of _ the rules. Transactions of these two types are subject to the full notification and waiting period re­ quirements of the act and the rules. The Transitional Rule also states that completed notifications received prior to the effective date of the rules will be deemed filed on the effective date of the rules.

For purposes of the Transitional Rule and the rules in parts 801-803, the completion or consummation or “making” of an acquisition refers to the closing date, or the date on which title is transferred, rather than to the date on which a contract, agreement in principle or letter of intent is signed.

In the course of promulgating the Transitional Rule, the Commission considered comments suggesting that persons that had complied with the Commission’s Resolution Requiring Notification and Submission of Special Reports Relating to Corporate Merg­ ers or Acquisitions, dated August 15; 1974, 39 FR 35717 (October 3, 1974) (referred to hereafter as the "Commis­ sion’s existing premerger notification program,”) should be exempt from the requirements of the act and the rules. At that time the Commission, with the concurrence of the Assistant Attorney RULES AND REGULATIONS General, determined not to grant such an exemption. In the statement ac­ companying the Transitional Rule, the Commission explained: The Commission * * * believes that all merger transactions should be placed on the same footing at the inception of the new program and that firms engaging in such transactions will have ample warning of the final effective date of the rules to permit them to schedule consummation of those transactions accordingly. 42 FR at 6365-66. D e t e r m in in g W h e t h e r t h e A ct A p p l ie s The act applies to any acquisition by an acquiring person of the assets or voting securities of an acquired person that meets the criteria of section 7A(a). Thus, the first step in analyzing whether the act applies to a specific acquisition of assets or voting securi­ ties is to determine the identify of the “acquiring person” and the “acquired person,” and which assets or voting se­ curities will be held “as a result of” the acquisition. One transaction may consist of, or may give, rise, to, several distinct “acquisitions” potentially sub­ ject to the act. See the examples to § 801.2 (c) and (e) and to § 801.4. To identify the “acquiring person,” consult the definitions of “person,” “entity,” and “ultimate parent entity” in § 801.1(a) and the definition of “hold” in § 801.(c). First determine which entity will have beneficial own­ ership of the assets or voting securities to be acquired, and identify that enti­ ty’s ultimate parent entity (as defined in § 801.1(a)(3)). The acquiring person consists of that ultimate parent entity and all entities that it controls directly or indirectly. The definition of “con­ trol” in § 801.1(b) will determine whether an entity is an ultimate parent entity and which entities are included within the acquiring person. If the entity that will hold the assets or voting securities to be acquired is controlled by another entity, one must follow the chain of control, locate the ultimate parent entity, and then de­ termine all entities that that entity controls directly or indirectly. This will be the acquiring person. Next determine the entity' whose assets or voting securities are being ac­ quired. See § 801.2(b). This will be the entity that prior to the acquisition has beneficial ownership of any assets, or is the issuer of any voting securities, which are to be acquired. The acquired person consists of the ultimate parent entity that controls the entity whose assets or voting securities are being ac­ quired, along with all other entities that that ultimate parent entity con­ trols directly or indirectly. See also § 801.2 (c), (d), and-(e). Having determined the identity of the acquiring and acquired persons, one must determine whether either 33453 person is engaged in commerce or in any activity affecting commerce. This is the “commerce text” of section 7A(a)(l); consult §§801.1(7) and 801.3 for further explanation of how this test is applied. .

If the commerce test is satisfied, then the size-of-person test of section 7A(a)(2) must be analyzed. This test focuses upon the annual net sales and total assets of the acquiring and ac­ quired persons. Section 801.11 explains how to determine these figures. It may also be necessary to determine wheth­ er the acquiring and acquired persons are “engaged in manufacturing,” a term defined in § 801.l(j). There are three different ways that the size-of-person test of section 7A(a)(2) may be satisfied. If the ac­ quiring person has annual net sales or total assets of $100 million or more and the acquired person is engaged in manufacturing and has annual net sales or total assets of $10 million or more, then section 7A(a)(2)(A) is satis­ fied. If the acquiring person has annual net sales or total assets of $100 million or more and the acquired person is not engaged in manufactur­ ing but has total assets of $10 million or more (net sales are irrelevant in this case), then section 7A(a)(2XB) is satisfied. Finally, if the acquiring person has annual net sales or total assets of $10 million or more and the acquired person has annual net sales of $100 million or more, then section 7A(a)(2)(C) is satisfied, without regard to whether either person is engaged in manufacturing. If none of these three tests is satisfied, the act does not apply; if any of them is satisfied, it is then necessary to analyze the size-oftransaction test of section 7A(a)(3). This test may be satisfied in any of five different ways, since the size-oftransaction test is satisfied whenever, as a result of the acquisition, the ac­ quiring person would hold at least 15 percent, or more than $15 million worth, of either the assets or the voting securities of the acquired person, or more than $15 milion worth of both the assets and the voting secu­ rities of the acquired person. In applying this test, one must first determine what will be held as a result of the acquisition. In general, the ac­ quiring person in an assets transaction will hold only those assets which will change hands as a result of the trans­ action. See § 801.13(b)(1), but, for the moment, ignore the value of the assets; see also §801.21. There is one significant exception: Whenever the acquiring person has acquired any assets from the same acquired person within 180 days preceding the signing of a contract, agreement in principle, or letter of intent to acquire additional assets, and the earlier-acquired assets have not been transferred to another FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33454 person, then § 801.13(b)(2) directs both persons to treat the earlier and the present transaction as if they were both occurring at the present time, unless § 801.15 requires otherwise. In other words, the two (or more) asset acquisitions must be aggregated, unless the earlier acquisitions fell within one of the exemptions listed in §801.15. The effect of aggregation is that the assets acquired in the two (or more) transactions will be “held as a result of” the present transaction, for purposes of determining the dollar value of assets—but not the percent­ age of assets—being acquired under section 7A(a)(3).

The voting securities of the acquired person to be held by the acquiring person as a result of a transaction are determined by § 801.13(a)(1). In gener­ al, any securities which will be held by the acquiring person after the present transaction are held as a result of the present transaction, even if some of those securities were acquired earlier. Certain exceptions are stated in §801.15 if an earlier acquisition was exempt under the act or rules. The next step is to determine wheth­ er, as a result of the acquisition, the acquiring person will hold an aggre­ gate total amount of assets and voting securities of the acquired person in excess of $15 million. The value of assets is the value at time of acquisi­ tion, and not the book value, and is de­ termined by reference to § 801.10 (b) and (c). The value of voting securities to be held as a result of the acquisition is also the current value, determined by reference to section § 801.10 (a) and (c).

If an acquiring person would hold both assets and voting securities of the acquired person as a result of a trans­ action, the aggregate total amount of voting securities and assets must be determined under § 801.14 and subject­ ed to the $15 million size-of-transac­ tion test of section 7A(a)(3)(B). If the $15 million test is satisfied, the alter­ native 15-percent test of section 7A(a)(3)(A) may be disregarded, since the size-of-transaction has already been satisfied. If the $15 million test is not satisfied, then the next step is to determine the percentage of the ac­ quired person’s assets or voting securi­ ties which the acquiring person will hold as a result of the acquisition. This requires a computation, in the form of a fraction, in which the assets or voting securities to be held as a result of the acquisition are divided by the aggregate total amount of assess or voting securities of the acquired person.

In an assets acquisition, the numera­ tor and denominator of this fraction will be dollar values obtained from the books of the acquired person. Section 801.12(d) explains how this computa- RULES AND REGULATIONS tion is made, and § 801.12(c) makes clear that the denominator consists of the total assets of the entire acquired person. If as a result of the acquisition the acquiring person will hold 15 per­ cent or more of the total assets of the acquired person, then section 7A(a)(3)(A) is satisfied. For an acquisition of voting securi­ ties, the numerator and denominator of this fraction will be numbers of votes for directors of the issuer that voting securities presently entitle their holders to cast or, as a result of the ac­ quisition, will entitle their holders to cast. Section 801.12 explains how this computation is made, and § 801.12(a) makes clear that the denominator con­ sists of the total number of votes for directors of the issuer whose voting se­ curities are being acquired. If as a result of the acquisition the acquiring person will hold 15 percent or more of the voting securities of the issuer, then section 7A(a)(3)(A) is satisfied. S p e c if ic T rea tm en t o f P a rticu la r T y pe s o f T ra n sa ctio n s A series of rules in part 801 specify the manner in which particular types of transactions are treated under the act.

Whenever as a result of an acquisi­ tion (the “primary acquisition”) an ac­ quiring person will obtain control of an issuer which holds a noncontrolling block of voting securities of another issuer, then the acquisition of the other issuer’s voting securities is a sec­ ondary acquisition which, by reason of § 801.4, is separately subject to the act and the rules.

Section 801.20 explains that acquisi­ tions meeting the critieria of section 7A(a) and not otherwise exempted under the act or the rules are subject to the reporting and waiting period re­ quirements of the act. This is true even though earlier acquisitions may also have been subject to the act; even though the acquiring person’s hold­ ings initially may have met or exceed­ ed a notification threshold (see § 801.1(h)) before the effective date of the rules; and even though the acquir­ ing person’s holdings initially may have met or exceeded a notification threshold by reason of increases in market values or events other than ac­ quisitions.

Section 801.30 explains that for cer­ tain types of transactions, the waiting period begins when only the acquiring person files notification, rather than when both persons file. In such cases, the acquired person must file within a specified number of days after the ac­ quiring person files. The types of transactions to which this treatment applies are: (1) Acquisitions of voting securities on a national securities ex­ change or “over the counter” securi­ ties markets, (2) certain acquisitions of voting securities by shareholders of the target company in a tender offer, (3) acquisitions of voting securities by means of a tender offer, (4) secondary acquisitions, (5) acquisitions (other than mergers and consolidations) in which voting securities are acquired from someone other than the issuer or a related entity, (6) acquisitions result­ ing from conversion of convertible voting securities, and (7) acquisitions resulting from the exercise of options and warrants. Additional provisions re­ lating to acquisitions of voting securi­ ties by shareholders of the target com­ pany in a tender offer are contained in § 801.31. Section 801.32 makes clear that conversion of convertible voting securities (see § 801.1(f)) is a potential­ ly reportable acquisition under the act.

When the persons contributing to the formation of a new corporation re­ ceive voting securities of that corpora­ tion, § 801.40 must be consulted in order to determine whether these ac­ quisitions are reportable.

Section 801.40(b) contains its own size-ofperson tests, which interpret those in section 7A(a)(2) in any transaction (except in connection with a merger or consolidation) in which a new corpora­ tion is formed. A special rule for deter­ mining the total assets of the new cor­ poration is stated in § 801.40(c), and a special rule relating to the commerce test of section 7A(a)(l) is contained in § 801.40(d).

In general, §801.40 applies to the formation of joint ventures organized in the corporate form, but the oper­ ation of the rule does not depend upon whether the parties or the enforce­ ment agencies would consider the new corporation to be a “joint venture.” Whenever a newly formed corporation issues sufficient, voting securities to two or more persons, so that section 7A(a)(3) and §801.40 (b) and (d) are satisfied, the transaction is reportable, although all such persons acquiring the new corporation’s stock may not necessarily have to file notification. The new corporation does not, howev­ er, have to report its acquisitions of the assets which its shareholders have contributed as part of the transaction setting up the new corporation. Finally, §801.90 states that when­ ever a reportable transaction is recast in a different form or broken up into a series of transactions, or whenever any other device is employed for the pur­ pose of avoiding the obligation to comply with the act and the rules, the form of the transactions is disregard­ ed, and the obligation to comply with the act and the rules is determined by applying the act and the rules to the substance of the transaction. FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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RULES AND REGULATIONS E x e m pt io n s If the commerce, size-of-person and size-of-transaction tests of section 7A(a) are all satisfied, one must next determine whether any exemptions apply. Statutory exemptions are found in section 7A (c)(1) through (cXll). With respect to section 7A(c)(l), see §802.1; with respect to section 7A (c)(6) and (c)(8), see § 802.6; as to sec­ tion 7A(c)(8), see also § 802.8; concern­ ing section 7A(c)(9), see §802.9; and concerning section 7A(c)(10), see §802.10.

Additional exemptions are found in the remainder of Part 802 of the rules. Each of the separate exemptions in the act and the rules must be sepa­ rately consulted. More detailed expla­ nations of these rules relating to ex­ emptions appear below.

F il in g R eq u ir em en ts If the criteria of section 7A(a) are met and the transaction is not entitled to exemption under the act or the rules, then the acquisition is reporta­ ble, and the procedures outlined in part 803 of the rules must be followed. The acquiring and acquired persons must file notification, and a waiting period must elapse, before the transac­ tion may legally be consummated. The Notification and Report Form is an appendix to part 803 of the rules and must be completed in accordance jvith § 803.1 and with the instructions appearing in §803.2 and on the form itself. Whenever a person filing notifi­ cation is unable to supply a complete response to any item on the form, it must provide a statement of reasons for noncompliance, in accordance with §803.3. Each Notification and Report Form must be accompanied by an affi­ davit; consult § 803.5. Each form must also be certified; see § 803.6. In the special case in which a foreign acquired person refuses to file notifi­ cation, § 803.4 may permit another person to file on its behalf. Under section 803.7, reported trans­ actions must be consummated within one year following the expiration of the waiting period in order to avoid the necessity of an additional filing at a later date.

W a it in g P er io d Sections 7A (a) and (b) state that, when notification is required with re­ spect to an acquisition of assets or voting securities, that transaction may not legally be completed until notifica­ tion has been accomplished and a 30day waiting period has thereafter ex­ pired (only 15 days is required in the case of a cash tender offer). Section 803.10(a) explains when the waiting period begins, and section 803.10(b) explains when it expires. Section 7A(b)(2) permits the Commis­ sion and the Assistant Attorney Gen­ eral to terminate the waiting period before it expires in certain cases, and section 803.11 explains the procedures governing termination.

R eq u ests fo r A d d it io n a l I n fo rm a­ t io n or D ocum en ta ry M aterial Section 7A(e) permits the Commis­ sion or the Assistant Attorney Gener­ al, prior to expiration of the waiting period, to require the submission of additional information or additional documentary material relevant to an acquisition, from any person required to file notification, or from any offi­ cer, director, partner, agent or employ­ ee of any such person. Section 803.20 explains the procedure for such re­ quests and details their impact upon the waiting period. Section 803.21 re­ quires compliance with such requests within a reasonable time. M iscella n eo u s P r o v is io n s o f t h e A ct and t h e R u les Section 7A(f) provides for expedited treatment by a United States district court of a motion by either enforce­ ment agency for a preliminary injunc­ tion to prevent consummation of a transaction reportable under the act. Sections 7A (g)(1) and (g)(2) provide the enforcement mechanisms for the act.

Under section 7A(g)(l), any person (or any officer, director or partner thereof) who fails to comply with any provision of the act (or the rules) may be liable for a civil penalty of up to $10,000 for each day during which such person is in violation of the act. If the notification require­ ments of the act and the rules are not substantially complied with, section 7A(g)(2) permits either enforcement agency to commence an action in United States district court. Under this section, the court may order com­ pliance and is required to extend the waiting period “until there has been substantial compliance.” The act con­ tains one exception: When a person whose stock is sought to be acquired by means of a tender offer (either cash or non-cash) has not complied, the waiting period may not be ex­ tended, although civil penalties may be assessed. Section 7A(g)(2)(C) also permits the court to “grant such other equitable relief as the court in its dis­ cretion determines necessary or appro­ priate.”

Section 7A(h) states that any infor­ mation or documentary material filed with the enforcement agencies under the act is exempt from disclosure under the Freedom of Information Act and that no such information or docu­ mentary material may be made public except “as may be relevant to any ad­ ministrative or judicial action or pro­ ceeding.” Section 7A(h) explicitly pre­ serves to Congress and its committees 33455 and subcommittees the ability to obtain information filed with the en­ forcement agencies under the act. Section 7A(i) contains two important explanations of the relationship be­ tween the act and other activities of the enforcement agencies. Under sec­ tion 7A(i)(l), any action by either agency or any failure of either agency to take any action under the act has no effect on any proceeding or any other action at any time under any other provision of the Antitrust Im­ provements Act of 1976 or any other provision of law. Moreover, the ability of the enforcement agencies to make full use of the Antitrust Civil Process Act, the Federal Trade Commission Act, and any other provision of law “to secure at any time from any person documentary material, oral testimony, or other information” is unaffected by the premerger notification require­ ments of the act.

The Commission, with the concur­ rence of the Assistant Attorney Gen­ eral, is required by section 7A(j) to submit an annual report to Congress on the operation of the act. Section 803.30 of the rules provides a mechanism whereby formal and infor­ mal interpretations of requirements under the act and the rules may be rendered. Section 803.90 provides for the separability of any provision of the rules or form, in the event that any provision is held invalid or inap­ plicable to any person or circum­ stances.

The final versions of the rules and form, and the detailed discussion of each which follows, are of necessity based upon certain factual assump­ tions. Only actual experience with the operation of the premerger notifica­ tion program will show which of these assumptions are valid. Such experi­ ence may suggest amendments to the rules, and some of those amendments and the reasons articulated for them may differ with portions of this discus­ sion.

P art 801 of t h e R u les SECTION 801.1(a)(1)—PERSON The term “person” appears 36 times in the act and is used in connection with virtually every subject with which the statute deals. It is the basic organizational unit to wliich the re­ quirements of the act apply. Of partic­ ular importance are its uses in the tests for determining whether the act applies: The commerce test of section 7A(a)(l), the size-of-person test of sec­ tion 7A(a)(2) and the size-of-transaction test of section 7A(a)(3). Two relat­ ed statutory concepts, “acquiring” and “acquired” persons, are separately de­ fined in § 801.2.

The definition states that a person is an ultimate parent entity together with all entities that it controls direct- FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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33456 ly or indirectly. “Entity” is defined in § 801.1(a)(2), and comprehends natural persons, corporations, partnerships, joint ventures, unincorporated associ­ ations, trusts, and several other types of units. “Control” is defined in § 801.1(b) and means, in most cases, beneficial ownership of 50 percent or more of the voting stock. Control is ef­ fected directly if the voting stock is held without intermediaries; it is ef­ fected indirectly if direct control is held by controlled entities, agents, or other means. An “ultimate parent entity” is defined in § 801.1(a)(3), and means an entity that is not controlled by any other entity. A “person” thus can be visualized as a collection of en­ tities headed by an ultimate parent entity and linked together by control relationships. These entities are re­ ferred to as being “included within” the person.

Four examples illustrate the rule. Example No. 1 illustrates the most typical case, that of a corporation with subsidiaries. Examples 2, 3, and 4 illus­ trate less common cases involving for­ eign governments, natural persons and entities included within two persons. The definition also notes an exception, § 801.12 (a) and (b), in which the term “person” is assigned a different mean­ ing in connection with percentage computations.

BACKGROUND INFORMATION TO § 801.1(a) Section 7A begins, “[N]o person shall acquire * * *” Although section 7 of the Clayton Act reaches only corpo­ rate acquisitions, Congress did not intend the definition of person to be limited to corporations. See 122 Cong. Rec. H10293 (daily ed. Sept. 16, 1976) (remarks of Rep. Rodino); 122 Cong. Rec. S15323 (daily ed. Sept. 7, 1976) (comparison of House and Senate ver­ sions with final compromise version). The definition of person accordingly embraces the variety of organizations contained in the definition of ‘‘entity.” But for purposes of the size-of-person test of section 7A(a)(2), “person” could not mean just the particular entity which was acquiring or transferring legal title. If such a limited definition of person were adopted, the ultimate parent entity would be able to evade the requirements of the act by mani­ pulating the entity to be involved in a transaction. For example, a large cor­ poration could evade the size-ofperson test of section 7A(a)(2) merely by arranging to have a small subsidi­ ary participate in an acquisition. In order to give effect to the size-ofperson test, “person” must mean the overall enterprise.

The rules solve this dilemma by in­ troducing the term “entity” to serve in the first capacity, that of defining the basic organizational units (such as cor­ porations, etc.) to which the act ap- RULES AND REGULATIONS plies. The rules reserve the term “person” for the larger concept, used in the size-of-person test of section 7A(a)(2). See the Statement of Basis and Purpose to § 801.12, which also ex­ plains the exception in the definition provided in that rule.

The original rules did not employ the term “entity,” and instead ex­ pressed the two meanings of “person” by using a more complex definition. The revised rules introduced the pres­ ent definitional system. The final defi­ nition reformulates the language for clarity and to remove potential ambi­ guities, but does not alter the sub­ stance of the definition. SECTION 801.1 (a)(2) ENTITY The term “entity” does not appear in the act, but in the rules is part of the definition of the term “person,” the basic unit to which the act applies. Section 801.1(a) defines a “person” as an ultimate parent entity and all enti­ ties that it controls directly or indi­ rectly. “Entities” thus constitute the component parts of persons. The defi­ nition of “entity” sets forth a list of organizational units that can be in­ cluded within a person. The proviso at the end of the defini­ tion excludes the governments of for­ eign' nations, the United States and the several States, as well as their agencies and political subdivisions, from qualifying as entities. Hence, these units are not subject to the act. However, corporations controlled by such units and engaged in commerce are entities, and may be subject to the requirements of the act. BACKGROUND INFORMATION TO § 801.1(a)(2) The need to introduce the term “entity” is explained in the statement of basis and purpose to §§ 801.1(a)(1) and 801.12.

Revised § 801.1(a)(2) marked the initial appearance of the term, although the original rules had achieved a similar result by means of a more complex definition of “person.” See the F ederal R egister notice ac­ companying the revised rules, 42 FR at 39042 (August 1, 1977). The final definition differs only slightly from the revised version. The reference to an entity’s domicile was deleted as unnecessary. The reference to joint ventures not yet formed has been conformed to the language of final § 801.40; the reason for its pres­ ence in the definition is explained in the statement of basis and purpose to that rule.

Foreign states, foreign governments, and their agencies are excluded from the definition of entity, but foreign governmental corporations engaged in commerce are entities. The definition draws this distinction because the ac­ tivities of corporations engaged in commerce are invariably commercial activities, over which a U.S. court may have jurisdiction, whereas actions taken directly by States or govern­ ments are less likely to be subject to U.S. jurisdiction. Furthermore, the principle of comity, which seeks to assure amicable relations among na­ tions, militates against the United States requiring a foreign state to comply with the reporting and waiting requirements of the act. By contrast, the principle of comity is less compel­ ling with respect to the activities of governmental corporations. The dis­ tinction is generally supported by the Foreign Sovereign Immunities Act of 1976, 28 U.S.C. 160-2-1611, which dis­ tinguishes between “commercial activi­ ties” of foreign states and agencies, which are not immune from, the juris­ diction of the United States, and their noncommercial activities, which retain their immunity. 28 U.S.C. 1605(a)(2). Similarly, the definition also ex­ cludes the States of the United States. The effect of the exclusion is that ac­ quisitions by States are not subject to the act, because the act applies only to acquisitions involving persons. See Section 7A(a). The same is true of asset acquisitions from any of these political units. Stock acquisitions from them are not excluded under this rule, since the issuer of the stock, not the State or government, would be the ac­ quired person. State-owned and U.S.owned corporations are included within the definition of entity, for rea­ sons similar to those applying to for­ eign governmental corporations. SECTION 8 0 1 . 1 ( a ) ( 3 ) ULTIMATE PARENT ENTITY The term “ultimate parent entity” does not appear in the act. The rules employ the term in the course of de­ fining the term “person.” An “ulti­ mate parent entity” is an entity that is not controlled by any other entity. The ultimate parent entity included within a person, therefore, is the entity that directly or indirectly con­ trols all other entities within the person and is not itself controlled by any other entity.

An ultimate parent entity must be a unit that fits the definition of “entity” in § 801.1(a)(2). Thus, for example, a corporation engaged in commerce and wholly owned by a foreign government can be an ultimate parent entity, but the controlling government cannot, because it is not an entity. See exam­ ple No. 2 to § 801.1(a)(1). The ultimate parent entity included within a person is responsible for a person’s compliance with the act and rules, under § 803.2(a). Because the concept of “person” is a creation of the act and. rules and, therefore, a person may not have a generally rec­ ognized name embracing all its compo- FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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nents, the name of the ultimate parent entity is used to identify the person within which it is included. See page 2 of the notification and report form.

BACKGROUND INFORMATION TO § 801.1(a)(3) The definition is part of the mecha­ nism which constructs the definition of the term “person.” The term did not appear in the original rules, and the definition is unchanged in sub­ stance from revised § 801.1(a)(3). SECTION 801.1(B) CONTROL The term “control” does not appear in the act, but the definition of the term is central to the entire scheme of the rules and indirectly affects the extent of coverage of the act. The lan­ guage of the act imposes its require­ ments upon “persons,” a term defined in § 801.1(a)(l/l to consist of an ulti­ mate parent entity and all ehtities which it controls directly or indirectly. Only after applying the definitions of control and person, can one determine whether the commerce test of section 7A(a)(l), the size-of-person test of sec­ tion 7A(a)(2) and the size-of-transaction test of section 7A(a)(3) are satis­ fied, and thus whether the act applies. The definition of control is also impor­ tant because the notification and report form, in general, requests reve­ nue data and other information only for entities included within the person.

The definition of control consists of two tests; if either is satisfied, control exists. Subparagraph (b)(1) provides that holding 50 percent or more of the outstanding voting securities of an issuer constitutes control. This test in­ vokes several other definitions and rules, which are necessary to apply the definition correctly. In particular, § 801.1(c) defines the'term “hold;” § 801.1(f)(1) defines the term “voting securities;” and § 801.12 governs the calculation of the percentage. The second alternative test in the defini­ tion, subparagraph (b)(2), provides that control is also “the contractual power presently to designate a major­ ity of the directors of a corporation, or in the case of unincorporated entities, of individuals exercising similar func­ tions.” The example to the definition illustrates the most important use of the term, the linkage of entities into a “person.”

Note that since both branches of the definition of control involve proper­ ties—the issuance of stock and the ex­ istence of directors or individuals exer­ cising similar functions—which cannot be possessed by natural persons, natu­ ral persons may exercise control but cannot be controlled. This means that natural persons may be ultimate parent entities within a person, but RULES AND REGULATIONS may not become “included within a person” as controlled entities. See ex­ ample No. 3 to § 801.1(a)(1) and exam­ ple No. 2 to § 801.1(a)(3). The language “in the case of unin­ corporated entities * * * individuals exercising similar functions” may in appropriate cases find application to organizational units other than corpo­ rations which are defined as entities in § 801.1(a)(2).

BACKGROUND INFORMATION TO § 801.1(b) Although the term “control” does not appear in the act, the concept is implicit within it. It furnishes the link between the term “entity,” which in the rules describes the types of units to which the act applies, and the term “person,” which is used throughout the act and rules. The need for two terms in the definitional scheme is ex­ plained in the statements of basis and purpose to those definitions, § 801.1(a) (IV and (2) and the use of the term “control” arises within that definition­ al structure.

“Control” was defined at the level of 50 percent stock ownership for two reasons. First, it supplied an objective, easily administrable criterion. Second, except for cases in which the holding is exactly 50 percent, majority owner­ ship will always enable the holder to direct the day-to-day activities of the controlled entity, even though for many large corporations, de facto con­ trol may arise from holdings well below 50 percent.

Several comments (e.g., 16, 115; 1050, 1088, 1102) suggested that control should stem only holdings of more than 50 percent, rather than exactly 50 percent, of the outstanding voting securities of an issuer. However, the final rule adheres to the position that a 50-percent holding constitutes con­ trol. If the shares of an issuer are evenly divided between two holders, it is more appropriate that the issuer be viewed as part of both “persons,” for purposes of the size-of-person test of section 7A(a)(2) and size-of-transaction test of section 7A(a)(3), than as part of neither. In such a situation, each of the 50-percent holders may ex­ ercise control. Moreover, after a holder acquires 50 percent of the shares of an issuer, further acquisi­ tions of those shares are exempt under section 7A(c)(3).

This first test of control has been re­ tained without substantial change through the revised and final defini­ tions. In the revised rule the word “ownership” was replaced by “hold­ ing,” thus incorporating the definition of “hold.” In the final rule the exclu­ sion of the holdings of affiliates was deleted as unnecessary because of the final definition of “affiliate.” The second test in the definition can best be understood in the context of 33457 its derivation from the earlier drafts. In the original definition the second test attempted to identify actual or working control, however effected. It also contained a proviso excluding from the definition of control any power arising from conditions in fi­ nancing contracts with certain speci­ fied lenders. The original version of the second test attracted approximate­ ly 25 comments, for the most part critical.

The comments made four principal criticisms. First, several comments (e.g., 9, 11, 78, 115) noted that the defi­ nition of control would determine the entities for which revenue and other data must be supplied on the Notifica­ tion and Report Form. If the defini­ tion imputed control of an entity which the reporting person did not in fact control, a reporting person might be unable to supply the required data. Since failure to comply could result in civil penalties of up to $10,000 per day, these comments urged that the defini­ tion of control should require the sub­ mission of data concerning only those entities with respect to which the re­ porting person could in fact obtain such data.

A second group of comments (e.g., 9, 11, 78, 88, 95, 120) focused on the sub­ jectivity of the original second test. These comments expressed concern about the potential expansiveness of two phrases in the definition, “domi­ nant minority” and “other means,” which they feared might include rela­ tionships other than stock ownership. They contended that different observ­ ers could reasonably arrive at differ­ ent conclusions about whether control existed in a given instance. They also urged that, in view of the civil penal­ ties provided for noncompliance with the act, the definition should focus upon objective criteria that would allow both reporting persons and the enforcement agencies to determine their obligations under the act with reasonable certainty.

The third and fourth groups of com­ ments reflected more specialized con­ cerns. A number of comments (e.g., 68, 81, 96, 105, 107, 108, 113) asserted that the second test of control, as applied to mutual funds, would regard an in­ vestment adviser that advises several separate mutual funds as controlling the funds. Thus, the several mutual funds would become part of the same “person,” and their security holdings would be aggregated for purposes of the 15 percent or $15 million test of section 7A(a)(3). They contended that the legislative history of the act indi­ cated a contrary congressional intent. Finally, the fourth group of com­ ments (e.g., 15, 83, 88, 98, 115, 120) criticized the proviso relating to fi­ nancing. They maintained that the ex­ clusion of powers arising from financ- FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33458 ing contracts should extend to all lenders, rather than to only those listed, since extensions of credit may come from many sources. The definition was substantially re­ vised in response to these comments. The revised version restricted control to contractual power to designate a majority of the board of directors. When such a contract exists, the con­ trolling entity can direct the actions of the controlled entity and can presum­ ably supply the data required by the Notification and Report Form without difficulty. All parties should be able to determine their obligations under the act with reasonable certainty based on objective criteria.

The limitation of control to these two instances also eliminated the criti­ cism in the comments on the mutual fund issue and on the proviso about creditors; since control could only flow from the two specified relationships, these two problems no longer arose. However, in addition to the revised definition, the F ederal R e g is t e r.

notice accompanying the revised rules solicited public comments on another possible modification of the second test of control. It would have defined control to include the power to desig­ nate or elect a majority of the direc­ tors of an issuer, without limiting the power to contractual instances only. The ijptice also solicited comments identifying “objective factors of voting control (or contractual power), with­ out relying on a specific percentage of voting securities held.” 42 FR at 39043 (August 1, 1977).

Nineteen comments expressed views kbout the revised definition and the F ederal R eg ister proposals. The com­ ments uniformly supported the revised definition and opposed the proposals in the F ederal R eg ister notice. Most considered that the revised definition adequately addressed the concerns ex­ pressed in the comments to the origi­ nal rules, while the new proposals would reintroduce the same subjectiv­ ity and uncertainty previously men­ tioned. The comments stressed the need for objective standards because of the civil penalty provisions of the act and viewed the proposals in the F ederal R eg ister notice as inad­ equate. Minority stockholdings, as well as other forms of influence, it was stated, could constitute the “power to designate or elect,” but would not be capable of objective ascertainment. The final rule retains the substance of the revised second test. The Com­ mission believes that in this instance, the advantages of certainty in the ap­ plication of the act outweigh the dis­ advantages of limiting the reach of the act. Should experience in adminis­ tering the act reveal shortcomings in this approach, the definition can be revised.

RULES AND REGULATIONS Accordingly, the final definition makes only one change in the revised version of the second test. It expands the formulation “directors or trustees” to clarify that for unincorporated enti­ ties the definition will look to “individ­ uals exercising similar functions” in place of the directors. This language does not apply, however, to banks or trust companies that designate the trustees of trusts they administer. In such cases, the definition o f, “hold,” § 801.1(c), allocates the responsibility for filing notification. SECTION 801.1(c) HOLD Section 801.1(c) defines the term “hold,” which is central to the struc­ ture of the rules. If the commerce test of section 7A(a)(l) and the size-ofperson test of section 7A(a)(2) are met, the act applies to an acquistion if “as a result of such acquisition, the acquir­ ing person would hold” 15 percent or $15 million worth of the voting securi­ ties or assets of the acquired person. Section 7A(a)(3) (emphasis supplied). The treatment of an acquisition thus depends upon what the acquiring person will hold as a result of the ac­ quisition. See sections 801.13 and 801.15.

Section 801.1(c)(1) states the basic rule that a person “holds” voting secu­ rities or assets if that person is the beneficial owner of such securities or assets. The rules do not contain a defi­ nition of “beneficial ownership.” In­ stead, the existence of beneficial own­ ership is to be determined in the con­ text of particular cases with reference to the person or persons that enjoy the indicia of beneficial ownership, which include the right to obtain the benefit of any increase in value or divi­ dends, the risk of loss of value, the right to vote the stock or to determine who may vote the stock, the invest­ ment discretion (including the power to dispose of the stock). It should be noted, however, that the concept of “beneficial ownership” for purposes of section 801.1(c) overlaps with, but is not identical to, the definition of bene­ ficial ownership promulgated by the SEC for purposes of section 13(d) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. 78m. Thus, while a person may be a benefi­ cial owner of securities for purposes of section 13(d) of that statute, it might not be the beneficial owner of those securities for purposes of the pre­ merger notification rules, or vice versa.

Record ownership by itself is of no relevance in determining whether a person “holds” stock or assets under the rules. See the example following section 801.1(c)(1). Beneficial owner­ ship may be effected directly (i.e., where the beneficial owner has legal title), or indirectly “through fiducia­ ries, agents, controlled, entities or other means.” This principle is subject to the provisions in subparagraphs (2) through (8) of the rule. These subparagraphs clarify who the beneficial owner is or is deemed to be in particular situations. The hold­ ings of spouses and minor children are by reason of section 801.1(c)(2) all at­ tributable to one another, so that .if any of them makes an acquisition, the holdings of all of them are aggregated for purposes of determining the total assets of the acquiring person and what it will hold as a result of the ac­ quisition. See also section 803.2(a). With certain exceptions, a trust, in­ cluding a pension trust, is deemed under section 801.1(c)(3) to hold all assets and voting securities constitut­ ing the corpus of the trust; the trust (not the trustee) may thus become a reporting person. See the example in the rule. In the case of a revocable trust,' and in the case of an irrevocable trust in which the settlor (i.e., he or she who creates the trust) retains a re­ versionary interest in the corpus, sec­ tion 801.1(c)(4) makes the corpus of the trust the “holdings” of the settlor. In these situations the settlor, rather than the trust, would be required to comply with any obligations under the act.

Beneficiaries of all other types of trusts, including pension trusts and common trust funds or collective in­ vestment funds, are in section 801.1(c)(5) deemed not to hold any assets or voting securities constituting the corpus of such trusts, since the trusts are the holders.” A bank or trust company that administers one or more common trust funds or collective investment funds is under section 801.1(c)(6) deemed the holder of the assets and voting securities constitut­ ing the corpus of each such fund, so that those assets and voting securities must all be aggregated with any other assets or voting securities which the bank or trust company may hold for its own account, if either the bank or one of its funds makes an acquisition. See the example following section 801.1(c)(6), Section 801.1(c)(7) is designed to make clear that assets and voting secu­ rities held for the benefit of separate accounts administered by an insurance company are holdings of the company; unlike a trust, the separate account is not itself a holder.

Section 801.1(c)(8) states that in ad­ dition to its own holdings an entity (including an ultimate parent entity) holds all assets and voting securities held by entities which it controls di­ rectly or indirectly. Moreover, a person holds all assets and voting se­ curities held by the entities included within it (i.e., held by the ultimate FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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parent entity and all entities which it controls). See section 801.1(a). BACKGROUND INFORMATION TO SECTION 801.1(C) Original section 80L05(c) defined the term “hold” in terms of the pos­ session of either direct or indirect “ownership” or “control.” Revised sec­ tion 801.1(c) deleted the reference to “control” and defined the term “hold” as “record or beneficial ownership.” Possible reporting requirements for persons having mere record ownership sparked a significant number of com­ ments (e.g., 1062, 1070, 1071, 1090, 1108). The final rule reflects the rec­ ognition that record ownership by itself is not meaningful for purposes of analyzing the impact of an acquisition on competition. Beneficial ownership is a more reliable indicator of the holder’s power to influence the man­ agement of the issuer. Record owner­ ship of the shares does not normally indicate which person enjoys the attri­ butes of beneficial ownership, in par­ ticular the right to vote or to desig­ nate who may vote the shares. More­ over, a variety of persons other than the beneficial owner may be the record owner of voting securities. (In many cases, of course, record owner and the beneficial owner will be the same person.) Under the final rule it makes no dif­ ference who the record owner is. The person or persons that have the bene­ fits and risks of ownership of securi­ ties or assets “hold” those securities or assets, and persons that acquire bene­ ficial ownership must report their “ac­ quisition” if the criteria of the act are satisfied.

The holdings of spouses and their minor children are aggregated under § 801.1(c)(2), so that natural persons cannot escape reporting merely by making separate purchases in the names of other natural persons within the immediate family. This limited ag­ gregation rule does not extend to other “related” persons, such as broth­ ers and sisters or parents (unless the beneficial owner is a minor child). The revised rule would have aggregated the holdings of spouses with those of their minor children, but hot vice versa, and was thus incomplete. A re­ lated rule, § 803.2(a), states that a single Notification and Report Form shall be filed on behalf of a natural person, his or her spouse and minor children, in the event that any of them makes a reportable acquisition. In general, under § 801.1(c)(5) the beneficiaries of a trust are deemed not to hold any assets or voting securities constituting the corpus of the trust, because the specific assets attributable to a specific beneficiary may be impos­ sible to determine, and because the beneficiary may have no control over RULES AND REGULATIONS an acquisition (or disposition) of assets by the trust. The one exception to this general rule is found in § 801.1(c)(4), when the settlor is also a beneficiary; in that case, the settlor is deemed the holder of the trust’s assets. Since a trust is an "entity” within the meaning of § 801.1(a)(2), the trust will also be a person, unless the trust is controlled by another entity (other than a bank or trust company). Since a trust does not issue voting securities, under the rules it can be controlled by another entity only if the latter has a contractual power, under the trust in­ denture, to designate the trustee or, if there is more than one, a majority of the trustees. See §§ 801.1(a)(1) and 801.1(b)(2). For example, if a corpora­ tion appoints the trustees of an em­ ployee pension plan organized as a trust, then the corporation would con­ trol the trust under § 801.1(b)(2), and the trust would not be a separate “person” under the rules. On occa­ sions when a trust is a separate person, the trust (normally through the trustee) must file notification and satisfy waiting period obligations if it makes a reportable acquisition. The holdings of a trust are not aggregated with those of any other entity for any purpose, unless the trust is controlled by or controls another entity. Thus, for example, if a bank is trustee of an individual trust, the bank will normal­ ly file notification on behalf of the trust whenever the trust makes a re­ portable acquisition. If the bank makes an acquisition for its own ac­ count, or for the account of another individual trust which it administers, the holdings of the individual trusts are not aggregated, nor are they ag­ gregated with other holdings of the bank.

Special rules are applicable to common trust funds and collective in­ vestment funds, as defined in 12 CFR 9.18(a) (referred to hereafter as “col­ lective investment funds”). Under § 801.1(c)(6), a bank or trust company which administers one or more collec­ tive investment funds holds the assets and voting securities constituting the corpus of each such fund. Therefore, the collective investment funds do not themselves hold any assets or voting securities, and as a result they will not themselves be subject to the act’s re­ quirements. Instead, the bank or trust company which administers such funds must comply with the act, if it applies. In order to determine whether a transaction is reportable, the bank or trust company must-aggregate all assets and voting securities held for its own account with all assets and voting securities held by all collective invest­ ment funds which it administers. This aggregation does not include assets held in any other kinds of trusts 33459 which the bank may administer or for which it may be trustee. Because of the degree of control which insurance companies typically exercise over their general and sepa­ rate accounts, all assets and voting se­ curities held for the benefit of any general or any separate account ad­ ministered by such companies are, under § 801.1(c)(7), deemed holdings of the insurance company. These ac­ counts are treated in a manner similar to that accorded to collective invest­ ment funds administered by a bank or trust company. Thus, all holdings of all such accounts are aggregated whenever the insurance company makes any acquisition for the benefit* of any of those accounts. Subparagraph (c)(8) states a conclu­ sion which follows from the concept of control. Since under § 801.1(a) a person is defined as the collection of entities directly or indirectly under the control of an ultimate parent entity, it follows that the assets held by each of the entities included within a person are also held by the person. Similarly, each entity which is includ­ ed within a person and controls an­ other entity also holds any assets or voting securities held by the con­ trolled entity. Thus, whenever the holdings of an entity must be deter­ mined, the holdings of that entity and those of each entity it controls must be aggregated.

At least one comment (1089) suggest­ ed that the Commission coordinate re­ porting requirements for certain types of persons or transactions with those promulgated by the Securities and Ex­ change Commission under section 13(d) of the Exchange Act. The SEC has adopted rules which define “benefi­ cial ownership” so that a person having either the power to vote or the power to dispose of (i.e., investment discretion with respect to) voting securities would be deemed the beneficial owner of such securities, and would under section 13(d) have to report holdings of 5 per­ cent or more of the stock of any issuer under SEC jurisdiction, and any changes in such holdings. Those rules became final on May 30, 1978. 43 FR 18484 (Apr. 28, 1978). The Commis­ sion’s rules do not, however, adopt the SEC’s position, which equates benefi­ cial ownership with either voting power or investment discretion standing alone. After assessing the compatibility of the SEC’s definition of “benefi­ cial ownership” and the use of that concept in these rules, the Commission concluded that the legislative intent underlying each program and the goals of each program were sufficiently dis­ tinct to support the different usages of the term “beneficial ownership.” FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33460 DELETION OP REVISED §§ 802.60 AND 802.61 Section 802.60 of the revised rules exempted “an acquisition by an agent on behalf of and at the specific direc­ tion of another person.” Under that rule, an agent included a broker or dealer in securities, a trustee, or a fidu­ ciary. The rule also stated that this exemption did not extend to the per­ sons on whose behalf the acquisition was made.

Because the definition of “hold” in § 801.1(c)(1) has been modified to delete record ownership, § 802.60 of the revised rules is superfluous and has been deleted. Whenever any agent makes an acquisition on behalf of an­ other person (whether or not at the specific direction of that other person), the agent does not become a beneficial owner and thus incurs no obligations under the act. Section 802.61 of the revised rules exempted “an acquisition in escrow by an escrow agent pursuant to a written escrow agreement.” That rule did not, however, exempt an acquisition by any person from an escrow agent, unless the assets or voting securities reverted to the original owner pursuant to the escrow agreement. The original rules contained a similar provision (§ 802.15).

Under the definition of “hold” in the final rules, the rule is no longer necessary, because an escrow agent does not become the beneficial owner of assets, or voting securities held in escrow. An acquisition in escrow must be reported if beneficial ownership changes hands as a result of the acqui­ sition; the same is true of an acquisi­ tion from an escrow agent. SECTION 801.1(d) AFFILIATE The term “affiliate” appears in the act only in section 7A(b)(3)(B), which states:

The amount or percentage of voting secu­ rities or assets of a person which are ac­ quired or held by another person shall be determined by aggregating the amount or percentage of such voting securities or assets held or acquired by such other person and each affiliate therof. Thus, the holdings of afiliates of the acquiring person must be included in that person’s holdings for the purpose of determining whether the size-oftransaction test of section 7A(a)(3), as well as thè additional notification thresholds defined in §801.1(h), are met with respect to a particular acqui­ sition. Section 801.1(d) defines an “af­ filiate” of a person as an entity con­ trolled directly or indirectly by the ul­ timate parent entity of that person. The practical effect of the definition of “affiliate” is that only holdings of entities included within the acquiring person, and no holdings of entities not RULES AND REGULATIONS included within the acquiring person, are counted in determining what that person holds, and thus whether the act applies to an acquisition. BACKGROUND INFORMATION TO § 801.1(d) The final definition of “affiliate” differs from the original and revised definitions, both of which designated as affiliates certain persons or entities not included within the acquiring person and thus required aggregation of their holding with those of the ac­ quiring person.

Original § 801.05(d) defined one person »as an affiliate of another person if either person held 5 percent or more of the other person’s out­ standing voting securities or if one person was an officer, director, or partner of the other person. The defi­ nition was intended to identify entities that although not closely enough linked to be Included within the ac­ quiring person may nevertheless have a substantial similarity of interest with the acquiring person. That definition attracted consider­ able critical comment. Several com­ ments (e.g., 6, 15, 63, 88) argued that a 5 percent holding is too small a per­ centage to create any competitively significant link between a person and its “affiliate.” Some of the comments suggested that a higher level of stock ownership, such as 20 or 25 percent, should be required for the “affiliate” relationship. Other comments (e.g., 49, 73, 78, 112) noted that since an acquir­ ing person might not in fact control its affiliates, it would in many cases be impossible for a person to compel dis­ closure of its affiliate’s stockholdings. Since the affiliate’s stockholdings could determine whether the size-oftransaction test was satisfied, an ac­ quiring person might not be able to find out whether a reporting require­ ment existed, or to comply fully with it, if it did.

A number of comments (e.g., 6, 63, 83, 88, 113) also criticized the concept that an officer, director, or partner could be an affiliate. They argued that since many companies have hundreds of officers, directors, and partners, it would be extremely, burdensome to re­ quire a reporting person to find out what all of them held. Several com­ ments (e.g., 7, 96, 105) argued that it would be unreasonable to aggregate the holdings of mutual funds, invest­ ment companies, or other institutions that are clients of the same invest­ ment adviser, either through the defi­ nition of “affiliate” or through other definitions. See the Statement of Basis and Purpose to § 801.1(b). Finally, sev­ eral comments (e.g., 49, 73, 78) sug­ gested that the confidentiality sur­ rounding some acquisitions likely would be breached if an acquiring person had to contact its noncontrolled “affiliates” before the acquisi­ tion in order to determine the affili­ ates’ holdings in the company to be ac­ quired.

In response to these comments, re­ vised § 801.1(d) considerably altered the definition of “affiliate.” In order to decrease the reporting burden on acquiring persons and to obtain infor­ mation only on more meaningful af­ filiations, the percentage of stock own­ ership constituting affiliation was in­ creased from 5 to 25 percent. Further­ more, affiliation arising from one’s status as an officer, director, or part­ ner of another person was deleted. In­ formation on these relationships, while potentially relevant, was deemed less essential and less useful than in­ formation on stockownership. Thus, the concept of “affiliation” was re­ stricted in the revised rules to the holding of a stock interest of at least 25 but less than 50 percent (which is defined as “control” and would result in inclusion within the person). In ad­ dition, the revised rule specified that holdings of voting securities of only the ultimate parent entity of the re­ porting person or the affiliated person were to be counted in determining af­ filiation.

The comments on the revised defini­ tion, although fewer than those on the original rules, continued to object to defining “affiliate” to include noncontrolled entities. The comments (e.g., 1090, 1110) reiterated t the contention that a person may be neither aware of nor able to compel disclosure of the holdings of a noncontrolled affiliate. Comment 1110 suggested that the definition of affiliate be tied more closely to the definition of “control,” and that a corporation be considered an affiliate of a person only if 50 per­ cent of its voting securities are owned by such person.

The final rules, in contrast to both of the earlier drafts, define “affiliate” as an entity controlled by the ultimate parent entity of a person. The concept of affiliation arising from a less-thancontrol relationship has been entirely deleted. The final rules thus incorpo­ rate a suggestion made by several com­ ments (e.g., 78, 83, 112; 1110) that af­ filiation be defined no more broadly than the concept of control. The final rules make this change be­ cause of what appeared to be potential administrative problems involved in any definition of affiliation that included less-than-control relationships.

Al­ though the Commission believes the act unmistakably affords it the power to define the term to include relation­ ships short of control, the Commission considered it difficult to require disclo­ sures of holdings of noncontrolled en­ tities. Furthermore, in many cases, ag­ gregation of thèse holdings also would have resulted in the imposition of a re- FEDERAL REGISTER, VO L. 43, N O . 147— M O N D AY, JULY 31, 1978

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porting requirement on a person whose holdings were less significant than those of its affiliate. Fon exam­ ple, assume that A, a large corpora­ tion, acquires a 14-percent stock inter­ est, valued at less than $15 million, in company X. This acquisition is not re­ portable under the act and rules. Assume that A also holds 25-percent of company F. Under the revised rules, F would have been an affiliate of A and A an affiliate of F. If F then pur­ chases 1-percent of X, and the criteria of section 7A (a)(1) and (a)(2) are met, this acquisition would have been re­ portable under the revised rules, since for purposes of section 7A(a)(3), F would have aggregated its holdings of X stock with A’s holdings of X stock. Therefore, F, the 1-percent sharehold­ er of X, would have been required to report on its business activities, but A, the 14-percent shareholder of X, would not have been required to report, and no information would have been received by the agencies on its activities. Thus a great deal of rele­ vant information would not have been obtained.

Defining the term “affiliate” by ref­ erence to the concept of control solves both of these problems. Since the only entities whose holdings are defined as relevant to determining the size of the transaction are those controlled by the reporting person, there should be no difficulty in obtaining information from such entities. In addition, the re­ porting person is always certain to be the most relevant person from a com­ petitive standpoint.

The Commission does not consider it likely that many significant acquisi­ tions will escape a reporting obligation because of the final definition of “af­ filiate.” The 15-percent-or-$15 million threshold of section 7A(a)(3) is low enough that most major acquisitions will be reported well before the acqui­ sition of control, even though the holdings of 25-percent-to-49-percent subsidiaries are excluded. Item 6 of the form was inserted, in part, so that once a reporting obligation exists, sig­ nificant holdings in other companies by the reporting person, and signifi­ cant holdings in the reporting person by others, can be identified. The form will reveal such holdings without af­ fecting the basic concept of what transactions are reportable. See the Statement of Basis and Purpose to item 6.

The final definition of “affiliate” is supported by the legislative history of the act. A similar definition of “affili­ ate” was contained in the Housepassed bill. See the final text of H.R. 14580 at 122 Congressional Record H8137 (daily ed. August 2, 1976). Al­ though the definition was deleted from the final version of the act, the Com­ mission believes that this deletion was RULES AND REGULATIONS intended to permit the agencies to de­ fine the term by rule rather than to preclude any particular definition. Note that since the term “person,” which is closely connected with the term “affiliate,” was not defined, a stat­ utory definition of “affiliate” would thus have been impracticable. Further­ more, Senator Philip Hart, explaining the deletion on the Senate floor, clear­ ly suggested that Congress intended the Commission to have maximum dis­ cretion in defining the term. See 122 Congressional Record S15417 (daily ed. September 8,1976).

SECTION 801.1(e) UNITED STATES PERSON, UNITED STATES ISSUER, FOREIGN PER­ SON, FOREIGN ISSUER Section 801.1(e) defines four terms relevant to determining the applicabil­ ity of several exemptions relating to foreign commerce or foreign parties. These exemptions turn partly on whether certain persons or issuers are U.S. persons or issuers, or foreign per­ sons or issuers. Subparagraph (e)(l)(i) defines a “U.S. person” as a person (other than a natural person) the ulti­ mate parent entity of which is incor­ porated in the United States, is orga­ nized under the laws of the United States, or has its principal offices in the United States. Subparagraph (eXIXii) similarly defines a “U.S, issuer” as an issuer which fulfills any of the above three criteria. A natural person is de­ fined as a “U.S. person” if he or she is a citizen or resident of the United States.

Note that a person or issuer which fulfills any of the stated criteria is de­ fined as a U.S. person or U.S. issuer. Thus, for example, a corporation in­ corporated abroad which has its prin­ cipal offices in the United States is a U.S. person (or issuer). A natural person who resides in the United States but is not a U.S. citizen is nev­ ertheless a “U.S. person.” The term “United States” is defined in § 8l.l(k) to include the several States, the territories, possessions, and com­ monwealths of the United States, and the District of Columbia. Conversely, a person other than a natural person is defined in subpara­ graph (eX2)(i) as a “foreign person” if its ultimate parent entity is not incor­ porated in the United States, is not or­ ganized under the laws of the United States, and does not have its principal offices within the United States. A for­ eign issuer is defined in subparagraph (e)(2)(ii) as an issuer which meets none of the three criteria for a “U.S. issuer.” A natural person is defined as a “foreign person” if he or she is nei­ ther a citizen nor a resident of the United States, 33461 The terms defined in § 801.1(e) do not appear in the act, which contains no special provision for transactions having foreign aspects. The terms appear in §§802.50 and 802.51, which exempt certain acquisitions by foreign persons and certain acquisitions of voting sécurités of foreign issuers or foreign assets. The terms “foreign person” and “foreign issuer” are also used in §803.4, which provides that under certain circumstances another party to a transaction may file notifi­ cation on behalf of a foreign acquired person that refuses to file. The term “U.S. issuer” is also used in item 9 of the Notification and Report Form, which requires the reporting person to list certain prior acquisitions of the voting securities of U.S. issuers. For purposes of the definition, a per­ son’s “principal offices” refers to that single location which the person re­ gards as the headquarters office of the ultimate parent entity. This location may or may not coincide with the loca­ tion of its principal operations. In determining whether a person other than a natural person is a U.S. person (or a U.S. issuer); orte will ordi­ narily have to consider only two coun­ tries—the place of its principal offices, and the place of its incorporation or organization. The definition uses the concept “organized under the laws of the United States” as well as “incorpo­ rated in the United States” to encom­ pass partnerships, associations, trusts, and other unincorporated units. BACKGROUND INFORMATION TO § 801.1(e) The primary purposes of this defini­ tion is to clarify the scope of the for­ eign commerce exemptions of §§ 802.50 and 802.51 and the special filing provi­ sion of §803.4. The definitions estab­ lish objective criteria that can be easily applied by reporting persons and by the agencies. These definitions include as “U.S.” persons or issuers those with significant ties to the United States; i.e., incorporation (or organization) or principal offices in the United States.

These definitions appear for the first time in the final rules. The original rules did not designate persons or issu­ ers as “United States” or “foreign”; in­ stead, the foreign commerce exemp­ tion embodied in original §802.35 was premised on the absence of “substan­ tial involvement” in United States commerce, as evidenced by United States sales or assets. Although the re­ vised rules did not use the terms “U.S. “person,”

“U.S.

issuer,”

“foreign person,” qnd “foreign issuer,” they im­ plicitly adopted similar criteria by re­ ferring to the domicile of persons and issuers. Revised §§802.50 and 802.51 would have exempted certain acquisi­ tions by persons domiciled outside the FEDERAL REGISTER, VOL. 43, NO . 147— M O N D AY, JULY 31, 1978

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33462 United States. Those rules, however, did not define “domicile.” The comment of the Department of State (1072) pointed out that the fail­ ure to define the concept of “domicile” in the revised rules could have led to confusion. The comment gave the ex­ ample of a corporation organized under the laws of Delaware but having its principal place of business in a for­ eign country. It inquired whether such a corporation would be considered do­ miciled in the United States for the purposes of 4I§ 802.50 and 802.51. The comment expressed no preference be­ tween a place-of-buSiness test or a place-of-incorporation test, and spe­ cifically noted that the Commission might choose to deny the foreign com­ merce exemptions if either the princi­ pal place of business or the place of in­ corporation were in the United States. The final definition adopts this sug­ gestion.

For natural persons, a similar alter­ native test was inserted to clarify an ambiguity in the revised rules. Since the term “U.S. person” includes U.S. citizens, wherever domiciled, it includes some persons not “domiciled” in the United States. Similarly, anyone, of whatever citizenship, who resides in the United States is also considered a “U.S. person.”

SECTION 801.1(f)(1) VOTING SECURITIES The Act applies to acquisitions of “voting securities.” “Voting securities” is defined in section 7A(b)(3)(A), and § 801.1(fXl) basically restates the stat­ utory definition. “Voting securities” are securities that at present or upon conversion entitle the owner or/holder to vote for directors of any issuer or for individuals exercising similar func­ tions in a non-corporate entity. B ackground Inform ation of § 801.1(f)(1) No definition of “voting securities” appeared in the original rules. The re­ vised definition incorporated the stat­ utory definition. The final definition expands the statutory, definition in only one respect. The phrase “or of any entity included within the same person as the issuer” was inserted so that if an entity issues securities which, upon conversion, will enable the holder to vote for directors of a different entity within the same person as the issuer, the issue is still one of “voting securities.” Without the added phrase, such securities would not be “voting securities” within the meaning of section 7A(b)(3)(A) or § 801.1(f)(1). The added phrase assures that such securities are treated on an equal footing with all other converti­ bles when converted.

See § 801.30(a)(6).

RULES AND REGULATIONS D eleted D e f in it io n of “S ec ur ity” Section 801.1(e) of the original and revised rules defined the term “securi­ ty.” The definition listed the various interests in businesses deemed to be securities, as well as “in general, any interest or instrument commonly known as a ‘security,’ ” or the right to purchase any such security. The definition was deleted from the rules for two reasoris. First, the stat­ ute uses only the term “voting securi­ ties,” which is defined both in section 7A(b)(3)(A) and in § 801.1(f)(1). “Voting securities” is a unitary concept and as such its components need not be de­ fined separately. See § 801.1(f)(1). Moreover, the term “security” has a commonly understood meaning which poses no difficulty in the vast majority of transactions. Inherent in the de­ leted definition was a recognition of this commonly understood meaning. Thus, the deletion should effect no substantive change.

SECTION 801.1(f)(2) CONVERTIBLE VOTING SECURITY Section § 801.1(f)(2) defines the term “convertible voting security” as a voting security that does not, at pres­ ent, entitle its owner or holder to vote for directors of any entity. The defini­ tion was added to the final rules to emphasize the existence of a distinct scheme for the treatment of convert­ ible voting securities (“convertibles”). See §§ 801.12(b), 801.15(a)(2), 801.32, and 802.31.

The distinction between convertibles and other voting securities is impor­ tant for two related reasons. First, under the final rules the reporting and waiting period requirements of the act do not apply to convertibles until they are exchanged for voting securities presently entitled to vote. The acquisi­ tion of convertibles, unlike the acquisi­ tion of other voting securities, is always exempt (§802.31), but a “con­ version” is a potentially reportable ac­ quisition (§ 802.32). The second reason is a corollary of the first. For purposes of the 15 percent-or-$15 million sizeof-transaction test of section 7A(a)(3), convertibles are disregarded entirely in computing the value or percentage of voting securities to be held or ac­ quired.

Section 801.12(b) provides that, for purposes of the 15 percent test of section 7A(a)(3)(A), it/ is irrele­ vant whether the acquiring person or others own convertible voting securi­ ties of the acquired person; these con­ vertibles appear in neither the numer­ ator nor the denominator of that per­ centage.

Similarly, under § 801.15(a)(2), the value of convertible voting securities is ignored for pur­ poses of the $15 million test of section 7A(a)(3)(B). The only time, in fact, that convertibles are “counted” is as assets on a person’s last regularly pre­ pared balance sheet, for purposes of the size-of-person test of section 7A(a)(2). See § 801.11(c)(2). B ackground Inform ation to 801.1(f)(2) Section 7A(b)(3)(A) of the Act pro­ vides:

The term “voting securities” means any securities which at present or upon conver­ sion entitle the owner or holder therof to vote for the election of directors of the issuer or, with respect to unincorporated is­ suers, persons exercising similar functions. (Emphasis supplied.) The only reference to convertible se­ curities in the legislative history of the act was made by Chairman Rodino from the House floor. He stated:

The House bill covered acquisitions of assets and "‘voting securities”—any debt or equity instrument entitling the holder to elect directors of a corporation. Nonvoting securities were completely exempt from the House-passed bill. However, nonvoting secu­ rities that can be converted into voting secu­ rities were covered “upon conversion,” and compliance with the bill’s notification and waiting requirements would thus have been required prior to conversion. In contrast, the Senate bill covered * * * nonvoting but convertible securities * * *. The compromise bill completely exempts acquisitions of non­ voting, nonconvertible debt or equity securi­ ties. Further, the compromise bill covers nonvoting but convertible securities upon acquisition, not conversion. 122 Cong. Rec. H10294 (daily ed. Sept. 16, 1978).

Neither section 7A(b)(3)(A) nor any other section of the act states when notification with respect to convertible securities is to take place. The legisla­ tive history provides very little guid­ ance. The Commission, however, inter­ prets the departure from the Housepassed bill (to which the final rules largely return) as an effort by Con­ gress to provide rulemaking flexibility in lieu of mandating that acquisitions of convertibles must be covered. Section 7A(c)(2), the subsection of the act that exempts acquisitions of nonvoting securities, reinforces this position. Since it does not specifically exempt convertibles as nonvoting se­ curities, it implicitly leaves the Com­ mission free to determine whether to cover acquisitions of convertibles. Moreover, the language of the act permits coverage at either the time of acquisition or the time of conversion: Either event is an “acquisition” poten­ tially required by the act to be preced­ ed by reporting and a waiting period. Indeed, nothing in the act prohibits coverage at both junctures. However, the Commission determined in the final rules that reporting at the time of conversion is most appropriate, and that reporting before conversion obvi­ ates the necessity of also reporting before acquisition.

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RULES AND REGULATIONS From an antitrust standpoint, re­ porting at conversion is more useful. It is true that before conversion, convert­ ible voting securities may confer upon their holder the power to influence, either directly or indirectly, the man­ agement of the issuer. But the conver­ sion price attached to convertibles may make conversion economically unat­ tractive. And the measurement of the potential voting power conferred by convertibles is highly speculative, since conversions by other holders may dilute the potential voting power of the person holding the convertibles. So although a substantial holding of convertible voting securities may give the holder some power to influence management, this power is far less sig­ nificant than the ability actually to vote the securities. At conversion a more accurate picture of voting power in the hands of the owner or holder of those securities can be calculated. In addition, convertible voting secu­ rities commonly change hands several times before conversion. By interpos­ ing the notification and waiting period requirements of the act only before conversion, the Commission minimizes the intrusion of the act into the capi­ tal markets.

Accordingly, §802.31 of the final rules exempts all acquisitions of con­ vertible voting securities, and § 801.32 explicitly designates conversions as ac­ quisitions potentially subject to the act. The exclusion of convertibles from the 15 percent-or-$15 million size-of-transaction test of section 7A(a)(3), mentioned above, is consist­ ent with the decision to disregard con­ vertibles prior to conversion, except for purposes of section 7A(a)(2). The revised rules had introduced the opposite approach to convertibles. Convertible voting securities were not differentiated from other voting se­ curities, and their acquisition was re­ portable if the criteria of section 7A(a) were met. Percentages were cal­ culated by means of a formula reflect­ ing “partial dilution”—that is, only convertibles held or acquired by the acquiring person were regarded as al­ ready converted. For example, when determining the percentage of voting securities of an issuer held, the holder was obliged under revised §801.12(b)(l)(i) to include within its holdings only those convertibles which were “convertible upon the occurrence of an event certain to occur within 5‘ years or convertible at the option of the holder.” The denominator of that fractional computation was to reflect the number of votes presently entitled to be cast plus “the votes represented by conversion of voting securities of the issuer which are included in the numerator by reason of (the foregoing formula).” This procedure assessed the maximum voting power that the acquiring person could achieve within a reasonable period of time by means of conversions by disregarding the impact of convertibles of the issuer held by all others. In addition, revised § 802.31 exempted the subsequent con­ version of convertibles. The comments to the revised rules did not object to covering convertibles at time of acquisition, but did object to the formula for computing the per­ centage of voting securities that con­ vertible voting securities represented. Several (e.g., 1026, 1070, 1090, 1102, 1108, 1115) perceived unfairness in not requiring full dilution in the percent­ age computations. One comment (1070) maintained that the language of the act mandated such treatment; for elaboration of that argument, see the Statement of Basis and Purpose to § 801.12(b). By ignoring all convertibles until exchanged for voting securities presently entitled to vote, the final rules eliminate this dispute and employ the most useful means of estimating voting power for purposes of an anti­ trust evaluation. - SECTION 801.1(F)(3) CONVERSION The reporting and waiting period re­ quirements of the act apply to acquisi­ tions of “voting securities.” The defini­ tions of voting securities, section 7A(b)(3)(A) and section 801.1(f).l(f)(l), provide generally that a voting security is one that at present or upon conversion entitles the owner or holder to vote for directors of an issuer. ~ Section 801.1(f)(3) defines “conver­ sion” as the exchange, without the payment of additional consideration, of voting securities not presently enti­ tled to vote for voting securities enti­ tling the owner or holder to vote for directors of any.issuer. Transfer costs, fees, and payments made to complete fractional shares are not considered “additional consideration” in this con­ text. The definition emphasizes that “conversion” represents an exchange of “voting securities,” as defined in section 801.1(f)(1), for “voting securi­ ties” and that an exchange, as opposed to automatic maturation of inchoate rights, must take place to effect con­ version. For example, if preferred shares become entitled to vote because dividends have been omitted, that oc­ currence is not a coversion and the act does not apply.

As a practical matter, although the definition of conversion means that convertible bonds and the like are voting securities, and that therefore reporting could be required prior to their acquisition, section 802.31 of the rules exempts all acquisitions of con­ vertible voting securities from the re­ quirements of the act. Thus, converti­ bles, like options and warrants, can be acquired without complying with the 33463 act, but compliance may be required prior to conversion or exercise. BACKGROUND INFORMATION TO SECTION 801.1(F)(3) The original rules did not address convertibles or the concept of “conver­ sion.” Revised section 801.1(f)(2), de­ fined “conversion” but employed cir­ cular language. It stated essentially that conversion was the conversion, without the payment of additional consideration, of securities not pres­ ently entitled to vote into voting secu­ rities entitling the owner or holder to vote.

\ The requirement that the conver­ sion be effected without additional consideration was essential in the re­ vised rules to distinquish convertible securities, which are “voting securi­ ties,” from options and warrants, which are not. Under those rules, con­ vertibles would have been reportable at acquisition and exempt at conver­ sion, while options and warrants would have been exempt at acquisition but potentially repoortable when exer­ cised. See the Statement of Basis and Purpose to section 801.1(f)(2). As stated above, the final rules treat convertibles in exactly the same way as options and warrants. The defini­ tion of “conversion” is present only to complete the scheme of the act, which uses the term in section 7A(b)(3)(A). The final definition’s emphasis on the exchange process addresses an issue raised by two comments (1070, 1090). Some issues of preferred stock entitle the owner or holder to vote for directors after the issuer has failed to pay dividends for a specified period of time. At acquisition, such preferred stock does not entitle its holder to vote; thus, the acquisition is not an ac­ quisition of voting securities and is not reportable. Since the accrual of voting rights to such preferred stock is an automatic process and does not repre­ sent an exchange, this eveiit is not a conversion, and* again, is not reporta­ ble. Therefore, since preferred stock which entitles its owner or holder to vote upon default is not converted within the meaning of the rules when such voting rights accrue, is is a “voting security” only when presently entitled to vote—that is, only when the issuer is already in default. Acquisi­ tions of this kind of preferred stock accordingly are subject to the report­ ing and waiting requirements of the act only if made during a period when voting rights have attached. On the othe hand, the acquisition of voting preferred stock is treated like any other acquisition of voting securities and is potentially reportable. If voting preferred may be converted into (ex­ changed for) voting common stock, this conversion is also subject to the requirements of the act if the criteria FEDERAL REGISTER, VOL. 43, NO . 147— M O N D AY, JULY 31, 1978

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33464 of section 7A(a) are met. (Note, howev­ er, that if the exchange does not in­ crease the holder’s percentage of the voting securities of the issuer, it may be exempt. See section 7A(c)(10).) The definition requires that voting securities be exchanged for voting se­ curities to make clear that the aquisition of voting securities for cash or equivalent securities is not a conver­ sion, and that cash and such securities therefore are not voting securities sub­ ject to the act.

SECTION 801.1(g)(1) TENDER OFFER Section 801.1(g)(1) defines the term “tender offer,” which appears in sever­ al places in the act and rules. The defi­ nition is important chiefly because the act and rules treat tender offers differ­ ently from other acquisitions in one important respect. A request for addi­ tional information and documentary material under section 7A(e) and sec­ tion 803.20 normally extends the wait­ ing period when directed to either party to an acquisition; however, for tender offers the waiting period is ex­ tended only when the request is di­ rected to acquiring persons. In addi­ tion, other special treatment, summa­ rized in the Statement of Basis and Purpose to section 801.1(g)(2), applies to cash tender offers.

The definition of “tender offer” in­ corporates the meaning of the term in section 14 of the Securities Exchange Act of 1934, 15 U.S.C. 78n. Neither the Exchange Act nor the rules and regu­ lations issued under that act by the SEC define the term “tender offer,” and the meaning of the term is instead found in case law and administrative precedent.

BACKGROUND INFORMATION TO SECTION 801.1(g)(1) In its regulatory programs, the SEC has considered, but explicitly de­ clined, defining the term “tender offer.” In August 1976, the SEC issued proposed rules and schedules to imple­ ment sections 14(d) and 14(e) of the Exchange Act relating to tender offers. Exchange Act Release No. 34- 12676 (August 2, 1976), 41 PR at 33004 (Aug. 6, 1976). The SEC stated that the dynamic nature of tender offers cautioned it to remain flexible in de­ termining which types of transactions fall within the term. It specifically noted that its position did not limit the term to “so-called conventional tender offers whereby an offer is pub­ lished by a person requesting that all or a portion of a class of a company's securities be deposited during a fixed period of time so that (the offeror) may purchase such securities * * * subject to specified conditions.” Id. The release mentioned other types of bids and solicitations, which, depend- RULES AND REGULATIONS ing on the circumstances, it might char­ acterize as tender offers. The definition in original section 801.05(f) was modeled after the SEC’s description of a conventional tender offer. The SEC criticized this defini­ tion in its comment on the original rules (125), noting that there did not appear to be any reason to limit the tender offer provisions of the pre­ merger notification rules to conven­ tional tender offers. Accordingly, the SEC comment suggested adoption of the definition which appeared in the revised rules. In its comment on the revised rules (1058), the SEC support­ ed the revised definition, which was retained without change in the final rules.

Section 801.1(g)(1), by referring to section 14 of the Exchange Act, in­ vokes section 14(e) of that act, which, as interpreted by the SEC, embraces all tender offers without regard to the limitations contained In section 14(d). Exchange Act Release No. 34-12676 (Aug. 2, 1976), 42 FR at 33005 (Aug. 6, 1976). The Commission specifically adopts this broader meaning of the term “tender offer.”

SECTION 801.1(g)(2) CASH TENDER OFFER Section 801.1(g)(2) defines the term “cash tender offer.” The act provides that for cash tender offers, the initial waiting period is 15 rather than 30 days (section 7A(b)(l)(B)), and may be extended only for 10, rather than 20, days after the response to a request for additional information or documen­ tary material is received (section 7A(e)(2)). These statutory provisions are explicated in section 803.10(b), and references to the term also occur in other rules, e.g., section 801.30(b). The definition states that a cash tender offer is a tender offer in which cash is the only consideration offered to the holders of the voting securities sought to be acquired.

BACKGROUND INFORMATION TO SECTION 801.1(g)(2) This definition merely states the plain meaning of the act. It appeared in the original rules as section 801.05(g) and in the revised rules as section 810.1(h), and attracted no com­ ments.

SECTION 801.1(g)(3) NONCASH TENDER OFFER Section 801.1(g)(3) defines the term “noncash tender offer.” This term ap­ pears for the first time in section 802.23 of the final rules, an exemption rule which modifies the length of the waiting period when a cash tender offer is amended into a noncash tender offer, or vice versa. The defini­ tion provides that a noncash tender offer is any tender offer that is not a cash tender offer—that is, one in which any consideration other than or in addition to cash is offered to the holder of the voting securities to be acquired.

B ackground Inform ation to § 801.1(g)(3) This definition is the logical con­ verse of the definition of cash tender offer.

SECTION 801.1(h ) NOTIFICATION THRESHOLD Section 801.1(h) defines the term “notification threshold.” The term does not appear in the act. In the rules the term identifies the levels of stock ownership that may not be attained or surpassed by a person without first filing notification and observing a waiting period. The most important application of the term is in § 802.21, the exemption rule governing stock purchase above the 15-percent or $15 million level prescribed in the act. To understand the term one must begin with the language of section 7A(a)(3), the size-of-transaction test. Notification and a waiting period are required if section 7A(a) (1) and (2) are satisfied, and if:

(3) as a result of such acquisition, the ac­ quiring person would hold 115-percent or $15 million of the stock or assets of the ac­ quired person]. (Emphasis supplied.) The rules interpret this language to include every acquisition after which the acquiring person would hold more than 15-percent or $15 million of the stock of the acquired person, rather than only those acquisitions which ini­ tially raise the acquiring person’s holdings to the 15-percent or $15 mil­ lion level. See § 801.13(a). Therefore, every stock acquistion above the 15percent or $15 million level becomes a potentially reportable transaction—re­ portable if section 7 (aXl) and (a)(2) also are satisfied, and if no exemption applies. Section 802.21 exempts all ac­ quisitions above the 15-percent or $15 million level except those attaining specified “notification thresholds,”

provided that certain timing and other conditions are satisfied. These levels of ownership, before which an addi­ tional notification and waiting period will be required, are defined in this rule as 15 percent of the stock of the acquired company, if valued at more than $15 million; 25 percent of the stock; and 50 percent of the stock. (The 15-percent or $15 million level contained in the act is inserted as the first notification threshold to facili­ tate the operation of §802.21.) Section 801.12 governs the calculation of all percentages. For further explanation of the role of notification thresholds, see the Statement of Basis and Pur­ pose to § 802.21.

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Notification thresholds and the ex­ emption conferred by §802.21 apply only to acquisitions of voting securi­ ties. Any acquisition of assets that sat­ isfies the three tests of section 7A(a) and is not exempted by the act and rules is reportable. In particular, any acquisition as a result of which the ac­ quiring person would hold 15 percent or $15 million of the acquired person’s assets is reportable, even though the reporting person may have previously filed notification with respect to an acquistion of assets from the same person. However, note that under § 801.13(b) assets cease to be assets of the acquired person after 180 days. The other occurrences of the term are relatively minor and relate to the same purposes.

For example, § 802.23(a) is a provision similar to §802.21 in connection with tender offers. Section 803.7 uses the term in explaining the impact of that rule upon § 802.21. Several rules relating to the application of section 7A(a)(3) also refer to § 801.1(h)(1) in order to assure consistency between the rules and the act. See, e.g., §§ 801.14, 801.21. B ackground Inform ation to § 801.1(h) Under § 801.13(a) every acquisition as a result of which the acquiring person would hold more than 15 per­ cent or $15 million of the voting secu­ rities of the acquired person becomes a reportable acquisition if the tests of section 7A(a) (1) and (2) are satisfied. The Commission has determined, how­ ever, that to interpose the notification and waiting period requirements before every acquistion above the 15percent or $15 million level would entail a burden on reporting persons and the enforcement agencies not jus­ tified by the additional information it would provide. See the Statement of Basis and Purpose to § 802.21. The definition of “notification threshold” identifies the points at which report­ ing subsequent to the 15-percent or $15 million level will be required. The number of notification thresh­ olds—four—was chosen because it serves the enforcement interests of the agencies without excessively taxing their administrative resources or burdening reporting persons. The particular percentage levels were se­ lected as notification thresholds be­ cause they are appropriate levels for the agencies to review the significance of holdings of voting securities. Subparagraph (h)(1), the criterion of sec­ tion 7A(a)(3), was selected by Congress as the first appropriate level. The second and third notification thresh­ olds are appropriate because the act applies to the acquisition of the stock of companies ranging from quite large to quite small, and from widely to closely held corporations. Thus, work­ ing control or significant influence RULES AND REGULATIONS may arise at different points with re­ spect to different companies. The 15percent (when applicable) and 25-per­ cent thresholds give the enforcement agencies adequate opportunities to assess the ability of a significant mi­ nority shareholder to influence or direct management.

The second threshold, which did not appear in the revised rules, was insert­ ed because for larger companies, stock valued at $15 million may represent substantially less than 15 percent of the total number of outstanding shares. A holding that posed no anti­ trust concern at such a low percentage level may pose concern well before reaching the 25 percent threshold. The final 50 percent threshold is ap­ propriate because that level represents veto power, if not actual control, and because section 7A(c)(3) exempts ac­ quisitions prior to which the acquiring person already held at least 50 percent of the shares.

The term “notification threshold” first appeared in the revised rules as § 802.21(a), but has been transferred to §801.1, inwhich other terms are de­ fined. The dollar amount in subpara­ graph (h)(1) has been corrected to an amount exceeding $15 million, to con­ form with section 7A(a)(3)(B). The reference in the revised rules to §802.64 were necessary to accommo­ date institutional investors that first filed notification not at 15 percent or $15 million, but at the higher limits in that rule. However, §802.21 has been reworded so that different notification thresholds for institutional investors are no longer required. Note that insti­ tutional investors, like other persons, are subject to the 25 percent and 50 percent thresholds.

SECTION 801.1(I)(1) SOLELY FOR THE PURPOSE OF INVESTMENT The phrase “solely for the purpose of investment” occurs in two statutory exemptions, section 7(A)(c) (9) and (11), and in two exemption rules, §§ 802.9 and 802.64. The definition pro­ vides that so long as a person does not intend to participate in the formula­ tion of the basic business decisions of an issuer, that person holds or ac­ quires the issuer’s voting securities “solely for the purpose of invest­ ment.”

B ackground Inform ation to § 801.1(0(1) The purpose of this definition is to limit the availability of the exemp­ tions contained in section 7A(c) (9) and (11) of the act and §§802.9 and 802.64 of the rules to situations in which the acquiring person or the holder has no intention of participat­ ing in the management of the issuer. For further information, see the Statements of Basis and Purpose to 33465 §§ 802.9 and 802.64. Although the defi­ nition has been reworded to conform with the language of the act, its sub­ stance is unchanged from revised §801.1(1). Original § 802.85(c) had ex­ cluded control holdings from the con­ cept, but the original rules did not otherwise define the term. In the F ederal R egister notice ac­ companying the revised rules, 42 FR at 39047 (Aug. 1,1977), comments were invited on the suggestion that this definition be further limited by requir­ ing that stock purchased for invest­ ment purposes not be voted. The com­ ments (e.g., 1020, 1050, 1051, 1058, 1067, 1070, 1090, 1101, 1103, 1110, 1111) were unanimously negative, ar­ guing that voting for directors, with­ out more, was not inconsistent with in­ vestment purpose. The Commission has decided not to incorporate this limitation into the final definition. Therefore, merely voting the stock will not be considered evidence of an intent inconsistent with investment pupose. However, certain types of con­ duct could be so viewed. These include but are not limited to: (1) Nominating a candidate for the board of directors of the issuer; (2) proposing corporate action requiring shareholder approval; (3) soliciting proxies; (4) having a con­ trolling shareholder, director, officer ,or employee simultaneously serving as an officer or director of the issuer; (5) being a competitor of the issuer; or (6) doing any of the foregoing with re­ spect to any entity directly or indirect­ ly controlling the issuer. The facts and circumstances of each case will be evaluated whenever any of these ac­ tions have been taken by a person claiming that voting securities are held or acquired solely for the purpose of investment and thus not subject to the act’s requirements. In appropriate circumstances the Commission may in­ vestigate to determine whether an en­ forcement action under section 7A(g) is warranted.

Comment 1059 suggested that sec­ tion 7A(c)(9) refers only to acquisi­ tions, but not holdings, for investment purposes, and therefore this rule should not refer to holdings. But sec­ tion 7A(c)(9) does refer to holdings: it provides that an acquisition “solely for the purpose of investment” is exempt only if, as a result of the acquistion, the amount of stock “acquired or held” does not exceed 10 percent of the issuer’s outstanding shares (em­ phasis supplied). Furthermore, the reference to “holding” in the rule is necessary because of the possibility of multiple acquisitions below either the percent limitation of section 7A(c)(9) or the 15 percent and $25 mil­ lion level of § 802.64(b)(5). In such sit­ uations, the question arises whether previously acquired stock is “held”— and thus must be aggregated with a FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33466 subsequent acquisition. Such questions are answered by § 801.15, and it is therefore necessary to have a concept of holding as well as acquiring “solely for the purpose of investment.” If a person makes an exempt acquisi­ tion “solely for the purpose of invest­ ment” and later decides to participate in the management of the issuer, this change in intent does not require filing with respect to the exempt pur­ chase, because the act applies only at the time of an acquisition. However, the change would require the person to file notification prior to any further acquisitions, whether or not exceeding the 10 percent limitation in section 7A(c)(9), if the criteria of section 7A(a) are met and the acquisition is not otherwise exempt.

SECTION 8 0 1 .l(i)(2 ) INVESTMENT ASSETS This definition defines “investment assets” to mean cash on hand or de­ posited in financial institutions, money market instruments (generally, commercial paper), and Goverment bonds. The term is used in connection with the foreign commerce exemp­ tions (§§802.50, 802.51), in connection with filing on behalf of foreign per­ sons refusing to file notification (§803.4), and in determining the total assets of a natural person (§ 801.11(d)). B ackground I n fo r m a t io n to § 801.1(i)(2) The use of the term “investment assets” is explained in the Statement of Basis and Purpose to each of the rules in which it appears. In general, these types of assets are believed to lack competitive significance. This definition appears for the first time in the final rules. It replaces the term “assets held solely for invest­ ment purposes” which was used in §§802.50 and 802.51 of the revised rules, and an equivalent provision in original § 802.35.

SECTION 801.l(j) ENGAGED IN MANUFACTURING Section 801.1(j) defines the phrase “engaged in manufacturing.” The defi­ nition is relevant only to the size-ofperson test of section 7A(a)(2). The size-of-person test can be satisfied in three ways, and two of the three—sec­ tion 7A(a)(2) (A) and (B)—use the phrase “engaged in manufacturing.” Under the definition, a person is “engaged in manufacturing” if it pro­ duces and derives more than $1 mil­ lion in aggregate annual sales or rev­ enues from products within industries 2000-3999, as coded in the 1972 edition of the Standard Industrial Classifica­ tion Manual, published by the Execu­ tive Office of the President, Office of Management and Budget. Since the definition applies to “persons,” all the activities of the person, as defined in RULES AND REGULATIONS § 801.1(a)(1), must be considered. The definition specifies that the person must produce and derive the revenues from manufactured products, so that merely reselling manufactured prod­ ucts does not satisfy the definition. B ackground I n fo r m a t io n to § 801.1(j) The size-of-person test of section 7A(a)(2) has three branches. If the ac­ quiring person has annual net sales or total assets of $100 million or more, then section 7A(a)(2)(A) provides that, if the acquired person is engaged in manufacturing, the test is satisfied if the acquired person has annual net sales or total assets of $10 million or more. If the acquired person is not en­ gaged in manufacturing, then section 7A(a)(2)(B) provides that the test will be satisfied only if the acquired person has total assets of $10 million or more. For the third branch, it is irrelevant whether either the acquiring or the acquired person is engaged in manu­ facturing. Section 801.11 explains how to determine the annual net sales and total assets of a person. Note that the definition is narrower than the standard for completing item 5 of the Form. That item requires a listing of all revenues derived from manufacturing activities regardless of whether those revenues exceed $1 mil­ lion.

The definition refers to selected 4digit (SIC code) industries because those classifications are commonly ac­ cepted as a basis for distinguishing manufacturing activities from non­ manufacturing activities. The original definition, § 801.05(h), did not provide for a threshold dollar amount of annual sales or revenues below which persons would not be deemed to be “engaged in manufacturing.” The $1 million threshold amount was inserted in the revised rules in response to sev­ eral comments (e.g., 15, 63, 115, 120) in order to distinguish de minimis from significant manufacturing operations. The final rules retain the revised defi­ nition.

SECTION 801.l(k ) UNITED STATES Section 801.l(k) defines the term “United States” to include each of the States, along with the territories, pos­ sessions and commonwealths of the United States, and the District of Co­ lumbia.

One of the two important applica­ tions of the term “United States” in the rules is to the foreign commerce exemptions, §§ 802.50 through 802.52, and the related definitions, in § 801.1(e). References in § 801.1(e) to the location of a person’s or an issuer’s principal offices or the residence of a natural person, and references in §§ 802.50 and 802.51 to the location of assets and to “sales in or into the United States” are all affected by this definition of the term “United States.” The other important application of the term “United States” appears in § 803.2(c)(1), which provides that re­ sponses to items 5, 7, 8, 9 and the Ap­ pendix to the Notification and Report Form shall be supplied only with re­ spect to operations conducted within the United States. In addition, the term appears in § 801.1(a)(2), which states that “the United States, any of the States thereof, or any political subdivision or agency of either * * *” are not themselves included in the term “entity.”

B ackground I n fo r m a t io n to § 801.l(k ) Original §801.05(i) made no refer­ ences to “possessions,” and neither the original nor the revised definition re­ ferred to the several States. The refer­ ence to the several States in § 801.l(k) was inserted into the final rules so that an entity “incorporated in the United States” or “organized under the laws of any of the United States” (see § 801.1(e)) would include entities organized or incorporated under the laws of the several States. Comment 1104 asserted that the Bureau of the Census collects data only from the continental United States and thus suggested that refer­ ence to the commonwealths, territor­ ies and possessions of the United States should be deleted from the rules. This suggestion was not adopt­ ed, for two reasons. First, Census data is collected from Puerto Rico, the Northern Mariana^Islands, Guam, and the Virgin Islands*, and statutory au­ thority permits collection of data by the Bureau of the Census from “such other possessions and areas over which the United States exercises ju­ risdiction, control, or sovereignty.” 13 U.S.C. 191(a) (1976). Second, for pur­ poses of the foreign commerce exemp­ tions, it would be inappropriate to regard these territories and posses­ sions as being outside the United States.

Moreover, while the term “State” in section 7A(c)(4) is not defined in the rules, it is intended that transfers to or from any of the governments of the commonwealths, territories or posses­ sions of the United States, or any po­ litical subdivisions thereof, are exempt under that subsection, which exempts “transfers to or from * * * a State or political subdivision thereof.” SECTION 801.l(Z) COMMERCE Section 801.1(1) defines the term “commerce” to have the same mean­ ing as in section 1 of the Clayton Act, 15 U.S.C. 12, or 4 of the Federal Trade Commission Act, 15 U.S.C. 44. Section 7A(a)(l) contains the “com­ merce test” of the act. An acquisition which satisfies the size-of-person and FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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size-of-transaction tests of section 7A (a)(2) and (a)(3) is subject to the act only if the acquiring person, or the person whose voting securities or assets are being aquired, is engaged in commerce or in any activity affecting commerce * * *. Section 801.3 interprets this test for all acquisitions except those in connec­ tion with the formation of joint ven­ ture or other corporations, to which § 801.40(d) applies. The term “com­ merce” does not appear elsewhere in the act or rules.

Background Information to § 801.1(f) “Commerce” was not defined in the original rules. The final rules define the term in the same way as the re­ vised rules did, except that the word “and” appearing between the statuto­ ry citations was changed to “or.” The change makes clear that “commerce” includes definitions and interpreta­ tions of that term under either stat­ ute.

One comment (1059) implied that some confusion resulted from having “two definitions” of the term “com­ merce” in the rules and suggested that, since section 7A is part of the Clayton Act, that statute’s definition should be adopted. The Commission has declined to adopt this suggestion. Congress intended that either the Clayton Act or the Federal Trade Commission Act, as well as the Sher­ man Act, could be used to challenged mergers or acquisitions. See section 7A(f). It is thus appropriate that a transaction which satisfies the com­ merce test of the act under either defi­ nition of the term “commerce” should be reportable.

Another comment (1086) suggested that the term “commerce” should be limited by a $1 million threshold simi­ lar to the provision of §801.1(j). The comment stated no reason for this sug­ gestion, and it was not adopted. While dollar thresholds appear in section 7A (a)(2) and (a)(3), none appears in sec­ tion 7A(a)(l); had Congress believed a threshold to be desirable, it could have added one. Moreover, a threshold would probably be unworkable: it is not clear, for example, how one might determine whether a person was en­ gaged in an activity affecting 1 million dollars’ worth of commerce. SECTION 801.l(m) THE ACT This paragraph explains that refer­ ences to “the act,” which appear throughout the rules, mean section 201 of the Hart-Scott-Rodino Anti­ trust Improvements Act of 1976, Pub. L. 94-435, 90 Stat. 1390, and codified at 15 U.S.C. 18A. References to subsec­ tions of the act appearing in the rules are denoted “section 7A(a)(l),” “sec­ tion 7A(d)(2)(B),” “section 7A(h),” RULES AND REGULATIONS etc., meaning, respectively, subsections (a)(1), (d)(2)(B), (h), etc., of the act. Because of required Federal Regis­ ter terminology, 1 CFR 21.10, 21.11, the word “section” is used in the rules to refer to sections of the rules (not to sections or subsections of the act, as the revised rules did). This usage de­ parts from the language of the act itself, which used the term “section” to mean section 7A.

SECTION 801.2 ACQUIRING AND ACQUIRED PERSONS Section 801.2 identifies the acquiring and acquired persons to a transaction for purposes of the act and rules. To apply the size-of-person test of section 7A(a)(2) and the size-of-transaction test Of section 7A(a)(3), one must first identify the acquiring and acquired persons.

— SECTION 801.2(a)—ACQUIRING PERSONS Section 801.2(a) defines an “acquir­ ing” person as any person that will hold voting securities or assets as a result of an acquisition. “Person” is defined in § 801.1(a)(1). “Hold” is de­ fined in § 801.1(c), and, in general, means beneficial ownership. The rule also mentions several ways in which a person may acquire beneficial owner­ ship, but these are supplied principally for emphasis since each is embodied in the definition of “hold.” An acquiring person may hold assets or voting securities either directly, or indirectly through controlled entities or other means. Thus, if agents, bro­ kers, or other entities (whether or not controlled) are acquiring on behalf of a person, they will not “hold” within the meaning of § 801.1(c)(1) and need not file notification with respect to ac­ quisitions made in that capacity. Only the beneficial owner will hold the voting securities and becomes the ac­ quiring person.

The example illustrates the unique case of a corporation with two 50 per­ cent shareholders. When such a corpo­ ration makes an acquisition, under the rules there are two acquiring persons. Background Information to § 801.2(a) No counterpart to any paragraph of § 801.2 appeared in the original rules. Since the act repeatedly refers to ac­ quiring and acquired persons, the re­ vised rules added § 801.2 to explain the terms. The final rule makes several changes to revised § 801.2(a). For ex­ ample, the revised rule identified an acquiring person as one which “is ac­ quiring voting securities or assets.” The size-of-transaction test of section 7A(a)(3), however, is couched in terms of the amount of voting securities or assets that “as a result of such acquisi­ tion, the acquiring person would hold” (emphasis supplied). Thus, the statute focuses on holding as a result of an ac- 33467 quisition rather than on the act of ac­ quiring. This focus is reflected in the language of final § 801.2(a), which de­ scribes an acquiring person as one “which, as a result of an acquisition, will hold voting securities or assets * * The revised rule also identified per­ sons as acquiring persons even if hold­ ing through “brokers or other entities acting on behalf of and at the specific direction of such person.” The refer­ ence to brokers was deleted altogether, because brokers, whether or not acting at the specific direction of a principal, typically do not acquire beneficial ownership of voting securities. There­ fore, under the final rules the princi­ pal, and not the broker, would become the holder, and hence the acquiring person. Since this result is embodied in the definition of “hold,” the quoted phrase was deleted as superfluous. The revised rule had restricted ac­ quiring persons to those acquiring assets other than cash. The final rule omits this exclusion from §801.2 (a) and (b) because new § 801.21(a) makes clear that cash is not considered an asset when acquired.

No comments addressed any portion of revised § 801.2.

SECTION 8 01.2 ( b )—ACQUIRED PERSONS Section 801.2(b), read together with § 801.12 (a) and (b), defines “acquired” person. For all but one purpose, the acquired person is the person within which the entity whose voting securi­ ties or assets are being acquired is in­ cluded. The most important conse­ quence of this definition arises in con­ nection with acquisitions of voting se­ curities from third-party holders. If voting securities are acquired from a holder not included within the same person as the issuer, then the acquired person is not the seller of the securi­ ties, but instead is the person within which the issuer is included. The latter person, rather than the trans­ feror of the shares, must file notifica­ tion. Example 1 to the paragraph illus­ trates this point. Since the term “hold” generally means beneficial ownership, see § 801.1(c), agents and other intermediaries are to be disre­ garded in determining whether a transferor is a third-party holder. The general rule stated in § 801.2(b) is subject to one exception: Whenever the percentage of voting securities to be held or acquired is calculated, the issuer of those voting securities will be deemed the acquired person. Thus, if a person will acquire shares of a subsidi­ ary of a corporation, the percentage test of section 7A(a)(3)(A) will be ap­ plied to the subsidiary, not to the entire “person” within which the sub­ sidiary is included. See the Statement of Basis and Purpose to §801.12 (a) and (b).

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33468 Example 2 to paragraph (b) illus­ trates the special case of the acquisi­ tion of a corporation with two 50 per­ cent shareholders. Under the rule there will be two acquired persons in this situation.

Background Information to § 801.2(b)' Antitrust analysis requires that the acquired person be the person within which the issuer of voting securities is included, rather than the person transferring the shares, when the two are different. The relationship estab­ lished by the acquisition, which will be the source of any competitive conse­ quences, will be between the acquiring person and the issuer. Accordingly, the rule places the reporting obliga­ tion upon the person within which the issuer is included, and places no obli­ gation upon the third-party transfer­ or.

Revised § 801.30(a) had specifically made this point. The original rules did not address the subject.. The exclusion of cash as an asset when acquired, which appeared in the revised rule, has been deleted from the final rule because § 801.21(a) precludes considering cash as an asset for pur­ poses of the 15-percent or $15-million test of section 7A(a)(3) throughout the rules.

SECTION 801.2(c)—ACQUIRED AND ACQUIRING PERSONS Sefction 801.2(c) makes clear that a person may be both an acquiring and an acquired person in the same trans­ action. The example to paragraph (c) illustrates such a situation. When it arises, the parties to the acquisition must complete portions of the Notifi­ cation and Report Form separately as acquiring and acquired persons. See § 803.2. A person need not complete two entire forms on such occasions; all that is necessary is to identify clearly the separate responses to the appro­ priate items.

Paragraphs (c) and (e) of the rule overlap. See the Statement of Basis and Purpose to § 801.2(e), below. Since under paragraph (e) the acquisitions are analyzed separately whenever voting securities are to be acquired from an acquiring person, one or both of the two acquisitions may not be re­ portable, For example, if an acquiring person is to acquire assets valued in excess of $15 million, the acquisition is reportable. However, if the acquiring person is to pay for the assets with cash plus its own stock valued at less than $15 million (and less than 15 per­ cent of the total shares outstanding), the acquisitions would be analyzed separately. The person transferring the assets would then be an acquiring person, but the criteria of section 7A(a)(3) would not be satisfied as to its acquisition of the stock, and it RULES AND REGULATIONS would not be reportable. See also § 801.21(a).

Background Information to § 801.2(c) Section 801.2(c) provides that per­ sons may be both acquiring and ac­ quired persons in the same transac­ tion, because, as the example illus­ trates, each person may fit both de­ scriptions. If so, the Notification and Report Form must be completed by each person in each capacity in order for the agencies to accurately evaluate the impact of the transaction upon competition. For the reasons why the form must be completed differently for acquiring and acquired persons, see the Statement of Basis and Purpose to § 803.2. A person also may be both an acquiring and an acquired person in a transaction described by § 801.2(e)., However, under that paragraph, when­ ever more than one separately repor­ table acquisition results, separate No­ tification and Report Forms must be filed.

SECTION 801.2(d)—MERGERS AND CONSOLIDATIONS This paragraph of the rule provides that mergers, consolidations, and other acquisitions combining all or part of the business of two or more parties are acquisitions within the meaning of the act. Each party to the acquisition is both an acquiring and acquired person, and if the acquisition is subject to the act, each will be re­ quired to file notification in both capa­ cities in accordance with § 803.2(b). Background Information to § 801.2(d) The legislative history of the act permits no doubt that Congress in­ tended the act to apply to mergers and other forms of business consolidations. For example, title II of the Hart-Scott- Rodino Antitrust Improvements Act of 1976 is entitled “Premerger Notifica­ tion.” See also, e.g., the remarks of Chairman Rodino, 122 Cong. Rec. H10293-94 (daily ed. Sept. 16, 1976). However, the language of the act em­ ploys only the term “acquisition.” Paragraph (d) of this rule simply makes clear that mergers and other business consolidations are “acquisi­ tions” within the meaning of the act. This paragraph of §801.2 specifies that both parties to a merger or con­ solidation are, for purposes of the act and rules, both acquiring and acquired persons. In the typical merger in which all the activities of both persons are combined, designating each party as an acquiring person would provide sufficient information for the agen­ cies, since under § 803.2 an acquiring person completes the Notification and Report Form with respect to all its ac­ tivities. But since the act contemplates an acquiring and an acquired person for each transaction, the rule instead designates each party as both an ac­ quiring and an acquired person. The dual designation does not involve mul­ tiple submissions of data, because for this type of transaction the reports filed by each person as an acquiring and an acquired person will be identi­ cal, and only one need be submitted. See § 803.2(b)(l)(iv).

The dual designation also proves useful for those mergers and consoli­ dations in which less than all of the is­ suers included within one of the per­ sons are to be merged or consolidated. Under § 803.2(b) that person, when re­ porting as an acquired person, will complete the Notification and Report Form with reference only to the enti­ ties to be involved in the merger or consolidation.

One comment (112) suggested that the rule provide objective criteria for designating the acquiring and acquired parties to a merger. For example, it suggested that unless the parties agreed otherwise, the person with the greater total assets could be designat­ ed the acquiring person. The Commis­ sion rejected this suggestion because this procedure would not assure sub­ mission of all necessary information. SECTION 8 0 1 .2 (e )—ACQUISITIONS OF VOTING SECURITIES FROM AN ACQUIR­ ING PERSON Section 801.2(e) states that when­ ever voting securities will be acquired from an acquiring person in connec­ tion with an acquisition, that acquisi­ tion is to be separately analyzed under the act and rules. To some extent paragraph (e) overlaps paragraph (c) of this rule. If, for example, a seller of assets (an acquired person) receives the voting securities of the acquiring person as consideration, both para­ graphs (c) and (e) are applicable. Under paragraph (c), each person is both an acquiring and an acquired person, and, if the criteria of section 7A(a) are satisfied, each acquisition is reportable. See the discussion and ex­ ample in the Statement of Basis and Purpose to § 801.2(c).

The focus of paragraph (e) is some­ what different. If a shareholder of an acquired person will acquire voting se­ curities from the acquiring person (or any issuer included within that person) in connection with an acquisi­ tion, only paragraph (e) would apply, because the shareholder is not an ac­ quired person within the meaning of the rule. For example, in a non-cash tender offer, the acquired person is the issuer whose shares are to be ac­ quired. Under paragraph (e), if any shareholder of the acquired person will be acquiring voting securities from the acquiring person, that acquisition is to be tested separately under the act and rules. If the shareholder would hold 15 percent or $15 million of the FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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voting securities of the issuer, and the criteria of section 7A (a)(1) and (a)(2) are also satisfied, the acquisition by the shareholder would be reportable. See also § 801.31. The example to para­ graph (e) illustrates the analogous sit­ uation in connection with a merger. When an acquisition is separately re­ portable, separate Notification and Report Forms must be submitted with respect to it.

B ackground Inform ation to § 801.2(e) This paragraph was added to the final rule to clarify that acquisitions of the type described, like other acqui­ sitions, are subject to the act. The Statement of Basis and Purpose to § 801.31 explains the rationale for cov­ erage, and for separate coverage, of such acquisitions. - SECTION 801.3 ACTIVITIES IN OR AFFECTING COMMERCE Section 7A(a)(l) is the first of the three tests that must be satisfied before the act applies to an acquisi­ tion. If either the acquiring or the ac­ quired person is engaged in commerce or in any activity affecting commerce, the test is satisfied. This rule inter­ prets the test by providing that if the activities of any entity included within the acquiring or acquired persons are in or affect commerce, then that person is so engaged, and the com­ merce test of section 7A(a)(l) is met. The term “commerce” is defined in §801.1(1).

B ackground Inform ation to § 801.3 The final rule is unchanged from the revised rule and is substantially the same as § 801.15 of the original rules.

Some comments (e.g., 87, 112; 1102) suggested that the commerce test should be less inclusive when foreign transactions are involved. These com­ ments have not been adopted, because restricted coverage of foreign transac­ tions is accomplished by specific ex­ emption rules, §§ 802.50-802.53. Simi­ larly rejected was the suggestion in comment 1115 that the rule specifical­ ly refer to United States commerce. Since the term “commerce” is defined in §801.1(1), there is no need to modify its use in this rule. Further­ more, such a limitation would poten­ tially cause confusion. The definition adopts the meaning of the term con­ tained, in the two statutes most rele­ vant to merger enforcement, the FTC Act and the Clayton Act. *Those acts apply to both the domestic and for­ eign commerce of the United States. Finally, comment 1086 suggested that a minimum dollar test be imposed in determining whether activities are in or affect commerce. Again, the Commission declined to so limit the act’s jurisdictional coverage. Section RULES AND REGULATIONS 7A(a)(l) sets no such limits. Rather than exclude transactions on jurisdic­ tional grounds, the rules exempt cer­ tain transactions that, because of their size, are of lesser competitive concern. See § 802.20.

SECTION 801.4 SECONDARY ACQUISITIONS Whenever as a result of an acquisi­ tion (a “primary” acquisition) a person will obtain control of an issuer, as a result of the same acquisition the ac­ quiring person will also hold any voting securities held by that issuer. See § 801.1(c)(8). If the issuer ]to be ac­ quired holds voting securities of other issuers that it does not control, the rule terms acquisitions of those voting securities “secondary acquisitions” and provides that they are separately sub­ ject to the act and rules. Making the primary and secondary acquisitions separately subject to the act and rules has three effects. First, the three tests of whether the act ap­ plies, section 7A(a) (l)-(3)r are applied separately to each acquisition. Thus, for example, if the issuer of the stock to be acquired in the secondary acqui­ sition does not meet the size-of-person test of section 7A(a)(2), the secondary acquisition would not be subject to the requirements of the act even though the primary acquisition might be. Second, as get forth in paragraph (b) of the rule, the exemptions contained in the act and rules are also applied separately. Subparagraph (b)(1) speci­ fies that even if the primary acquisi­ tion is exempt, the secondary acquisi­ tion may be reportable. Conversely, subparagraph (b)(2) makes clear that if the primary acquisition is reporta­ ble, the secondary acquisition never­ theless may be exempt. Third, since the secondary acquisition, if reporta­ ble, is separate from the primary ac­ quisition, separate Notification and Report Forms must be submitted with respect to it. Three examples illustrate the rule.

Note that secondary acquisitions in­ clude, in addition to the noncontroll­ ing holdings of the issuer to be ac­ quired in the primary acquisition, any noncontrolling holdings of entities controlled by such an issuer. See § 801.1(c)(8). The rule does not apply to acquisitions of voting securities of entities controlled by the issuer ac­ quired in the primary acquisition. All such voting securities are acquired as part of the primary acquisition. See §§801.1 (a)(1), (b), and (c)(8). Nor does the rule apply if the acquiring person will not control or already controls the issuer to be acquired in the primary acquisition;

secondary acquisitions occur only when, as a result of the pri­ mary acquisition, the acquiring person obtains control. Finally, note that the acquiring person must aggregate all its preexisting holdings, if any, with the 33469 voting securities to be acquired in a secondary acquisition, in determining whether the act or an exemption ap­ plies.

In the case of a merger or consolida­ tion, each party will make secondary acquisitions of any noncontrolling stock holdings held by the other party prior to the merger or consolidation. Since § 801.2(d) designates each party to the acquisition as both an acquiring and acquired person, in its capacity as acquiring person each party will make secondary acquisitions of the non-controlling stock holdings of the issuer to be acquired.

The waiting period with respect to secondary acquisitions begins upon re­ ceipt of notification from only the ac­ quiring person. See §801.30 and the Statement of Basis and Purpose to that rule.

B ackground Inform ation to § 801.4 An acquisition may violate the anti­ trust laws even though it is effected as a secondary acquisition. The rule merely clarifies that such acquisitions are within the ambit of the act and in­ sures that the agencies review the competitive consequences of such ac­ quisitions prior to consumation. The rule appeared in the revised rules. The final version has been rew­ ritten for clarity but reflects no sub­ stantive change. The terminology of the revised rule, “indirect acquisi­ tions,” has been changed to secondary acquisitions in order to avoid confu­ sion arising from the use of the former term elsewhere in the rules. “Indirect acquisition” refers to an acquisition made through a controlled entity, an agent, or another means resulting in acquisition of beneficial ownership. See § 801.1(c).

Only one comment (1090) was re­ ceived on the rule. It recommended that § 801.30 should be expanded to in­ clude acquisitions described by this rule, and that secondary acquisitions resulting from mergers should be spe­ cifically covered by the rule. The first proposal was adopted. No change was necessary to adopt the second sugges­ tion, since § 801.2(d) provides that mergers and consolidations are acqui­ sitions within the meaning of the act. Therefore, since primary acquisitions include mergers, secondary acquisi­ tions resulting from mergers fall within the rule.

SECTION 801.10 VALUE OF VOTING SECURITIES AND ASSETS TO BE ACQUIRED Section 801.10 governs the valuation of voting securities and assets to be ac­ quired. The third criterion for cover­ age under the act, the size-of-transaction of test section 7A(a)(3), provides in general that as a result of the acqui­ sition, the acquiring person must hold either 15 percent or $15 million of the FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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33470 stock or assets of the acquired person. Section 801.10 explains how to deter­ mine whether the $15 million test is satisfied. (Section 801.12 explains how to determine whether the 15-percent test is satisfied.) The rule does not apply to the valuation of total assets fore the section 7A(a)(2) size-of-person test, which is governed by § 801.11. Paragraph (a) of the rule treats the valuation of voting securities; para­ graph (b) treats the valuation of assets. Both paragraphs employ the term “market price,”

“acquisition price,” and “fair market value,” and these terms are explained in para­ graphic).

Section 801.13 also pertains to valua­ tion. It provides valuation rules for voting securities and assets of the ac­ quired person that are already held by the acquiring person prior to the ac­ quisition at issue; for that reason, §801.10 begins, “[elxcept as provided in §801.13 * * *.” Section 801.13 also utilizes, by reference, the terms de­ fined in paragraph (c) of this rule. Background Information to § 801.10 The words “to be acquired,” which were not in the revised rule, were in­ serted into the title and first sentence of the rule to distinquish the rule even more clearly from §801.11, relating to total assets as suggested by comment 89. With the new title, subparagraph (b)(1) of the revised rule, which was a reminder to consult §801.11 to deter­ mine the total assets of a person, was deleted as unnecessary. SECTION 801.10(a)—VOTING SECURITIES Paragraph (a) prescribes the method of valuing voting, securities to be ac­ quired. In brief, the value is the higher of the market price or acquisi­ tion price. If neither market nor acqui­ sition price can be ascertained, the fair market value is used. The procedures for determining “market price,” “ac­ quisition price,” and “fair market value” are set forth in paragraph (c). The rule utilizes market quotations only from a “national securities ex­ change” or “interdealer quotation system of a national securities associ­ ation registered with the U.S. Securi­ ties and Exchange Commission.” “Na­ tional securities exchange” means any securities exchange registered with the SEC under section 6 of the Securi­ ties Exchange Act of 1934, 15 U.S.C. 78f, and thus includes the regional stock exchanges. The only interdealer quotation system currently registered with the SEC is the National Associ­ ation of Securities Dealers Automated Quotation (NASDAQ) service. Background Information to § 801.10(a) Section 801.10(a) defines the $15 million test of section 7A(a)(3)(B) to RULES AND REGULATIONS mean the greater of the acquisition and market prices. If the acquisition price exceeds the market price, desig­ nating the acquisition price as the value is appropriate because the value of the acquisition to the parties is greater. Market value reflects present supply and demand for a stock. A major acquisition, such as a tender offer, may change that equilibrium more quickly than the market can re­ flect it, thus making market value a less appropriate test of the value of the transaction to the parties. On the other hand, if the market price ex­ ceeds the acquisition price, the market price must be employed as the value for purposes of the act. The rule in­ vokes the procedure for determining fair market value only as a last resort, when neither market nor acquisition price is available.

The precedessor of the rule, original §801.20, had provided that the value was the market price, or, if none, the higher of the acquisition price and fair market valué. A number of comments (e.g., 15, 48, 63, 71, 120) complained that no board of directors would ever assign a fair market -value different from the acquisition price, and that the required determination of fair market value would prove expensive and troublesome. The comments rec­ ommended that the acquisition price be determinative, and the fair market value reserved for occasions when the securities have no ascertainable dollar value. Thé revised rule reflects this recommendation, and no comments on this aspect of the revised rule were re­ ceived.

SECTION 801.10(b)—ASSETS Paragraph (b) prescribes the method of valuing assets to be acquired. The rule provides that the value is the fair market value of the assetis, or, if the acquisition price is determined and is greater than the fair market value, the acquisition price. The procedures for determining fair market value, which are set forth in paragraph (c), therefore must be applied in connec­ tion with every acquisition of assets. If the reporting person has designated the acquisition price as the value of the assets, the agencies will treat this designation as a representation by the filing person that the fair market value has been determined to be equal to or less than the acquisition price. Again, the term “acquisition price” is defined in paragraph (c). Background Information to w § 801.10(b) The valuation of assets is analogous to that of voting securities, except that for assets no market price gener­ ally exists, and the fair market value substitutes for it. If the parties assign an acquisition price greater than the fair market value, then the acquisition price becomes the yalue of the assets because that is the value to the par­ ties. If the fair market value is greater, it, rather than the acquisition price, becomes the value.

Original § 801.20(b) specified that the value would be the highest of the fair market value, book value, and ac­ quisition price. The comments on paragraph (a) of the original rule were for the most part equally directed to paragraph (b)—that is, the required determination of fair market value was said to be unnecessary and trou­ blesome when the acquisition price had been determined. However, the re­ vised rule retained the requirement for assets, deleting only the reference to book value as irrelevant and unlike­ ly to exceed the greater of the other two values. See comment 77. Although several comments (1059, 1102, 1108) continued to call for the elimination of fair market value, the final rule re­ tains it. In many cases, the acquisition price of assets may not be known at the time of filing. Note that the re­ vised and final rules modify the proce­ dure for determining fair market value, making it significantly more flexible. See the Statement of Basis and Purpose to § 801.10(c)(3). SECTION 801.10(C) Paragraph (c) defines the terms “market price,” “acquisition price” and “fair market value” used in this rule and § 801.13.

SECTION 801.10(c)(1)—MARKET PRICE Subparagraph (c)(1) provides instructions for determining the market price separately for transac­ tions subject to § 801.30 and for other transactions. Section 801.30, in gener­ al, applies to acquisitions on stock ex­ changes and other transactions not in­ volving agreement between the acquir­ ing and acquired persons. See the Statement of Basis and Purpose to that rule.

For transactions subject to § 801.30, clause (i) provides that the market price is the lowest closing quotation or bid price within the 45 calendar days preceding either the receipt of the notice by the acquired person required by § 803.5(a), or, if the act does not apply to the transaction, the consum­ mation of the acquisition. For other transactions, clause (il) provides that the market price is the lowest closing quotation or bid price within the 45 or fewer calendar days preceding the con­ summation of the acquisition, but not extending back prior to the day before execution of any contract, agreement in principle or letter of intent to merge or acquire. Clause (iii) specifies that if the security was not traded within the time period set forth, the last preceding trade or bid should be FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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used, notwithstanding the time limita­ tions of clause (ii). Clause (iii) also provides that if quotations are availa­ ble in more than one market, the person filing notification may select any such quotation.A Both clauses (i) and (ii) give the par­ ties the benefit of a decline in market price by providing that the value is the lowest price within time periods not only prior to filing notification but also prior to consummating the acqui­ sition. For example, assume that, in an acquisition in which the 15-percent test of section 7A(a)(3)(A) is not satis­ fied, the parties have filed notification because the market price exceeded $15 million, even though the acquisition price is less than $15 million. If the market price falls during the waiting period, the rule would assign a new value and the $15 million test would no longer be satisfied. Therefore, the act would no longer apply, and the parties would be free to consummate the acquisition, even though notifica­ tion had already been filed. (Note that a change in market price can have no effect upon whether the 15-percent test of section 7A(a)(3)(A) is satisfied, because the percentage of stock or assets does not depend on market price. See §801.12. In addition, if the 15-percent test had been satisfied, the decline in market price may make the acquisition exempt under § 802.20.) Finally, the rule also allows parties to determine with assurance that the act does not apply. If on a given day the market price results in a value of less than $15 million for an acquisi­ tion, that price may or may not be the lowest price for the following 45-day period. But so long as the acquisition is consummated within 45 days follow­ ing that date, under the rule the value of the acquisition can be no greater, and thus will be less than $15 million, and the parties need not file notifica­ tion or observe a waiting period. Background Information to §801.10(0(1) The previous versions of the rule, original §801.20 and revised §801.10, would have directed selection of a market price within a specified number of days before filing notifica­ tion. Two comments (1026, 1108) noted that this procedure did not permit a firm determination that an acquisition was not reportable—since no notifica­ tion was contemplated, the time period for selecting the market price could not be identified, and conse­ quently the parties were presumably imperiled by the risk that a rise in market prices would render the acqui­ sition reportable shortly before the planned consummation date. In order to cure this problem, the final rule makes two changes. First, it provides for selecting the market price within a RULES AND REGULATIONS time period prior to either receipt of the notice preceding notification under § 803.5(a), or the date of con­ summation. Second, it provides that the market price is the lowest price within the 45-day period preceding consummation, so that a market price indicating that the transaction need not be reported assures the parties of their ability to consummate for that length of time.

Since the rule specifies the lowest price within the 45-day period, the parties need not agree to perform the valuation as of any particular date. Antagonistic parties therefore cannot select dates that lead to inconsistent conclusions about whether the acquisi­ tion is reportable. And the lowest price gives the parties the benefit of a de­ cline in the market price, as discussed above.

The time period was lengthened to 45 days in order to provide adequate time for planning while still reflecting a reasonably current value. Comment 1115 noted that the few days afforded by the revised rule may have been in­ sufficient. However, the 45-day period may not extend back to any days prior to the day before execution of a con­ tract, agreement in principle, or letter of intent to acquire, since the parties presumably entered into their agree­ ment on the basis of market prices prevailing at that time. The subparagraph distinguishes be­ tween transactions subject to §801.30 and those that are not, because, for the former there typically will be no objective reference point for the time period until the acquisition is consum­ mated or the notice preceding notifica­ tion is received by the acquiring person. By contrast, for consensual (non-§ 801.30) transactions, the date of execution of the contract, agreement in principle or letter of intent marks the reference date.

The SEC’s comment (1058) suggest­ ed the inclusion, in clauses (i) and (ii), of bid prices on interdealer quotation systems, and the treatment in clause (iii) of situations in which the stock has not been traded.

SECTION 801.10(c)(2)—ACQUISITION PRICE Subparagraph (c)(2), “acquisition price,” specifies that the acquisition price includes the value of all consider­ ation for the voting securities or assets to be acquired. This means, for exam­ ple, that cash, voting securities, non­ voting securities, tangible and intangi­ ble assets and assumption of liabilities, if consideration for an acquisition, must all be valued in computing the acquisition price.

33471 Background Information to §801.10(0(2) Determination of the acquistion price is part of the procedure for im­ plementing the $15 million test of sec­ tion 7A(a)(3)(B). Section 801.10(c)(2) states that the acquisition price is the value of all the consideration for the acquisition.

The original rules contained no counterpart to subparagraph (c)(2). Instead, original § 801.20(c) provided that if securities were to be furnished as consideration for an acquisition, they were to be valued according to this rule. That provision was deleted from the revised rule as superfluous, since the recipient of securities fur­ nished as consideration must use this rule to value them. The final rule pro­ vides instructions for determining the value of voting securities to be ac­ quired by any person, and the revised and final rules effect no change by the deletion. Comment 1090 requested re­ instatement of such language and the suggestion accordingly was rejected as unnecessary. The final provision is identical to the revised provision except for minor editorial revisions. Comment 115 suggested that the value of installment contracts be dis­ counted to reflect the present worth of the payments. This suggestion was rejected. The value of an installment contract is the value of the total pay­ ments of principal to be made under the contract, but excluding interest. SECTION 801.10(C)(3)—FAIR MARKET VALUE Subparagraph (c)(3) provides that the fair market value shall be deter­ mined in good faith by the board of di­ rectors of the ultimate parent entity included within the acquiring person, or, if the ultimate parent entity is un­ incorporated, by officials exercising similar functions. The board or offi­ cials may delegate the actual process of making that determination, but in any case remain responsible for it. The determination can be performed at any time, but must reflect the fair market value as of any day within 60 calendar days prior to either filing no­ tification or consummating the acqui­ sition. If the 60-day period expires before filing or closing, the parties would no longer be entitled to rely on the value previously determined, and if in doubt about whether to close without filing notification, the acquir­ ing person would be obliged to make a new determination. Item 2(d)(i) on the form, however, which requests the ap­ proximate value of assets to be ac­ quired, would not alone require a de­ termination if the parties were other­ wise certain that the act applied. The example illustrates these points. FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

Page 184

33472 Background Information to §801.10(0(3) The rule provides that the acquiring person makes the determination, so that the parties to the acquisition can resolve with certainty whether the act applies. If the acquiring and acquired person each made determinations, or if the rule required the two sides to agree on a fair market value, the rule could lead to inconsistent conclusions about whether filing notification and observing the waiting period was re­ quired.

The rule provides that the determi­ nation of fair market value must re­ flect the value as of any day within 60 days prior to either filing notification or consummating the acquisition for the same reasons discussed in connec­ tion with market price—in brief, to permit the parties to determine with certainty whether or not they must comply with the act prior to an acqui­ sition. The 60-day limitation is intend­ ed to allow enough time for a determi­ nation but still assure that the fair market value assigned is reasonably current.

The final rule on fair market value exhibits significant changes from both the original and revised rules. Original § 801.20 did not have a sepa­ rate paragraph instructing how to de­ termine the fair market value, but had equivalent language within para­ graphs (a) and (b) pertaining to securi­ ties and assets, respectively. The origi­ nal rule arguably did not permit the board of directors to delegate the de­ termination, and was criticized by nu­ merous comments (e.g., 38, 48, 58, 74, 77, 98, 112, 115, 120). Imposing the re­ sponsibility upon the board of direc­ tors, the comments stated, would re­ quire a costly and time-consuming in­ dependent appraisal, and the value de­ termined by management ought to suffice. Although the original rule did not seek to preclude such an appraisal, the revised rule explicitly permitted the board to delegate the determina­ tion. The final rule substitutes the word “function” for “responsibility” to make clear that the board of directors cannot disavow the determination if compliance with the act and rules is drawn into question. One comment on the revised rule (1061) suggested that the board of directors of the ultimate parent entity should be allowed to del­ egate the determination to a subsidi­ ary, and the final rule clarifies that this is permitted by replacing the word “person” in the revised rule by “entity.”

Two comments (29, 104) suggested that an accurate determination of fair market value may be impossible until after the acquisition closes, and that the rule should permit an estimate. This suggestion was not explicitly adopted because it seemed unneces- RULES AND REGULATIONS sary to state that in some circum­ stances the determination of fair market value may require a good faith estimate. Note that the instructions to the notification and report form ex­ plicitly permit estimates and provide that the sources of the estimates must be indicated.

Two other comments (92, 115) sug­ gested that acquisitions of patents and other forms of intangible property could not be readily assigned a fair market value, and that the rule should specifically permit valuing such assets at zero. This proposal was rejected, for the same reason that the rule insists upon comparison of the acquisition price to the fair market value: That the acquisition price alone may be dif­ ficult to determine at the time of filing notification. In such cases there may be no alternative but to deter­ mine the fair market value of the in­ tangible property.

The final rule modifies the last sen­ tence of the revised rule, as noted ear­ lier, to reflect determinations of fair market value which establish that no­ tification is not required, and to expand the 15-day period to 60 days. SECTION 801.11 ANNUAL NET SALES AND TOTAL ASSETS Section 801.11 explains how to com­ pute the annual net sales and total assets of a person. The terms “annual net sales” and “total assets” occur pri­ marily in the size-of-person test of sec­ tion 7A(a)(2). In general, either the ac­ quiring or the acquired person must have annual net sales or total assets of at least $100 million, while the other must have annual net sales or total assets of at least $10 million before the act applies; but see section 7A(a)(2)(B) (for acquired persons nou “engaged in manufacturing,” a term defined in §801.1(j), only total assets satisfy the test);

Section 801.12(d)(2) of the rules also provide that the total assets of a person serve as the denominator in de­ termining the percentage of assets to be held or acquired; thus the rule also contributes to determining Whether the third test for application of the act, the size-of-transaction test of sec­ tion 7A(a)(3), is satisfied. In addition, the terms “annual net sales” and “total assets” appear elsewhere in the rules, most notably in § 801.40, which contains its own size-of-person test ap­ plicable to the formation of a joint venture or other corporation, and §802.20, which exempts certain small acquisitions.

Since the chief purpose of the rule is to determine whether the act applies, persons need not use the rule to com­ pute precise figures for annual net sales or total assets if they are certain that the act either does or does not apply. None of the items on the notifi­ cation and report form requires a statement of the annual net sales or total assets of either party, and item 3(a), which requests the percentage of assets to be held or acquired, may be answered by estimating the total assets figure for the denominator of the percentage. See the statement of basis and purpose to item 3(a). Section 801.11 prescribes a method by which persons that are unsure whether the size-of-person test of section 7A(a)(2) or the percentage-of-assets test of sec­ tion 7A(a)(3) is satisfied can resolve definitively whether the act applies. Except for § 801.40, the rule does not explicitly refer to other rules, but an understanding of the definition of “person,” § 801.1(a)(1), is essential to applying the rule correctly. The rule presupposes identification of the “person” the annual net sales and total assets of which are to be deter­ mined.

The rule consists of four paragraphs. Paragraph (a) expresses the general principle that all sales and assets of the person are included, whether for­ eign or domestic. Paragraph (d) consti­ tutes a limited exception to this princi­ ple for natural persons. Paragraph (b) sets forth the general rule that the annual nets sales and total assets shall be as stated on the person’s financial statements, with two provisos that may modify the figures on such state­ ments. Paragraph (c) specifies exactly which statements are to be consulted. SECTION 801.11(a) Paragraph (a) states that the annual net sales and total assets of a person include all net sales and all assets, whether foreign or domestic, except as provided in paragraph (d), which ex­ cludes certain assets of natural per­ sons.

By including both foreign and do­ mestic sales and assets, paragraph (a) makes clear that foreign assets, oper­ ations or subsidiaries may not be disre­ garded for purposes of the size-ofperson test of section 7A(a)(2) or the percentage-of-assets test of section 7A(a)(3)(A) even though foreign oper­ ations may affect the applicability of certain exemptions under §§ 802.50- 802.52.

The term “net sales” has its common meaning, that is, sales less (or exclu­ sive of) returns, discounts, excise . taxes, and the like. See § 801.11(b) and its Statement of Basis and Purpose. The costs of production or materials may not be deducted. Persons that do not have “sales” should use net re­ ceipts, revenues, or other comparable figures.

Of course, the sales and assets of a “person” include the sales and assets of all of its component entities. See § 801.1(a)(1).

FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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Background Information to § 801.11(a) Original § 801.25 corresponds to this rule, and paragraph (c) of the original rule corresponds most nearly to para­ graph (a) of the final rule. The com­ ments to original paragraph (c) ad­ dressed matters that appear in other paragraphs of the final rule. Revised §801.11 set the rule into its current format, and the final version of paragraph (a) retains the revised version with only two changes. It in­ serts the word “net” before “sales,” to clarify that deductions normally made from gross sales under the person’s ac­ counting procedures, e.g., returns, dis­ counts, etc., are permitted. The term “sales” does not, however, mean net income after costs of goods sold, as one comment (1088) suggested. Con­ gress manifestly intended the act to reach acquisitions by large firms, and while sales are a useful measurement of size for this purpose, profitability is not.

The final rule also inserts the word “held,” to incorporate all of the con­ cepts of ownership that the definition of that term imports. See § 801.1(c). SECTION 801.11(b) Paragraph (b) provides that the annual net sales and total assets of a person shall be as stated on vthe finan­ cial statements specified in paragraph (c), with a number of exceptions and provisos.

First, the paragraph states that the total assets of a joint venture or other corporation at the time of its forma­ tion are not determined under this rule, but shall be determined in ac­ cordance with § 801.40(c). Second, subparagraph (b)(1) re­ quires that the annual net sales and total assets of the person reflect the annual net sales and total assets of every entity included within the person. If the financial statements of the ultimate parent entity do not re­ flect consolidation of the net sales and total assets of all the entities included within the person, the annual net sales and total assets must be recom­ puted to include the nonduplicative annual net sales and nonduplicative total assets of each such unconsolidat­ ed entity. The term “nonduplicative” makes clear that the consolidation may not consist simply of adding the sales and assets of unconsolidated en­ tities, since, for example, the parent corporation’s interest in an unconsoli­ dated entity have have been carried as an asset on the parent corporation’s books; therefore, to add the assets of the unconsolidated entity without sub­ tracting the asset already reflected would be to count the same assets twice. The example following subpara­ graph (b)(2) illustrates this point. RULES AND REGULATIONS Next, subparagraph (b)(2) requires that the financial statements (and any restatements necessary to comply with the previous subparagraph) must, in­ sofar as possible, be prepared in ac­ cordance with the accounting princi­ ples normally used by the person. The financial statements must be of a date not more than 15-months prior to filing notification or consummating the acquisition.

Note that neither the financial statements required by this rule, nor the restatements directed by para­ graph (b), must necessarily be submit­ ted as such in response to the Notifica­ tion and Report Form. Item 4 of the form explains in detail which docu­ ments must be submitted. Background Information to § 801.11(b) Paragraph (b) creates the frame­ work for determining the annual net sales and total assets of a person. Since annual net sales and total assets are accounting concepts, the rule logi­ cally employs financial statements to derive figures for these terms. The rule requires modifying the figures shown on the statements only to the extent necessary to conform to the pattern of the act and rules. The total assets of a joint venture or other corporation at the time of its formation are determined under § 801.40 instead of this rule. Since the annual net sales and total assets must reflect the entire person, the financial statements must reflect consolidation of the sales and assets of each entity included within the person. Comment 89 asserts that under the original rules, consolidation of the total assets of controlled enti­ ties may unfairly inflate a person’s size for purposes of the section 7A(a)(2) size-of-person test, because it attributed to the person all of the assets of an entity that could be “con­ trolled” with only a minority interest. The revised and final rules in most cases will not cause the same result, since the definition of control insures that the person holds at least 50 per­ cent of the controlled entity’s stock. On occasions when control arises from contractual power to designate a ma­ jority of the board of directors, con­ solidation is justified for the same rea­ sons underlying the existence of con­ trol in such situations—basically, the similarity of interest for purposes of antitrust analysis. See the Statement of Basis and Purpose to § 801.1(b). Likewise, subparagraph (b)(1) re­ quires that the recomputation of annual net sales and total assets result in nonduplicative figures so that the recomputation does not unfairly in­ flate a person’s size. Two comments (15, 29) suggested that the rule define “nonduplicative,” but the revised and 33473 final rule retain the term without ad­ ditional explanation, as adequately de­ scriptive of the result sought. The term was extended to net sales as well as total assets in response to comment 29.

Paragraph (b) of original § 801.25 would have required a different re­ statement of the financial statements: if a material change in net sales or total assets had occurred after the date of the statement, which could reasonably have been expected to in­ crease the annual net sales or total assets to the levels of section 7A(a)(2), the rule required either preparation of a new statement or compliance with the act as though the test of section 7A(a)(2) had been satisfied. Revised subparagraph (b)(2) preserved a simi­ lar provision and encompassed disposi­ tions as well as acquisitions since the last statement. However, no consist­ ent, easily administrable way could be found to require restatement of annual net sales when a business had been acquired or disposed of after the beginning of the fiscal year. The final rule abandons the approach as not worth the added complexity. Subparagraph (b)(2) requires the fi­ nancial statements and any restate­ ments to be prepared insofar as possi­ ble in accordance with the accounting principles normally used by the re­ porting person, so that novel proce­ dures are not adopted in order to cir­ cumvent the act. Original § 801.25(a) would have required certified financial statements prepared in accordance with Regulation S-X of the Securities and Exchange Commission. A number of comments (e.g., 15, 59, 63, 78, 83, 93, 120) criticized this provision as unnec­ essary and burdensome to privately held companies and foreign firms, which are not subject to regulations by the SEC and thus may not have certified financial statements prepared in accordance with Regulation S-X. Therefore, the revised rule called only for financial statements prepared in accordance with generally accepted ac­ counting principles. Comment 1090, however, noted that generally accept­ ed accounting principles would still be incompatible with several other provi­ sions in the rule: for example, general­ ly accepted accounting principles may not permit consolidation of some ma­ jority-owned entities and would not permit restatement of annual net sales for businesses acquired during the fiscal year. Accordingly, the comment suggested deleting the words “general­ ly accepted,” and the final rule adopts the suggestion. For similar reasons, the final rule requires use of the ac­ counting principles normally used only insofar as possible.

The 15-month limitation insures that the statements reflect annual net sales during the most recent fiscal FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

Page 186

33474 year. The original rule would have permitted statements prepared only within 1 year, rather than 15 months, of the date of filing notification. A number of comments (e.g., 29, 63, 78, 83, 88, 93, 115, 120) attacked the limi­ tation as inadequate to allow prepara­ tion of the statement after the close of the fiscal year, and the revised and final rules provide for 15 months. The final rule modifies the 15month restriction so that statements within 15 months of consummating the acquisition, as well as filing notifi­ cation, qualify. In that way, parties to an acquisition can resplve whether they satisfy the size-of-person test of section 7A(a)(2) even if not required to file notification. The change also allows persons to secure the benefit of a decrease in annual net sales or total assets. If during the waiting period a new regularly prepared financial state­ ment appears and reveals that the act no longer applies, the parties need not comply with the act.

SECTION 801.11(C) The two subparagraphs of para­ graph (c) specify exactly which figures on the financial statements are the annual net sales and total assets of the person. Since paragraph (c) is subject to the provisions of paragraph (b), the annual statement must consolidate the net sales and total assets of all en­ tities included within the person, use the accounting principles normally used by the person, and be prepared as of a date within 15 months of the date of filing or consummation. Subparagraph (c)(1) provides that the annual net sales of a person shall be as stated on the last regularly pre­ pared annual statement of income and expense of the person. See the State­ ment of Basis and Purpose to para­ graph (b) of this rule, above. Subparagraph (c)(2) specifies that the total assets of the person shall be as stated on the last regularly pre­ pared balance sheet of the person. “Assets” means assets disregarding li­ abilities but less depreciation if the ac­ counting principles normally used by the person so provide. “Regularly pre­ pared,” as used in both subparagraphs, means that the statement was pre­ pared both at the time a statement would normally be prepared and in the normal fashion that such a state­ ment would be prepared. Internal bal­ ance sheets prepared for management and not audited or disseminated to the public may satisfy this standard. If no statements of income and ex­ pense or balance sheets are regularly prepared, statements must be pre­ pared if necessary to determine whether the act applies. An example illustrates the para­ graph.

RULES AND REGULATIONS Background information to §801.11(0 Paragraph (c) had no equivalent in the original or revised rules. Each of the earlier versions provided that the annual net sales and total assets of a person should be as stated on the fi­ nancial statements of the person. The earlier rules would also have required restatement of the annual net sales and total assets to reflect certain changes occurring since the beginning of the fiscal year; see the Statement of Basis and Purpose to paragraph (b). The final rule abandoned that ap­ proach and instead inserted paragraph (c) .

SECTION 801.11(d) Paragraph (d) relates to the determi­ nation of total assets for natural per­ sons. The total assets for a “person” of which the ultimate parent entity is a natural person are, under paragraph (b) of this rule, as stated on a balance sheet which consolidates all the enti­ ties which the natural person controls, directly or indirectly.

See also § 801.1(a)(1), (b). However, paragraph (d) permits a natural person to omit from such a balance sheet all assets except “investment assets” (a term de­ fined in § 801.1(i)(2) to mean, in sub­ stance, cash and equivalents, and Gov­ ernment bonds), voting securities and other income-producing property.

Thus, a natural person compiling such a balance sheet could omit the value of assets such as a personal residence, automobile and other personal (non­ income-producing) property. The phrasing of the rule makes clear that all voting securities are regarded as income-producing property. Similar­ ly, “income-producing property”

means any property held for invest­ ment or for the production of income, whether or not actually * producing income.

The “annual net sales” of a natural person will be the annual net sales of all entities (including partnerships) he or she controls, plus any annual net sales from proprietorships. Of course, a natural person may not have com­ piled a balance sheet, regularly pre­ pared or otherwise, reflecting all such entities. As discussed above in connec­ tion with paragraph (a), the annual net sales and total assets of a “person” need be determined according to the rule only if the person is in doubt about whether compliance with the act is necessary.

Since paragraph (a) of the rule in­ cludes all assets “held,” and because the definition of “hold” provides that the holdings of spouses and minor children are treated as though held in common (see 1801.1(c)(2)), a natural person’s balance sheet, to comply with the rule, must reflect all investment assets, voting securities and other income-providing property held by the spouse or minor children of a natural person, or by the parents if the person is a minor child.

Background Information to § 801.11(d) The assets excluded by this para­ graph are generally irrelevant to any antitrust concerns that may arise from an acquisition, and thus their exclu­ sion for purposes of determining whether the act applies is appropriate. In general, the rules treat natural persons, corporations, and other enti­ ties alike. This rule adheres to that principle by aggregating all entities, however unrelated in their business activities, that are under the common control of the ultimate parent entity (whether a corporation or natural person) and by consolidating the annual net sales and total assets of all such entities.

Original § 801.25(d) would have ex­ cluded all assets of a natural person other than partnership assets. Com­ ment 63 criticized the provision, noting that Congress must have in­ tended the act to cover acquisitions by natural persons, but that excluding all assets of" natural persons effectively exempted such acquisitions, since sec­ tion 7A(a)(2) would never be satisfied. Revised § 801.11(d) was quite similar to the final rule. Comment 1090 criti­ cized the inclusion of all income-pro­ ducing assets, arguing that only those related to control of a trade or busi­ ness were relevant to antitrust consid­ erations.

However, that criterion seemed difficult for the agencies to ad­ minister and the parties to apply. Fur­ thermore, it could result in artificial understatement of the size of natural persons by comparison with corporate persons or others, for which the crite­ rion would not apply. Accordingly, the final rule retains as the test “incomeproducing” property. The final rule also clarifies the test by specifically in­ cluding in the total assets all invest­ ment assets and voting securities. SECTION 801.12 CALCULATING PERCENTAGE OF VOTING SECURITIES OR ASSETS Section 801.12 prescribes the method of calculating the percentage of voting securities or assets to be held or ac­ quired. Whenever the act or rules refer to a percentage, the percentage must be determined by applying this rule.

In general terms, the rule provides that the percentage of voting securi­ ties is the percentage of the total votes for directors of the issuer which the acquiring person will be entitled to cast after the acquisition. The percent­ age of assets is the ratio of the book value of the assets to be held as a result of the acquisition to the total assets of the person (not the entity) FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

Page 187

from which acquired. However, these general statements are subject to cer­ tain modifications and exceptions con­ tained in the rule.

In many instances calculation of the precise percentage of assets or voting securities to be held or acquired may be unnecessary. For example, any ac­ quisition as a result of which the ac­ quiring person will hold assets of the acquired person valued (under §§801.13 and 801.10) at more than $15 million will satisfy the size-of-transaction test without regard to the per­ centage held or acquired. Conversely, § 802.20 will exempt any acquisition of assets for which the corresponding figure is less than $10 million, without regard to the percentage of assets to be held or acquired. For voting securi­ ties, the situation is similar, except that the exemptions under §§802.20 and 802.21 may require calculation of percentages.

SECTION 801.12 (a), (b )—VOTING SECURITIES Paragraph (a) provides that when­ ever the act and rules refer to the per­ centage of voting securities of the ac­ quired person, the issuer whose voting securities are being acquired shall be deemed the acquired person for that purpose. Therefore, the percentage of voting securities is calculated with ref­ erence only to the voting securities of the issuer to be held or acquired, in the manner prescribed by paragraph (b). Since the term “person” normally refers to all entities under common control, see § 801.1(a)(1), the use of the issuer rather than the person as the denominator of the percentage calculation represents a departure from the usage of the term “person” elsewhere in the rules. For this reason, the definition of “person” begins, “Except as provided in paragraphs (a) and (b) of § 801.12 * * *.” The example following § 801.12(a) illustrates this point.

Paragraph (b) prescribes a formula for computing an exact percentage. The numerator is the nuinber of votes for directors that voting securities presently entitle the holder to cast, or, as a result of the acquisition, will enti­ tle the acquiring person to cast. This instruction requires application of the definition of “hold” contained in § 801.1(c), and §801.13, which tells which voting securities are to be held “as a result of” an acquisition, before the correct number of votes can be as­ certained. Votes that the holder may cast because of proxies obtained from other persons are not included in the numerator.

The denominator of the computa­ tion is the total number of votes for directors that all outstanding shares are entitled to cast. If the acquisition will increase the number of outstand- RULES AND REGULATIONS ing shares, clause (b)(1)(h) specifies that the larger number should be used in the denominator. Otherwise, subparagraph (b)(2) directs that treasury shares and authorized but unissued shares should not be included for pur­ poses of determining the number of votes presently entitled to be cast. Fi­ nally, for purposes of determining the number of outstanding voting securi­ ties of an issuer, subparagraph (b)(3) permits a person to rely on the most recent information set forth in filings with the SEC, if any, unless the person knows or has reason to believe that that information is inaccurate. Two examples following § 801.12(b) illustrate application of the percent­ age formula.

Background Information on Voting Securities Applying the percentage test to the issuer whose voting securities are being acquired sparked considerable controversy in the comments. The controversy ultimately arises, howev­ er, from the fact that the act itself uses the term “person” in at least two different senses. The act phrases each of the three tests that must be satis­ fied before the act applies to an acqui­ sition—the commerce test of section 7A(a)(l), the size-of-person test of sec­ tion 7A(a)(2), and the size-of-transaction test of section 7A(a)(3)—in terms of “person.” For purposes of the sizeof-person test of section 7A(a)(2), the relevant “person” must be the entire corporate structure, rather than just the company or subsidiary which is making the acquisition. If the size-ofperson test depended upon the size of the particular corporation making an acquisition, rather than the overall corporate structure, the act would become easily susceptible of evasion. Accordingly, § 801.1(a)(1) defines “person,” in general, as the entire cor­ porate structure, and §801.11 applies the size-of-person test to that “person.” Likewise § 801.3 appropriate­ ly applies the commerce test of section 7A(a)(l) to the same, overall “person.” However, the 15-percent test of sec­ tion 7A(a)(3)(A) poses a problem. As the Federal Register notice accompa­ nying the revised rules explained: For example, suppose the transaction in­ volves the purchase by a large corporation of a subsidiary of another large corporation. The definition of “person” as the entire cor­ porate structure would dictate that the sell­ ing corporation’s entire corporate structure be considered the “acquired person” for purposes of the $100 million or $10 million size criteria. But if the selling corporation and its subsidiary each issue their own stock, then a specific number of the subsid­ iary’s shares cannot conveniently be ex­ pressed as a percentage of either the shares of the parent, of1 the combined shares of the parent and ite subsidiary corporations. The problem is not as acute when the acquisition 33475 is of assets rather thán voting securities, since assets could be valued without refer­ ence to the corporate forms. (42 FR at 39042 (Aug. 1, 1977).) The revised rules addressed this problem by introducing the term “entity” to mean the component parts of a “person.” See § 801.1(a)(2). For purposes of the size-of-transaction test of section 7A(a)(3), the revised rules designated as the “acquired person” the entity (rather than the person) whose voting securities or assets were being acquired. The original rules had accomplished the same result, without using the term “entity,” by means of a more complex definition of “person.” That scheme, in essence, defined the term “person” differently for the dif­ ferent tests for coverage. The comments criticized original § 801.30(a) and revised § 801.12(a), the predecessors of the final rule. In gen­ eral, the comments argued that differ­ ent definitions of the single term “person” were impermissible. Some of the comments (e.g., 63, 89; 1042, 1050, 1091) complained that the scheme “ex­ panded” the coverage of the act. Others (e.g., 120; 1042, 1050, 1059, 1091) disagreed that the different con­ texts required different meanings for the term “person.” They noted that Congress used the term “issuer” in section 7A(c)(3), (c)(9) and (c)(10) and therefore inferred that Congress, by failing to sue the term “issuer” in sec­ tion 7A(a)(3), did not intend the agen­ cies to substitute the word “issuer” for “person” in that context. Still others (82; 1042) noted that the rule could be circumvented by first collapsing a sub­ sidiary into the parent corporation, and that therefore the rule made cov­ erage under the act turn upon the form of corporate organization. The Commission did not agree with these comments. Unless Congress in­ tended the 15-percent test of section 7A(a)(3)(A) to reach acquisitions not meeting the $15 million test of section 7A(a)(3)(B), the former provision would not appear in the act. Section 7A(d) of the act assigns the Commis­ sion the power to define the terms of the act and to prescribe rules to imple­ ment the act. The use of the term “issuer” elsewhere in the act does not preclude its use in any definition or rule. The argument in the comments thus reduces to insisting that the term “person” ought to carry the same meaning in all instances. But since “person” must mean a collection of en­ tities for purposes of the section 7A(a)(2) size-of-person test, demands for consistency were not constructive to the extent that they failed to sug­ gest a way to apply the 15-percent test of section 7A(a)(3)(A) when shares of one corporation of a multicorporate person are to be acquired. FEDERAL REGISTER, VO L. 43, N O . 147— M O N D AY, JULY 31, 1978

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33476 Of the other comments, one (1091) dismissed the problem as one for the agencies to solve. Two comments (1059, 1070) conceded that application of the percentage test on any basis other than the issuer was inconve­ nient.__ Comment 1042, however, suggested that the agencies Should treat the shares of a subsidiary as assets of the parent corporation and calculate a percentage on that basis. This propos­ al was rejected. First, it is inconsistent with the statutory scheme—restated in § 801.21(b)—which deals separately with assets and voting securities. In addition, the proposal proves unwor­ kable for third-party transactions since even though the seller is not the relevant person for purposes of an antitrust analysis, the proposal would calculate the percentage with refer­ ence to that person.

As the Federal Régister notice ac­ companying the revised rules noted, 42 FR at 39042 (August 1, 1977), the agencies also considered another set of definitions. It would have defined the acquiring person to be the entire cor­ porate structure, while defining the acquired person to be the entity whose voting securities (or assets) were being acquired, and all entities it controlled. Although this would have cured the inconsistency discussed above, it would have introduced another inconsisten­ cy—differing definitions for acquiring and acquired persons. It also would have permitted large corporations to evade the size-of-person test of section 7A(a)(2) by conducting transactions through small subsidiaries. As indicat­ ed in the Federal Register notice, this alternative was rejected. Accordingly, the Commission re­ tained the substance of the revised rule. The final version of paragraph (a) reflects only editorial differences from the revised rule.

The final version of paragraph (b) simplifies the revised rule, because the percentage formula no longer need ac­ commodate convertible voting securi­ ties. The final rules makes convertible securities reportable, if at all, upon conversion, whereas the revised rules would have made the acquisition of convertible voting securities a poten­ tially reportable event. This change in approach is discussed in the State­ ment of Basis and Purpose to § 801.1(f)(2). Under the revised rules, conversions would not have prompted additional reports to the agencies. Therefore, the formula in paragraph (b) had to assess the voting power po­ tentially represented by convertibles whenever acquired (or held). On the other hand, since under the final rules conversions must be preceded by filing notification and waiting, the agencies will be able to assess the competitive impact of the conversion. Therefore, RULES AND REGULATIONS the voting formula in paragraph (b) can disregard the voting power poten­ tially represented by unconverted con­ vertibles.

A number of comments (e.g., 1026, 1070, 1090, 1102, 1115) criticized re­ vised § 801.12(b) because it computed its percentages assuming conversion of only the convertibles held by the ac­ quiring person, rather than all out­ standing convertibles. Most of these comments no longer apply to the final rule, because the final rule does not assume conversion of any voting secu­ rities. However, one comment (1070) argued that section 7A(b)(3)(A), the definition of voting securities con­ tained in the act, requires that the rule compute percentages assuming full dilution, that is, conversion of all outstanding convertible voting securi­ ties.

The Commission does not agree. Sec­ tion 7A(b)(3)(A) provides: The term “voting securities” means any securities which at present or upon conver­ sion entitle the owner or holder thereof to vote for the election of directors of the issuer or, with respect to unincorporated is­ suers, persons exercising similar functions. Comment 1070 argued that this lan­ guage compelled that all convertible securities be considered voting securi­ ties for all purposes, and therefore be treated as converted for purposes of percentage calculations. However, this interpretation ignores the function of the definition. Subsection (b)(3)(A) of the act simply empowers the Commis­ sion to bring convertible voting securi­ ties within its ambit, a matter which, but for the words “or upon conver­ sion,” might not be free from doubt. The Commission does not interpret the language of the definition to re­ quire that the agencies treat convert­ ible voting securities in any particular fashion, as the Statement of Basis and Purpose to § 801.1(f)(2) explains in detail.

Paragraph (b) expresses the percent­ age formula in terms of the number of votes to be cast, rather than the number of shares, in order to accom­ modate (to the extent possible) multi­ ple classes of voting securities or other voting arrangements differing from a single class of voting stock that elects the entire board of directors. The formula includes only votes that voting securities entitle the holder to cast, and therefore excludes votes cast by proxies. Example 2 to paragraph (b) makes this point.

Subparagraph (b)(2) excludes au­ thorized but unissued voting securities and treasury shares from the percent­ age formula simply to confirm that such shares are not “outstanding.” The final rule adds new subpara­ graph (b)(3) in response to comment 1089. Persons applying the percentage test can rely upon the total number of outstanding voting securities shown in the most recent filing with the SEC, if any, unless they know or have reason to believe that information to be inac­ curate. This language is patterned after SEC rule 13d-l(d), 17 CFR 240.13d-101(d), 43 FR 18484 at 18496 (April 28, 1978).

SECTION 801.12 (C), (d )—ASSETS Section 801.12(c) provides that whenever the act and rules refer to the percentage of assets of the ac­ quired person, the “acquired person” is the person whose assets are being acquired. This treatment differs from that accorded voting securities in para­ graph (a), which specifies that the issuer whose voting securities are to be acquired is the “acquired person.” In­ stead, when the percentage test is ap­ plied to assets, the denominator of the percentage fraction will be calculated with reference to entire “person.” Paragraph (d), which specifies the exact ratio which composes the per­ centage, confirms this treatment. Subparagraph (d)(2) provides that the de­ nominator for the percentage ratio is the total assets, determined in accord­ ance with §801.11, of the acquired person. The numerator of the fraction is the book value of the assets to be ac­ quired as shown on the books of the acquired person. The assets to be ac­ quired do not include any previouslyacquired assets identified by § 801.13(b)(2); only the assets subject to the current acquisition, identified in § 801.13(b)(1), need be considered for the percentage-of-assets test of section 7A(a)(3)(A). .

Background Information on Assets The final rule made two important changes in the application of the per­ centage test of section 7A(a)(3)(A) to assets.

The first change is the shift from “entity” to “person” in paragraph (c). Under both original section 801.30(b) and revised section 801.12(c), the entity from which the assets were to be acquired would have been the “ac­ quired person” for purposes of the percentage test. The earlier versions, in effect, took the same position that the final rules take as to voting securi­ ties. The comments criticized the earli­ er versions; in general, the comments discussed above in connection with voting securities were equally directed to the assets provisions of the rules. Their arguments generally urged that the “acquired person” for purposes of the percentage test should be the entire person^ from which the assets are. acquired, rather than the specific entity from which acquired, because the section 7A(a)(2) size-of-person test and the section 7A(a)(3) size-of-transaction test ought both to employ a FEDERAL REGISTER, V O L 43, N O . 147— M O N D AY, JULY 31, 1978

Page 189

consistent meaning of “acquired person.”

The final rule adopts the position proposed by the comments as to assets, even though it rejects the com­ ments as to voting securities. The chief reason for the difference is that no practical problem prevents the rules from employing the larger “person” in applying the percentage test to assets, as it does for voting se­ curities. The book value of assets, no matter from which entity within the person acquired, can be compared to the total assets of the person. By con­ trast, the impossibility of expressing the shares of a subsidiary as any per­ centage of the voting securities of the parent corporation prevented the rules from comparing voting securities to any entity or combination of entities other than the issuer.

Thus, the final rule achieves as much consistency between the terms governing each of the three tests of section 7A(a) as is possible. The second important change effect­ ed by the final rule is in the numera­ tor of the percentage fraction. Revised § 801.12(d)(1) would have valued the assets to be acquired at the value as­ signed by § 801.10(b) for purposes of the $15 million test. The final rule substitutes the book value of the assets on the books of the acquired person. Several comments (e.g., 1040, 1090) noted that the numerator reva­ lued the assets to be acquired, in order to reflect current values, but that the denominator reflected total assets at book value, which is typically lower than current value. The comments maintained that the resulting percent­ age would be exaggerated, and indeed, could exceed 100 percent. To cure this anomaly, subparagraph (d)(1) of the final rule provides that the book value of the assets on the books of the ac­ quired person is to be the numerator. Although book value may understate the actual value of the assets, the re­ sulting ratio is likely to be reasonably accurate.

Comment 1115 questioned whether intangible assets such as patents and goodwill are to be valued and included in the percentage-of-assets calculation. Since the final rule makes no distinc­ tion between types of assets, these assets, like any others, are to be in­ cluded at book value in the percentage calculation.

For purposes of the percentage-ofassets test of section 7A(a)(3)(A), the numerator does not include any assets of the acquired person previously ac­ quired by the acquiring person. Sec­ tion 801.13(b)(2) includes the value of such assets under certain circum­ stances for purposes of the $15 million test of section 7A(a)(3)(B). Thé State­ ment of Basis and Purpose to § 801.13(b)(2) explains why such assets RULES AND REGULATIONS are excluded from the percentage-ofassets test.

SECTION 801.13 VOTING SECURITIES OR ASSETS TO BE HELD AS A RESULT OF AC­ QUISITION Section 801.13 interprets the statuto­ ry phrase, “as a result of.” Notifica­ tion and a waiting period are required if section 7A(a)(l) and (2) are satisfied, and if “as a result of such acquisition, the acquiring person would hold (15 percent or $15 million of the stock or assets of the acquired person.)” Sec­ tion 7A(a)(3) (emphasis added). This rule identifies which voting securities and assets will be considered to be held “as a result of” an acquisition. The rule also provides instructions for valuing the voting securities and assets identified by the rule.

Several other provisions of the rules are indispensable in applying § 801.13. Chief among these is §801.15, which excepts from this rule certain acquisi­ tions of assets and voting securities which were exempt from the require­ ments of the act at the time of their acquisition (or would have been had the act and rules been in effect). Al­ though this rule would provide that some such assets and voting securities are held as a result of an acquisition, § 801.15 constitutes an exception to this rule and may provide that some of them are not so held.

In addition, the definition of “hold,” § 801.1(c), is important, since voting se­ curities or assets must first be “held” before they may be held as a result of an acquisition. And the valuation pro­ visions of the rule invoke the valua­ tion procedures set forth in § 801.10(c). Paragraph (a) of the rule treats voting securities, and paragraph (b) of the rule addresses assets. SECTION 801.13(a) VOTING SECURITIES The first sentence of § 801.13(a)(1) states the entire substance of the rule regarding voting securities: All voting securities of the issuer that will be held by the acquiring person after the acquisition are voting securities held as a result of the acquisition. Section 801.15, though, constitutes an excep­ tion to this rule for certain voting se­ curities exempt when acquired, as de­ scribed above. See that rule and its Statement of Basis and Purpose. The rule has two important conse­ quences. First, the number of transac­ tions or the length of time between ac­ quisitions becomes irrelevant in deter­ mining whether the act applies. The acquiring person after the acquisition either will or will not hold, cumula­ tively, 15 percent or $15 million of the issuer’s outstanding voting securities. Second, the rule means that every acquisition after which the acquiring person will hold more than 15 percent or $15 million of the voting securities 33477 of the acquired is one in which the 15 percent or $15 million test of section 7A(a)(3) is satisfied. Therefore, every acquisition after which the acquiring person would hold 15 percent or $15 million of the acquired person’s voting securities—rather than only those which ihitially raise the acquiring per­ son’s holdings to that level—becomes a reportable acquisition if the two other tests of section 7A (a)(1) pud (2) are satisfied. Therefore, large holdings of voting securities that antedate the ef­ fective date of the act and rules must be reported before being increased. Note, however, that §802.21 exempts acquisitions above the 15 percent or $15 million level for 5 years after an initial notification except for those meeting or exceeding specified notifi­ cation thresholds.

This rule also prescribes the value to be assigned to voting securities held as a result of an acquisition. Subpara­ graph (a)(1) provides that the value of the voting securities is the sum of the value of the voting securities to be ac­ quired, determined in accordance with §801.10, and the value of the voting securities held prior to the acquisition, determined in accordance with subpar­ agraph (a)(2).

Subparagraph (a)(2) of the rule pro­ vides that, for securities traded on a national securities exchange or quoted on an inter-dealer quotation system, the value is the market price calculatèd in accordance with § 801.10(c)(1); for other securities, the value is the fair market value determined in ac­ cordance with § 801.10(c)(3). The prac­ tical effect of the subparagraph is to require revaluation of the previously held securities to reflect current value. Of course, revaluation may affect whether the act applies. A pre-existing holding acquired for less than $15 mil­ lion may become worth more than $15 million, thus rendering any further purchases reportable.

The examples illustrate the rule, and cross-reference §§ 801.20 and 801.15.

Background Information to § 801.13(a) Acquisitions raising the holdings of the acquiring person to meet or exceed the 15 percent or $15 million level of section 7A(a)(3) self-evidently meet the standard of that subsection of the act. The only aspect of the rule ad­ dressed by the comments was the con­ struction of “as a result of” that per­ mits the agencies to require notifica­ tion and a waiting period in connec­ tion with acquisitions subsequent to the one reaching the 15 percent or $15 million level of section 7A(a)(3). Origi­ nal §801.50 first contained this inter­ pretation, which several comments (e.g., 11, 73, 84; 1059) challenged. The comments characterized it as an at- FEDERAL REGISTER, VO L. 43, NO. 147— M O N D AY, JULY 31, 1978

Page 190

33478 tempt to achieve retroactive coverage of partial acquisitions or to accumu­ late “dossiers” on major companies by means of repetitive reports. (The origi­ nal rules would have required report­ ing and waiting at every 5 percent in­ terval above the 15 percent or $15 mil­ lion level; §802.21 of the revised and final rules lessens the burden of repet­ itive reports considerably.) Other com­ ments simply noted that the construc­ tion “could have gone the other way” (63) or implicitly supported the inter­ pretation (78, 96). However, to adopt the opposite position would be to assert that large securities holdings (short of control) may be increased without limit if only the 15 percent or $15 million level could be surpassed before the act and rules take effect. But the Commission believes that it is unreasonable to construe the act in a manner which would leave the en­ forcement agencies powerless to detect and investigate such holdings. The act manifests an intention that the agen­ cies should be informed of large secu­ rities holdings whenever an acquisi­ tion takes place, and the rule is faith­ ful to that intention.

The revised rule cast the rule into its present form, and the final rule re­ tains the revised rule save for editorial changes and the reference to new §801.15.

SECTION 801.13(B)—ASSETS Section 801.13(b)(1) provides that all assets to be acquired in an acquisition will be assets held as a result of the ac­ quisition. It also provides that the value of such assets shall be deter­ mined in accordance with § 801.10. Subparagraph (b)(2) provides that, under certain circumstances, assets previously acquired by the same ac­ quiring person will be considered assets to be held as a result of the ac­ quisition, for purposes of the $15 mil­ lion test of section 7A(a)(3)(B) only. Previously acquired assets will be assets held as a result of a subsequent acquisition if:

The subsequent acquisition is also of assets of the same acquired person; The assets were acquired within 180 days of the execution of the contract, agreement in principle, or letter of intent to make the subsequent acquisi­ tion;

The acquiring person still holds the assets previously acquired; and Section 801.15 does not dictate oth­ erwise.

If the criteria are met, the acquiring and acquired persons must treat the earlier acquired assets as though they had not been previously acquired but were to be acquired as part of the sub­ sequent acquisition. This treatment applies only for purposes of the $15 million test of section 7A(a)(3)(B) and not for purposes of the 15-percent test RULES AND REGULATIONS of section 7A(a)(3)(A). The value of the previously acquired assets in such cases shall be the value determined in accordance with § 801.10 as of the time of their acquisition.

Since subparagraph (b)(2) does not apply for purposes of the 15-percent test of section 7A(a)(3)(A), only the assets to be acquired in an acquisition need be considered in computing the percentage figure.

See also § 801.12(d)(1).

Subparagraph (b)(2) also has no effect upon the size-of-person test of section 7A(a)(2). The total assets of all persons remain, under § 801.11(c)(2), as stated on the last regularly pre­ pared balance sheet of the person, re­ gardless of subsequent acquisitions or dispositions not reflected on the bal­ ance sheet.

The example at the end of the rule illustrates the operation of subpara­ graph (b)(2).

B ackground Inform ation to § 801.13(b) Section 801.13(b)(1) merely states the obvious in declaring that assets to be acquired in an acquisition will be held as a result of that acquisition. The criteria for application of subparagraph (b)(2) can be more easily understood with reference to its basic purpose. Subparagraph (b)(2), by in­ cluding assets acquired within the pre­ ceding 180 days, prevents persons from evading the $15 million test of section 7A(a)(3)(B) by dividing an acquisition into two or more smaller acquisitions, each valued at less than $15 million. Subparagraph (b)(2) would still allow such a scheme to succeed, so long as the agreement to make each of the smaller acquisitions was executed at least 180 days after the consummation of the previous one. Note, however, that if the parties agreed* to execute a series of formal contracts more than 180 days apart, the transactions might be viewed as one, depending upon when beneficial ownership passes. Each aspect of subparagraph (b)(2) relates to this purpose. The 180-day period, for example, is sufficiently long to discourage the type of evasion described. In addition, after a period of time assets cease to be attributable to the person from which acquired and become assets of the acquiring person. The length of the period did not at­ tract any comment.

The subparagraph’s application is limited to the $15 million test of sec­ tion 7A(a)(3)(B) for two reasons. First, attempting to incorporate the previ­ ously acquired assets into the percent­ age test would pose practical prob­ lems. Section 801.12(d) provides that the denominator of the percentage is the total assets of the acquired person, but the denominator could shift during the 180 days, reflecting the first sale of assets. Therefore, the per­ centages computed fof each asset ac­ quisition would not be comparable to one another and could not be added together. And if the denominator is held constant at the total assets level of the acquired person at the time of the first acquisition, then a substantial disparity from the actual percentage could arise. Second, acquisitions of assets which satisfy the 15-percent test of section 7A(a)(3)(A), but which do not satisfy the $ 15-million test of section 7A(a)(3)(B), will frequently be exempt in any event, because § 802.20 exempts such acquisitions valued at $10 million or less. Although two com­ ments (63, 83) questioned the omission of the percentage test from original § 801.35, the predecessor of final § 801.13(b)(2), the final rule refrains from introducing such complexity and problematical calculation in order to secure reports for asset acquisitions valued at more than $10 million but not exceeding $15 million. Similarly, the value of the earlier ac­ quired assets is not used to adjust the total assets of either the acquiring or the acquired person for purposes of the size-of-person test of section 7A(a)(2). If the figures shown on the balance sheets were adjusted in order to reflect earlier acquisitions or dispo­ sitions of assets, the adjustment would affect whether compliance with the act was required only when it changed the total assets of one party to exceed or fall short of either the $10 million or $100 million figure “ in section 7A(a)(2).

Although revised § 801.13(b)(2) had attempted to make such adjustments, the final rule jetti­ sons the scheme as more complex than the result warrants.

The final rule also reflects, in an­ other context, the limited purpose of the provision. The original and revised rules declared assets of the acquired person to be assets held as a result of any acquisition by the acquiring person within the following 180 days— that is, for purposes of subsequent ac­ quisitions of either voting securities or assets. The final rule includes the pre­ viously acquiring assets only when the subsequent acquisition is also of assets. See clause (i). The change con­ fines subparagraph (b)(2) more closely to its principal purpose of preventing evasion, but also embodies another principle. A prior acquisition of stock, because of the influence the share­ holder may exert upon management, may contribute to the subsequent sale of assets. Therefore, aggregating the dollar amounts of the two acquisitions (which the phrase, “aggregate total amount of voting securities and assets” in section 7A(a)(3) and §801.14 will do) is appropriate. However, once assets are sold, they confer no continu­ ing ability to participate in the affairs FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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of the acquired person, and so prior acquisitions of assets need not be con­ sidered for purposes of subsequent ac­ quisitions of stock. Accordingly, the final version of subparagraph (b)(2) does not label previously acquired assets to be assets held as a result of a subsequent acquisition of stock (and therefore § 801.14 does not compel ag­ gregation of the stock and asset values for purposes of the $15 million test in such cases).

The final rule makes several other changes in the revised rule. The refer­ ence to new § 801.15 is added, since that rule constitutes an exception and provides that certain assets are not held as a result of an acquisition, even though §801.13 might declare other­ wise. See comment 15. The reference to § 801.1(h)(1) was inserted to assure consistency between rules and statute. Section 801.1(h)(1). is the first “notifi­ cation threshold” and simply restates the test of section 7A(a)(3) for use in § 802.21, and elsewhere; for more infor­ mation, see §§ 801.1(h) and 802.21. The final rule measures the 180-day period back from the date of execution of the contract, agreement in principle or letter of intent, rather than the date of filing of notification as was pro­ vided in the revised rule. This change was made in order to clarify that the aggregation of the previous and cur­ rent asset acquisitions may determine whether notification is required, rather than presuppose notification and measure the 180-day period from the date of its filing, as did the revised rule. And the final rule requires that the earlier acquired assets must still be held by the acquiring person at the time of the execution of the agree­ ment, since disposing of the assets would seemingly eliminate any cumu­ lative anticompetitive effect flowing from the earlier asset acquisition. SECTION 801,14 AGGREGATE TOTAL AMOUNT OF VOTING SECURITIES AND ASSETS Section 801.14 explains the phrase “aggregate total amount of voting se­ curities and assets” which appears in the size-of-transaction test of section 7A(a)(3)(B). That test is satisfied if, as a result of an acquisition, the acquir­ ing person will hold an aggregate total amount of voting securities and assets in excess of $15 million. The rule pro­ vides that the “aggregate total amount” is the sum of the values of the voting securities and assets to be held as a result of an acquisition, as determined under the rules. To apply the rule, add the values of the voting securities and assets to be held as a result of an acquisition. Paragraph (a) of the rule specifies that the value of voting securities to be held as a result of an acquisition is to be determined in accordance with RULES AND REGULATIONS §801.13(a), and paragraph (b) provides that the value of assets to be held as a result of an acquisition is to be deter­ mined in accordance with § 801.13(b). Two examples illustrate the rule. Background Information to § 801.14 This rule interprets section 7A(a)(3)(B) and states the plain mean­ ing of that provision. Original § 801.40 attracted little comment, and revised §801.15 attracted no comment. The final rule is unchanged in substance and reflects only clarifying editorial changes and the renumbering of other rules. The examples have been revised. SECTION 801.15 AGGREGATION OF VOTING SECURITIES AND ASSETS THE ACQUISI­ TION OF WHICH WAS EXEMPT Section 801.15 interprets the size-oftransaction test of section 7A(a)(3). That test will be satisfied whenever as a result of an acquisition, the acquir­ ing person will hold 15 percent or $15 million of the assets or voting securi­ ties of the acquired person. This rule explains whether assets and voting se­ curities acquired in transactions exempt under the act or rules will be deemed held as a result of an acquisi­ tion.

This rule applies only when the ac­ quiring person is simultaneously ac­ quiring both exempt and nonexempt assets or voting securities of the same acquired person, or is acquiring nonex­ empt assets or voting securities after previously acquiring exempt assets or voting securities of the same acquired person. Because its application is nar­ rowly limited to situations combining exempt and nonexempt acquisitions, the rule should apply to relatively few transactions.

In general, §801.13 specifies which assets and voting securities are deemed held as a result of an acquisi­ tion. This rule constitutes an excep­ tion to § 801.13, declaring that not­ withstanding § 801.13 certain assets and voting securities acquired in exempt transactions will not be held as a result of an acquisition. For this reason, reference to § 801.15 appears at the beginning of § 801.13. Since §801.15 determines which assets and voting securities count toward satisfying the size-of-transac­ tion test of section 7A(a)(3), it neces­ sarily will affect the application of the rules determing the value of the voting securities or assets to be held or acquired (§801.10), the percentage of assets or voting securities to be held or acquired (§ 801.12), and the aggregate total amount of voting securities and assets to be acquired (§801.14). The rule is not relevant to the size-ofperson test of section 7A(a)(2), or to the rule implementing that test, §801.11.

33479 The rule applies both to current and to past exempt acquisitions. For cur­ rent acquisitions, the rule permits the acquiring person, in deciding whether the size-of-transaction test of section 7A(a)(3) is satisfied, to disregard assets or voting securities that are exempt under the listed provisions of the act and rules. Thus, if the acquiring person is acquiring a mixture of exempt and nonexempt assets and voting securities in a single acquisi­ tion, only the nonexempt assets and voting securities need be considered in determining whether the test of sec­ tion 7A(a)(3) is satisfied. Example No. 1 to the rule illustrates this point. Of course, if only exempt assets or voting securities are being acquired, the ac­ quisition is exempt and need not be re­ ported regardless of whether the par­ ticular exemption is listed in the rule. The rule also entitles the acquiring person to disregard certain past exempt acquisitions, although apply­ ing the rule becomes more complicat­ ed in such situations. First, if the cur­ rent acquisition is exempt under any provision of the act or rules, whether or not listed in this rule, this rule does not apply. Second, the acquiring person must verify that under § 801.13 the assets or voting securities previ­ ously acquired would be deemed held as a result of the current transaction. As a practical matter, this will fail to be true in only three instances: when the acquiring person has disposed of the assets or voting securities in the interim; when the earlier acquisition was of assets, and the subsequent ac­ quisition is to be of voting securities (§ 801.13(b)(2)); and when both the earlier and current acquisitions are of assets of the acquired person, but the earlier acquisition took place more than 180 days prior to the execution of the contract, agreement in principle or letter of intent with respect to the current acquisition of assets. In the last-mentioned case the assets are no longer deemed those of the acquired person, and thus they cannot be rele­ vant for purposes of section 7A(a)(3). See § 801.13(b)(2).

If under §801.13 the acquiring person would hold the earlier-acquired assets or voting securities as a result of the current acquisition, and if the ear­ lier acquisition was exempt under one of the listed provisions of the act or rules, this rule allows the acquiring person to disregard those assets or voting securities for purposes of the size-of-transaction test of section 7A(a)(3). Example No. 2 to the rule il­ lustrates this point.

Additionally, if the earlier acquisi­ tion occurred before the act and rules went into effect, the rule still permits the assets or voting securities acquired earlier to be disregarded if, had the act and rules been in effect, the acqui- FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33480 sition would have been exempt under a listed provision. Example No. 3 to the rule illustrates this case. In each of the last two instances, if the earlier acquisition was exempt (or would have been exempt, had the act and rules been in effect) under a provi­ sion of the act or rules not mentioned in this rule, the acquiring person cannot disregard the earlier acquisi­ tion for purposes of applying the sizeof-transaction test to the current ac­ quisition. For example, voting securi­ ties exempt when acquired under sec­ tion 7A(c)(10) will be deemed held as a result of any subsequent acquisitions of voting securities or assets of the same issuer.

Section 801.15(b) is applied similarly, but represents a slightly different ap­ proach. Earlier acquisitions which when acquired were exempt under one of the listed provisions will not be held as a result of a subsequent transaction “unless the limitations contained in section 7A(c)(9) or those sections do not apply, or as a result of the acquisi­ tion would be exceeded, in which case the assets or voting securities so ac­ quired will be held as a result of the acquisition * * This means, in the case of section 7A(c)(9), that if the 10percent limitation contained in that exemption will not be exceeded by the aggregate of the prior exempt acquisi­ tions and the current acquisition, the voting securities previously acquired and-to be acquired under the exemp­ tion will not be held as a result of the acquisition. If the aggregate of the prior and current acquisitions would exceed the 10-percent figure, all of the holdings are considered “held.” Like­ wise, the limitation contained in sec­ tion 7A(c)(9) that the acquisition be solely for investment purposes must apply to the current acquisition; if it does not, both the voting securities previously acquired under section 7A(c)(9), and the voting securities to be acquired (which would not be exempt under section 7A(c)(9)) will be held as a result of the acquisition. Ex­ ample No. 4 to the rule illustrates § 801.15(b).

The principal consequence of finding that voting securities exempt when ac­ quired under section 7A(c)(9) are not held is that the acquiring person may acquire voting securities of other issu­ ers included within the same acquired person, or assets of the same acquired person, without having the section 7A(c)(9) securities count toward the aggergate total amount of voting secu­ rities and assets of the acquired person that, if exceeding $15 million, would make the subsequent acquisition re­ portable.

The exemption rules listed in para­ graph (b) contain parallel limitations that must continue to apply (“qualita­ tive limitations”), or not be exceeded RULES AND REGULATIONS (“numerical limitations”), if acquisi­ tions under those sections are to be not held under the rule.

In § 802.50(a)(2), there is the qualitative limitation that the assets must be lo­ cated outside the United States, and the numerical limitation that the sales in or into the United States attributa­ ble to the assets in thé acquired per­ son’s most recent fiscal year must not meet or exceed $10 million. In § 802.50(b), there is the qualitative lim­ itation that the issuer be foreign, and two numerical limitations are ex­ pressed in subparagraphs (b)(1) and (b)(2) of that rule. In § 802.51(b), there is the qualitative limitation that the issuer be foreign, and the numerical limitations in subparagraphs (b)(1) and (b)(2). In §802.64, there are the qualitative limitations of subpara­ graphs (b)(l)-(3), and the numerical limitations of subparagraphs (b)(4) and (b)(5).

Section 801.15(c) is similar to para­ graph (b) of the rule. Voting securities that were exempt when acquired under section 7A(c)(ll)(A) will not be held unless additional voting securities of the same issuer have been or are being acquired.

Background Information to § 801.15 This rule had no couterpart in the original or revised rules, although a number of comments (for example, 1059, 1070, 1089, 1099, 1100) suggested similar concepts.

Under this rule, assets and voting se­ curities acquired under certain exemp­ tion provisions of the act and rules may be disregarded for purposes of the size-of-transaction test of section 7A(a)(3). Each of the provisions was selected, in general, because the ratio­ nale for the exemption indictates that counting the acquisition toward making subsequent acquisitions repor­ table would not serve enforcement in­ terests. By contrast, the exemptions provisions of the act and rules omitted from § 801.15 were omitted either be­ cause the opposite conclusion was reached, or because whether the assets or voting securities are held makes no difference in such situations. The listed provisions will be treated first, followed by the omitted provisions. For convenience, each will be dis­ cussed in the content of a prior acqui­ sition exempt under the exemption provision in question, followed by a subsequent acquisition, although the rule makes clear that it is equally ap­ plicable to acquisitions occurring prior to the effective date of the act and rules that would have been exempt and to simultaneous acquisitions. Exemption Provisions Listed in §801.15 Certain acquisitions of goods or realty transferred in the ordinary course of business are exempt under section 7A(c)(l) and §802.1, which in­ terprets the statutory exemption. Since section 7A(c)(l) is listed in §801.15, such acquisitions are not counted toward making later acquisi­ tions reportable. Because of the nature of goods and realty, and be­ cause of the limitations inherent in the concept “ordinary course of busi­ ness,” it is unlikely that these acquisi­ tions will be relevant to subsequent ac­ quisitions.

If acquisitions were exempt from re­ porting under section 7A (c)(5) or (c)(6), then the underlying transaction is exempt from the antitrust laws. If that is true, no enforcement purpose can be served by counting the acquisi­ tion toward making later acquisitions reportable, and accordingly §801.15 lists those exemptions. Insection 7A (c)(7) and (c)(8), Con­ gress has determined that certain transactions which require agency ap­ proval need not be subject to the full requirements of the act, even though they are not exempt from the anti­ trust laws generally. Thus acquisitions exempt from reporting under sections 7A (c)(7) or (c)(8) or under § 802.8 are not relevant for purposes of subse­ quent acquisitions.

Acquisitions of voting securities solely for the purpose of investment are exempt under section 7A(c)(9) if the acquiring person’s holdings as a result of these acquisitions do not exceed 10 percent of the outstanding voting securities of the issuer. Section 801.15(b) provides that, as long as the investment purpose limitation contin­ ues to be satisfied and the 10 percent limitation has not been or will not be exceeded, these acquisitions are not counted for purposes of other or sub­ sequent transactions, since the ratio­ nale for the section 7A(c)(9) exemp­ tion continues to apply. They are counted, however, in determining whether a person holds 10 percent or more of the outstanding shares of the issuer.

Similarly, acquisitions of assets by certain types of acquiring persons in the ordinary course of business, exempt under section 7A(c)(ll)(B), are not held by the acquiring person for purposes of subsequent transactions. The aggregation provisions of § 801.13(b)(2) are not applied to such assets because the opportunities for evasion of the act seem minimal. How­ ever, voting securities acquired by the same types of persons pursuant to a plan of reorganization under the bank­ ruptcy laws or pursuant to a plan of dissolution, while exempt under sec­ tion 7A(c)(ll)(A), are held (under § 801.15(c)) when additional voting se­ curities of the same issuer have been or are being acquired in a transaction which is not itself exempt. The means FEDERAL REGISTER, VOL. 43, N O . 147— M O N D AY, JULY 31, 1978

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of acquisition does not affect the abili­ ty of the acquiring person to influence or control the issuer after the acquisi­ tion.

Convertible voting securities are never deemed held for purposes of sec­ tion 7A(a)(3) or the notification thresholds of § 801.1(h). See the State­ ment of Basis and Purpose to § 801.1(f)(2).

The several exemptions relating to foreign commerce are handled in two different ways.

For purposes of making later acquisitions reportable, acquisitions exempt under certain of those provisions never result in the ac­ quiring person’s holding the assets or voting securities acquired; acquisitions exempt under others may under cer­ tain circumstances. In the former cate­ gory are acquisitions by United States persons of assets located abroad that generate no sales in or into the United States (§ 802.50(a)(1)); acquisitions by foreign persons of assets located abroad, regardless of whether sales in or into the United States are generat­ ed by such assets (§ 802.51(a)); acquisi­ tions by or from a foreign governmentcontrolled entity of assets located in the same country as the foreign gov­ ernment, or of voting securities issued by ah entity organized under the laws of the same country (§802.52); and certain foreign banking transactions subject to the approval of the Federal Reserve System (§802.53). The consid­ erations of jurisdiction and comity which underlie the exemptions them­ selves also suggest that assets and voting securities acquired pursuant to these exemptions should not be count­ ed for purposes of later acquisitions. On the other hand, certain of the foreign commerce exemptions depend for their applicability upon the fact that the impact of an acquisition upon United States foreign commerce is lim­ ited. Accordingly, assets or voting se­ curities acquired pursuant to these ex­ emptions also are not counted for pur­ poses of subsequent acquisitions, so long as the limitations stated in the exemption rules will not be exceeded. Sections 802.50(a)(2), 802.50(b) and 802.51(b) fall into this category, and under § 801.15(b) acquisitions exempt under these sections are only counted toward testing the limitations con­ tained in those sections. Example 4 to the rule illustrates § 801.15(b) with re­ spect to § 802.50(a)(2). Similar proce­ dures apply to §§ 802.50(b) and 802.51(b), both of which relate to ac­ quisitions of voting securities of for­ eign issuers. The foreign issuer’s hold­ ings of U.S. assets and the annual net sales and total assets of any U.S. issuer whose stock is held by the foreign issuer must be examined in order to determine whether the acquiring person holds the voting securities it acquired in a previous exempt transac- RULES AND REGULATIONS tion, and thus whether a subsequent acquisition is exempt.

Assets and voting securities acquired by creditors and insurers in the ordi­ nary course of business under the ex­ emption in § 802.63 are not counted for purposes of subsequent acquisitions of assets or voting securities of the same acquired persons.

An acquisition exempt under §802.63 is not likely to become a predicate for the acquiring person’s attempting to gain control of the acquired person. On the other hand, a creditor or insurer may make unrelated investments in the acquired person with which it would be inap­ propriate to aggregate assets or voting securities acquired under the exemp­ tion.

Acquisitions by institutional inves­ tors that satisfy the various limita­ tions of §802.64 do not result in the acquiring person’s holding the voting securities of the issuer. So long as those limitations continue to apply or are not exceeded, the rationale for the exemption continues to apply. If the limitations are exceeded or do not apply, then all voting securities of the acquired person of which the acquir­ ing person is beneficial owner or is deemed the holder (see § 801.1(c)) are held by the acquiring person for pur­ poses of additional acquisitions. Finally, acquisitions subject to an order of the Commission or any Feder­ al court, and thereby exempt under § 802.70, do not result in the acquiring person holding those assets or voting securities for purposes of additional acquisitions, since presumably the su­ pervision of the Commission or court ensures that all competitive consider­ ations have been or will be carefully weighed.

E x em ptio n P r o v isio n s N ot Listed in §801.15 Under §801.15, previous acquisitions exempt under sections 7A (cX2), (c)(3), (c)(4), and (c)(10) are held for pur­ poses of the size-of-transaction tests of section 7A(a)(3) and the notification thresholds of § 801.1(h), since these statutory exemptions are not listed in § 801.15. Acquisitions of non-voting se­ curities or other obligations exempt under section 7A(c)(2) are irrelevant for purposes of making later acquisi­ tions reportable, because the act ap­ plies only to acquisitions of voting se­ curities. Thus it makes no difference that technically they are “held,” be­ cause they do not affect either the dollar or percentage computations ap­ plicable to voting securities (§§801.10, 801.12, 801.13, 801.14), and because these securities or other obligations are deemed not to be assets of the ac­ quired person (§801.21). While voting securities acquired under a section 7A(c)(3) exemption are deemed held for purposes of later acquisitions of 33481 the same person’s securities the later acquisitions are themselves exempt if prior to that transaction the acquiring person holds at least 50 percent of the outstanding voting securities of the ac­ quired person. So long as the later ac­ quisitions are exempt, it is not signifi­ cant whether the voting securities ac­ quired under the section 7A(c)(3) ex­ emption are held. Furthermore, if some voting securities are disposed of, so that acquisitions subsequent to the one exempt under section 7A(c)(3) are not exempt under section 7A(c)(3), the voting securities acquired under the section 7A(cX3) exemption must be deemed held so that the later acquisi­ tion becomes reportable. Acquisitions exempt under section 7A(c)(4) because they involve transfers to or from a Federal agency or from a State or political subdivision are deemed held for purposes of later ac­ quisitions. If the later acquisition in­ volves the transfer of assets of, or voting securities issued by, a Govern­ ment agency, it will also be exempt. On the other hand, if a Government agency were to make an exempt trans­ fer of voting securities of a non-gov­ ernmental issuer, and if the acquiring person were later to purchase addi­ tional voting securities of the same issue, all the holdings of that issuer’s . voting securities by the acquiring person must be aggregated by the ac­ quiring person to determine its hold­ ings. This aggregation is appropriate because the fact that voting securities were acquired from a governmental entity does not affect the possible use of such securities by the acquiring person to influence or control the issuer.

Voting securities acquired in a trans­ action exempt under section 7A(c)(10) and § 802.10 must be counted for pur­ poses of all later acquisitions. While the acquisition of voting securities by means of stock dividends or stock splits is exempt, these securities are not qualitatively different from any other voting securities of the acquired person, and thus the acquiring person is deemed to hold them for purposes of subsequent acquisitions. In addi­ tion, a contrary conclusion would mean that a stock dividend or stock split actually would reduce the acquir­ ing person’s percentage holdings as measured under the rules. With respect to exemption provi­ sions in the rules, under §801.15 cer­ tain exempt acquisitions of assets or voting securities will result in the ac­ quiring person’s holding such assets or voting securities for purposes of later acquisitions. The exemptions in this category are §§ 802.20, 802.21, 802.23, 802.30, 802.40, 802.41, 802.51 (c) and (d), 802.60 and 802.71. Acquisitions which are exempted by § 802.20 are those which, while techni- FEDERAL REGISTER, VOL. 43, NO. 147— M O NDAY, JULY 31, 1978

Page 194

33482 cally within the requirements of the act, generally seem too small to merit detailed pretransaction antitrust scru­ tiny. These acquisitions, like those which are too small to satisfy the re­ porting criteria of the act, may become more significant if similar ac­ quisitions follow. Likewise, those ac­ quisitions of voting securities exempt under § 802.21 because notification previously has been filed may not in­ crease the holdings of the acquiring person significantly enough to war­ rant an additional filing. But the hold­ ings which result from these exempt acquisitions must be aggregated with all voting securities of the acquired person held by the acquiring person in order to give an accurate picture of the latter’s ability to influence or con­ trol the issuer.

Voting securities acquired under the procedures outlined in § 802.23 are in­ distinguishable from the issuer’s voting securities acquired in any other manner. The same is true of voting se­ curities acquired by means of an intra­ person transaction exempt under §802.30. Thus the holdings resulting from each of these exemptions are counted for purposes of determining whether later acquisitions are reporta­ ble.

Acquisitions of voting securities in the process of forming a joint venture or other corporation may be reporta­ ble under § 801.40. When the transac­ tion forming the joint venture or other corporation is complete, the shareholders of the joint venture or other corporation obviously continue to hold the shares of that corporation. That is true whether or not the acqui­ sitions are exempt under § 802.40 be­ cause the corporation being formed is a nonprofit entity within the meaning of the sections of the Internal Reve­ nue Code cited in §802.40. Similarly, while the new corporation by reason of §802.41 never has to report its ac­ quisitions of assets in the transaction forming that corporation, the assets are held by the new corporation after formation and must be counted for purposes of any subsequent acquisi­ tions by or from the corporation. An acquisition by a foreign person of less than $10 million of assets located in the United States (other than in­ vestment assets) is exempt under § 802.51(c), but those assets are held by the acquiring person as a result of the acquisition. Thus, an additional asset acquisition by the acquiring person, if falling within the aggrega-1 tion provisions of § 801.13(b)(2), will be exempt only if the aggregate value of the U.S. assets (other than investment assets) acquired in both the earlier and the later acquisitions is less than $10 million.

Section 802.51(d) exempts transac­ tions in which both the acquiring and RULES AND REGULATIONS 4;he acquired persons are foreign, if the combined annual sales of the two persons in or into the United States are less than $110 million and if the two persons’ combined total assets lo­ cated in the United States (other than investment assets) are less than $110 million. Both assets and voting securi­ ties acquired under this exemption are held for purposes of future acquisi­ tions (subject, in the case of the assets, to the aggregation provisions of § 801.13(b)(2)), since the cumulative impact of the transactions on foreign commerce determines the availability of the exemption.

Securities underwriters which are exempt under § 802.60 from reporting certain acquisitions of voting securities nevertheless hold those voting securi­ ties as a result of their acquisition and continue to hold such securities for purposes of any subsequent acquisi­ tions.

Finally, when an acquisition is the result of a gift, intestate succession, testamentary disposition or transfer by a settlor to an irrevocable trust, the transaction is exempt under §802.71 because the recipient typically does not cause the transaction to occur and is thus unlikely to use the transaction to further an anticompetitive purpose. After the transaction is complete, however, the recipient’s ability to use the voting securities or assets acquired under this exemption is indistinguish­ able from that of other acquiring per­ sons, and thus that person is deemed to hold what was acquired under the exemption.

D eletion op R evised § 801.20 Revised § 801.20 stated that any par­ ticular acquisition, even if part of a se­ quence of transactions that will even­ tually exceed the threshold levels of section 7A(a)(3), was not subject to the requirements of the act unless as a result of the particular acquisition the acquiring person’s holdings would meet or exceed a threshold level of section 7A(a)(3). Original §801.45 was a similar provision.

The final rules omit revised § 801.20 as unnecessary. The proposed rule merely restated a conclusion that fol­ lowed from § 801.13—that any particu­ lar transaction was subject to the re­ quirements of the act only if, as a result of that transaction, the hold­ ings of the acquiring person satisfied the size-of-transaction test of section 7A(a)(3).

SECTION 801.20 ACQUISITIONS SUBSEQUENT TO EXCEEDING THRESHOLD When a person has previously made an acquisition of assets or voting secu­ rities, this rule clarifies the acquiring person’s obligation to file notification and comply with the waiting period re­ quirements with respect to a later ac­ quisition of the assets or voting securi­ ties of the same acquired person. The rule states that such notification and compliance is required: (a) Even though the earlier acquisi­ tion or acquisitions may have been re­ portable;

(b) Even though the prior acquisi­ tions may have resulted in the acquir­ ing person’s meeting or exceeding a notification threshold (as defined in § 801.1(h)) prior to the effective date of the act or the rules; and (c) Even though a notification threshold may previously have been met or exceeded by reason of increases in market values or events other than acquisitions.

The basic principle underlying the act and incorporated in the rules is that every acquisition as a result of which the acquiring person’s holdings meet or exceed the statutory notifica­ tion threshold of section 7A(a)(3) and § 801.1(h)(1) gives rise to an obligation to file notification and comply with the waiting period requirements. See the Statement of Basis and Purpose to §801.13. Section 802.21 substantially modifies this basic principle for acqui­ sitions of voting securities when notifi­ cation has previously been filed with respect to a transaction involving the same parties, and for that reason §802.21 is specifically mentioned in the beginning portion of this rule. This basic principle is also subject to the commerce test of section 7A(a)(l) and the size-of-person test of section 7A(a)(2), to each of the exemptions contained in section 7A(c)(l) through section 7A(c)(ll), and to each of the exemptions in part 802 of the rules. In other words, if the statutory criteria are not met, or if the later acquisition is exempt under either the act or the rules, § 801.20 does not create a report­ ing obligation.

When a notification threshold is met or exceeded by reason of an event other than an acquisition, no filing or waiting period obligations arise at that time. Thus, for example, if a person acquired voting securities worth less than $15 million, and the market price of those securities thereafter rose above $15 million, that increase in market price would not by itself create a reporting obligation, because the price increase is not an acquisition within the meaning of section 7A(a). Similarly, if a person acquired less than 15 percent of the shares of an issuer, and thereafter the issuer pur­ chased enough of its own stock so that the originally purchased shares consti­ tuted more than 15 percent of the shares then outstanding, no notifica­ tion would be required, because the in­ crease in percentage holdings did not result from an acquisition by the person whose holdings met or exceed­ ed a notification threshold. However, FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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in either of these situations, if the ac­ quiring person thereafter purchased any additional shares, notification would be required with respect to that subsequent transaction. See example No. 2 to this rule.

This rule merely clarifies the oper­ ation of other rules (notably §801.13) and does not change the results ob­ tained by application of those rules. B ackground Inform ation to § 801.20 Original § 801.50 and revised § 801.21 were similar to the final rule. A number of comments relating to the original version are discussed in the Statement of Basis and Purpose to § 801.13, and there were no comments on the revised rule.

SECTION 801.21 SECURITIES AND CASH NOT CONSIDERED ASSETS WHEN ACQUIRED Section 801.21 clarifies that neither cash nor securities of an issuer unre­ lated to the person from which ac­ quired are to be considered “assets” of that person for purposes of the 15 per­ cent or $15 million test of section 7A(a)(3). The rule thus excludes a pos­ sible literal interpretation of the term "assets” which could have made an ac­ quisition of cash or securities reporta­ ble as an acquisition of the “assets” of the person from which acquired. The heading of the rule states that it applies to the size-of-transaction test of section 7A(a)(3), the notifica­ tion threshold that restates that test (§ 801.1(h)(1)), and the rules imple­ menting the test (§§ 801.12(d)(1) and 801.13(b)). Paragraph (a) directs that cash is not to be considered an asset of the person from which it is received. Paragraph (b) provides that securities, whether voting or nonvoting, are not to be viewed as assets of third-party holders. Three examples illustrate the rule.

Note that even though the cash and securities are not assets for purposes of section 7A(a)(3) when acquired, after acquisition they must be reflect­ ed on the acquiring person’s next reg­ ularly prepared balance sheet as assets for purposes of the size-of-person test of section 7A(a)(2).

This rule also affects §801.2, which identifies acquiring and acquired per­ sons for purposes of the act and rules. Section 801.21(a) makes clear that if cash is the only consideration for the voting securities of an issuer, the ac­ quired person will not thereby acquire any “assets’ of the acquiring person and therefore will not become both an acquiring and acquired person within the meaning of § 801.2(c). The acquir­ ing person, likewise, will not be trans­ ferring any of its “assets” by paying cash, and thus does not also become an acquired person. The same result follows whenever an acquisition is of securities issued by an entity not in- RULES AND REGULATIONS eluded within the person from which acquired. The person transferring the securities does not transfer “assets” and become an acquired person; in­ stead, under § 801.2(b) the acquired person is the person within which the issuer is included. See example No. 1 to § 801.2(b).

B ackground Inform ation to § 801.21 This rule appears for the first time in the final rules. It was added in order to avoid situations in which a lit­ eral reading of the term “assets” could result in the imposition of meaningless reporting and waiting period require­ ments upon transferors of cash or se­ curities of unrelated issuers. Cash gen­ erally lacks competitive significance, and so treating it as an asset would not further the purposes of the act. Nor would filings by. third-party hold­ ers of voting securities advance the purposes of the act, since only the re­ lationship between the acquiring person and the issuer is likely to have competitive consequences. In such cases § 801.2(b) appropriately rests the obligation to comply with the act upon the person within which the issuer whose voting securities are to be ac­ quired is included.

SECTION 801.30 TENDER OFFERS AND AC­ QUISITIONS OF VOTING SECURITIES FROM THIRD PARTIES Section 801.30 applies to certain enu­ merated types of transactions that may be initiated by the acquiring person without the agreement of the acquired person. For these acquisi­ tions, the waiting period begins upon receipt of only the acquiring person’s Notification and Report Form, rather than both the acquiring and acquired persons’ forms. The rule ensures that a hostile or indifferent issuer cannot prevent the beginning of the waiting period by failing to file notification. Paragraph (a) specifies the seven types of acquisitions to which the rule applies. These are acquisitions on a na­ tional securities exchange or through an inter-dealer quotation system regis­ tered with the SEC; certain acquisi­ tions by offerees of noncash tender offers described in § 801.31; tender offers, which are defined in § 801.1(g)(1); secondary acquisitions, which are described in § 801.4; all ac­ quisitions (other than mergers and consolidations) in which voting securi­ ties will be acquired from holders other than the issuer or an entity in­ cluded within the same person as the issuer; conversions, which are defined in § 801.1(f)(3); and the exercise of op­ tions or warrants that were issued by the acquired person and that are sub­ ject to a currently effective registra­ tion statement filed with the SEC. For these acquisitions, subparagraph (b)(1) specifies that the waiting period 33483 begins when notification is received from the acquiring person. Subpara­ graph (b)(2) requires the acquired person in such acquisitions to file noti­ fication no later than 5 p.m. eastern time on the fifteenth (or, in the case of a cash tender offer, the tenth) day thereafter. If the fifteenth (or, in the case of a cash tender offer, the tenth) day falls on a weekend or Federal holi­ day, the acquired person must file no­ tification by 10 a.m. eastern time on the next business day.

This rule does not affect the length of the waiting period. Section 803.10 governs the length of the period, and also explains when receipt of a notifi­ cation is effective.

Three examples illustrate the rule. B ackground I n fo r m a t io n to § 801.30 Except with respect to tènder offers, the original rules made no special pro­ vision for acquisitions of blocks of stock from third parties unrelated to the issuer or through securities ex­ changes or other open-market transac­ tions.

That approach tracked the statutory language describing the required wait­ ing periods. The act provides for a 30day waiting period that commences when notification is filed by both the acquiring and acquired persons. The only exception relates to tender offers. Section 7A(a) states in part: [Nlo person shall acquire * * * any voting securities * * * of any other person, unless both persons (or. in the case of a tender offer, the acquiring person) file notification * * * and the waiting period * * * has expired * * *. Section 7A(b)(l) likewise states in part;

The waiting period * required under [§ 7A](a) shall— (A) Begin on the date of receipt * * * of * * * the completed notifi­ cation required under [§ 7AKa) * * * from both persons, or, in the case of a tender offer, the acquiring person * * *. This result was inadequate, however, because absent special provision, thirdparty and open-market acquisitions (other than tender offers) would have been subject to the same rules as twoparty acquisitions. As noted in several comments (e.g., 9, 19, 49, 63, 74, 78, 93, 96, 115), unless the beginning of the waiting period is conditioned solely upon filing by the acquiring person, an apathetic or hostile issuer could frus­ trate tfhe transaction merely by ne­ glecting to file notification. The wait­ ing period thus might never begin to run. The Commission believes that notwithstanding the language of sec­ tion 7A(a) and (b)(1), these types of acquisitions are more closely analo­ gous to tender offers than to twoparty consensual acquisitions. FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33484 As Chairman Rodino stated on the House floor, lengthy delays in the waiting period for tender offers. will give the target firm plenty of time to defeat the offer, by abolishing cumulative voting, arranging a speedy defensive merger, quickly incorporating in a state with an an­ titakeover statute, or negotiating costly life­ time employment contracts for incumbent management. And the longer the waiting period, the more the target’s stock may be bid up in the market, making the offer more costly—and less successful. (122 Cong. Rec. H10294 (daily ed. Sept. 16, 1976)) Although the Williams Act does not apply, these same basic concerns—in­ cluding delay, avoidance, and detri­ mental impact on the capital market— all exist with respect to third-party ac­ quisitions other than tender offers. See generally, 122 Cong. Rec. S15417 (daily ed. Sept. 8, 1976); id. at H10293- 94 (daily ed. Sept. 16,1976). The final rule extends to analogous types of transactions the treatment ac­ corded tender offers. In each type of acquisition listed in paragraph (a), treatment under the standard twoparty rules could delay or preclude the acquisition. Therefore, in each case the waiting period begins when notifi­ cation is filed by the acquiring person. The difficulties in applying the normal two-party rules are particular­ ly pronounced in the case of those ac­ quisitions that are part of other acqui­ sitions, such as acquisitions of an ac­ quiring person’s stock by offerees in a tender offer (§801.31) and secondary acquisitions (§801.4). In these in­ stances, even if the acquired person chooses to file notification, it may well be hard-pressed to do so quickly. Often the acquired person is unaware of the acquisition until the acquiring person is ready to file notification. In these situations—unlike negotiated ac­ quisitions—the acquired person usual­ ly will not have begun to prepare its form or have undertaken a prelimi­ nary analysis of the legality of the ac­ quisition. As comment 1090 suggested, delay by acquired persons in these re­ lated acquisitions could easily impede the main acquisitions, often with severly detrimental effects. In subparagraph (a)(5), mergers and consolidations are excluded from the treatment afforded by the rule be­ cause even though acquisitions are made from third-party holders, such transactions are typically consensual. Therefore, the rationale for the rule, the danger that an issuer will seek to frustrate the transaction, does not apply.

In subparagraph (a)(7), the two limi­ tations placed upon the types of op­ tions that qualify for treatment under the rule seek to prevent improper use of the rule by means of characterizing consensual acquisitions as the exercise RULES AND REGULATIONS of spurious “options.” Note that al­ though these limitations exclude “put” and “call” options from subpar­ agraph (a)(7), acquisitions of stock re­ sulting from the exercise of such op­ tions typically would qualify under other subparagraphs of paragraph (a). Revised § 801.30 was substantially similar to the final rule. Although in stating the coverage of the rule it mentioned only tender offers and transactions described in § 801.30(a)(5) of the final rule, its coverage would have been similar to that of the final rule because the types of transactions identified in the final version of para­ graph (a) overlap to a considerable extent.

For example, acquisitions made on a securities exchange are usu­ ally acquisitions from third parties. The final version of paragraph (a) was expanded merely to clarify the scope of the rule.

Paragraph (a) of the revised rule, which identified the acquired person, was deleted from the final rule. Since § 801.2(b) identifies the acquired person, repetition of the point is un­ necessary. The effect, however, re­ mains the same: The acquired person is that collection of entities within which the issuer of the voting securi­ ties to be acquired is included. The seller of the securities—if it is not also the acquired person—has no obligation to file notification.

See also § 801.21(b).

The statutory authority for compel­ ling the acquired person in a tender offer to file notification lies in the last sentence of section 7A(a). Comment 1075 complained that for the acquired person to file notification within the time limits prescribed by subpara­ graph (b)(2) could be burdensome, be­ cause the acquired person would be preoccupied with evaluating the fair­ ness of the tender offer or with other aspects of the acquisition. However, the act mandates that the agencies review the acquisition during the wait­ ing period. Much of the information necessary for a review of the acquisi­ tion is in the hands of the issuer. The length of time afforded the acquired person by the rule is the maximum that will still permit the agencies to perform their duties.

SECTION 801.31 ACQUISITIONS OF VOTING SECURITIES BY OFFEREES IN TENDER OFFERS This rule applies only to those non­ cash tender offers in which the stock­ holders of the issuer whose shares are sought to be acquired will receive, voting securities from the offeror as full or partial consideration for their shares. Section 801.2(e) provides that such acquisitions are separately sub­ ject to the requirements of the act and rules if the criteria of section 7A(a) are satisfied. Section 801.31 details the procedures to be followed regarding the notification and waiting period for such acquisitions, and provides for an optional escrow arrangement to facili­ tate the underlying tender offers. The term “noncash tender offer” is defined in § 801.1(g)(3).

When an acquisition is separately re­ portable, separate Notification and Report Forms must be submitted with respect to it. Paragraph (a) of the rule provides that the waiting period—that is, the separate waiting period with re­ spect of the acquisition by the offeree, distinct from the waiting period with respect to the tender offer—begins when the offeree files notification. See §§801.30 and 803.10(a)(1). Paragraph (b) requires the person within which the issuer of the shares to be acquired by the offeree is included to file notifi­ cation within 15 days thereafter. Note that the shares to be acquired by the offeree need not necessarily be those of the tender offeror. Paragraph (c) provides that a request for additional information will extend the waiting period in accordance with § 803.20(c). Finally, paragraph (d) creates a spe­ cial escrow mechanism that can be used if the tender offeror would other­ wise be unable to acquire the shares tendered by the offeree, because the waiting period with respect to the of­ feree’s acquisition of the voting securi­ ties furnished by the offeror has not expired. The rule permits the voting securities destined for the offeree to be placed into escrow for the benefit of the offeree, so that the tender of­ feror may accept the tendered shares and complete the tender offer as soon as the waiting period with respect to the tender offer expires, even if the waiting period with respect to the ac­ quisition by the offeree has not ex­ pired. The escrow agreement may be structured in any way determined by the parties, and may provide for the transfer of alternative consideration to the offeree in the event that either agency secures an injunction against the offeree’s acquisition of shares from the offeror. The only limitation on the escrow agreement provided by the rule is that the shares placed in escrow cannot be voted by anyone during the pendency of the escrow. An example illustrates the rule. Background Information to § 801.31 This rule, which had no counterpart in either the original or revised rules, was added in order to clarify that ac­ quisitions of voting securities by offer­ ees of tender offers may be separately reportable, to detail the procedural as­ pects of such acquisitions, and to elim­ inate, by means of the escrow provi­ sion of paragraph (d), the risk that tender offers could be delayed or frus­ trated by complications arising in con­ nection with such acquisitions. FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

Page 197

As with any other acquisition, an ac­ quisition described by this rule is sub­ ject to the requirements of the act whenever the criteria of the act are satisfied and no exemption applies. It is separately subject to the act because the potential antitrust problems posed by the acquisition differ from those posed by the underlyng tender offer. The antitrust analysis of the tender offer will focus upon the relationship of the tender offeror and issuer whose shares are sought to be acquired. The analysis of the offeree’s acquisition, by contrast, will typically focus upon the relationship between the offeree—the acquiring person—and the issuer of the shares that the offeree will ac­ quire from the tender offeror. Since different parties are involved, separate application of the act is necessary. Acquisitions described by the rule are specifically mentioned in § 801.30(a)(2) as qualifying for that section’s special treatment. As with other acquisitions falling under that rule, the waiting period commences when notification is filed by the ac­ quiring person, in this case the offeree of the tender offer. Th£ acquired person, the issuer of the securities to be acquired by the offeree, must file notification within 15 days thereafter. Section 801.30 treatment for these ac­ quisitions facilitates completion of the tender offer. It will be particularly im­ portant if the voting securities fur­ nished by the offeror are not issued by the offeror, in which case the issuer may regard its filing requirement with indifference or hostility. For further explanation of the* rationale for §801.30 treatment, see the Statement of Basis and Purpose to that rule. The escrow arrangement permitted by paragraph (d) of the rule is de­ signed to permit noncash tender offers to be consummated before the expira­ tion of any waiting periods imposed on the acquisitions of voting securities being offered as consideration. With­ out this provision, consummation of the tender offer could be delayed, and conflict with the Williams Act could result.

The escrow provision prohibits any person from voting any shares placed in escrow during the pendency of the escrow. Because voting presents the risk of anticompetitive activity, the Commission determined that this indi­ cium of beneficial ownership should not pass to the offeree prior to the ex­ piration of the waiting period. SECTION 801.32 CONVERSION AND ACQUISITION Section 801.32 declares that a con­ version is an acquisition within the meaning of the act. Therefore, if the criteria of section 7A(a) are satisfied, the acquisition of voting securities by means of a conversion must be preced- RULES AND REGULATIONS ed by notification and observance of the waiting period. Note that conver­ sions are among the transactions for which the waiting period commences upon receipt of the acquiring person’s Notification and Report Form. See § 801.30(a)(6).

The term “conversion” is defined in § 801.1(f)(3).

An example illustrates the rule. B ackground Inform ation to 6 801:32 A conversion of convertible voting securities into securities presently able to vote for directors involves an ex­ change in which the holder acquires voting securities and surrenders con­ vertibles as consideration for that ac­ quisition. See § 801.1(f)(3). The fact that one type of voting securities is ex­ changed for another does not alter the fact that the exchange involves an ac-. quisition of voting securities. Therefore, the purpose of this rule is merely to clarify the Commission’s in­ terpretation of the act; the rule does not create any obligation which would not exist in its absence. Several of the final rules implement the treatment of convertible voting se­ curities. This rule insures that persons acquiring voting securities by means of conversions first file notification and observe a waiting period, if the criteria of section 7A(a) are met. Section 802.31 exempts acquisitions of convert­ ible voting securities. For a complete explanation of the manner in which the rules treat convertible voting secu­ rities, see the statement of Basis and Purpose to § 801.1(f)(2)* see also §§ 801.1(f)(3) and 802.31. SECTION 801.40 FORMATION OF JOINT VENTURE OR OTHER CORPORATIONS Section 801.40 announces the crite­ ria by which to identify those joint ventures or other corporations the for­ mation of which, because of the acqui­ sition of voting securities of the new entity by its parents, will trigger the requirements of the act. The rule specifies which such transactions must be reported. It also enables acquiring persons reporting such acquisitions to complete properly item 5(d) of the form, which relates exclusively to such transactions.

The phrase “joint venture or other corporation” means that the forma­ tion of any corporation, whether or not denominated a joint venture by the parties, is potentially subject to the reporting and Waiting period re­ quirements of the act. (This rule ap­ plies to the formation of all corpora­ tions except those formed in connec­ tion with mergers and consolidations, which are treated under § 801.2(d).) Since the formation of a new corpora­ tion all of the voting securities of which will be held by one person will be an intraperson transaction exempt 33485 from the requirements of the act under §802.30, as a practical matter only the formation of corporations the voting securities of which will be held by two or more persons is potentially subject to the act. And since the rule applies only to the formation of corpo­ rations, the formation of entities other than corporations is by virtue of this rule, not brought within the coverage of the act and need not be preceded by compliance with the act’s require­ ments.

As with any other acquisition, the requirements of the act need be ob­ served only if the criteria of section 7A(a) are met. Paragraph (a) identifies the acquiring and acquired persons in such a transaction. Paragraphs (b), (c), and (d) of the rule explain the applica­ tion of the criteria of section 7A(a) to such acquisitions, and an example il­ lustrates their application. Paragraph (a) of the rule provides that the persons contributing to the formation of a joint venture or other corporation are acquiring persons. Since they will acquire and hold voting securities of the new entity, the rule parallels § 801.2(a). Even though the new entity may also acquire assets or voting securities from the contribu­ tors, notwithstanding § 801.2(c) the contributors are deemed acquiring per­ sons only, and the new éntity is an ac­ quired person only. Under § 802.41, however, the joint venture or other corporation need not file notification in connection with its own formation. The criteria of paragraph (b) consti­ tute the size-of-person test of section 7A(a)(2) in connection with the forma­ tion of a new corporation. An acquir­ ing person is subject to the require­ ments of the act if it has annual net sales or total assets of $100 million or more, if at least one other contributor has annual net sales or total assets of $10 million or more, and if the joint venture or other corporation will have $10 million or more in total assets. If, on the other hand, the new corpora­ tion will be of $100 million size, its for­ mation is reportable if two or more of its shareholders are of $10 million size or larger. In the latter case, each con­ tributor of $10 million size is required to file notification and wait. For ac­ quiring persons, § 801.11 governs calcu­ lation of annual net sales and total assets;

for the new corporation, § 801.40(c) determines the total assets for purposes of this rule. Paragraph (b) also makes clear that the act applies only if the size-of transaction test of section 7A(a)(3) is satisfied. In the context of the forma­ tion of a joint venture or other corpo­ ration, the test will be satisfied as to a particular acquiring person if, as a result of the transaction forming the corporation, the acquiring person FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33486 would hold 15 percent or $15 million of the new corporation’s stock. Under § 801.40(c), the total assets of a joint venture or other corporation at the n time of its formation will be deemed to include (1) all assets that, as of the time of formation, the par­ ents have agreed to transfer or for which agreements have been obtained for the new entity to acquire at any time, and (2) all credit or other obliga­ tions that, as of the time of formation, the parents have agreed to extend or guarantee at any time. Paragraph (c) supplants §801.11, the rule that nor­ mally governs the calculation of total assets, only at the time of its forma­ tion, for purposes of paragraph (b) of this rule. If the joint venture or other corporation after its formation ac­ quires or is acquired by another entity, its total assets and annual net sales at that time would be determined under §801.11.

Paragraph (d) interprets the com­ merce test of section 7A(a)(l) for transactions forming a joint venture or other corporation. It provides that the test is satisfied either if the activi­ ties of any acquiring person are in or affect commerce, or if the person filing notification should reasonably believe that the new entity will be en­ gaged in activities in or affecting com­ merce.

Two additional rules complete the treatment of the formation of joint venture or other corporations: Section 802.40 exempts acquisitions of voting securities in connection with the for­ mation of certain tax-exempt, non­ profit corporations, and § 802.41 exempts the new corporation from filing notification in connection with its own formation.

Background Information to § 801.40 The earlier versions of the rules, which were drafted in terms of joint ventures rather than joint venture or other corporations, generated a sub­ stantial number of comments during both the first and second comment pe­ riods. Many comments insisted that Congress had not intended the act to apply to joint ventures and therefore that including them within the ambit of the rules was improper. (See, e.g., 16, 47, 57, 59, 62, 83, 84; 1018, 1019, 1025, 1030, 1046, 1060, 1068, 1069, 1070, 1075, 1086, 1087, 1088, 1096, 1097.) These arguments were based on infer­ ences drawn from legislative history and other sources outside title II of the Antitrust Improvements Act, as well as from the specific language of section 7A. Specifically, the comments noted that title II omitted mention of joint ventures (16, 83, 84), and con­ trasted the explicit references, to joint ventures in title I of the Antitrust Im­ provements Act, the Antitrust Civil Process Act amendments, 15 U.S.C. RULES AND REGULATIONS 1311 (57, 67). One comment (92) also suggested that, since Congress had eliminated from an earlier draft a clause giving the Commission the power to expand the scope of the act’s coverage, coverage should not be “ex­ panded” by rule to embrace joint ven­ tures. Comment 47 argued that since, in contrast to a merger, there is no problem “unscrambling” the assets of a joint venture if after its formation it is found to be anticompetitive, precon­ summation review is less imperative. Finally, one comment (59) objected to coverage because the Commission’s ex­ isting premerger notification program does not reach joint ventures. The Commission finds, however, that nothing in the act’s legislative history indicates that Congress did not intend for the act to reach acquisitions of voting securities in connection with the formation of new corporations. To the contrary, the language of the act indicates that, except for the qualifi­ cations of section 7A(a) and the ex­ emptions in section 7A(c), Congress in­ tended that the act reach all acquisi­ tions of voting securities—regardless of the types of transactions in which they occur. The comments that object­ ed to joint venture coverage were fo­ cused on the formation of the new entity rather than on the acquisition of its voting securities. Since under the act the former is irrelevant and coverage of the latter is beyond doubt, these comments were rejected. The formation of new corporations in connection with mergers or consoli­ dations is excluded from the rule, since the character and likely competi­ tive consequences of such transactions are dissimilar to those treated under this rule.

“J o in t V enture or O ther Corporation”

It became apparent after the first comment period that there is no com­ monly understood and generally ac­ cepted definition of “joint venture.” The comments suggested that thou­ sands of common business arrange­ ments in different industries could be construed as joint ventures. These business arrangements range from co­ production ventures in the motion pic­ ture industry (e.g., 67, 78, 116) to joint bidding, exploration and drilling in the oil and gas industry (e.g., 3, 5, 8, 16, 24, 34, 46, 72) to real estate devel­ opment and shopping center construc­ tion projects (e.g., 10, 60, 81, 83). It was clear from the> comments that there was no consensus whether any, some, or all of these arrangements were “joint ventures” and thus wheth­ er their formation would have been a reportable event under those rules. The comments insisted that these common joint arrangements are un­ likely to violate the antitrust laws, and that because of the frequency with which they are used, the reporting and waiting period requirements would impose substantial hardships on the venturers.

The Commission thus sought more information about joint ventures. The F ederal R egister notice accompany­ ing the revised rules invited comments detailing the types and forms of orga­ nizations of joint ventures that would have been reportable under the re­ vised rules <42 FR at 39044 (Aug. 1, 1977).

This invitation attracted 52 com­ ments. These comments revealed that in the industries in which joint busi­ ness arrangements are most commonly formed to effect day-to-day oper­ ations—the oil, gas, and other extrac­ tive industries (e.g., 1018, 1019, 1022, 1024, 1025, 1033, 1034, 1046, 1056, 1060, 1069, 1075, 1081, 1084, 1087, 1088, 1096, 1097, 1107); the construction industry (e.g., 1015, 1047, 1077, 1092, 1112, 1113, 1114); the real estate investment and development and shopping center de­ velopment industries (e.g., 1064, 1065, 1070, 1079, 1085); the motion picture industry (e.g., 1066); and financing transactions (e.g., 1071, 1089) very few of those arrangements typically are in­ corporated. They also suggested that although the venturers are sometimes competitors, the ventures usually do not engage in marketing and are pri­ marily risk-sharing devices. As a gen­ eral rule, in these day-to-day joint ven­ tures the participants provide a pro rata share of the expenses and take in kind from the output of the venture. They frequently are formed for a single, specific purpose (e.g., bidding on a lease or project, making a movie, or completing a specific project) and often are dissolved when that purpose has been accomplished or abandoned. The comments also expressed concern that the coverage of “joint ventures” under the revised rules was ambigu­ ous.

The approach to joint ventures adopted in the final rules meets these concerns. Section 801.40 applies to “joint venture or other corporations.” When a new corporation is formed, it typically issues its stock to those con­ tributing capital. The language of the rule makes clear that the formation of any corporation, regardless of what the parties call it, potentially gives rise to a reportable acquisition of voting securities by every shareholder. This approach obviates the need to decide whether an entity should be termed a joint venture, because the concept of “corporation” is unambiguous. More­ over, it emphasizes that it is not the formation of the corporation upon which the act (and similarly, the rules) focuses, but rather the acquisi­ tion of a corporation’s voting securi­ ties.

FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

Page 199

RULES AND REGULATIONS 33487 There is evidence that Congress in­ tended coverage of acquisitions by or of noncorporate entities.

Section 7A(b)(3)(A) states:

The term “voting securities” means any securities which * * * entitle the owner or holder thereof to vote for the election of di­ rectors of the issuer or, with respect to un­ incorporated issuers, persons exercising sim­ ilar functions. (Emphasis supplied.) However, the Commission has in­ structed its staff to monitor the for­ mation of joint business arrangements of all types and forms and to deter­ mine, after a year of operation, wheth­ er the rules provide appropriate cover­ age. The fact that persons contribut­ ing to the formation of a noncorporate joint venture are not required to report and wait prior to the transac­ tion should not, of course, be con­ strued as a Commission statement that such transactions are free from antitrust concerns. See section 7A(i). SlZE-OF-PERSON AND SlZE-OF- T ransaction T ests The rule adapts acquisitions in con­ nection with the formation of joint ventures, which alway involve at least three parties, to the basic two-party framework of the act by separately pairing each parent with the joint ven­ ture or other corporation, and then testing the pair against a modified ver­ sion of the size-of-person test of sec­ tion 7A(a)(2), and the size-of-transaction test of section 7A(a)(3). Thus with respect first to the size-of-person test, if the joint venture or other corpora­ tion is of $10 million size (determined under paragraph (c) of the rule), a parent of $100 million size may be re­ quired to report. If the new entity will have $100 million or more in total assets, an acquiring person with annual net sales or total assets of $10 million may be required to report. This aspect of § 801.40(b) is drawn di­ rectly from section 7A(a)(2). In each of these cases, however, paragraph (b) of the rule imposes an additional requirement not present in section 7A(a)(2)—the participation of another person of $10 million size forming the corporation. See § 801.40 (bKIKiii), (b)(2)(iii). Thus, a parent of $100 million size contributing to the formation of a corporation of $10 mil­ lion size need only report and wait if a second contributor is of $10 million size. This additional contributor may not itself be required to report. If nei­ ther it nor the joint venture or other corporation are of $100 million size, when paired they will not satisfy the test of § 801.40(b) (because they would not satisfy the test of section § 7A(a)(2)).

Likewise, each pair, composed of an acquiring person and the acquired person (new entity), must satisfy the size-of-transaction test of section 7A(a)(3) before the acquiring person need report. If the particular acquir­ ing person as a result of the acquisi­ tion forming the new corporation will not hold either 15 percent or $15 mil­ lion of the voting securities of the new corporation, it need not report. This approach to coverage in final § 801.40(b) differs in two respects from that taken in the original rules. First, the size criteria were stated as exemp­ tions in original §802.30, rather than as coverage Criteria in original § 801.55. Second, the original rules addressed only the situation in which parents of $100 million and $10 million sizes were involved as acquiring persons, regard­ less of the size of the new entity. The revised rules transferred the size crite­ ria to § 801.40 and expanded them to include two parents of $10 million size contributing to the formation of a $100 million joint venture. As com­ ment 95 observed, the latter situation reflects section 7A(a)(2)(C), which is applicable to all other types of acquisi­ tions.

Comment 16 suggested that a joint venture should be exempt from the notification and waiting period re­ quirements unless all of the acquiring persons have net sales on total assets of $100 million or more. This sugges­ tion was rejected. Clearly section 7A( a)(2) authorizes the Commission to go further than that. If the acquired person (the new entity) has net sales or total assets of $100 million or more, an acquiring person may be of $10 mil­ lion size and, if the size-of-transaction tests are met, it will be subject to the act. Another comment (63) suggested that if the formation transaction is re­ portable, all the contributors should be required to report. This comment was also rejected, since, as discussed above, paragraph (b) is closely mod­ eled after those combinations of ac­ quiring and acquired persons that sat­ isfy the size-of-person test of section 7A(a)(2).

Comment 57 suggested that, since section 7A(a)(I) is stated in the pres­ ent tense, coverage of joint ventures at formation is improper. First, it argued, securities cannot be acquired from a person not yet in existence, and second, the act should not apply unless the acquired person satisfies the size-of-person test at the time of acquisition. The Commission is unper­ suaded by these arguments. Section 7A(d)(l) grants the Commission the power to define the terms of the act, and the rules define “person” to in­ clude a joint venture or other corpora­ tion not yet formed.

Section 801.1(a)(2) defines “entity” to include “any joint venture or other corpora­ tion which has not been formed but the acquisition of the voting securities in which, if already formed, would re­ quire notification under the act and these rules * * And under § 801.1(a)(1) a “person” is composed of entities. Thus, since a joint venture not yet formed may be a "entity,” it also may be a “person.” Somewhat similarly, § 801.40(c) adapts the size-ofperson test to the formaton of a joint venture or other corporation, notwith­ standing the fact that the corporation, by one view, does not have total assets at the time of formation. The Commis­ sion believes this treatment is reason­ able and permissible for the reasons previously stated.

T otal A ssets of J o in t V enture or O ther Corporation Paragraph (c) of the rule provides that the assets of the new entity will include (1) all assets that the parents have agreed to transfer or for which agreements have been obtained for the new entity to acquire at any time, and (2) all credit or other obligations that the parents have agreed to extend or guarantee at any time. The paragraph focuses upon the agree­ ment at the time of formation; howev­ er, the new entity’s assets are not lim­ ited to those contributed at formation. Thus, if the contributors agree to form a joint venture or other corpora­ tion and agree to contribute assets each year for a specified number of years, the total assets of the new entity for the size-of-person and percentage-of-assets tests will be the total of all contributions over the several years. See the example to the rule. This approach to total assets is fol­ lowed because, at least at formation, the timing of the contribution of assets to a new entity is totally within the control of the contributors. The Commission considers it reasonable to rely on agreements entered into by those contributors for purposes of cal­ culating the entity’s size. The emphasis of the original rule was different. Original § 801.55(d) pro­ vided that assets of a joint venture in­ cluded all assets intended to be con­ tributed to the venture within 1 year of formation. Numerous comments (e.g., 25, 26, 74, 84, 92) objected that reliance on the parents^ intentions made the act’s coverage turn on a purely subjective determination and therefore was unworkable. Comment 95 suggested—and the Commission agreed—that the assets of the joint venture need not be restricted to those contributed during the first year; in­ stead, it urged that all assets that the contributors intended to commit during the life of the new entity should be tallied. The revised rule thus looked to those assets and loans that the venturers (or any other per­ sons) had agreed to contribute or guarantee at any time. It was adopted in the final rule with only minor revi- FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33488 sions for clarity and conformity with other language of the rule. Commerce T est Paragraph (d) provides that the commerce test of section 7A(a)(l) is satisfied, for purposes of this rule, if the activities of any acquiring person are in or affect commerce, or if the filing person should reasonably believe that the activities of the joint venture or other corporation will be in or af­ fecting commerce. Section 7A(a)(l) states that the act applies if “the ac- -quiring person, or the person whose voting securities or assets are beng ac­ quired, is engaged in commerce or in any activity affecting commerce * * [Emphasis supplied.] Since the word “or” is disjuncative, the test is satis­ fied if only the acquiring person is en­ gaged in commerce or an activity af­ fecting commerce, within the meaning of that term in § 801.1(f). Moreover, it is appropriate to find the commerce test satisfied, if the joint venture or other corporation to be created will engage in commerce. Under the definition of “entity,” the joint venture or other corporation qualifies as a “person,” as discussed above. And since the joint venture or other corporation merely by its forma­ tion may exert an effect on commerce it is appropriate to consider its future activities in or affecting commerce for purposes of the commerce test at the time of its formation.

N Original § 801.55(c) would have pro­ vided that a joint venture would be deemed engaged in commerce or an ac­ tivity affecting commerce if the per­ sons contributing to its formation in­ tended that it be so engaged within 1 year of formation. Revised § 801.40(d) eliminated the 1-year limitation, and instead focused upon whether the agreement among the contributors, rather than the contributors them­ selves, contemplated that the activities of the joint venture would be in or af­ fecting commerce. The formulation in the final rule, the reasonable belief of the person filing notifiction, both es­ tablishes an objective standard and unambiguously calls for its application by the particular person filing notifi­ cation.

SECTION 801.90 TRANSACTIONS OR DEVICES FOR AVOIDANCE Section 801.90 prohibits transactions or devices entered into or employed for the purpose of avoiding the obliga­ tion to comply with the notification and waiting period requirements of the act. It provides that whenever the parties to an acquisition appear to have structured their transaction in order to avoid the requirements of the act, the Commission will apply the act and the rules to the substance rather than to the form of the transaction. RULES AND REGULATIONS The rule serves as a warning that the enforcement agencies may seek civil penalties or equitable relief under sec­ tion 7A(g) whenever it appears that the act’s reporting and waiting period requirements apply and have not been observed.

For purposes of determining wheth­ er transactions or devices for avoid­ ance have been employed, of obvious relevance will be the existence of rea­ sons other than avoidance for the manner in which a particular transac­ tion is consummated. Each situation, therefore, will be considered on its own merits.

Two examples illustrate the rule. Background Information to § 801.90 Because of the broad variety of transactions subject to the act and the unavoidable complexity of the act and rules, persons may be able to structure acquisitions to avoid the act and rules in ways not specifically contemplated by the act and rules. Even if a complex rule or set of rules could be construct­ ed to prohibit such maneuvers, a gen­ eral prohibition is preferable. Any transaction or sequence of transac­ tions that appear to have been devised in order to avoid reporting obligations will be disregarded, and the substance of the underlying transaction will detemine whether the act applies. This rule appears for the first time in the final rules.

P art 802 of the R ules SECTION 802.1 ACQUISITION OF GOODS OR REALTY IN THE ORDINARY COURSE OF BUSINESS Section 802.1 interprets and expands the exemption contained in section 7A(c)(l) which exempts “acquisition of goods or realty transferred in the ordi­ nary course of business.” Paragraph (a) of the rule extends the section 7A(c)(l) exemption to ac­ quisitions of voting securities, when the issuer’s assets consist solely of realty and other assets incidental to the ownership of realty. In such cases, acquisition of the voting securities of the realty corporation will be viewed as acquisition of the realty. This treat­ ment does not mean that every acqui­ sition of either real estate or the stock of real estate corporations is automati­ cally entitled to exemption under sec­ tion 7A(c)(l). The rule means only that if an acquisition of realty would be exempt under section 7A(c)(l), the exemption will not be lost simply be­ cause the realty purchase is accom­ plished by making a stock acquisition, so long as the issuer meets the limita­ tions set forth in the rule. Paragraph (b) of the rule provides that an acquisition shall not be exempt under section 7A(c)(l) if, as a result of the acquisition, the acquiring person will hold all or substantially all of the assets of an entity (or of an op­ erating division of an entity). None of the goods or realty to be acquired may be considered “transferred in the ordi­ nary course of business” if such a situ­ ation will arise. The only exceptions are entities described in paragraph (a) of the rule. All of the assets of such an entity—i.e., the realty and related assets—may be acquired in the ordi­ nary course of business, and such an acquisition may be exempt under sec­ tion 7A(c)(l). Likewise, all of the voting securities of such a corporation may be so acquired, since under para­ graph (a) such an acquisition will be treated as an acquisition of realty. Background Information to § 802.1 This rule appears for the first time in the final rules.

Paragraph (a) appears hecause the Commission determined that the ap­ plicability of this exemption should not depend upon the form of the ac­ quisition. At least from an antitrust standpoint, whether real estate is ac­ quired directly or by acquiring voting securities would seem to make no dif­ ference. Comments 83 and 1070 recom­ mended a provision resembling para­ graph (a).

Paragraph (b) excludes from the concept of ordinary course of business acquisitions of all or substantially all of the assets of an entity. A person which transfers all or substantially all of its assets normally does not do so in the ordinary course of business. Fur­ thermore, the Commission has deter­ mined that Congress did not intend to exempt such acquisitions under sec­ tion 7A(c)(l). See, e.g.„ 122 Congres­ sional Record S15417 (daily edition, September 8, 1976) (remarks of Sena­ tor Hart).

SECTION 802.6 FEDERAL AGENCY APPROVAL Section 7A(c)(6) exempts from the requirements of the act and rules-— * * * transactions specifically exempted from the antitrust laws by Federal statute if approved by a Federal agency, if copies of all information and documentary material filed with such agency are contemporane­ ously filed with the Federal Trade Commis­ sion and the Assistant Attorney General; And section 7A(c)(8) exempts— * * * transactions which require agency ap­ proval under section 4 of the Bank Holding Company Act of 1956 (12 U.S.C. 1843), sec­ tion 403 or 408(e) of the National Housing Act (12 U.S.C. 1726 and 1730a), or section 5 of the Home Owners’ Loan Act of 1933 (12 U.S.C. 1464), if copies of all information and documentary material filed with any such agency are contemporaneously filed with the Federal Trade Commission and the As­ sistant Attorney General at least 30 days prior to consummation of the proposed transaction.

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Section 802.6 identifies, for purposes of sections 7A (c)(6) and (c)(8), what is included in the term “information and documentary material.” It provides that a person availing itself of these exemptions must file one copy of all documents, application forms, and all other written submissions of any type whatsoever filed with another agency in connection with the acquisition. Al­ ternatively, the filing person may submit one copy of an index describing all such “information and documen­ tary material,” provided that the index is accompanied by a certification that any information or documents in­ dexed but not provided will be sup­ plied within 10 calendar days of a re­ quest by the Commission, Assistant Attorney General, or a delegated offi­ cial of either. The Federal Trade Com­ mission has delegated its power to make such requests to the Director Deputy Directors and Associate Direc­ tor for Premerger Notification of the Bureau of Competition, without power of redelegation. All materials (“infor­ mation and documentary material” or indices therof) must be submitted to the offices of the agencies designated in §803.10(0.

Section 802.53, which invokes the procedure set forth in this section re­ garding the index, is thus likewise sub­ ject to the same provisions regarding submission of the index, requests for the underlying documents, and delega­ tion of the power to make such re­ quests by the Federal Trade Commis­ sion.

B ackground I nform ation to § 1802.6 Under original § 802.75, a person that elected to file an index of infor­ mation and documentary material in lieu of copies of all such filings was re­ quired merely to certify that copies of such materials would be provided to the agencies upon request. The final rule adds the requirement that the filing person be prepared to submit the materials with 10 days. One comment (15) questioned whether the “contemporaneous filing” requirement to the act and rule ap­ plied to transactions for which agency approval had been sought, but not for­ mally conferred, prior to the effective date of the rules. The comment sug­ gested that the rule be amended to make clear that the “contemporane­ ous filing” provision does not apply to documents submitted to agencies before the effective date of the rules. An amendment of this sort does not appear necessary. The Commission in­ terprets the requirement of “contem­ poraneous” submissions to mean that material filed with another agency prior to the effective date of the rules need not be submitted to the Commis­ sion and Assistant Attorney General. The Commission construes the exemp- RULES AND REGULATIONS tion to apply -in such cases, even though the prior submission of the documents prevents contemporaneous filing and, consequently, no docu­ ments are filed.

For the same reason, if the initial submissions commencing proceedings that may lead to such agency approval were made before the effective date of the rules, the filing of supplemental submissions is not required, regardless of when such submissions are made. Such supplemental submissions would not be useful in the review process. However, new original filings with other agencies occurring after the ef­ fective date of the rules must of course be contemporaneously filed with the Federal Trade Commission and Assistant Attorney General in order to gain exemption under section 7A(c)(6).

SECTION 802.8 CERTAIN SUPERVISORY ACQUISITIONS Section 7A(c)(8) of the act specifical­ ly-exempts a limited class of acquistions subject by statute to the approv­ al of the Federal Home Loan Bank Board (“FHLBB”) or the Federal Sav­ ings and Loan Insurance Corporation (“FSLIC”) from the requirements of the act, provided that copies of the in­ formation and documentary material filed with the FHLBB or FSLIC are also contemporaneously filed with the Commission and the Assistant Attor­ ney General at least 30 days prior to consummation of the transaction. This rule completely exempts certain emer­ gency acquisitions of failing savings and loan associations (known as super­ visory acquisitions) from any filing re­ quirement if the agency whose approv­ al is required finds that approval of the transaction is necessary to prevent the probable failure of one of the in­ stitutions involved.

This specialized exemption has rel­ evance only to a limited class of trans­ actions-acquisitions and mergers of savings and loan associations which by statute require the approval of the FHLBB. There are several types of such transactions. The FHLBB has the statutory power under section 5 of the Home Owners’ Loan Act of 1933, 12 U.S.C. 1464* to approve or disap­ prove a merger, consolidation, or pur­ chase of the assets of a Federal sav­ ings and loan association. In its capac­ ity as operating head of the FSLIC, it also has the power under section 403 of the National Housing Act, 12 U.S.C. 1726, to approve or disapprove mergers of savings and loan associations in­ sured by the FSLIC. In the same ca­ pacity, the FHLBB exercises a similar power, under section 408(e) of the Na­ tional Housing Act, 12 U.S.C. 1730a(e), to approve or disapprove the acquisi­ tion of control by a savings and loan 33489 holding company of a savings and loan association.

B ackground Inform ation to § 802.8 This exemption was suggested by the FHLBB in its comment (1) on the original rules. The exemption for su­ pervisory acquisitions—those in which the FHLBB or the FSLIC approves (and often arranges) acquisition of a failing savings and loan association in order to save it from imminent fail­ ure—is based on the need for extreme­ ly speedy action in such cases. The 30day waiting period provided in section 7A(c)(8) might be too long, because the savings and loan association might fail before the period expires, result­ ing in the payment of savings account insurance claims by the FSLIC and the depletion of the corporation’s in­ surance reserves. This failure could have an adverse effect on other finan­ cial institutions and on the confidence of savers in such institutions. Further, the exemption from the waiting period requirement reflects a judgment that, as the FHLBB suggest­ ed, supervisory acquisitions are not likely to violate the antitrust laws since the disappearing association is always a failing institution. An exemption for supervisory merg­ ers and acquisitions is also consistent with other existing law and practice in the area of regulation of financial in­ stitutions. For example, in bank merg­ ers subject to section 18(c) of the Fed­ eral Deposit Insurant Company Act, 12 U.S.C. 1828(c) (exempt from report­ ing under this Act by reason of 7A(c)(7)), the Attorney General ordi­ narily has thirty days to review the competitive impact of a proposed transaction, but this period may be dispensed with if immediate action is necessary to prevent the probable fail­ ure of one of the institutions. 12 U.S.C. 1828(c)(4).

For these reasons the Commission accepted the suggestion of the FHLBB and exempted supervisory transac­ tions under the relevant statutory pro-^ visions from reporting and observing any waiting period at all. SECTION 802.9 ACQUISITIONS SOLELY FOR THE PURPOSE OF INVESTMENT This rule interprets the exemption contained in section 7A(c)(9) of the act. The rule provides that if an acqui­ sition is made solely for the purpose of investment, as defined in § 801.1(i)(l), the acquiring person need not observe the reporting and waiting period re­ quirements of the act, regardless of the dollar value of voting securities held or acquired, so long as its hold­ ings as a result of the acquisition will not exceed 10 percent of the issuer’s voting securities. The act limits the ex­ emption to acquisitions of voting secu­ rities.

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33490 RULES AND REGULATIONS If as a result of acquisition the acquiring person’s holdings would exceed 10 percent of the voting securi­ ties of the issuer, investment intent is no longer relevant, and the section 7A(c)(9) exemption can no longer apply.

Section 801.12 governs the calcula­ tion of percentages for this provision, as for all other provisions of the Act and rules.

B ackground Inform ation to § 802.9 The rule merely interprets the ex­ emption conferred by section 7A(c)(9). The F ederal R egister notice accom­ panying the revised rules stated: Because of the difficulty in establishing criteria for determining when voting securi­ ties are held “solely for the purpose of in­ vestment,” the Commission also invites com­ ment on the desirability of exempting from the reporting requirments all acquisitions of voting securities which do not result in the acquiring person holding more than 10 per­ cent of the outstanding voting securities of the issuer regardless of the acquiring per­ son’s intent.

42 FR at 39047 (Aug. 1, 1977). A number of comments (e.g., 1053, 1059, 1070, 1077, 1110, 1111) endorsed the suggestion that investment intent should be disregarded and that all ac­ quisitions below the 10 percent level should be exempt. The Commission declined to follow this course for two reasons. First, the language of section 7A(c)<9) clearly makes the acquiring person’s intentions a relevant consid­ eration. Second, such an exemption would, when large corporations are in­ volved, eliminate the $15 million re­ porting threshold of section 7A(a)(3)(B), contrary to congressional intent.

Original § 802.85 would have re­ quired an acquiring person to file a short statement at the time of pur­ chase in order to qualify for the sec­ tion 7A(c)<9) exemption. The state­ ment was to contain the names of the acquiring person and the issuer, the percentage of the latter’s voting secu­ rities held before and after the acqui­ sition, and a declaration that the voting securities would be held solely for the purpose of investment. A number of comments (e.g., 63, 89, 105, 112, 115, 120) questioned the Commis­ sion's legal authority to require such a statement. The revised rules did not contain any similar filing requirement, and none has been included in the final rules. The principal result of re­ quiring such statements would have been to disclose holdings of less than 10 percent of the shares of an issuer, and in general holdings of 5 percent or more will be disclosed in any event by the filing of a schedule 13D with the SEC. The Commission believes that it has the authority to insert such a re­ quirement at a later date, should it appear necessary to monitor compli­ ance with section 7A(c)(9) more close­ ly.For further information, see the definition of “solely for investment purpose,” § 801.1(i)(l), and its State­ ment of Basis and Purpose. SECTION 802.10 STOCK DIVIDENDS AND SPLITS Section 7A(c)<10) exempts Acquisitions of voting securities, if, as a result of such acquisition, the voting securi­ ties acquired do not increase, directly or in­ directly, the acquiring person’s per centum share of outstanding voting securities of the issuer * * *.

This exemption was designed to apply to two common types of stock acquisitions: Those resulting from stock splits and pro rata stock divi­ dends. Section 802.10 makes this ex­ plicit.

B ackground Inform ation to § 802.10 Neither of the two types of acquisi­ tions exempted by the rule increases the holder’s ability to influence man­ agement decisions vis-a-vis other shareholders, even though, under cer­ tain circumstances, these acquisitions may increase the market value of that person’s stock holdings. Original §802.90 exempted only the two types of aquisitions exempted by the final rule. In response to comment 63, revised §802.10 also exempted ac­ quisitions of voting securities “pursu­ ant to an issue of new shares offered proportionately to all shareholders.” The revised rule generated no com­ ments. However, this provision was de­ leted from the final rule because it ap­ peared to exceed the criterion of sec­ tion 7A(cX10). The fact that a new issue of voting securities is offered proportionally to all shareholders does not insure that the offer will be ac­ cepted (or accepted proportionally) by all shareholders. Thus, acquisitions which result from such an offering may increase the acquiring person’s share of the outstanding voting securi­ ties of the issuer. Accordingly, the Commission determined to eliminate that portion of the revised exemption. SECTION 802.20 MINIMUM DOLLAR VALUE This rule exempts certain acquisi­ tions as a result of which the acquir­ ing person would hold 15 percent or more of the voting securities or 15 per­ cent or more of the assets of the ac­ quired person, but the aggregate total amount of voting securities and assets so held will be $15 million or less (i.e., the 15-percent test of section 7A(a)(3XA) will be satisfied, but the $15 million test of section 7A(a)(3)(B) will not). The rule exempts acquisi­ tions as a result of which the acquir­ ing person would not hold either (a) assets of the acquired person valued at more than $10 million, or (b) voting se­ curities conferring control of an issuer which, together with all entities that it controls, has annual net sales or total assets of $10 million or more. B ackground Inform ation to § 802.20 The purpose of this rule is to elimi­ nate reporting and waiting period re­ quirements with respect to certain rel­ atively small acquisitions that are clearly reportable under the act. For example, if a $100 million person were to make an acquisition of assets from a $10 million person, the transfer of as little as 15 percent of the assets of that person, worth as little as $1.5 mil­ lion, would be subject to a reporting requirement. Further, because per­ centage holdings of voting securities are calculated with reference only to the issuer (see § 801.12(a)), potentially some even smaller acquisitions of voting securities may, by reason of sec­ tion 7A(a)(3)(A), be reportable. For ex­ ample, if the same $100 million person were to acquire 15 percent of the voting securities of an entity included within the $10 million acquired person, that transaction would be re­ portable but for this rule, regardless of the size of the entity. It is clear from the language of the act that Congress did not intend to limit the coverage of the act to large acquisitions: instead, the act expressly applies to transactions between large paKies, including some relatively small acquisitions.

Nevertheless, the Commission be­ lieves that certain relatively small transactions (frequently involving only a portion of the stock or assets of the acquired person) that might be re­ portable under the act are sufficiently unlikely to have a significant anticom­ petitive impact that imposition of the act’s requirements would not repre­ sent an appropriate use of public re­ sources.

These transactions are exempted by §802.20. As with any other exemption rule, of course, either agency may challenge an acquisition under a substantive antitrust law, not­ withstanding exemption from section 7A. See section 7A(i).

Original § 802.40 and the revised and final versions of §802.20 all exempt asset acquisitions as a result of which the acquiring person will not hold assets of the acquired person valued at more than $10 million.

The original version also would have exempted acquisitions as a result of which the acquiring person would not hold voting securities of the acquired person valued at more than $10 mil­ lion, so long as the transaction did not confer control of any issuer. Several comments (e.g., 45, 81, 120) pointed out that, as long as that provision placed no limitation on the size of the FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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issuer, reporting requirements might still extend to transactions which con­ ferred control of issuers of de minimis size. In response, the revised rule exempted all acquisitions of voting se­ curities valued at less than $10 million which did not confer control of an issuer with annual net sales or total assets of $10 million or more. Acquisi­ tions of ^voting securities valued at more than $10 million were not exempt under the revised rule, regard­ less of whether such acquistions con­ ferred control of an issuer. In the final rule, the exemption does not depend on the value of the voting securities, although the rule does not apply (as neither of the earlier ver­ sions applied) to an acquisition as a result of which the acquiring person will hold voting securities of the ac­ quired person valued at more than $15 million. (If such voting securities are valued at more than $15 million, sec­ tion 7A(a)(3)(B) is satisfied, and § 802.20 is inapplicable.) If such voting securities are valued at $15 million or less, the final rule exempts the acqui­ sition unless it will confer control of an issuer which (together with any en­ tities which that issuer controls) has annual net sales or total assets of $10 million or more.

In addition, while the revised version of § 802.20 did not apply to the forma­ tion of joint ventures (see comment 1059), the final version treats acquisi­ tions in connection with the formation of joint venture or other corporations in the same way that it does all other acquisitions. In light of the changes in §801.40 which result in similar treat­ ment for joint venture and other cor­ porations, the distinction in revised § 802.20 no longer seemed appropriate. Under the final rule, a person which, in a transaction forming any corpora­ tion, acquires sufficient voting securi­ ties of the newly formed corporation to require reporting under the act may take advantage of the exemption in §802.20 if it applies. Thus if three or more (but fewer than seven) persons, each having $100 million or more in assets or sales, form a joint venture corporation and acquire equal amounts of its stock, and if the assets of that corporation, as measured by §801.40(c), are $10 million or more, this rule would apply. Section 801.40 would require each acquiring person to report its acquisition of voting securi­ ties of the newly formed corporation, because each person would hold more than 15 percent of the shares of an entity with total assets of $10 million or more. (If there were seven or more persons acquiring equal shares no one person would hold as much as 15 per­ cent.) However, under § 802.20, if none of the acquiring persons would be ac­ quiring voting securities valued in excess of $15 million and since none of RULES AND REGULATIONS the acquiring persons would obtain control of an issuer of $10 million size, each person’s acquisition would be exempt under § 802.20. If any one person were acquiring voting securities valued in excess of $15 million, or if any one (or two, if there were only two) of the acquiring persons were ob­ taining control of this issuer, each such person’s acquisition would not be exempt under §802.20, although the acquisitions of the other persons might be. See the Statement of Basis and Purpose to § 801.40. One comment on the original rule (95) pointed out that the rule would permit acquisition of 25 percent of the stock of a $40 million company or 15 percent of a $66 million company. That is not technically correct, since the amount of stock that may be pur­ chased without reporting is deter­ mined by the value of the stock ac­ quired, not by the size of the compa­ ny, although the value of the stock may be related to the value of the company’s assets. (If it is assumed that the aggregate value of a compa­ ny’s outstanding shares is equal to its total assets, then the final rule could permit acquisition of as much as 37.5 percent of a $40 million company, or 22.7 percent of a $66 million company, or 49.9 percent of a $30 million compa­ ny; any greater percentage would in each case result in a holding of stock valued in excess of $15 million, and the exemption would not apply.) That comment questioned the wisdom of exempting such transactions without a detailed study of their frequency and effect. The Commission did not believe it appropriate to impose reporting ob­ ligations and to expend scarce law en­ forcement resources on relatively small stock acquisitions, since the benefit to the public is less likely to be as significant in these situations. While the thrust of this comment may have been that the exemption had been extended to inappropriately large transactions, it did not suggest an al­ ternative means of distinguishing rela­ tively small acquisitions from those that may have a more substantial impact upon a significant amount of commerce. After the effective date of these rules, the Commission staff will continue to monitor mergers and ac­ quisitions brought to their attention by members of the public, reports in the trade press and other sources. If it appears from this experience that the balance between administrative cost and the benefits of enforcement should be shifted because the exemp­ tions in § 802.20 are unduly broad, the Commission will consider narrowing them.

Comment suggested that § 802.20 should exempt all transaction involving less than $15 million worth of stock or assets, in order to eliminate 33491 the “anomaly” of reaching very small transactions. The Commission believes that, if Congress had intended such a result, the act could easily have been worded so as to achieve it. The fact that the act contains an alternative percentage test in section 7A(a)(3)(A) and dollar test in section 7A(a)(3)(B) indicates a clear congressional inten­ tion to ieach at least some acquisitions that satisfiy only the percentage test. Adoption of this suggestion thus seems inappropriate.

Comment 1061 suggested that if a person containing an institutional in­ vestor holds a noncontrolling stock in­ terest in another person, the former should be permitted to purchase up to $10 million of the assets of the latter without reporting. The rationale un­ derlying the comment apparently was that a small acquisition of assets does not gain additional significance by reason of the acquiring person’s hold­ ing of the seller’s voting securities for investment. Section 801.15(b) of the final rules adopts a similar procedure, but extends it to all acquisitions of voting securities exempt under section 7A(c)(9) or § 802.64, so long as the limi­ tations of those respective exemptions are not exceeded.

Finally, comment 1075 suggested in­ creasing the $10 million coverage threshold in the rule for capital-inten­ sive industries, on the theory that small acquisitions in such industries are less likely to have an impact on competition than in less capital-inten­ sive industries. The comment did not, however, propose a means of imple­ menting this suggestion, and the Com­ mission regards it as unworkable. It is also unclear whether the premise un­ derlying the suggestion is necessarily correct, and the comment offered no factual support for it. The difficulty of generalizing about the impact of merg­ ers and acquisitions upon competition suggests the inadvisability of eliminat­ ing reporting requirements as a result of similar generalizations about whether an industry is “capital-inten­ sive.”

SECTION 802.21 ACQUISITIONS OF VOTING SECURITES NOT MEETING OR EX­ CEEDING GREATER NOTIFICATION THRESHOLD In general, if a person has previously complied with the act, § 802.21 exempts for a period of 5 years addi­ tional acquisitions of the voting securi­ ties of the same acquired person, so long as the acquiring person’s holdings do not meet or exceed the next higher “notification threshold.” The rule also replaces §802.22 of the revised rules and permits the acquiring person, if its holdings decrease below the level for which it originally filed notification, to meet or exceed that level again within 5 years without filing notifica- FEDERAL REGISTER, VOL. 43, NO . 147— M O N D AY, JULY 31, 1978

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33492 tion. The rule does not exempt any ac­ quisitions of assets.

Under the act, every acquisition after which the acquiring person would hold more than 15 percent or $15 million of the stock of the ac­ quired person is potentially reporta­ ble. Section 801.13 interprets the phrase “as a result of” in section 7A(a)(3), the size-of-transaction test for application of the act. Under §801.13, every acquisition after which the acquiring person would hold more than 15 percent or $15 million of the stock of the acquired person satisfies this criterion, rather than only acqui­ sitions that first raise the acquiring person’s holdings to the 15 percent or $15 million level. See the statement of basis and purpose to that rule. Section 802.21, in substance, exempts all acquisitions above the 15 percent or $15 million level except those meeting or exceeding notifica­ tion thresholds or those occurring more than 5 years after the earlier no­ tification.

The rule conditions the exemption upon three requirements, set forth in paragraphs (a), (b), and (c). First, the acquiring person (in the acquisition for which the exemption is being con­ sidered) must have filed notification with respect to an earlier acquisition of the same issuer’s stock, and all other persons required by the rules to file with respect to the earlier acquisi­ tion must also have done so. Second, the waiting period with respect to the earlier acquisition must have expired or been terminated, and the expiration or termination must have occurred within 5 years of the acquisition being considered for exemption. Finally, the acquisition must not increase the hold­ ings of the acquiring person to meet or exceed a notification threshold greater than the greatest threshold surpassed in the earlier acquisition. The term “notification threshold” is defined § 801.1(h). In brief, the four thresholds are (1) the 15 percent or $15 million level of section 7A(a)(3); (2) 15 percent of the outstanding voting securities of the issuer, if valued at more than $15 million; (3) 25 percent of the outstanding voting se­ curities of the issuer; and (4) 50 per­ cent of the outstanding voting securi­ ties of the issuer. See also the state­ ment of basis and purpose to § 801.1(h)(1). Thus, as the example to §802.21 illustrate, after complying with the act for an acquisition of 15 percent of the stock of an issuer, the acquiring person can increase its hold­ ings to any amount below 25 percent of the stock within 5 years of the end of the earlier waiting period without again filing notification and waiting; after acquiring 25 percent, up to 50 percent within 5 years, and so on. Once a person holds 50 percent or RULES AND REGULATIONS more of the outstanding voting securi­ ties of an issuer, further acquisitions are exempt under section 7A(c)(3). Note that under § 803.7, the earlier notification entitles the reporting person to meet or exceed only those notification thresholds with respect to which the earlier notification was filed, and that were actually achieved within a period of 1 year. After 1 year the notification expires, and though the person may use this rule to raise its holdings to just under the next greatest threshold, it may not meet or exceed a higher threshold without again filing notification. See the exam­ ple to § 803.7.

Example No. 5 to the rule illustrates the other feature of the rule: That if for some reason the acquiring person reduces its holdings below a threshold for which it filed notification and waited, it can (within 5 years of the expiration of the waiting period) cross the same notification threshold again without filing and waiting. Of course, after recrossing the threshold, it may acquire additional shares so long as it does not meet or exceed the next threshold.

Since acquisitions of assets are not exempted by the rule, any acquisition of assets that satisfies the three tests of section 7A(a) and is not exempted by the act or rules, is reportable. In particular, any acquisition as a result of which the acquiring person would hold 15 percent or $15 million of the assets of the acquired person is repor­ table, even though the reporting person may have previously filed noti­ fication with respect to an acquisition of assets from the same person. Note, however, that under § 801.13(b) assets cease to be assets of the acquired person, and become assets of the ac­ quiring person, after 180 days. B ackground Inform ation to § 802.21 The language of the act indicates that Congress contemplated agency review of stock acquisitions not only at the 15 percent or $15 million level, but also at additional, higher levels of ownership. Further review is desirable because holdings that may be innoc­ uous at low levels may pose antitrust concerns at higher levels. Section 801.13 construes the phrase “as a result of” to^ fulfill this congressional purpose; see the statement of basis and purpose to that rule. However, this principle would not justify notification and a waiting period prior to every acquisition above the 15 percent or $15 million level. The delay and expense of repeated fil­ ings would be extremely burdensome to reporting persons and would pres­ ent too substantial an administrative burden for the enforcement agencies. Nor would such notifications serve any enforcement purpose.

Percentage .holdings varying by a few percentage points will in most cases have equiva­ lent antitrust significance, and period­ ic review at the levels of the notifica­ tion thresholds, or within the timing constraints of § 802.21, should be suffi­ cient. The rule insures that the agen­ cies learn pf appreciable increases in holdings by imposing the reporting re­ quirements at the prescribed notifica­ tion thresholds, and insures that the agencies learn of changed circum­ stances by imposing the reporting re­ quirement in any event after 5 years. Of course, in a particular case an ac­ quisition exempted by the rule may prove to have antitrust significance, and the fact that the acquisition was exempt under this (or any other) rule does not preclude either agency from challenging the acquisition. See sec­ tion 7A(i).

The reasons why these precise own­ ership levels were selected as notifica­ tion thresholds are detailed in the statement of basis and purpose to § 801.1(h). The 5-year limitation is dis­ cussed in connection with paragraph (b) of this rule.

The final version of the rule reflects important modifications both from re­ vised § § 802.21 and 802.22 and from re­ lated provisions in the original rules. The definition of “notification thresholds,” which appeared in the re­ vised rules as § 802.21(a), has been transferred to § 801.1(h) because the term proves useful in other rules as well.

Paragraph (a) of the rule is un­ changed from revised § 802.21(b)(1). The Commission rejected suggestions in the comments (e.g., 74, 77, 120) that submissions under the existing FTC premerger notification program should satisfy the requirement of a prior report, or that the requirement should be eliminated. The existing program’s report form is not as com­ prehensive or detailed as the notifica­ tion and report form, and the breadth of the exemption conferred by the rule warrants the more penetrating initial inquiry.

Paragraph (b), however, significant­ ly alters revised § 802.21(b)(2). The final rule inserts the requirement that the waiting period for the earlier ac­ quisition must have expired or been terminated in order to insure that the agencies have completed their review of the competitive consequences of the acquisition. In addition, by measuring the time period from the date of expi­ ration or termination of the waiting period, rather than the date of filing notification, the time period for ex­ emption is a full 5 years. Paragraph (b) of the final rule also lengthens the 180-day period con­ tained in the revised rule into a 5-year period during which subsequent acqui­ sitions may qualify for the exemption. FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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RULES AND REGULATIONS 33493 Numerous comments had protested the 180-day restriction, urging various­ ly 1 year (1053, 1090, 1091, 110.1), 2 years (1044, 1077, 1090), 5 years (1059) or its deletion altogether (1086). The comments argued that changed busi­ ness activities of the parties would not change the Government’s enforce­ ment intentions often enough to justi­ fy the burden of compliance with the act at such brief intervals. The. com­ ment of the Securities and Exchange Commission (1058) had also expressed concern that 180 days from the date of filing might not be long enough to avoid conflict with proposed SEC rule 14d-6, which would require tender of­ ferors to pay the tender offer price for all purchases within 40 dg,ys after the close of the offer. The final rule sets the time period at 5 years because, in addition to the reasons expressed by the comments, the Bureau of the Census undertakes its comprehensive economic censuses every 5 years, so that by the time the exemption ceases to be available the agencies will have new census data to compares with the data submitted.

Final § 802.21(c) replacess revised §802.22, which exempted acquisitions recrossing notification thresholds, by rewording revised § 802.21(b)(3). In­ stead of prohibiting attainment of any notification threshold, as did the re­ vised rule, the final version of para­ graph (c) prohibits only reaching or exceeding a greater notification threshold than the highest one at­ tained in connection with the earlier notification. Thus, any number of ac­ quisitions raising or lowering holdings across a notification threshold earlier attained are fully exempt, and § 802.22 has been deleted. The comments on § 802.22, which almost exclusively rec­ ommended lengthening the time period for the exemption (1059, 1077, 1086, 1090, 1091), have been acknowl­ edged by combining the rule with the 5-year period adopted for § 802.21. The final version of § 802.21(c) also accomodates the insertion of §803.7 into the final rules. Its phrasing, “the greatest notification threshold met or exceeded in the earlier acquisition” means the greatest threshold met or exceeded within the 1-year period before the notification expires under § 803.7. See the example to that rule. Original § 802.45 would have adopted a different exemption scheme for ac­ quisitions subsequent to compliance with the act. It would have allowed in­ cremental increases of 5 percent of an issuer’s voting securities, without time limit, above the holdings reflected by the original notification, provided that the incremental acquisition would not confer control of the issuer. (“Con­ trol” in the original rules was defined to mean control in fact, regardless of the percentage held.) Several com­ ments on the revised rule (1044, 1059, 1077, 1090) recommended adoption of both schemes: Permitting acquisitions up to thresholds within a time period, as the final rule does, and incremental acquisitions of a de minimis percent­ age above the last notification filed, without time limit. Comment 1059, for example, argued that the two exemp­ tions served different needs, but that both were desirable. The final rules do not provide for a de minimis exemp­ tion without time limit, partly because of the lengthening of the time period for the exemption to 5 years. De mini­ mis incremental acquisitions that cross a notification threshold are thought to warrant examination for the rea­ sons underlying the notificatibn thresholds, while those occurring more than 5 years after the waiting period from the previous filing do not merit exemption because the business­ es of the acquiring and acquired per­ sons, the market or the product may have changed.

The original rules also contained a provision, §802.50, allowing a “short report” in place of the notification and report form for acquisitions be­ tween the same parties within 1 year of filing notification with respect to the earlier acquisition. The final rules omit this procedure since §802.21 em­ bodies a more comprehensive exemp­ tion.

Finally, the rules adopt no exemp­ tion for multiple acquisitions of assets by the same acquiring person from the same acquired person. Since one group of assets does not necessarily bear any relation to another, the competitive significance of each acquisition of assets is unique and must be evaluated on its own merits. Comment 63 sup­ ported this view. In any event, the problem is much less acute since, while voting securities potentially remain voting securities of the ac­ quired person indefinitely, acquired assets become assets of the acquiring person after days.

See § 801.13(b)(2).

SECTION 802.23 AMENDED OR RENEWED TENDER OFFERS Section 802.23 modifies Ihe notifica­ tion and waiting period requirements of the act under certain circumstances when a tender offeror amends or renews a tender offer with respect to which it previously filed notification. Except in three situations, the rule fully exempts amended or renewed tender offers from any notification or waiting period requirement under the act. The rule does not affect reporting and waiting period obligations with re­ spect to the original offer. If none of the three exceptions applies, the ac­ quiring person is free to amend or renew its tender offer, and to consum­ mate the acquisition, for up to one year after the expiration of the wait­ ing period, in accordance with the pro­ visions of section 803.7. The rule applies only when the amended or renewed tender offer seeks to acquire voting securities of the same issuer as did the original tender offer. An amended tender offer is one that alters only the terms of the offer; a renewed tender offer is one that reopens the time period for offer­ ees to tender their stock. An offer may be both amended and renewed. In order for the rule to apply, the. tender offeror must have filed notifi­ cation with respect to the original offer. The rule applies whether or not the acquired person has filed notifica­ tion, since under section 801.30(b)(2) the acquired person need not file until fifteen (or, in the case of cash tender offers, 10) days after filing by the ac­ quiring person.

Paragraphs (a), (b), and (c) describe the three instances in which the rule grants only a partial exemption. First, under paragraph (a), if the number of voting securities the offeror seeks to acquire pursuant to an amended offer will meet or exceed a greater notifica­ tion threshold than earlier reported, the offeror must complete and file a new Notification and Report Form, and a new waiting period will com­ mence. The acquired person, however, is required to file only once. If the ac­ quired person already filed notifica­ tion in response to the offeror’s first filing, its obligation is discharged (unless it receives a request for addi­ tional information under section 7A(e) and section 803.20). If the acquired person has not yet filed notification by the time of the second notification by the offeror, the acquired person must nevertheless file no later than the time it becomes due in respose to the first notification. The term “noti­ fication threshold” is defined in sec­ tion 801.1(h). See also section 802.21. Second, under paragaph (b), if a non-cash tender offer is amended to become a cash tender offer, the of­ feror must file a copy of the amended offer with the enforcement agencies, in the manner prescibed in section 803.10(c). The waiting period will expire 15 days after that filing, or 30 days after the original filing, which­ ever is earlier. Since the expiration date is determined by section 803.10(b), it is subject to extension by requests to the acquiring person for additional information or documen­ tary material under section 7A(e) and section 803.20'or by court order under section 7A(g)(2) and to early termina­ tion under section 7A(b)(2) and section 803.11. When a non-cash tender offer is amended to become a cash tender offer, the acquired person's obligations are not affected. It must file no later than the time determined by the FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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33494 tender offeror’.s first notification, and remains subject to a second request, although the waiting period is not thereby extended.

Third, if a cash tender offer is amended to become a non-cash tender offer, the offeror again must file a copy of the amended offer with the enforcement agencies in the manner specified by section 803.10(c). The waiting period will expire 15 days after that filing, or 30 days after the origi­ nal filing, whichever is later. Again, the obligation of the acquired person to file notification is unaffected and is determined by the date of the original notification, and both parties remain subject to second requests. In each of the latter two instances, the rule may be applicable even though the waiting period begun by the original offer has expired or been terminated.

If a waiting period is to be extended by a request for additional informa­ tion or documentary material under section 7A(e) and section 803.20, the. length of the extension is determined by the character of the tender offer at the time the response is received—that is, ten days if a cash tender offer, 20 days if a non-cash tender offer. B ackground I nform ation to § 802.23 The purpose of this rule is to mini­ mize the reporting and waiting period obligations for amended or renewed tender offers, while still ensuring that the agencies receive sufficient infor­ mation and advance notice to fulfill the purposes of the act. If a tender offer is amended or re­ newed under circumstances other than those described in the three para­ graphs of the rule, the amendment or the renewal is unlikely to have com- .petitive consequences appreciably dif­ ferent from those of the original offer, as to which notification has already been filed. The agencies’ decision whether to challenge the acquisition will probably not be affected by the amendment or renewal. Accordingly, the rule exempts such amendments and renewals altogether. Amended and renewed offers de­ scribed in paragraph (a), however, present different concerns. Since a higher notification threshold will be met or exceeded, a new notification and a new waiting period are required just as they would be for sequential acquisitions under §802.21. In such cases, the increased holdings warrant fresh scrutiny by the agencies. The ac­ quiring person’s Notification and Report Form is necessary to inform the agencies of the amended acquisi­ tion. However, the rule exempts the acquired person from filing again since its Form will contain adequately cur­ rent information. If the amendment is made before the acquired person has RULES AND REGULATIONS filed notification in response to the original tender offer, it must still file that notification.

If a non-cash tender offer is amend­ ed to become a cash tender offer, the acquiring person would be subject to a waiting period no longer than 15 days (before any extension), simply by filing a new notification. Paragraph (b) of the rule further relaxes the waiting period, by permitting it to expire at the end of the original 30 day period if that is earlier. The earli­ er expiration date is practicable be­ cause the agencies, upon receipt of no­ tification for the original non-cash tender offer, would have had 30 days to decide whether to challenge the ac­ quisition, and because the change in the nature of the consideration should not unduly complicate the agencies’ review of the acquisition. The copy of the tender offer is needed to inform the agencies of the amendment, while the acquired person’s re-filing would be redundant and is eliminated. When a cash tender offer is amend­ ed to become a non-cash tender offer, the waiting period expires 15 days from the filing of the amended tender offer, or 30 days from the original filing, whichever is later, Again, since the agencies’ review of the acquisition should be completed within 30 days from the original filing, the rule af­ fords the agencies adequate time. Again, the copy of the tender offer is needed to inform the agencies of the amendment, but the acquired person is not required to file again. Note that for non-cash tender offers, § 801.31 facilitates the agencies’ review by ensuring that any significant hold­ ings resulting from acquisitions of voting securities by offerees of the tender offer will be separately reporta­ ble.

By minimizing the notification and waiting period requirements, the rule minimizes multiple reporting in the event that a tender offeror changes the terms of its offer in response to competing offers by other prospective purchasers.

The rule first appeared as revised § 802.23, which had several limitations not present in the final rule. First, revised § 802.23(a) would have required the amended or renewed tender offer to be consummated within 180 days of the filing of the earlier notification. This period has been lengthened to the 1-year period of §803.7. The change should resolve the concern of the SEC expressed in comment 1058. The SEC had feared that the 180-day period might not be long enough for the tender offeror to comply with state laws delaying tender offerors, and with proposed SEC rule 14d-6, which would integrate with the tender offer certain pur­ chases of securities within 40 days after its termination. Comments 1086 and 1090 also criticized the 180-day limit.

Second, revised § 802.23(b) would not have exempted the amended offer if it offered as consideration voting securi­ ties that had not been offered as con­ sideration in the original offer. This restriction was deleted because §801.31 assures that the agencies will learn of any significant holding result­ ing from acquisition of voting securi­ ties by offerees of the tender offer. Comment 1090 noted this point in sub­ stance.

SECTION 802.30 INTRA-PERSON TRANSACTIONS This rule provides generally that whenever the acquiring and acquired persons are (or, when a wholly owned subsidiary is being formed, will be) the same person, the acquisition is exempt from the reporting and waiting period requirements of the act. Acquiring persons are defined by § 801.2(a), and for this purpose acquired persons are identified by § 801.2(b). Acquisitions of both assets and voting securities are exempt under the rule. Note that for voting securities, the acquired person is the person within which the issuer whose voting securities are to be ac­ quired is included, and is not the person from which the voting securi­ ties are to be acquired (unless they are the same). See example No. 1 to § 801.2(b).

Thus, example No. 1 to this rule il­ lustrates that any transaction between entities included within the same person (save for an exception noted below) is exempt. Example No. 2 illus­ trates that the formation of a new wholly owned subsidiary is exempt. And example No. 4 illustrates that a corporation’s repurchase of its own stock is exempt. Redemptions and re­ tirements of shares are likewise exempt. In each of these cases the ac­ quiring and acquired persons are the same.

The rule contains two exceptions. First, the formation of a new corpora­ tion will not be exempt under the rule if the voting securities of the new cor­ poration will be held by more than one person. Example No. 5 to the rule il­ lustrates this exception. Second, the acquiring and acquired persons must be included within the same person be­ cause of holdings of voting securities. The definition of control, § 801.1(b), determines whether an entity is in­ cluded within a person. If an entity is included within the person under the other test of control, i.e., because a contract permits the person to name a majority of the board of directors of that entity, acquisition of the shares of that entity is not exempt under this rule. Example No. 3 illustrates this point.

FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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Background Information to § 802.30 Section 7A(c)(3) exempts: acquisitions of voting securities of an issuer at least 50 per centum of the voting securi­ ties of which are owned by the acquiring person prior to such acquisition * * *. This exemption expresses a Congres­ sional determination that such acqui­ sitions are unlikely to raise questions under the antitrust laws that were not raised by acquisition of the 50- percent interest. The rule extends the exemp­ tion to other situations to which the same rationale applies: transfers of assets between subsidiaries of the same parent, formations of new wholly owned subsidiaries, repur­ chases of stock by a corporation, and the like.

The two exceptions to the rule deny the exemption because this rationale does not apply. The contracts underly­ ing contractual control may be less permanent than controlling ownership interests. In addition, termination of a contractual control relationship will generally not give rise to a reporting requirement, whereas transfer of a controlling block of stock will. Com­ ment 1061 questioned withholding the exemption for such situations, but the final rule adheres to the position. The formation of a joint venture or other corporation having two or more share­ holders is also excluded, because the combination of two different persons is an event posing precisely the kinds of antitrust concerns that the act dir­ ects the agencies to review. The final version of the rule reph­ rases the previous versions, revised §802.32 and original §802.25. The re­ vised rule used somewhat cumbersome language to exempt the formation of a subsidiary, which is achieved explicitly in the final rule. The final rule states that the acquiring and acquired per­ sons are or will be the same person be­ cause the new corporation may not yet exist.

Since the reworded final rule exempts repurchases and redemptions, the final rules omit revised section 802.30 as superfluous.

Revised section 802.32 had excluded the formation of all joint ventures, but in response to comment 1070 the final rule makes clear that joint ventures involving the participation of only one person are exempt under the rule. A joint venture between subsidiaries of the same corporation would be exempt.

Comment 25 suggested that pur­ chases of a corporation’s shares should be exempt not only if made by the cor­ poration for its own account, but also if made for the account, of an employ­ ee’s stock or pension plan. Under final section 801.2(a), the acquiring person is the person that as a result of the ac­ quisition will hold the voting securi- RULES AND REGULATIONS ties, and section 801.1(c) defines “hold” to mean beneficial ownership. Therefore, when the corporation ac­ quires shares “for the account of” an employees’ stock or pension plan, the acquisition would be exempt under this rule if the corporation becomes the beneficial owner, but would not be exempt under this rule if, for example, a pension trust became the beneficial owner. See section 801.1(c)(3). The latter acquisition may, however, be exempt under section 7A(c)(9) or under section 802.64. Likewise, the definition of “hold” answers the inqui­ ry in comment 1058, because when other persons act on behalf of a corpo­ ration to repurchase its own stock, the corporation becomes the beneficial owner and the acquisitions are exempt under this rule.

SECTION 802.31 ACQUISITION OF CONVERTIBLE VOTING SECURITIES Section 802.31 exempts the acquisi­ tion of convertible voting securities from the requirements of the act. The term “convertible voting security” is defined in section 801.1(f)(2). Note that section 801.32 specifies that the conversion of convertible voting secu­ rities is a potentially reportable acqui­ sition.

Background Information to section 802.31 Revised section 802.31 exempted from the requirements of the act the conversion of convertible voting secu­ rities into voting securities presently entitled to vote. Under the revised rules, the reporting '•requirements would have attached when the conver­ tibles were acquired. Under the final rules, however, the acquisition of voting securities that results from the conversion of convertibles is the event requiring the holder to report. The ac­ quisition of convertible votion securi­ ties is exempt. For a full explanation of the rationale for the exemption, see the Statement of Basis and Purpose to section 801.1(f)(2); see also sections 801.1(f)(3) and 801.32. SECTION 802.40 EXEMPT FORMATION OF JOINT VENTURE OR OTHER CORPORATIONS Section 802.40 exempts from the re­ quirements of the act the acquisition of voting securities in connection with the formation of a joint venture or other corporation if the newly-formed entity will be not for profit within the meaning of sections 501(c) (l)-(4), (6)- (15), (17)-(20) or (d) of the Internal Revenue Code.

Background Information to section 802.40 Section 802.40 exempts the forma­ tion of any corporation, whether or not termed a joint venture, that will 33495 be not for profit within the meaning of any of the cited sections of the In­ ternal Revenue Code (“Code”). The types of organizations thereby exempted include: Corporations cre­ ated by act of Congress and acting as instrumentalities of the United States, section 501(c)(1) of the Code; holding companies for otherwise tax-exempt organizations, section 501 (c)(2); reli­ gious, charitable, scientific, literary, or educational organizations that are not substantially dedicated to lobbying ef­ forts, section 501(c)(3); civic leagues or employee associations, section 501(c)(4); business leagues, chambers of commerce, real estate boards, boards of trade, or professional foot­ ball leagues, section 501(c)(6); recrea­ tion clubs, section 501(c)(7); fraternal lodges that provide insurance benefits to members or their dependents, sec­ tion 501(c)(8); employee beneficiary associations, section 501(c)(9); domes­ tic fraternal lodges that devote their net earnings to religious, charitable, scientific, literary, educational and fraternal purposes, section 501(c)(10); certain local teachers’ retirement fund associations, section 501(c)(ll); local benevolent life associations or other cooperative companies, if at least 85 percent of their income consists of amounts collected from members to meet losses and expenses, section 501(c)(12); cemeteries and burial soci­ eties operated solely for the benefit of their members, section 501(c)( 13); cer­ tain credit unions, section 501(c)(14); small mutual insurance (other than marine or life) companies or associ­ ations, section 501(c)(15);

certain trusts forming part of a plan providing for the payment of supplemental un­ employment compensation benefits, section 501(c)( 17); certain pension trusts funded solely by employee con­ tributions, section 501(c)(18); certain organizations of war veterans, section 501(0(19);

certain organizations formed as part of a qualified group legal services plan or plans, section 501(0(20); and certain religious and apostolic organizations, section 501(d). All these types of organizations are operated solely for the benefit of soci­ ety of some segment thereof, or for the benefit of a specific membership. They either are not usually engaged in commerce within the meaning of the act and rules or are specifically pro­ hibited from permitting any of their net earnings to inure to the benefit of any private shareholder or other indi­ vidual. In light of these characteris­ tics, it was considered unlikely that the formation of a joint venture or other corporation of one of these var­ ieties would violate the antitrust laws, and this exemption was thus provided. The formation of some species of or­ ganizations exempt from income taxes remains nonetheless subject to the re- FEDERAL REGISTER, VO L. 43, N O . 147— M O N D AY, JULY 31, 1978

Page 208

33496 quirements of the act and rules. Sec­ tion 501(c)(5) of the Code exempts “[1 labor, agricultural, or horticultural organizations,” and section 501(c)(16) provides that farmers’ cooperatives or­ ganized to finance crop operations of their members are tax-exempt even if they have capital stock that is owned by the associations or their members, pay dividends, and accumulate and maintain a reserve. Organizations taxexempt under these two sections of the Code—unlike organizations taxexempt under the other cited sections of the Code—often engage in activities that are in or significantly affect com­ merce. The tax-exempt status of these organizations does not insure that a combination of certain persons form­ ing such “joint venture or other corpo­ rations” will be free from antitrust concerns. In fact, the identity of the persons contributing to the formation of such organizations is essential to de­ termining whether the activities of the organizations so formed may be exempt from the antitrust laws under section 6 of the Clayton Act or under the Capper-Volstead Act, 7 U.S.C. sec­ tion 291. Since agricultural or horti­ cultural organizations and farmers’ cooperatives may exist in the corpo­ rate form and may be organized to produce and market goods or services, the fact that they are tax-exempt is not sufficient justification to exempt their formation from the requirements of the act and rules.

Revised §802.40 exempted the for­ mation of tax-exempt, nonprofit joint ventures from the requirements of the act. The F ederal R egister notice ac­ companying the revised rules invited comments identifying and discussing other types of joint ventures or other corporations that are unlikely to vio­ late the antitrust laws and should thus be exempted from the requirements of the act. It stated:

[T]he Commission would like to know in greater detail the reasons that formation of specific types of joint ventures might be un­ likely to violate the antitrust laws, as many of the comments have alleged. Given the ■ fact that some judgment concerning the possible anticompetitive impact of a joint venture must be made by the enforcement agencies at the time of its formation, the Commission specifically invites comments concerning appropriate tests that would prospectively distinguish ventures which might raise possible anticompetitive conse­ quences from those that are unlikely to do so.

The Commission has difficulty with the suggestions, made in a significant number of comments received in response to the origi­ nally proposed rules, that narrow exemp­ tions relating to specific types of joint ven­ tures in particular industries would be ap­ propriate. The Commission invites specific suggestions concerning principles of general application to broad classes of joint ven­ tures, regardless of the specific industry or particular purpose of the venture, which may serve to didtinguish those ventures RULES AND REGULATIONS raising little likelihood of antitrust prob­ lems. The Commission is not inclined to grant exemptions absent clear indication that they are warranted under the Act. Comments which do not attempt to relate suggested exemptions to the underlying purposes of the act are not likely to be help­ ful to the Commission.

(42 FR at 39044 (Aug. 1, 1977).) Despite this instruction, numerous comments persisted in urging indus­ try-specific exemptions.^See the State­ ment of Basis and Purpose to § 801.40. The Commission does not believe that the formation of a particular type of joint venture is less likely to be anti­ competitive simply because it is com­ monly used in a particular industry. Nothing revealed in the comments eliminates this concern. Other com­ ments suggested that “method of op­ eration” exemptions be introduced into the rules. These exemptions would have extended to the formation of joint ventures that would not market products or services outside the venture (e.g., 1027, 1059, 1068); to joint ventures organized to perform a single contract or organized for a lim­ ited time period (e.g., 1059, 1092, 1112, 1113); or to joint ventures with public policy goals (1050).

These limiting conditions, however, do not necessarily render the forma­ tion of such ventures unlikely to vio­ late the antitrust laws. Ventures that will not market manufactured prod­ ucts (or real estate or services) other than to their parents may in fact raise numerous anticompetitive problems, including market foreclosure and in­ creased entry barriers. Such effects are even more likely if the venturers maintain a customer-supplier relation­ ship prior to formation of the venture. A great many problems surround the suggested “single purpose, limited du­ ration” exemption. First, the distinc­ tion between a single project or single contract and some larger undertaking is necessarily artificial. A single con­ tract, for example, could call for un­ dertaking a project continuing over many years, or the production of a large number of units could be desig­ nated a single project. The “limited duration” criterion also is inherently vague and would introduce an unac­ ceptable level of subjectivity into the rule. It is not always clear whether a new entity will be permanent or tem­ porary, and what constitutes a limited period of time. Any period of time chosen to delineate such a “limited du­ ration” would necessarily be arbitrary. Moreover, the duration of a new entity might be limited at formation but ex­ tended thereafter: No reporting re­ quirement would have attached at for­ mation under this proposal, and none would have attached at extension. This would have created a large and improper loophole in the reporting scheme.

Finally, public policy motivation, evidenced perhaps by absence of profit (as opposed to tax-exempt status), is not a satisfactory safeguard. The mere absence of .profit, particularly in a sit­ uation in which a joint venture or other new corporation has a vertical relationship with its parents, simply may mean that the parents have elect­ ed to take their profits at a different level of operations. Moreover, these kinds of exemptions are unavailable in connection with acquisitions involving already existing corporations. Accord­ ingly, the proposals in these comments were rejected.

SECTION 802.41 JOINT VENTURE OR OTHER CORPORATIONS AT TIME OF FORMATION Section 802.41 exempts newly formed joint venture or other corpora­ tions from filing notification in con­ nection with their own formation. The exemption reaches only the transac­ tions involving formation and does not extend to subsequent acquisitions by or from the newly formed corporation. B ackground Inform ation to § 802.41 Since it is the combination of the persons that form the new entity (and not the new entity standing alone) that presents antitrust issues when a new corporation is formed, the Notifi­ cation and Report Forms submitted by the parents of the new corporation will provide the information necessary to evaluate the competitive impact of the combination. Any data relevant to the intended activities of the new entity would appear on the parents’ forms. The new entity would have no history and its report would provide no additional detail with respect to the consequences of its own formation. Original § 801.55(b) and revised §802.41 also provided that a newly formed joint venture (the acquired person in the formation transaction) need not file notification with respect to its formation. Final § 802.41 retains this exemption. The examples to the rule were revised and enlarged in the final version to make clear the distinc­ tion between formation transactions and subsequent transactions, as to which the new entity (or the person within which it is included) would be required to file notification. Whenever a joint venture or other corporation acquires assets or voting securities of another person or sells its own assets or stock—other than in connection with its formation—and the criteria of section 7A(a) are satisfied, it must comply with the reporting and waiting requirements of the act like any other acquiring or acquired person. No comments were received on this rule.

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SECTION 802.50 ACQUISITIONS OP FOR­ EIGN ASSETS OR OF VOTING SECURITIES OF A FOREIGN ISSUER BY UNITED STATES PERSONS This,rule exempts certain acquisi­ tions by United States persons of assets located outside the United States or of voting securities of a for­ eign issuer. It does not apply to acqui­ sitions by foreign persons, which are treated in § 802.51. The terms “United States person,” “United States issuer,” “foreign person” and “foreign issuer” are defined in § 801.1(e). Paragraph (a) of the rule governs asset acquisitidns. It exempts the ac­ quisition of assets located outside the United States to which no sales in or into the United States are attributa­ ble. It also exempts the acquisition of assets located outside the United States to which less than $10 million of sales in or into the United States were attributable during the acquired person’s most recent fiscal year. The exemption of a foreign assets acquisi­ tion by a United States person thus turns entirely upon the United States sales, if any, attributable to the assets to be held. It is of no consequence in this context whether the acquired person is a United States person or a foreign person.

The term “as a result of” the acqui­ sition is used in the sense described in § 801.13(b). In order to determine whether this exemption is applicable, therefore, the acquiring person must aggregate all assets of the acquired person it is acquiring in the present transaction and has acquired in the previous 180 calendar days. If all such assets together had $10 million or more in sales attributable to them in the most recent fiscal year, the exemp­ tion is not applicable, as indicated in example No. 2 to the paragraph. Paragraph (b) of the rule concerns voting securities. It exempts acquisi­ tions by United States persons of the voting securities of a foreign issuer unless that issuer (together with all entities it controls) holds assets locat­ ed in the United States (other than in­ vestment assets and securities of an­ other person) having an aggregate book value of $10 million or more, or made aggregate sales in or into the United States of $10 million or more in its most recent fiscal year. The term “investment assets? is defined in § 801.1(i)(2). The value of these types of United States assets held by a for­ eign issuer does not count toward the $10 million threshold above which the exemption does not apply. B ackground Inform ation to § 802.50 This rule, like its companion rule, §802.51, is intended to exempt several classes of transactions having only a limited nexus with United States com- RULES AND REGULATIONS merce. The commerce criterion of sec­ tion 7A(a)(l) requires only that either the acquiring or the acquired person be engaged in commerce or in any ac­ tivity affecting commerce. The act thus permits coverage of a great many transactions that have some or even predominant foreign aspects. This rule, like the other “foreign com­ merce” exemptions, is designed to i exempt some of these acquisitions— those with only a minimal impact on United States commerce. The Commis­ sion also recognizes that consider­ ations of comity may be significant in the areg, of international business transactions. With respect to some ac­ quisitions whose principal impact is foreign, it is appropriate for the agency in its discretion to exercise a self-imposed limitation and decline to subject them to the act’s require­ ments. The exemption from the notifi­ cation and waiting period obligations does not, of course, imply an exemp­ tion from the substantive antitrust laws.

The rule fixes the threshold of impact on United States commerce at $10 million largely because section 7A(a)(2) of the act uses that figure as the minimum size for a person in a re­ portable transaction. In each instance when foreign assets or voting securi­ ties are being acquired by <a United States person, the nexus with United States commerce will be as great as that statutory threshold. The final rule is largely similar to re­ vised § 802.50 but incorporates some changes. The final rules partially re­ structure the foreign commerce ex­ emptions so that all acquisitions by foreign persons are treated in § 802.51, which in the revised rules had treated only acquisitions by foreign persons from other foreign persons. Final § 802.50 applies only to acquisitions by United States persons. The final rules thus differentiate between acquisi­ tions by foreign persons and acquisi­ tions by United States persons; the former must have a more substantial link to United States commerce before they are reportable. For further infor­ mation, see the Statement of Basis and Purpose to § 802.51. The final rule’s reference to “invest­ ment assets” as one of the types of assets that may be excluded in count­ ing a foreign issuer’s holdings in the United States pursuant to subpara­ graph (b)(1) represents a clarification and limitation of the exclusion in the revised rule. That rule would have ex­ cluded “assests held solely for invest­ ment purposes” from this computa­ tion. The purpose of the exception re­ mains unchanged: To exclude assets that do not reflect a substantial busi­ ness presence in the United States and generally have little competitive sig­ nificance. However, the Commission 33497 does not believe that the term “assets held solely for investment purposes” has any well-understood or adminis­ trable meaning. Therefore, as implied in the F ederal R egister notice accom­ panying the revised rules, the refer­ ence to “assets held solely for invest­ ment purposes” has been deleted. See 42 FR at 39047 (Aug. 1, 1977). Instead, final § 802.50(b)(1) instructs the ac­ quiring person to exclude “investment assets,”

which are defined in § 801.1(iK2), as well as voting or non­ voting securities of another person, In addition, final §802.50 refers to “United States” persons and “foreign” issuers. The revised rule had referred to issuers “domiciled outside the United States.” As a result of the defi­ nitions inserted in final section 801.1(e) and the deletion of the con­ cept of domicile, this reference was al­ tered. See the Statement of Basis and Purpose to section 801.1(e). The original rules did not distin­ guish between acquisitions by foreign persons and those by United States persons. Original section 802.35, the only foreign commerce exemption in those rules, would have exempted ac­ quisitions by any person of voting se­ curities of an issuer not substantially involved in United States commerce or of assets to which no substantial in­ volvement in United States commerce was attributable. The revised rules re­ fined this exemption to provide sepa­ rate exemptions, with differing crite­ ria, depending on the identity of the acquiring and acquired persons. This is essentially the pattern followed in the final fuie.

Several comments (e.g., 1059, 1063) expressed disagreement with the dif­ fering treatment accorded to foreign persons and United States persons. They argued that the special provi­ sions for foreign persons might preju­ dice American firms abroad, since a foreign firm might prefer to deal with another foreign firm in order to avoid a reporting requirement. This differ­ ing treatment, according to comment 1063, is also inconsistent with the as­ serted principle that the antitrust laws should be enforced without regard to nationality. These comments suggest­ ed that a uniform but higher thresh­ old of impact on United States com­ merce should be applicable to all for­ eign transactions. Comment 1063, for example, suggested a $50 million or even a $100 million test instead of the $10 million test in revised section 802.50.

These comments were rejected be­ cause it is not clear that transactions below these higher thresholds are un­ likely to violate the antitrust laws, and because the considerations of comity that also underlie this exemption were lessened when a transaction has at least a $10 million nexus with United FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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33498 States commerce. The differing treat­ ment for acquisitions by United States persons is also justified, since such ac­ quisitions may be more likely to vio­ late the antitrust laws. Comment 1099 asserted that section 802.50(a)(1) was superfluous, because assets to which no United States sales were attributable would also qualify as assets to which less than $10 million of United States sales were attributable, and thus would be exempt under § 802.50 (a) (2). However, the structure of final § 801.15 clarifies the difference in treatment^. Under § 801.15(a)(2), assets to which no United States sales are attributable may be disregarded in determining whether subsequent ac­ quisitions of assets from the same ac­ quired person meet the $15 million test of section 7A(a)(3)(B); Such assets are not considered held by the acquir­ ing person for that purpose. On the other hand, since § 802.50(a)(2) is listed in § 801.15(b) rather than § 801.15(a)(2), assets acquired in trans­ actions exempt under § 802.50(a)(2) are held for purposes of the $15 mil­ lion tet of section 7A(a)(3)(B), once the $10 million United States sales threshold is met. Thus, assets to which some United States sales were attributable must be aggregated with any additional assets that the acquir­ ing person within 180 days agrees to acquire, for purposes of the $15 mil­ lion test of section 7A(a)(3)(B), and hence for determining whether the act applies. See § 801.13(b)(2) and §801.15, and the Statement of Basis and Pur­ pose to those rules.

SECTION 802.51 ACQUISITIONS BY FOREIGN PERSONS This rule exempts certain acquisi­ tions by foreign persons, a term de­ fined in § 801.1(e). Paragraphs (a) through (d) of the rule describe the circumstances in which the exemption applies.

Paragraphs (a) and (c) relate to asset acquisitions. Paragraph (a) exempts all acquisitions by foreign persons of assets located outside the United States. In contrast with the exemption in § 802.50(a), which treats acquisitions of foreign of foreign assets by United States persons, this exemption does not depend upon the United States sales, if any, attributable to the for­ eign assets. Paragraph (c) exempts assets. Paragraph (c) exempts acquisi­ tions by foreign persons of less than $10 million of assets (excluding invest­ ment assets) in the United States. The term “investment assets” is defined in § 1801.(1X2).

Paragraph (b) relates to voting secu­ rities acquisitions. It exempts acquisi­ tions by foreign persons of voting se­ curities of foreign issuers, except in two circumstances. If the acquisition of the foreign issuer will give the ac- RULES AND REGULATIONS quiring foreign person control either of an issuer that holds assets (other than investment assets) located in the United States with an aggregate book value of $10 million or more, or of a United States issuer with annual net sales or total assets of $10 million or more, the acquisition is not exempt under paragraph (b). Example 2 illus­ trates this paragraph.

Paragraph (d) applies to both voting securities and asset acquisitions. It exempts all transactions in which both the acquiring and the acquired per­ sons are foreign persons, unless either their aggregate annual sales in or into the United States, or their aggregate total assets located in the United States, total $110 million or more. Note that paragraphs (a) through (d) are to be read in the alternative, and that an acquisition is exempt if any one (or more) of these paragraphs^ is satisfied. For example, if a foreign person acquires $20 million of assets located in the United States from an­ other foreign person, the transaction is not exempt under paragraph (c), but it may still be exempt under para­ graph (d), depending on the United States sales and assets of the acquiring and acquired persons.

B ackground Inform ation to § 802.51 Like § 802.50, this rule exempts cer­ tain acquisitions by foreign persons because of their minimal relationship to United States commerce. See the Statement of Basis and Purpose to § 802.50.

As explained in the Statement of Basis and Purpose to § 802.50, this treatment represents a change from the revised rules, which distinguished from all other foreign-commerce transactions those acquisitions involv­ ing only foreign persons. All other transactions with foreign aspects could be exempted only under the more limited exemption of revised § 802.50.

This change was made in the final rules because the Commission believes that an anticompetitive impact upon United States commerce is less likely to occur when a foreign person is ac­ quiring foreign assets or voting securi­ ties, regardless of who the acquired person is. Since the anticompetitive impact, if any, results from the trans­ fer of the stock or assets to the acquir­ ing person, the identity of the acquir­ ing person is of greater antitrust sig­ nificance than the identity of the ac­ quired person. In addition, consider­ ations of comity are more significant whenever a foreign person is the ac­ quiring person. Therefore, the final rules distinguish acquisitions by for­ eign persons, which benefit from the broader exemption of this rule, from acquisitions by United States persons, which may be exempt under § 802.50. Paragraph (a) of the rule states that the acquisition by a foreign person of foreign assets is never reportable. Ac­ quisitions by foreign persons of for­ eign assets generally have a less sub­ stantial connection with United States commerce, regardless of any United States sales attributable to the assets, and are therefore less likely to violate the antitrust laws. Paragraph (c) pro­ vides that the acquisition by a foreign person of less than $10 million of United States assets is not reportable. This threshold was adopted in part to parallel the size-of-person tests in sec­ tion 7A(a)(2) and the exemption in § 802.20(a).

Paragraph (b) sets out criteria for acquisitions of voting securities of for­ eign issuers roughly parallel to the ex­ emption of voting securities acquisi­ tions below a minimum dollar amount in § 802.20.

Paragraph (d) is substantially identi­ cal to revised § 802.51(a)(1) and thus retains an aggregate sales or assets test for acquisitions involving only for­ eign persons. The $110 million thresh­ old was adopted to approximate the criteria of section 7A(a)(2), which pro­ vide various combinations of total assets or annual net sales require­ ments, each totaling $110 million. It appears appropriate and consistent with congressional intent not to exempt a transaction involving two foreign persons with a United States presence similar in size to the general criteria of the act for all persons. Note that unlike the section 7A(a)(2) test, the test of § 802.51(d) can be met, e.g., by a foreign acquiring person with United States sales of $60 million and a foreign acquired person with such sales of $50 million.

Like final § 802.50, final § 802.51 uses the term “investment assets” for the first time and deletes the concept of “domicile” found in the revised rules. For the reasons for these changes, see the Statement of Basis and Purpose to § 802.50.

Comment 1035 criticized the revised rule for allegedly placing an inappro­ priate barrier in the path of a foreign company contemplating a U.S. acquisi­ tion. The final rules reject this com­ ment and retain a reporting and wait­ ing period requirement in most cases when a foreign person acquires the stock of a U.S. issuer or assets located in the United States. The transfer of such voting securities or assets, éven to a foreign person, is considered to be of potential competitive significance. When the transaction is btherwise re­ portable, there is no doubt of U.S. ju­ risdiction and the potential antitrust concerns outweigh any considerations of comity.

Comment 1099 argued that a greater nexus to U.S. commerce should be re­ quired before acquisitions involving FEDERAL REGISTER, VO L. 43, N O . 147— M O N D AY, JULY 31, 1978

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only foreign persons are subject to the act. The comment cited considerations of comity and the greater interest a foreign country may have in the trans­ action, and suggested that the report­ ing and waiting period obligations might be reduced in situations when only foreign persons are involved. Comment 1100 also cited comity as a reason not to impose a waiting period on “non-U.S. transactions” or on com­ panies domiciled in countries with a greater interest in the transaction. Ah though final §802.51 provides several exemptions for acquisitions involving only foreign persons, the Commission did not choose to broaden these ex­ emptions further. The reason is that the Commission believes acquisitions not exempt under § 802.51 potentially have important anticompetitive impact upon U.S. commerce. The con­ siderations of comity cited in the com­ ments have been taken into account in framing the exemption. Therefore, the suggestion in comment 1099 that the reporting and waiting period obliga­ tions be reduced for reportable trans­ actions involving foreign persons was rejected.

Comment 1100 noted that since the $110 million threshold, of § 802.51(d) involves aggregating the Ü.S. sales or assets of both persons ip the transac­ tion, an acquisition by a foreign person with no U.S. contacts of a for­ eign person with $110 million in U.S. sales may be reportable. The comment suggested that a m inim um of $10 mil­ lion in U.S. sales or assets by both for­ eign persons be required, since it viewed as extremely unlikely the chances that a violation of U.S. law could result if the acquiring person had no U.S. contacts. This suggestion was rejected. The Commission does not view it as unlikely that an anti­ trust violation can arise when a for­ eign person with no sales or assets in the United States makes an acquisi­ tion of a person with substantial UJS. assets or sales.

Similarly, comment 1116 argued that all transactions involving only foreign persons are unlikely to violate the antitrust laws and urged their exemp­ tion. This suggestion was rejected. In the limited circumstances in which such transactions are reportable, there will always be a significant impact on U.S. commerce in terms of assets, sales, or both.

For a discussion of the comments on the differing treatment accorded to foreign firms and U.S. firms, see the Statement of Basis and Purposes to § 802.50.

§ 802.52 ACQUISITIONS BY OR FROM FOREIGN GOVERNMENTAL CORPORATIONS This rule exempts certain acquisi­ tions of assets or voting securities in which a foreign governmental corpora- RULES AND REGULATIONS tion is a participant. The acquisitions exempted by the rule are those of assets located within a foreign state, or of voting securities of an issuer or­ ganized under the laws of a foreign state, if the ultimate parent entity of either the acquiring person or the ac­ quired person is controlled by the for­ eign state, the government of that state, or an agency thereof. Since foreign states, foreign govern­ ments, and agencies thereof (other than corporations engaged in com­ merce) are not “entities” as defined in § 801.1(a)(2), they therefore cannot be “persons,” nor can they be included within “persons,” under § 801.1(a)(1). The act does not apply to acquisitions by or from foreign governments be­ cause the act applies only to acquisi­ tions of assets or voting securities by or from persons. See section 7A(a). The act does apply to acquisitions of voting securities of noncontrolled (third-party) issuers from foreign gov­ ernments, since the foreign state then would not be the acquired person; but for the same reason, in such cases this rule would not apply. This rule thus concerns only acquisitions by corpora­ tions engaged in commerce that are ul­ timately controlled by foreign govern­ ments, or acquisitions of the voting se­ curities or assets of such corporations. An example illustrates the rule. B ackground Inform ation to § 8 0 2 . 5 2 The transactions exempted by this rule are considered to be so directly in­ volved with the acts of foreign states within their own borders as to merit exemption. Since the interests of a sovereign are generally paramount within its own borders, to require a State-controlled corporation to file no­ tification with respect to these trans­ actions might violate principles of in­ ternational comity. In addition, acqui­ sitions or dispositions by corporations controlled by a foreign government of assets located within the foreign coun­ try are in many cases considered acts of State and may be substantively immune from U.S. antitrust law. This exemption appeared in substan­ tially similar form in revised § 802.52; it did not appear in the original rules. However, the final rule changes three provisions of the revised rule. First, the revised rule would have required the acquiring or acquired person to be a corporation more than half of whose voting securities are held by a foreign state before the exmption applied; the final rule requires the ultimate parent entity of either person to be controlled by a foreign state. Hie change makes clear that the exemption is equally ap­ plicable if the involvement of the gov­ ernmental corporation is effected through subsidiaries. The change also substitutes control for the “more than half” formulation and refers to per- 33499 sons rather than corporations (as sug­ gested by comment 1072), for consist­ ency with the rest of the rules. Second, the revised rule would have exempted only acquisitions “solely” of assets located within the foreign state or voting securities of a foreign issuer. The final rule deletes the word “solely,” so that the exemption applies even if assets or voting securities locat­ ed outside the foreign state in ques­ tion, e.g., in the United States, are also being acquired in a transaction. In such a situation only the nonexempt portion of the transaction is reporta­ ble. See § 803.2(c)(2). Last, the final rule substitutes the concept of “orga­ nized under the laws” of a foreign state for the undefined and potential­ ly ambiguous term “domicile” used in the revised rule. See the Statement of Basis and Purpose to § 801.1(e). Comments 1063 and 1072 recom­ mended that § 802.52(b) shôuld exempt acquisitions of voting securi­ ties when the issuer’s principal place of business, rather than its place of in­ corporation, is the foreign state in­ volved. The suggestion was rejected because comity considerations, as well as the potential act of State defense, are strongest in the case of an issuer incorporated in the relevant foreign state.

Comment 1063 argued that if for­ eign governmental corporations must file notification with the agencies for nonexempt acquisitions, American firms may become handicapped in competing for business transactions involving foreign governmental corpo­ rations. Citing comity and the desir­ ability of American firms participating in such transactions, the comment urged that foreign governmental cor­ porations be exempted from filing no­ tification even when the acquisition was not exempt. This recommendation was rejected. Sections 802.50 and 802.51 exempt acquisitions in which the United States lacks a substantial interest in or nexus to the acquisition. This rule exempts acquisitions that might give rise to particularly sensi­ tive issues of comity. When neither ra­ tionale applies and the acquisition is not exempt, the interest of the United States in comprehensive evaluation of the acquisition will generally outweigh the foreign state’s interest in avoiding the burden of filing notification. Moreover, adopting the suggestion would undercut the distinction made between governments, whether for­ eign or domestic, which are not sub­ ject to the act, and governmental cor­ porations, which in general are subject to the act. See § 801.1(a)(2) and its Statement of Basis and Purpose. Ac­ cordingly, all persons, including for­ eign governmental corporations, must file notification with respect to nonex­ empt acquisitions.

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33500 In the F ederal R egister notice ac­ companying the revised rules, the Commission stated that it would con­ sider excluding from the exemption indirect acguisitions of assets located in the United States and indirect ac­ quisitions of voting securities of United States issuers. 42 FR at 39045 (August 1, 1977). The Department of State in its comment (1072) opposed narrowing the exemption, citing the considerations supporting the exemp­ tion, ahd the likelihood that the agen­ cies would learn of any acquisition of interest to them from public sources. In view of this comment, the final rule did not adopt the change proposed in the F ederal R egister. SECTION 802.53 CERTAIN FOREIGN BANKING TRANSACTIONS This rule exempts acquisitions that require the consent or approval of the Board of Governors of the Federal Re­ serve System (“the Board”) under sec­ tion 25 or section 25(a) of the Federal Reserve Act from the requirements of the act on the same basis as those transactions listed in section 7A(c)(8), which require approval of the Board under section 4 of the Bank Holding Company Act.

The rule applies only to acquisitions by national banks of securities of enti­ ties engaged in foreign or internation­ al banking, which according to the ap­ plicable statutes and Board regula­ tions transact, at most, only minimal business in the United States. This rule, like section 7A(c)(8), requires that copies of all information and doc­ umentary material filed With the Board be contemporaneously filed with the antitrust agencies at least 30 days prior to consummation of the ac­ quisition. One of the provisions of §802.6 is also made applicable to fil­ ings under this rule: Instead of filing with the antitrust agencies all docu­ ments filed with the Board, the re­ porting persons may provide an index describing all such material together with a certification that any such in­ formation not provided will be pro­ vided within 10 calendar days of a re­ quest to do so.

Under section 25 of the Federal Re­ serve Act, 12 U.S.C. 601-604, a national bank may, with the Board’s approval, invest directly in the stock of a foreign bank not engaged in any activity in the United States (except activities that, in the judgment of the Board, are incidental to its international or foreign business). Under the same sec­ tion, a national bank, with the Board’s approval, may also make indirect in­ vestments in foreign banks by acquir­ ing stock in a U.S. corporation princi­ pally engaged in international or for­ eign banking, either directly or through foreign subsidiaries. Such a corporation, to be eligible for invest- RULES AND REGULATIONS ments by national banks, must enter into afi agreement with the Board, under 12 U.S.C. 603, to restrict its op­ erations or conduct its business in such manner or under such limitations as the Board may prescribe. This type of corporation is known as an “agree­ ment” corporation.

A national bank may also, under sec­ tion 25(a) of the Federal Reserve Act, 12 U.S.C. 611-631 (the “Edge Act”), invest in the stock of a United States or foreign corporation (known as an “Edge Act corporation”) chartered with the Board’s approval to engage in foreign or international banking or other foreign financial operations. An Edge Act corporation mayr with the Board’s consent, acquire and hold stock of foreign non-banking compa­ nies that do not transact any business in the United States other than activi­ ties incidental to their international or foreign business. 12 U.S.C. 615. All of these types of investments re­ quire the consent or approval of the Board and are thus exempted by this rule. The Board, in granting or with­ holding this consent, is empowered by section 11 of the Clayton Act, 15 U.S.C. 21, to enforce section 7 of the Clayton Act as it applies to stock ac­ quisitions by banks, banking associ­ ations and trust companies. The Board’s policy is to refer to the Assist­ ant Attorney General all applications received pursuant to those provisions that appear to present antitrust issues. B ackground Inform ation to § 802.53 This rule had no counterpart in the original or the revised rules. Several comments (e.g., 90, 91; 1071) suggested that a new rule be inserted to exempt these acquisitions. The major reason they are exempted in the final rules is to achieve similarity of treatment with acquisitions subject to the approval of the Board under section 4(c)(13) of the Bank Holding Company Act of 1956, which are exempted under sec­ tion 7A(c)(8). The standards applica­ ble to those transactions—acquisitions by bank holding companies of shares of companies that do not do business in the United States except as an inci­ dent to their foreign business—are substantially the same as those appli­ cable to agreement and Edge Act cor­ porations. In each case, similar restric­ tions limit the amount of U.S. business that may be conducted by a company in which a national bank has an inter­ est.Accordingly, in each case the re­ quirement of prior approval by the Board, along with the Board’s working relationship with the Assistant Attor­ ney General, should, in conjunction with the requirement that the anti­ trust agencies receive copies of the material filed with the Board (or in­ dexes of such documents) 30 days in advance of consummation^ suffice to identify any potential competitive problems. The final rules thus take the position that it would be inconsist­ ent to require that investments made pursuant to sections 25 or 25(a) of the Federal Reserve Act fully comply with the notification and waiting period re­ quirements, while similar acquisitions made pursuant to section 4(c)( 13) of the Bank Holding Company Act have a qualified exemption.

Some of the transactions exempted by this rule may also be exempt from the act by virtue of §802.50, which, inter alia, exempts certain acquisitions of voting securities of foreign issuers by U.S. persons. But when Edge Act and agreement corporations are U. S. persons, acquisitions of their stock by a national bank will never be exempt­ ed by § 802.50.

Several comments (e.g., 90, 91; 1071) recommended that transactions re­ quiring Board approval under either the Bank Holding Company Act or the Federal Reserve Act be completely exempted from all reporting, including the section 7A(c)(8) requirement of contemporaneous filing. They asserted that these types of transactions are not likely to violate the antitrust laws, since the only companies in which an interest may be acquired are those with only incidental activities in the United States. This approach was re­ jected. The Commission believes that such transactions may present anti­ trust concerns. The Federal Reserve Board’s comment (91) itself noted that three applications for approval have in the past been referred to the Assistant Attorney General for review. The pro­ cedure provided in section 7A(c)(8) should be adequate to identify any other such transactions that may pose competitive questions.

SECTION 802.60 ACQUISITIONS BY SECURITIES UNDERWRITERS This rule exempts acquistions of voting securities if (1) the acquiring person is acting as a securities under­ writer, (2) the acquisition is made in the ordinary course of the business of the acquiring person, and (3) the ac­ quisition is made in the. process of un­ derwriting. Because securities under­ writers that purchase shares from is­ suers for resale to securities dealers or the investing public become beneficial owners of those securities prior to resale, and because such temporary holdings may exceed the limitations of § 802.64(b)(5), many acquisitions made in the process of an underwriting are subject to the act and, but for this ex­ emption, would be reportable. For the exemption to apply, the ac­ quiring person must be functioning as in underwriter with respect to the par­ ticular voting securities to be acquired. FEDERAL REGISTER, V O L. 43, NO. 147— M O N D AY, JULY 31, 1978

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B ackground I n fo r m a t io n to § 802.60 This exemption is appropriate be­ cause a securities underwriter pur­ chasing shares under the circum­ stances stated in the rule typically does not retain those shares for any period of time or use those shares to influence the management of the issuer. As long as all three limiting conditions in the rule are satisfied at the time of acquisition, the acquisition is exempt, regardless of the length of time the shares may subsequently be retained by the underwriter. However, during the time that such shares remain in the hands of the underwrit­ er, they are “held” by the underwriter for purposes of § 801.1(c). Thus if the underwriter acquires any additional shares not in the process of underwrit­ ing, it must aggregate the shares to be acquired with any shares that are still held as a result of an acquisition that was exempt under § 802.60, in order to determine whether the subsequent transaction is reportable. Original § 802.10(a) exempted acqui­ sitions by brokers or dealer in securi­ ties if the acquistion was made in the process of underwriting.

Revised § 802.62 extended the exemption to any person (not just a broker or dealer) but added the requirements that (1) the person be acting as an un­ derwriter and making the acquisition for its own account, and (2) the acqui­ sition be made in the normal course of business, solely for investment pur­ poses, and in the process of an under­ writing. The final rule deletes the sep­ arate requirement that the acquisition be made by the underwriter for its own account, since acquisitions by un­ derwriter in the process of underwrit­ ing normally satisfy that requirement. Moreover, if an acquisition were made for the account of another person, that person, rather than the under­ writer, would hold the securities and would thus be subject to reporting ob­ ligations. See § 801.1(c). Comment 1091 also suggested delet­ ing the requirement that an acquisi­ tion by an underwriter be made solely for investment purposes. The com­ ment pointed out that such purchases normally are not made “for invest­ ment,” as that term is generally un­ derstood, but rather for resale. The Commission agreed with the com­ ment’s suggestion that if an under­ writer is “acting as a securities under­ writer” when purchasing voting securi­ ties “in the process of underwriting,” the additional requirement that the acquisition be solely for the purpose of investment is unnecessary to insure that the underwriter’s purchase# will not likely be used to influence the management of the issuer. This limit­ ing requirement was therefore deleted from the final rule.

RULES AND REGULATIONS SECTION 802.63 CERTAIN TRANSACTIONS BY CREDITORS AND INSURERS This rule exempts from the require­ ments of the act certain types of ac­ quisitions made by creditors and insur­ ers in the ordinary course of business. The rule should be read in conjunc­ tion with section 7A(c)(ll), which exempts “acquisitions, solely for the purpose of investment, by any bank, banking association, trust company, investment company, or insurance company, of (A) voting securities pur­ suant to a plan or reorganization or dissolution; or (B) assets in the ordi­ nary course of its business,” and sec­ tion 7A(c)(l), which exempts “acquisi­ tions of goods or realty transferred in the ordinary course of business.” Paragraph (a) of the rule exempts several types of acquisitions by credi­ tors: Acquisitions of collateral or re­ ceivables, acquisitions in foreclosure or upon default, acquisitions in connec­ tion with the establishment of a lease financing and acquisitions in connec­ tion with a bona fide debt work-out. The rule provides that such acquisi­ tions are exempt only “if made by a creditor in a bona fide credit transac­ tion entered into in the ordinary course of the creditor’s business.” Any transaction made with the primary motivation of extending credit to the debtor, as opposed to a transaction structured as a financing transaction for purpose of evading a reporting re­ quirement, may be considered “bona fide.”

Paragraph (b) exempts acquisitions by insurers pursuant to a condition in an insurance contract relating to fidel­ ity, surety or casualty obligations. The rule thus exempts acquisitions com­ monly made in connection with an in­ surer’s normal insurance business. It does not exempt purchases of voting securities or assets made by insurance companies as investors in securities markets or elsewhere. Those transac­ tions may, however, be exempt unde section 7A(c)(9) and § 802.9, or under § 802.64.

B ackground I n fo r m a t io n to § 802.63 This rule exempts certain routine transactions by creditors and insurers in the ordinary course of business. They are typically not undertaken with the intention of influencing the affairs of the acquired person or even necessarily with the intention of making an investment. The acquiring person may not desire to retain the ac­ quired property, such as assets or stock acquired in default or foreclo­ sure situations, and the acquired assets or stock may frequently be dis­ posed of as speedily as possible. Many transactions covered by this rule occur by operation of law, such as acquisi­ tions by insurance companies of in­ sured property upon payment of a 33501 claim under a casualty-loss insurance contract. In general, these acquisitions take place in circumstances and for reasons different from those underly­ ing corporate mergers, acquisitions, tender offers, and similar transactions. These transactions occur with great frequency in the insurance, banking, and finance industries. To interpose the act's notification and waiting period requirements before such ac­ quisitions would severly impede the normal and. essential procedures of these industries without achieving any significant gain in antitrust enforce­ ment.

The original rules did not contain any exemption for creditors and insur­ ers. During the first comment period, however, the Commission specifically solicited comments on the proper in­ terpretation of section 7A(c)(ll).

Statements were requested on the questions of “with what frequency, and under what circumstances, do banks, banking associations, trust com­ panies, investment companies, and in­ surance companies acquire voting se­ curities pursuant to a plan of reorgani­ zation or dissolution, or assets (as dis­ tinguished from securities) in the normal course of business,” and “to what extent the reporting and waiting requirements of (the act) may impede normal business practices by such companies.” 41 FR at 55490 (Decem­ ber 20, 1976). Revised §802.63 was drafted in response to a large number of comments from the banking and in­ surance communities explaining the reasons for exempting various common types of transactions in their industries.

For example, with respect to credi­ tors’ transactions, comment 90 de­ scribed several customary bank financ­ ing transactions that the comment considered not competitively signifi­ cant. The comment observed that banks often engage in lease financings, conditional sales transactions, and other arrangements in which they re­ ceive a security interest in property of . various types, including voting securi­ ties. Transfers of property in foreclo­ sure situations, including transfers to banks from their customers, are also common banking transactions.

In credit transactions, banks frequently purchase from customers large quanti­ ties of accounts receivable, which may well exceed $15 million in value or be more than 15 percent of the custom­ er’s assets. The comment argued that these and similar common bank fi­ nancing transactions have no competi­ tive significance since they do not transfer to banking institutions man­ agerial control over significant com­ petitive assets; indeed, they may in­ crease competition by assisting compa­ nies to raise needed capital. The com­ ment suggested a broad exemption of FEDERAL REGISTER, VOL. 43, N O . 147— M O N D AY, JULY 31, 1978

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33502 all acquisitions of voting sécurités or assets “by or from a bank or banking association in the ordinary course of its business.”

Comment 97 suggested that acquisi­ tions by financial institutions of voting securities be exempt if they arise from an event stipulated in a loan Contract, such as a default. The comment stated that such acquisitions may be involuntary and thus may not be accompanied by anTntent to obtain control. Moreover, banks are generally prohibited by law from holding securi­ ties for their own interest and must dispose of any they own within a spec­ ified time. Comment 102 also urged the exemption of acquisitions of stock or assets upon foreclosure. The Feder­ al Deposit Insurance Corporation in its comment (56) also noted that sec­ tion 7A(c)(ll) appears to exempt rela­ tively temporary acquisitions by banks arising from the liquidation of a de­ faulted loan.

With respect to transactions by in­ surers, several comments (e.g., 73, 77, 83, 98, 110) recommended that various types of transactions made in the normal course of the business of insur­ ance be exempted. Specifically, com­ ment 77 urges that acquisitions of sé­ curités or assets by an insurer pursu­ ant to its insurance claims or surety operations be exempt. The comment explained that after an insurance com­ pany issues a surety bond to quarantee the performance of services by a build­ ing contractor, it may acquire some or all of the contractor’s assets if the latter defaults. Alternatively, an insur­ ance company often gains title, by op­ eration of law, to the assets of an in­ sured or a third party after it has paid a claim relating to those assets—for example, when a large quantity of stock certificates are lost by an in­ sured brokerage firm and the insur­ ance company pays the loss. If any of the certificates are later found, they become the insurer’s property. The comment also noted that insurance companies, like banks and finance companies, frequently acquire the stock or assets of corporations pursu­ ant to bankruptcy reorganizations, foreclosures, and similar proceedings relating to loan defaults, and urged the exemption of such acquisitions. These comments, like the comments relating to creditors’ transactions, all noted that in the acquisitions for which an exemption was proposed, the acquiring person has no intention of permanently acquiring any business assets.

Revised §802.63 thus exempted ac­ quisitions by creditors in bona fide credit transactions entered into in the ordinary course of the creditor’s busi­ ness, of collateral, in foreclosure, or upon default. It also exempted acquisi­ tions by an insurer in the ordinary RULES AND REGULATIONS course of business, pursuant to a sure­ tyship contract, or in the exercise of a right of subrogation.

The final rule represents an expan­ sion of the exemption granted in the revised rule. Several comments on the revised rule suggested that it would not have exempted certain types of credit transactions that generally raise no antitrust concern. First, since the terms “creditor” and “credit transac­ tion” were not defined, several com­ ments (e.g., 1050, 1059, 1062) suggested that it was not clear whether transac­ tions such as lease financings, condi­ tional sales contracts, factoring oper­ ations, and other hybrid credit ar­ rangements, which might be interpret­ ed as assets acquisitions, were exempt. In a common type of lease financing, several equity investors contribute part of the cost of the leased equip­ ment to a trustee (the owner trustee). The owner trustee, usually a commer­ cial bank, then borrows the remaining funds from other investors (usually other institutional investors) and pur­ chases the equipment, which is then leased to the actual user. Often, a second trust is established that takes a security interest in the leased property to protect the rights of the equity in­ vestors. The comment argued that none of these various “acquisitions” should be subject to the act. Any un­ certainty on this point was removed in the final rule, which now specifically exempts transactions in connection with a bona fide lease financing. Comment 1073 also suggested that the revised rule, which was limited to acquisitions of collateral in foreclosure or upon default, failed to exempt cer­ tain functionally similar transactions in which no formal foreclosure or de­ fault takes place. The term “collater­ al,” the comment stated, may be limit­ ed to the acquisition of a security in­ terest in tangible rather than intangi­ ble property, and the use of the words “in a bona fide credit transaction” might be interpreted as not including acquisitions by a creditor made at some time other than the commence­ ment of a credit transaction or not specifically identified with a particular credit transaction. For example, in a bona fide debt work-out, a transaction whereby all or part of a debtor’s obli­ gations to one or mQre creditors are re­ organized, the debtor’s assets or voting securities, which may not technically be termed collateral, may be conveyed to a creditor. The comment argued that thé economic and business reali­ ties of such transactions are substan­ tially identical to the foreclosure of a pre-existing security interest and thus should be treated similarly. The final rule adopts this suggestion and exempts acquisitions of receivables in credit transactions and acquisitions in connection with bona fide debt work­ outs.

Several comments (e.g., 1031, 1103) also suggested that the exemption in the revised rules for acquisitions by in­ surers was unclear. These comments pointed out that the revised rule may not have exempted certain acquisi­ tions by insurers arising out of re­ quirements in insurance contracts that technically were considered neither suretyship contracts nor acquisitions pursuant to rights of subrogation. Since the revised rule sought to exempt all acquisitions by insurers in the ordinary course of business occur­ ring pursuant to conditions in con­ tracts of insurance, the final rule exempts acquisitions arising from con­ ditions in fidelity, surety, and casualty contracts.

Several comments (e.g., 1038, 1070, 1073) also maintained that the revised rule did not adequately solve a number of creditor’s-rights problems arising from public auction or bankrupcy sales. They stated that application of the statute to such transactions might chill bidding by large companies and hinder such' sales generally, since speed is often a critical factor in pro­ tecting creditors’ interests.

They therefore suggested that sales under the supervision of a bankruptcy court be exempt, and, more generally, that sales by creditors and insurers of prop­ erty obtained pursuant to foreclosure or default be exempt so that creditors can obtain maximum value for fore­ closed collateral. These recommenda­ tions were rejected. Purchases at bankruptcy sales may pose antitrust concerns, as may subsequent disposi­ tions of property acquired pursuant to a credit relationship. A bankruptcy court has no responsibility to consider antitrust issues relating to dispositions of the debtor’s property. Any timing problems resulting from the necessity to observe the waiting period may be mitigated by requests for early termi­ nation of the waiting period under sec­ tions 7A(b)(2) and 803.11. The final rule specifically exempts acquisitions of receivables in connec­ tion with a bona fide credit transac­ tion. Thus an assignment of accounts receivable, with or without recourse, is exempt. Such transactions are crucial to the operation of consumer sales and credit institutions and, although they may occasionally meet the criteria of section 7A(a) of the act, they do not generally have antitrust implications. But for this rule, such assignments of receivables would not be exempt; al­ though receivables are typically trans­ ferred in the ordinary course of busi­ ness, they are neither goods nor realty. Cf. section 7A(c)(l). Furthermore, there is an explicit reference in the legislative history of the act to the fact that these acquisi- FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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tions ought to be exempt. Explaining the differences between the final bill and the original House and Senate versions, Senator Philip Hart stated on the floor of the Senate: Section 7A(c)(2) exempts acquisitions of bonds, mortgages, deeds of trusts, or other obligations which are not voting securities and section 7A(c)(l) exempts acquisitions or goods or realty transferred in the ordinary course of business. It is the intention of the managers that these provisions exempt con­ sumer receivables and loans or other obliga­ tions, which are not voting securities, which are traditional financing arrangements and which normally are sold to banks or other financing agencies and acquired in the normal course of business. 122 Cong. Rec. S15417 (daily ed., Sept. 8, 1976).

SECTION 802.64 ACQUISITIONS OF VOTING SECURITIES BY CERTAIN INSTITUTIONAL INVESTORS This rule provides a higher initial re­ porting threshold than that contained in section 7A(a)(3) of the act for cer­ tain voting securities purchases made by institutional investors. The rule does not apply to acquisitions of assets. Paragraph (a) of the rule lists the types of entities, denominated in­ stitutional investors, which may be en­ titled to the rule’s special treatment. Paragraph (b) exempts acquisitions of voting securities by institutional inves­ tors whenever the conditions set forth in subparagraphs (b)(1) through (b)(5) are satisfied. Paragraph (c) sets forth two exceptions to the exemption—situ­ ations when the exemption does not apply even though paragraph (b)’s conditions are met.

Paragraph (a) of the rule contains an exclusive list of fourteen types of entities that can qualify for the rule’s special treatment. Subject to the ex­ ceptions contained in paragraph (c), paragraph (b) exempts acquisitions of voting securities made by institutional investors as a result of which the ac­ quiring person’s holdings either would not exceed 15 percent, or would not exceed $25 million, of the issuer’s voting securities, so long as four other conditions are met. First, the acquisi­ tion must be made by an entity that is one of the types of institutional inves­ tors listed in paragraph (a) of the rule. Second, the acquisition must be made in the ordinatry course of the institu­ tional investor’s business. Third, the acquisition must be made “solely for the purpose of investment” as that term is defined in § 801.1(i)(l). Finally, as a result of the acquisition the ac­ quiring person must not control the issuer.

If each of these conditions is met, the rule effectively eliminates the ini­ tial statutory reporting threshold of section 7A(a)(3) and § 801.1(h)(1). The rule allows an institutional investor to RULES AND REGULATIONS acquire voting securities without being subject to the requirements of the Act until its holdings exceed both 15 per­ cent and $25 million. The acquisition that would first result in a holding ex­ ceeding both 15 percent and $25 mil­ lion in value is reportable, and the waiting period must be observed. Once this initial reporting threshold is crossed, further acquisitions by insti­ tutional investors are treated exactly like those of other acquiring persons. Note that an institutional investor will never have to make a subsequent report upon reaching the 15 percent threshold of § 801.1(h)(2), since that threshold will be surpassed by the ex­ emption provided in this rule. Thus, only the 25 percent threshold of § 801.1(h)(3) and the percent threshold of § 801.1(h)(4) will apply. In addition, since § 802.64(b)(5) refers to the holdings of the acquiring person, rather than the acquiring in­ stitutional investor entity, the rule does not permit each institutional in­ vestor within the same person to hold 15 percent and $25 million worth of an issuer’s voting securities before report­ ing. That limitation thus applies to the aggregate holdings of all institu­ tional investor entities included within the same person.

Paragraph (c) contains two limita­ tions to the exemption granted by paragraph (b). These exceptions apply even though all of the conditions in paragraph (b) are satisfied. If either of these limiting conditions exists, the in­ stitutional investor’s acquisitions are not exempt under paragraph (b), and the normal reporting thresholds of section 7A(a)(3) and § 801.1(h) apply. The first exception, § 802.64(cXl), provides that when the voting securi­ ties of an institutional investor are being acquired, if the acquiring person includes an institutional investor entity of the same type as the issuer or an entity controlled by the issuer, the exemption does not apply. For this purpose, each of the numbered subparagraphs in paragraph (a) of the rule is a “type.” The second limitation, § 802.64(c)(2), withdraws the exemp­ tion granted in paragraph (b) when­ ever any voting securities of the issuer whose voting securities are to be ac­ quired are already held by an entity included within the acquiring person that is not also an institutional inves­ tor.

B ackground Inform ation to § 802.64 By providing a higher initial report­ ing threshold for voting securities pur­ chases by institutional investors, this rule was designed to minimize the act’s impact upon these entities’ normal op­ erations. The anticompetitive poten­ tial of the transactions exempted by the rule is low, and acquisitions by in­ stitutional investors that may have 33503 competitive significance should be reached by the notification threshold of this rule or by one of the exceptions of paragraph (c).

Paragraph (a) lists the types of entitiee entitled to the exemption. Acqui­ sitions by any of the types of entities listed in paragraph (a) of the rule are likely to have a relatively insubstan­ tial effect on competition, assuming that the conditions described in para­ graph (b) exist and that neither of the exceptions in paragraph (c) apply. Some of these investors, such as non­ profit entities, are constrained by law or by their charters from participating in the management of most business corporations. Pension trusts, insurance companies and others are limited by their fiduciary duty to the ultimate beneficiaries of their investment. Enti­ ties such as broker-dealers and invest­ ment companies frequently engage in acquisitions that may meet the crite­ ria of the act, but they generally have no interest in affecting the manage­ ment of the companies whose stock they buy. The rule thus attempts to reduce the disruption of the securities markets that could result from requir­ ing them to report and observe a wait­ ing period before such acquisitions. The conditions in paragraph (b) are intended to assure that the acquisi­ tions exempted are in fact unlikely to violate the antitrust laws. Subpara­ graphs (b)(1) and (b)(2) simply state the basic criterion that the acquisition of voting securities must be made in the ordinary course of business by an institutional investor, as defined, in paragraph (a). Subparagraph (b)(3), requiring that the purchase be made “solely for the purpose of invest­ ment,” as defined in § 801.l(i), ex­ cludes from the exemption any acqui­ sitions made by institutional investors with the intent of influencing manage­ ment. The reasoning behind this ex­ emption does not apply to such invest­ ments, and therefore they are treated like ordinary acquisitions. Similarly, the exclusion of control acquisitions in subparagraph (b)(4) is necessary, since if an institutional investor gains con­ trol, it will invariably participate in the management of the issuer. Subpar­ agraph (b)(5), which states the special size-of-transaction test for such acqui­ sitions, is designed to permit the ma­ jority of them to be exempt, while re­ taining the act’s coverage for the very largest ones, which may, because of their size, have anticompetitive conse­ quences.

The limitations contained in para­ graph (c) are designed to impose the act’s usual reporting and waiting period requirements on acquisitions that seem to pose a greater potential for anticompetitive, impact even though the criteria of paragraph (b) are satisfied. Acquisitions described by FEDERAL REGISTER, VO L. 43, N O . 147— M O N D AY, JULY 31, 1978

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33504 RULES AND REGULATIONS subparagraph (c)(1) may indicate in­ creasing concentration in an area of commerce related to the business of the type of institutional investor ac­ quired. And the limitation of subpara­ graph (c)(2), which withdraws the ex­ emption whenever any voting securi­ ties of the issuer are held by an entity included within the acquiring person that is not also an institutional inves­ tor, is present because the existence of such holdings calls into question the investment intent of the acquiring person. In each case, the special treat­ ment for institutional investors afford­ ed by the rule is not extended. The original rules did not address ac­ quisitions by institutional investors. Instead, the F ederal R egister notice accompanying their publication con­ tained a “Statement With Respect to Certain Financial Transactions and In­ stitutions” that specifically solicited comments on the treatment to be ac­ corded normal business transactions by institutional investors (41 FR at 55490 (Dec. 20, 1976)). The revised rule resulted from these comments. The list in paragraph (a) of the 14 types of entities that can qualify for the rule’s special treatment is general­ ly similar to the list in the revised rule, with certain changes. Mutual funds were deleted as superfluous in light of the inclusion of registered in­ vestment companies in (a)(6). The gen­ eral inclusion of trusts was replaced by a narrower reference to qualified em­ ployee pension or other benefit trusts in (a)(10), because there are many types of trusts that may hold or ac­ quire voting securities for purposes other than investment, to which the exemption would not be appropriate. Added to the list of qualifying insti­ tutional investors were the following: Savings banks, (a)(2); building and loan companies, (a)(3); regulated small business and minority small business investment companies, (a)(9); bank holding companies, (a)(ll); subsidiar­ ies of institutional investors that per­ form functions that the institutional investors would ordinarily perform themselves, (a)(12); and holding com­ panies that essentially own only other institutional investors, (a)( 13). These entities were added in response to nu­ merous comments, because they have similar characteristics to the other types of entities entitled to the exemp­ tion.

Comment 1070 suggested that real estate investment trusts (REIT’s) be added. Since the holdings of REIT’s will typically be either real estate or stock in realty holding companies, which may be exempt under § 802.1(a) when purchased, institutional investor status is not necessary to exempt their acquisitions.

Furthermore, to the extent that REIT’s may make short­ term investments in other types of voting securities, the exemption in sec­ tion 7A(c)(9) may often apply. Comment 1090 also suggested part­ nerships holding voting securities for investment, investment advisers, and insurance company separate accounts as candidates for institutional investor status. The specific inclusion of insur­ ance company separate accounts is un­ necessary because subparagraph (a)(5) defines insurance companies as institu­ tional investors, and because under § 801.1(c)(7) insurance companies hold all voting securities in their separate accounts. Thus, insurance company special accounts are in effect covered by the exemption given the insurance company. Partnerships holding voting securities for investment and invest­ ment advisers were rejected because no adequate reasons for affording in­ stitutional investor status to such enti­ ties were advanced, and because the safeguards characterizing the entities listed in § 802.64(a) do not appear to be present. These two types of entities, of course, may avail themselves of the exemption afforded by section 7A(c)(9) when appropriate. Comment 1100 proposed that for­ eign entities of the types listed in paragraph (a) should be expressly in­ cluded as institutional investors for purposes of the rule. This suggestion was not adopted. In certain cases, ac­ cording foreign entities this treatment would be inappropriate; for example, foreign banks are not covered by the Glass-Steagall Act, 12 U.S.C. 24, and are therefore not prohibited from in­ vesting in common stock for their own account. Although it is possible that certain types of foreign entities will qualify as institutional investors under this rule’s provisions, the comment did not supply adequate justification for a general provision on this point. The final version of paragraph (b) is unchanged in substance from revised § 802.64. The final version of subpara­ graph (c)(1), however, is somewhat less restrictive than that contained in the revised rule. The revised rule would have withdrawn the exemption whenever voting securities of any type of institutional investor were to be ac­ quired by an institutional investor. This change was made so that the rule would be less disruptive of normal cap­ ital markets. The final rule modifies revised § 802.64(c)(2), which would have withheld the exemption if the ac­ quiring institutional investor was con­ trolled by an entity that was not an in­ stitutional investor. The Commission considered that the revised rule’s limi­ tation was potentially too restrictive of normal investment operations of in­ stitutional investors, which are com­ monly controlled by other types of en­ tities. The Commission will, for the time being, rely upon the conditions set forth in paragraph (b) of the rule in order to prevent evasion of the act’s normal reporting requirements by en­ tities controlling institutional inves­ tors.

Choice of A lternative P roposed R ules The revised rules contained two al­ ternative reporting schemes for insti­ tutional investors, §§ 802.64 and 802.64a. Revised § 802.64 was essential­ ly similar to the final rule. Section 802. 64a would have required an annual report of acquisitions qualify­ ing under the rule during the preced­ ing year, but no waiting period. The F ederal R egister notice accompany­ ing the rules invited comments as to which approach should be adopted. 42 FR at 39046 (August 1, 1977). Neither exemption scheme is com­ pelled by the statute. On the contrary, section 7A(c)(9) indicates an apparent congressional intent to subject institu­ tional investors to the preacquisition reporting and waiting period require­ ments of the act. Thus, the Commis­ sion has adopted revised §802.64 and has rejected the postacquisition re­ porting approach of revised § 802.64a. Similarly rejected were those com­ ments (e.g., 1020, 1043, 1050, 1054, 1067, 1083, 1089, 1110, 1111) that either expressly or by implication pro­ posed eliminating all reporting and waiting requirements when the condi­ tions of subparagraphs (b) (1)—(4) were satisfied.

The adoption of the preacquisition reporting scheme with its higher ini­ tial reporting threshold is also based upon the Commission’s belief that the section 7A(c)(9) exemption may not in fact be sufficient for the ordinary op­ erations of institutional investors. The holdings of institutional investors in particular issuers may frequently exceed 10 percent and $15 million, thus making reportable numerous ac­ quisitions that merit exemption be­ cause of the restrictions of paragraph (b). However, the Commission believes that on those presumably rare occa­ sions when an institutional investor’s holdings exceed both 15 percent and $25 million the potential for anticom­ petitive consequences is sufficiently great to warrant obtaining a preacqui­ sition report and imposing a waiting period. Except in instances in which control of an issuer would change hands (when subparagraph (b)(4) would preclude the exemption), the adoption of § 802.64a would have de­ prived the agencies of a primary en­ forcement tool encouraged by the act—the preliminary injunction. The fact that antitrust problems can arise well before holdings reach the 50-percent (control) level reinforced the se­ lection of § 802.64 over § 802.64a. The comments that expressed a preference between the two ap- FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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proaches contained in the revised rules were divided. Numerous reasons were given for selecting one option or the other. Nearly all the comments, regardless of which rule they pre­ ferred, however, were concerned with the reporting burden and interference with normal investment operations. The Commission believes that the changes between the revised and final rule versions of § 802.64, together with the significant amendment of the defi­ nition of “hold,” see § 801.1(c), will greatly reduce the impact of the act upon institutional investors in both of these areas of concern. SECTION 802.70 ACQUISITION SUBJECT TO ORDER This rule exempts two common types of acquisitions from the require­ ments of the act. Paragraph (a) exempts acquisitions of assets and voting securities from parties subject to divestiture orders issued by the Commission or, at the instigation of the Commission or the Department of Justice, by a Federal court. Paragraph (b) exempts any acquisition in which the acquiring party is subject to an order of . the Commission or a Federal court that requires Commission, Jus­ tice Department, or judicial approval of the acquisition, and for which ap­ proval has been obtained. B a c k g r o u n d I n f o r m a t io n t o § 802.70 Because the information normally obtained by the courts, the Commis­ sion, or the Department of Justice in these divestiture situations will be much the same as that required by the Notification and Report form, the Commission determined that the im­ position of the act’s requirements was unnecessary. These groups of acquisi­ tions are by their nature already sub­ ject to careful antitrust scrutiny by the agencies.

Comment 1026 suggested thaif the rule also should exempt acquisitions expressly permitted by the terms of Commission or Federal court orders. The Commission is unaware of any order that, by its terms, permits the acquisition of specifically identified assets or voting securities, and no ex­ ample was cited.

A number of comments (e.g., 1026, 1027, 1042, 1053, 1059, 1063, 1076, 1077, 1100) requested reinstatement of the business review/advisory opinion ex­ emptions that appeared in § 802.05 (c) and (d) of the original rules and were deleted from the revised rules. The de­ leted exemptions would have exempt­ ed acquisitions approved by the Com­ mission under its advisory opinion pro­ cedure, 16 CFR 1.1, or by the Anti­ trust Division under its business review procedure, 28 CFR 50.6. These exemptions have not been restored in the final rules. As the F ed e r a l R e g is - RULES AND REGULATIONS t e r n o tic e a c c o m p a n y in g p u b lic a tio n o f t h e r e v is e d r u le s e x p la in e d : [Slince the statute envisions that either the Commission or the Antitrust Division may investigate or seek to enjoin a project­ ed acquisition, both agencies must receive completed Notification and Report Forms from the parties to the transaction. Even if one agency or the other were able to deter­ mine ahead of time that it would not inves­ tigate or challenge a particular transaction, the Commission feels that the other agency should be able to obtain sufficient informa­ tion to permit its own informed judgment on the possible anticompetitive conse­ quences of that transaction. (42 FR at 39045 (Aug. 1, 1977).) Furthermore, the Commission has never felt itself legally bound by busi­ ness review letters issued by the Anti­ trust Division. Similarly, the Antitrust Division has not believed that its abili­ ty to challenge an acquisition was re­ stricted by a Comjnission advisory opinion. Moreover, the exemptions would be philosophically at odds with section 7A(b)(2) of the act, in which Congress required the agreement of both agencies in order to grant early termination of a waiting period. A statement of enforcement intent at the end of the waiting period was suggested in comment 1077 as an alter­ native to the business review/advisory opinion exemption. Such a proposal would transform the act from a pre­ merger notification program to a pre­ merger clearance system. The Com­ mission does not plan to effect such a metamorphosis since it is clear from section 7A(i)(l) of the act that Con­ gress permitted both the Commission and the Antitrust Division to be free to proceed against any acquisition even though no action was taken within the waiting period. SECTION 802.71 ACQUISITIONS BY GIFT, SUCCESSION OR DEVISE, OR BY IRREVO­ CABLE TRUST This rule exempts acquisitions re­ sulting from gifts, intestate succession, testamentary dispositions, and trans­ fers into irrevocable trusts by settlors. Acquisitions by trusts from persons other than settlors are not exempted by the rule. For such acquisitions the trust is the acquiring person, and the tests of section 7A(a) determine whether the act applies.

See §801.1(0(3).

Note that transfers by a settlor into a revocable trust, or into any trust in which a settlor retains a reversionary interest, also are not exempted by the rule. However, such transfers are not reportable because the rules disregard the transfer. Under § 801.1(c)(4), the settlor continues to hold the assets or voting securities constituting the corpus of such trusts.

33505 Background Information to § 802.71 The acquisitions exempted by the rule are typically involuntary and without consideration. The Commis­ sion believes that the likelihood of an antitrust violation resulting from such an acquisition is significantly less than from cases in which an acquiring person actively seeks to purchase assets or voting securities. In response to comments 1071 and 1089, the rule exempts transfers into inter vivos trusts.

P a r t 803 o f t h e R u l e s SECTION 803.1 NOTIFICATION AND REPORT FORM Paragraph (a) of this rule provides that the notification required by the act shall be the notification and report form, which is an appendix to Part 803 of the rules. All persons required by the act^and the rules to file notifica­ tion are directed to comply by com­ pleting and filing the notification and report form (or a photostatic or other equivalent reproduction of the form) in accordance with the instructions on the form and those contained in the rules. This portion of the rule also ex­ plains where copies of the form may be obtained, either in person or by mail. Paragraph (b) of the rule states that any person filing notification may, in addition to the submissions re­ quired by the rule, submit any other information or documentary material that it believes will be helpful to the enforcement agencies in assessing the impact of the acquisition upon compe­ tition. If the parties attempt to antici­ pate the analysis of the enforcement agencies or believe the information in the form provides and incomplete pic­ ture, they may wish to augment their submissions in an effort to clarify or expand upon any required information or to demonstrate that the transaction would not violate the antitrust laws if consummated.

B a c k g r o u n d I n f o r m a t io n t o § 803.1 Section 7A(d)(l) directs the Commis­ sion by rule to “require that the noti­ fication required '(by the act) be in such form and contain such documen­ tary material and information rele­ vant to a proposed acquisition as is necessary and appropriate to enable the Federal Trade Commission and the Assistant Attorney General to de­ termine whether such acquisitions may, if consummated, violate the anti­ trust laws * * The Commission finds that complete responses to each of the items on the notification and report form, along with copies of the documentary materials required to be submitted with- the form, are neces­ sary and appropriate to enable the Commission and the Assistant Attor- FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33506 ney General to discharge their respon­ sibilities under the act. Paragraph (a) of the final rule ap­ pears essentially as it did in original § 803.05(a) and revised § 803.1(a). Origi­ nal § 802.50 contained a reference to a short form, which was to have been filed when acquiring persons made ad­ ditional acquisitions of assets or voting securities of the same acquired person after filing a notification and report form. Since the short form reporting mechanism was eliminated from the revised and final rules, the reference to it was deleted. See the statement of basis and purpose to § 802.21. Paragraph (b) was added in the final rules. Its purpose is to encourage per­ sons filing notification to provide any other information or materials that may be helpful to the enforcement agencies in assessing the impact of a reportable transaction upon competi­ tion.

The revised rule contained two para­ graphs (§ 803.1 (b) and (c)) that re­ ferred the the Commission’s existing reporting programs relating to certain acquisitions in the grocery and dairy industries. These programs require submission of special reports 60 days in advance of consummation of trans­ actions to which they apply. The pur­ pose of these paragraphs was to co­ ordinate the timing requirements for persons required to file both under the act and rules and under either the gro­ cery or the dairy acquisitions report­ ing program.

j These provisions were eliminated from the final rule. The Commission has determined that it can accomplish the same purpose by altering the re­ porting obligations contained in its grocery and dairy acquisitions report­ ing programs. Because those programs were promulgated under the Federal Trade Commission Act, the anticipat­ ed changes do not appear in these rules but will appear in amended orders to be issued under the FTC Act. When those orders are amended, persons required to file notification under the act which are to acquire voting securities or assets of a person engaged (in whole or in part) in whole­ sale or retail grocery distribution (SIC Groups 514 and 541, respectively) will, in addition to the notification required by § 803.1(a), simultaneously file FTC Forms 1859 A and B with Supplement, completed in accordance with the instructions contained on those forms and in the Commission’s amended order. Persons required to file notifica­ tion under the act which are to ac­ quire voting securities or assets of a person engaged (in whole or in part) in the processing or distribution of Class I milk products (SIC product classes 20262 and 20264) will, in addition to the notification required by § 803.1(a), simultaneously file FTC Special RULES AND REGULATIONS Report on Acquisitions and Mergers by Corporations in the Fluid Milk Products Industry, completed in ac­ cordance with the instructions there­ on and the Commission’s amended order.

Because the requirement to file either the grocery or the dairy report­ ing forms does not. stem from these rules, but from separate orders under the FTC Act, that requirement does not constitute a request for additional information within the meaning of section 7A(e) or § 803.20. As in the past, the special grocery and dairy re­ ports will be filed only with the Com­ mission.

SECTION 803.2 INSTRUCTIONS FOR NOTIFICATION AND REPORT FORM Section 803.2 prescribes instructions for completing the Notification and Report Form. Some of its provisions are not contained within the form itself, and reference to § 803.2 is essen­ tial if the Form is to be completed cor­ rectly.

Paragraph (a) of the rule designates which entities or natural persons may file notification on behalf of the “person” to which the language of the act refers. Paragraphs (b) and (c) pre­ scribe limited or separate responses for certain items on the Notification and Report Form under certain cir­ cumstances. Paragraph (d) defines the term “dollar revenues” that appears throughout the form.

SECTION 803.2(a) Paragraph (a) of the rule specifies which entities may file notification on behalf of a “person” to which the act and rules apply. The first clause sup­ plies the general rule: That the ulti­ mate parent entity included within the person filing notification is re­ sponsible for filing the Notification and Report Form. Although para­ graph (a) permits the ulimate parent entity to authorize another entity in­ cluded within the same person to file the form on its behalf, the responsibil­ ity for fully complying with the act and rules nevertheless remains with the ultimate parent entity. The au­ thorization need not be formalized; all that is necessary is that the entity ac­ tually filing the form submit a form complying with the act and rules. A natural person who is the ultimate parent entity of a person required to file notification must do so just like any other ultimate parent entity. Noti­ fication may be filed on behalf of a natural person by a “legal representa­ tive.” The term “legal representative” contemplates an attorney in fact, a legal guardian or custodian, or any other equivalent person^ Of course, natural persons who control other en­ tities may also authorize other entities included within the “person” to file on their behalf.

The proviso at the end of the para­ graph directs that, notwithstanding other provisions in the rules, a natural person, spouse and minor children shall file only one Notification and Report Form reflecting the holdings of all of them. The example to the paragraph illustrates the proviso. Section 803.4 also addresses the filing of the form, and contains a spe­ cial procedure for certain circum­ stances when foreign persons refuse to file notification.

B ackground Inform ation to § 803.2(a) The general rule stated by para­ graph (a), that the responsibility for filing the Notification and Report Form lies with the ultimate parent entity included within the person, is appropriate because the ultimate parent entity “controls” every other entity included within the person. See § 801.1(a)(1). The ultimate parent entity therefore can direct the actions of the other entities included within the person. Permitting the ultimate parent entity to delegate the task of filing the form reflects the fact that in some instances the ultimate parent entity may not be in the best position to gather the data necessary to com­ plete the form.

The rule specifies that the preacqui­ sition ultimate parent entity is to file notification in order to forestall any confusion if the ultimate parent entity of one or more of the reporting per­ sons is to change as a result of the ac­ quisition.

The provision permitting a legal rep­ resentative of a natural person to file notification on behalf of a natural person simply attempts to ease the mechanics of compliance in such cases. The provision regarding the spouse and minor children of a person is nec­ essary because the definition of “hold” in § 801.1(c)(2) attributes the holdings of a natural person, spouse and minor children to each other. In effect, each is viewed as holding the combined holdings of the group. Section 801.2, therefore, would designate each member of the group as an acquiring or acquired person if any of them is. Since multiple forms reflecting the same holdings are unnecessary, the rule provides that only one, form should be filed.

No equivalent to § 803.2(a) appeared in the original rules. The final rule re­ flects only minor changes from revised § 803.2(a).

The revised rule provided that if a person had two ultimate parent enti­ ties, both would be required to file. This situation could have arisen only when an entity controlled by two per­ sons, such as a corporation with two 50 percent shareholders or a two- FEDERAL REGISTER, VO L. 43, NO. 147— M O N D AY, JULY 31, 1978

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RULES AND REGULATIONS 33507 person partnership, was party to a re­ portable acquisition. This provision was deleted because the final rules now treat such an entity as being part of two persons, rather than as one person with two ultimate parent enti­ ties. See the example to § 801.2(a). Under the final rules, each ultimate parent entity is required to file notifi­ cation as part of a “person” compris­ ing itself, the entity of which control is shared, and any other entities it may control (but not the other ulti­ mate parent entity with which it shares control).

The proviso in the revised rule stated that either the natural person(s) or the trustee(s) could file the form in such cases. This provision was deleted since § 801.1(c)(3), part of the definition of “hold,” provides that a trust generally “holds” securities which it acquires. Therefore, the trust, rather than its beneficiaries or its trustee(s), is the entity (and “person”) to which the act applies. SECTION 803.2 (b) Paragraphs (b) and (c) of the rule in­ struct persons completing the Notifi­ cation and Report Form that for cer­ tain acquisitions the acquiring or ac­ quired persons must submit limited or separate responses to certain items on the form. The items on the form to which the paragraphs apply include those requiring the submission of reve­ nue, geographic and other data. If the form is not completed in accordance with this rule, the enforcement agen­ cies may be unable to determine whether the transaction may violate the antitrust laws, and ma,y reject the form as improperly filed under § 803.10(c)(2) or may request addition­ al information under section 7A(e) and § 803.20.

Clause (b)(l)(i) specifies that, in re­ sponding to items 5-9 and the appen­ dix, acquiring persons must. provide data with respect to all their activities. Clause (bXIXii) provides that in an acquisition of assets, the acquired person must respond only with respect to the assets to be acquired. If the assets to be acquired represent the entire acquired person, then the ac­ quired person’s response will be the same as it would have been without the instruction; but if the assets to be acquired represent only part of the ac­ quired person, then that person must restrict its responses to the assets to be acquired.

Clause (bXIXiii) is analogous to clause (bXIXii) for acquisitions of voting securities. For example, if only one subsidiary of the acquired person is being acquired, then the acquired person should report on the activities of only that subsidiary (and any enti­ ties controlled by that subsidiary). Clause (bXIXiv) specifies that per­ sons that are both acquiring and ac­ quired persons must respond separate­ ly in the manner that paragraph (b) directs, if such responses will be differ­ ent. This situation will occur, for ex­ ample, when less than all of the assets, or voting securities of a subsidiary, of the acquired person is to be acquired, and the acquired person is to receive stock or assets of the acquiring person in return. The acquired person will thus become an acquiring person as well; see § 801.2(c). In such cases the reporting person will submit data first as a,n acquiring person with respect to all its activities, and separately as an acquired person with respect only to the assets or voting securities to be ac­ quired. Separate reponses to the items, clearly labeled, are sufficient, rather than two entire Notification and Report Forms.

Items 7-9 of the form require the person filing' notification first to decide whether it and other reporting persons derive revenues in one or more of the same four digit SIC code indus­ tries. Section 803.2(b)(1) dectates that in an asset acquisition, for example, the acquired person for purposes of items 7-9 should regard itself as deriv­ ing only the dollar revenues attributa­ ble to the assets to be acquired. Subparagraph (b)(2) of the rule requires the acquiring person, in the course of completing items 7-9, to compare its dollar revenues to only those same dollar revenues—that is, those attrib­ utable to the assets to be acquired. Subparagraph (b)(2) does this by di­ recting the acquiring person, for pur­ poses of the comparisons in items 7-9, to regard the acquired person in the manner specified by clauses'(bXIXii) and (bXIXiii) of the previous subpara­ graph.

Note that subparagraph (b)(1) also applies to items 7-9. Therefore, the ac­ quired person, if it is also an acquiring person, must Under clause (bXIXiv) answer items 7-9 separately in its ca­ pacity as an acquiring person (i.e., with respect to all its activities) as well as with respect to the assets or voting securities to be acquired, if the re­ sponses would be different. An example illustrates paragraph (b).

B ackground Inform ation to § 803.2 (b) The responses to items 5-9 of the Notification and Report Form will pro­ vide much of the data that the agen­ cies will use to gauge the competitive impact of the acquisition. Paragraph (b), by specifying limited or separate responses, insures that the data sup­ plied will enable the agencies to per­ form their initial review with refer­ ence to the specific impact of the ac­ quisition. Thus, clause (b)(l)(i) speci­ fies that acquiring persons must pro­ vide data on all their activities, be­ cause all their activities will be under common control with the stock or assets to be acquired. The proposal in comment 1027, which suggested that the acquiring person should disclose only activities matching or related to activities of the acquired person, was rejected. This approach is inappropri­ ate since the purpose of the act is to permit the agencies to do their own analysis, rather than rely on the par­ ties for that purpose.

Clauses (bXIXii) and (bXIXiii), re­ stricting the data submitted by the ac­ quired person to the assets or voting securities to be acquired, are essential to a meaningful evaluation of partial acquisitions. Without the instruction, the data relevant to the assets or voting sécurités to be acquired would be mingled with the data reflecting assets or subsidiaries of the acquired person not being acquired. Comment 1115 complained that this requirement may be a hardship if the information is maintained by the filing person on a consolidated basis.* The C om m ission believes that regardless of any hard­ ship, the information is indispensable, and therefore meets the statutory standard of section 7A(d)(l) as “neces­ sary and appropriate” to determine whether the acquisition may violate the antitrust laws. In addition, the data will in many cases have been seg­ regated by the parties in the course of negotiating or analyzing the acquisi­ tion.

For the same reasons that other ac­ quiring persons must disclose all their activities acquired persons that are also acquiring persons likewise must do so. Such persons report separately in each capacity because of the differ­ ent focus of the antitrust analysis in each instance: In one case, the acquir­ ing person’s acquisition of the ac­ quired person’s assets or subsidiary, and in the other, the acquired person’s holdings of the acquiring person’s stock. Clause (bXIXiv) accomplishes this result.

Comment 1059 suggested language to clarify that the acquired person must meet the criterion of -section 7A(a)(3)—i.e., must satisfy the 15 percent-or-$15 million size-of-transaction test—independently as an acquiring ■person, before the more burdensome responses as an acquiring person must be provided. The comment cited the example of a $20 million asset sold principally for cash. The comment suggested that inclusion of a minor noncash asset, or a small amount of voting securities, should not trigger the acquired person’s responsibility to file as an acquiring person. The final rules reach this result by means of § 801.2(e), which provides that in such cases the acquisition of the stock or FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33508 assets of the acquiring person is sepa­ rately subject to the act, i.e., is not subject to the act and'rules unless sep­ arately satisfying the criteria of sec­ tion 7A(a)*, and §801.21, which pro­ vides that cash is not an asset when acquired. See the Statements of Basis and Purpose to §§ 801.2(e) and 802.21. Subparagraph (b)(1) (the four clauses just discussed) appeared in the original rules as the “Special Instruc­ tion” on page 2 of the Notification and Report Form and attracted virtually no comment. Its content was thought more appropriately embodied as a rule, and it appeared in the revised rules as § 803.2(b). Final § 803.2(b)(1) retains revised § 803.2(b) with only sty­ listic changes.

Subparagraph (b)(2) was added to the final rule to cure the omission noted by comment 1070. Responses to items on the form that require com­ parisons between the activities of the acquiring and acquired persons will yield responses meaningful to the agencies’ review only of the acquiring person compares its activities to the specific assets or voting securities about which the acquired person re­ ports.

SECTION 803.2(c) Paragraph (c) provides two addition-^ al instructions for completing items 5, 7, 8, 9, and the appendix to the form. Subparagraph (c)(1) provides that information shall be supplied only with respect to operations conducted within the United States.

See § 801.l(k).

Subparagraph (c)(2) provides that data need not be supplied with respect to assets or voting securities to be ac­ quired, the acquisition of which is exempt from the reporting and wait­ ing-period requirements of the act under any provision of the act or rules.

B ackground Inform ation to § 803.2(c) Subparagraph (c)(1) is necessary to assure that the responses are as nearly as possible comparable to the data published by the U.S. Bureau of the Census in its Economic Censuses. It appeared on the instruction page of the Notification and Report Form in the original rules (and still appears there) and was added to § 803.2(c) of the revised rules. The final rules retain the provision unchanged save for adjusting the item numbers* on the form.

The only comment to address the provision (1053) suggested that a dollar revenue threshold of $1 million in an SIC category should be satisfied before data must be supplied concern­ ing that SIC category. The suggestion was rejected for the reasons stated in the Statement of Basis and Purpose to RULES AND REGULATIONS the various parts of item 5 of the form.

Subparagraph (c)(2) confirms that exempt acquisitions are totally exempt from the requirements of the act and are not subject to disclosure on the form even if acquired along with non­ exempt assets or voting securities. The provision attracted no comments and was retained in the final rules without change.

SECTION 803.2(d) Paragraph (d) of the rule defines the term “dollar revenues,” which appears throughout the Notification and Report Form. The term identifies which goods and services are to be taken into account for purposes of the form and how they are to be valued. It occurs in two principal contexts on the form. First, item 5 requires persons filing notification to disclose the dollar revenues derived in various SICbased categories. Second, responses to items 7-9 are conditioned upon more than one reporting person’s deriving dollar revenues in the same industry. For manufacturing operations, dollar revenues are value of ship­ ments; for nonmanufacturing oper­ ations, dollar revenues are other ap­ propriate measures of receipts, includ­ ing, for example, insurance premiums and sales commissions. The definition specifies the treatment of returns, allowances, and the like. Dollar rev­ enues include interplant transfers. B ackground Inform ation to § 803.2(d) The definition was devised in order to permit comparison between the data supplied in item 5 on the form and the data compiled by the U.S. Bureau of the Census in its economic censuses. The Census Bureau denomi­ nates its figures “value of shipments” for manufacturing operations, and “value of sales” for nonmanufacturing operations. The term “dollar rev­ enues” was selected because “value of shipments” and “value of sales” are es­ sentially equivalent, and “dollar rev­ enues” embraces both census terms. The definition of “dollar revenues” in the original rules appeared on page 1 of the Notification and Report Form.

It was transferred into § 803.2(d) of the revised rules along with other instructions to the Notifi­ cation and Report Form; as part of a consolidation of most of the substan­ tive instructions into the rules. The re­ vised definition contained only stylis­ tic changes, except that the last sen­ tence of the original definition, requir­ ing an explanation of the dollar rev­ enues in certain two-digit SIC major groups, was transferred into items 5(a) and 5(c). The final definition is identi­ cal to the revised definition. The only aspect of the definition which attracted comment was the in­ clusion of interplant transfers. Several comments (15, 26, 74; 1102) questioned this provision, suggested that it was burdensome, or requested its deletion. Interplant transfers were retained be­ cause their inclusion is essential if the data on the form áre to be comparable to the census of manufactures. One comment (74) was incorrect in assert­ ing that the census figures do not in­ clude interplant transfers; see, e.g., 1 U.S. Bureau of Census, Census of Manufactures, 1972, XXIX. SECTION 803.3 STATEMENT OF REASONS FOR NONCOMPLIANCE Section 803.3 requires that a com­ plete response must be supplied to each item on the Notification and Report Form, and to any request for additional information under section 7A(e) and § 803.20. Whenever a person filing notification is unable to supply a complete response to any item on the form, any part of an item or any por­ tion of a request for additional infor­ mation, the person must submit a statement of reasons for noncompli­ ance. Such a statement must indicate why the person is unable to supply a complete response; what information is required for a complete response; who, if anyone, has the required infor­ mation; and what efforts were made to obtain that information. A separate statement must be provided for each item, part of an item, or portion of a request that is not fully answered. Under section 7A(b)(l)(A), the wait­ ing period begins when the reporting persons submit completed notification and report forms, or, if any responses are not complete, the forms to the extent completed together with state­ ments of the reasons for such noncom­ pliance. Section 7A(e)(2) contains a similar provision with respect to re­ quests for additional information. Sec­ tion 7A(g)(2) states that if a person fails substantially to comply with either of these requirements, a U.S. district court may order compliance and (with one exception) is required to extend the waiting period until there has been substantial compliance. The only exception is that when the issuer in a tender offer has failed substan­ tially to comply, the court may order compliance but may not extend the waiting period. See section 7A(g)(2). A complete response, within the meaning of the act and rules, is one that supplies all requested informa­ tion. Anything less than a complete re­ sponse potentially is not substantial compliance. The rule does not define substantial compliance, and the agen­ cies contemplate resolving whether a person has substantially complied on a case-by-case basis. The provisions of § 803.3 are designed to focus on the in­ formation necessary to determine whether the filing person actually FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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cannot supply the required informa­ tion or documents, or whether the failure is based on a mere unwilling­ ness to comply or misunderstanding of what is required by a particular item. B ackground I n fo r m a t io n to § 803.3 The legislative history supports the focus of the rule. Senator Hart indi­ cated:

The submission of (the statement of rea­ sons for noncompliance) is clearly not a sub­ stitute for compliance with the notification obligation. The explanation will, however, serve two salutary purposes. First, it will tend to reduce the disagreement between the agencies and the persons subject to the Act since the antitrust authorities will be in­ formed of the reasons underlying noncom­ pliance. Second, the explanation will be useful in any civil penalty proceeding that may be brought under subsection (g)(1). 122 Cong. Rec. S15417 (daily ed. Sept. 8, 1976).

By specifying in advance the type of information that must be included in the statement, the rules attempt to minimize such “disagreement between the agencies and the persons subject to the act.” In most cases, a controver­ sy over the adequacy of a response to an item on the form or a request for additional information should be re­ solvable by reference to the statement of reasons for noncompliance. Vague, uninformative reasons for noncompli­ ance could necessitate requests for ad­ ditional information or documentary material pursuant to section 7A(e) and §803.20, or an action in district court under section 7A(g)(2). The original rule would have re­ quired a somewhat more detailed statement of reasons for noncompli­ ance. Original § 803.25(b) required that whenever “less than a complete re­ sponse has been supplied,” the filing person must indicate what additional work would be required to furnish the complete response; and whether a complete response was being prepared, and if so, when it would be submitted. See original § 803.25(b) (4), (5). The original rule was refined and amended. Revised §803.3 made clear that statements of reasons for noncompliance must indicate why the filing person cannot submit, rather than merely has not submitted, a com­ plete response to any item on the form. The revised rule also specified that the rule applies to requests for additional information. The final rule added the requirement that a state­ ment of reasons for noncompliance must describe all efforts made to obtain the required information from another person that has it. These revisions were made, in part, to emphasize that the situations in which a person will be deemed “unable” to supply a complete re­ sponse will be construed narrowly. A RULES AND REGULATIONS complete response cannot be supplied, for instance, if necessary information is in the hands of a person that re­ fuses to make it available to the filing person. That it will be costly or bur­ densome to obtain requested informa­ tion will not necessarily excuse a fail­ ure to comply substantially; nor does the fact that another person has the requested information, standing alone, excuse a filing person from seeking and submitting the information. The acceptability of reasons for noncompli­ ance will be determined on a case-by­ case basis.

Several comments (103, 115; 1108) disputed the Commission’s basic au­ thority to promulgate a rule specify­ ing what should be included in the statement of reasons for noncompli­ ance. However, section 7A(d) clearly gives the Commission such power. Other comments suggested that the rule was too inflexible (1076) or mis­ leading (1059) because the statute re­ quires substantial rather than abso­ lute compliance. These comments were rejected. The information neces­ sary to complete the form is the type that a filing person normally can pro­ vide from its records, and complete compliance is necessary for the agen­ cies to perform the review envisioned by the act. Thus, it is the C om m ission’s position that anything less than complete compliance potentially is not substantial, compliance. Another com­ ment (1086) suggested that persons should be permitted to decide which items on the form are relevant or irrel­ evant to the acquisition and to answer only those items they deem relevant at the risk of a request for additional information. This approach is inappro­ priate; all items on the form were de­ signed to evoke the information most relevant to an antitrust analysis. Therefore, aif incomplete response to any item on the form diminishes the ability of the enforcement agencies to make a well-informed evaluation of the acquisition. A decision on the part of a filing person that an item is irrele­ vant does not relieve that person of the obligation to provide a complete response to the item.

SECTION 803.4 FOREIGN PERSONS REFUSING TO FILE NOTIFICATION In certain situations in which a for­ eign acquired person refuses to file the notification required by the act and the rules, this rule permits any other party to the transaction to file notifi­ cation on behalf of the foreign person. This provision is set forth in para­ graph (a) of the rule; paragraphs (b), (c), and (d) establish the procedural framework for this special type of no­ tification. The term “foreign person” is defined in § 801.1(e)(2)(i). Under paragraph (a), the rule ap­ plies only to transactions to which 33509 § 801.30 does not apply—that is, to con­ sensual two-party acquisitions. In ad­ dition, the rule applies only if the for­ eign person is an acquired person.-Fi­ nally, the rule applies only if no assets located in the United States (other than investment assets) and no voting securities of United States issuers are to be acquired. If any assets located in the United States or voting securities of United States issuers are to be ac­ quired indirectly—that is, because they are held by the issuer to be ac­ quired—the rule is inapplicable. The term “investment assets” is defined in § 801.1(i)(2). The rule thus applies principally to acquisitions by United States persons that fail to gain exemp­ tion under § 802.50.

Paragraph (b) requires that the person filing on behalf of the foreign person must state in the affidavit re- ' quired under § 803.5(b) that the for­ eign person has refused to file notifi­ cation, and must explain all efforts it has made to obtain that person’s com­ pliance. Paragraph (c) provides that the substitute filing must contain all information and documentary materi­ al required of the foreign person that is reasonably available to the person actually filing. For example, informa­ tion located abroad in the possession of the foreign person that the person refuses to disclose may not be reason­ ably available. If some information or documentary material is not available, the person filing on behalf of the for­ eign person must so indicate, but need not supply a formal statement of rea­ sons for noncompliance as provided in § 803.3.

According to paragraph (d), howev­ er, even when this substitute filing procedure is used, the foreign person remains the “person filing notifica­ tion” for the purposes of the Act and the rules. Therefore, the foreign person still may be issued a request for additional information under section 7A(e) and § 803.20, and the waiting period will be extended until twenty days after that person has responded. Section 803.4 does not permit substi­ tute responses to a request for addi­ tional information under section 7A(e) and § 803.20. If a foreign acquired person refuses to respond to a second request, it is possible that the waiting period will continue indefinitely.

(Note, however, that despite the pend­ ency of a second request, the agencies retain the power to terminate the waiting period sua sponte pursuant to § 803.11(c).

See the example to § 803.20(c).) B ackground I n fo r m a t io n to § 803.4 The purpose of this rule is to permit the consummation of certain consen­ sual two-party transactions when a foreign acquired pérson refuses to file notification. Under the limited circum- FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33510 stances describe^ in the rule, another party to the acquisition may file on behalf of the foreign person so that the waiting period can begin, as sec­ tion 7A(b)(l) requires, upon receipt of notification from both the acquiring and acquired persons. (The problem does not arise for transactions covered by § 801.30, because that rule condi­ tions the start of the waiting period on receipt of only the acquiring person’s completed Form.) If either agency requires additional information or finds that some infor­ mation not supplied on the form is needed for its analysis, a foreign person will not be able to thwart the agency’s investigation by refusing to respond to a request for additional in­ formation. Paragraph (d) of the rule makes clear that the “person required to file notification,” to which a re­ quest for additional information may be addressed, remains the foreign person. If the foreign person does not respond to the second request, the waiting period will not expire and the person may be subjected to a suit for compliance under section 7A(g) after failing to respond within a reasonable time. See §803.21. In this situation, since the foreign person will in many cases have exclusive access to the addi­ tional information or documentary material requested, it is inappropriate to permit another party to the trans­ action to respond.

This rule does not permit another party to transaction to file on behalf of a foreign acquiring person under any circumstances. Furthermore, for similar reasons, the rule applies only to acquisitions of foreign assets and of voting securities of a foreign issuer. This rule had no counterpart in the original or the revised rules. It was in­ serted in the final rules partly in re­ sponse to comments (e.g., 1059, 1063) that argued that noncompliance by foreign persons may prevent U.S. com­ panies from consummating certain kinds of transactions. The rule also re­ sponds in part to comment 87, which recommended an ad hoc exemption rule to permit the consummation of transactions in which a foreign ac­ quired person refuses to file notifica­ tion. For discussion of that specific suggestion, see the Statement of Basis and Purpose on the “ad hoc exemp­ tion” issue, below.

SECTION 803.5 AFFIDAVITS REQUIRED Section 803.5 requires that affidavits attesting that certain pre-notification obligations have been fulfilled must accompany each Notification and Report Form. It thus governs when notification may be filed. Paragraph (a) provides that before notification may be filed in connection with acquisitions described in § 801.30, the acquired person must receive from RULES AND REGULATIONS the acquiring person certain informa­ tion relevant to the acquisition. In ad­ dition, in the case of a tender offer, the intention to make the offer must have been publicly announced. Para­ graph (b) provides that in all other ac­ quisitions notification may be filed after a contract, agreement in princi­ ple or letter of intent to merge or ac­ quire has been executed. Subparagraphs (a)(1) specifies the information that, in all acquisitions to which § 801.30 applies, the issuer of the voting securities must receive from the acquiring person. The information must be delivered to the issuer by cer­ tified or registered mail, by wire or by hand to its principal executive offices. Subparagraph (a)(2) provides that the acquiring person must attest that it has a good faith intention to make the acquisition and, in the case of tender offers, that the intention to make the offer has been publicly an­ nounced. The public announcement may be effected by a press release an­ nouncing the acquiring person’s inten­ tion to make the offer, by a filing under a state statute that has the effect of publicly announcing the ac­ quiring person’s intention to make the offer, or by actually publishing and commencing the offer. (In the latter case, of course, the tender offer could not be consummated until the waiting period expires or is terminated.) Paragraph (b) of the rule provides that for all transactions to which §801.30 does not apply—typically transactions which the parties have negotiated directly with each othernotification must be accomplished by an affidavit stating that a contract, agreement in principle, or letter of intent to merge or acquire has been executed. Thus, the parties may file notification at any time after one of those types of documents has been ex­ ecuted.

The rule requires that the affidavits be attached to the front of the notifi­ cation. A Notification and Report Form submitted without the affidavits required by this rule is a deficient filing and will not begin the running of the waiting period.

See § 803.10(c)(2).

B ackground Inform ation to § 803.5 By requiring that certain affidavits accompany the Notification and Report Form, § 803.5 accomplishes two purposes. First, it ensures that the ac­ quired person is informed of its obliga­ tion to file notification when the ac­ quired person may not otherwise be aware of that duty. Second, it governs when persons may file notification. Subparagraph (a)(1) accomplishes the first purpose of the rule, that of informing the acquired person of its obligation to file notification in in­ stances when it might not be aware of the facts. Those instances are transac­ tions of the types described in § 801.30, which do not necessarily involve agree­ ment between the acquiring and ac­ quired persons. The information set forth in clauses (a)(l)(i)-(vi) of the rule will provide the issuer with cer­ tain information necessary to com­ plete its Form as an acquired person. The requirement that the acquiring person attest that the information has been received (not merely that it has been sent) is intended to make certain that a delay in delivery will not reduce the time available to the acquired person to prepare and file its notifica­ tion or the time within which the en­ forcement agencies must complete their review. The rule specifies that the information may be transmitted to the offices of the acquired person by wire primarily in order to accommo­ date foreign transactions. Several comments (e.g., 19, 73, 74, 78, 93) suggested that original § 803.15 was inadequate in that open market or other acquisitions of voting securities from third-party holders (other than tender offers) were not addressed by the rule and were improperly included with consensual acquisition in para­ graph (b). Revised § 803.4 added subparagraph (a)(1) to accommodate such acquisitions.

Revised § 803.4 also would have pro­ vided for service of the information by any means permitted under rule 4(d) of the Federal Rules of Civil Proce­ dure. That provision would* have per­ mitted service to individuals or places other than the acquired person’s prin­ cipal executive offices, and conse­ quently might have introduced a degree of uncertainty and delay into the timing of the waiting period. Ac­ cordingly, the reference to the Federal Rules of Civil Procedure was deleted, and final § 803.5(a)(1) specifies the permissible, means of transmitting the information.

The final version also refers to § 803.30 transactions instead of refer­ ring to “tender offers and other acqui­ sitions of voting securities from third parties.” This change simply reflects the rephrasing and clarification of § 803.30. See the Statement of Basis and Purpose to that rule. Two considerations motivate the in­ clusion of subparagraph (a)(2) arid paragraph (b), which require a good faith intention to make the acquisi­ tion, public announcement of tender offers, and execution of a contract, agreement in principle or letter of intent. First, those provisions ensure that the parties intend to consummate the acquisition, and are not using noti­ fication as a means of testing the agencies’ enforcement intentions. Be­ cause of the time and resource con­ straints upon the agency staffs, the agencies could not tolerate review of / FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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RULES AND REGULATIONS 33511 hypothetical transactions. Second, the requirement assures that the forms will contain sufficiently definitive in­ formation about the transaction to permit accurate analysis. The original rule, §803.15, would have required that in tender offers, the offeror must attest that the tender offer had been “published, sent or given” to the security holders of the issuer of the voting securities to be acquired. The SEC, in its comment (125) on the original rule, supported this provision. The comment urged that pre-commencement notification not be required. A pre-commencement notification, requirement, it said, would have “(tipped) the balance of regulation in favor of the subject com­ pany and undermined the extreme care taken by Congress in enacting the Williams act to balance the interest of both the bidder and the subject com­ pany, while providing full and fair dis­ closure to investors and others.” See also the Statement of Basis and Pur­ pose to § 803.30.

However, several comments (e.g., 12, 63, 93, 96) objected to this provision. Since some State statutes require per­ sons intending to make certain types of tender offers to file notice of their intentions significantly in advance of making the offers, the waiting period required by the act would not begin to rim until after the waiting period re­ quired by State law. Therefore, these comments requested that notification be permitted before commencement of the tender offer.

Revised § 803.4 eliminated the re­ quirement that the tender offer be “published, sent or given” to security holders of the acquired issurer before notification could be filed. It substitut­ ed the requirements that the offeror state its good faith intention to make the acquisition, and that the tender offer must have been publicly an­ nounced.

Since filings under most State stat­ utes of the type referred to by the comments have the effect of making public the acquiring person’s intention to make the offer, the revised (and final) rule permits notification prior to commencement of the tender offer when such a filing has been made. In permitting such notifications, the commission, as it stated in the F ederal R egister notice accompanying the re­ vised rules, 42 FR at 39046-47 (August 1, 1977), takes no position about whether any State statute requiring any type of filing by the acquiring person in a tender offer is preempted by Federal statute or regulations, or may be otherwise unlawful. The Com­ mission specifically does not endorse or oppose the principle of required dis­ closure of planned tender offers which underlies such statutes. The SEC suggested in its second comment (1058) that in view of the un­ certainties surrounding tender offers (including the possible effects of State statutes, the increasing incidence of competing tender offers and possiblity of litigation in connection with tender offers), the affidavit required in para­ graph (a) should reflect only a good faith intent to make an offer, rather than the intent to make an acquisi­ tion. The final rule retains the word “acquisition,” although as the com­ ment noted developments subsequent to the attestation may thwart' the tender offer.

Another comment (1102) suggested that public announcement of the tender offer should not be necessary when there is no legal requirement of publication. However, the purposes of the requirement support retaining it even when public announcement is not otherwise compelled.

Original § 803.15(b) and revised § 803.4(b) would have allowed notifica­ tion only when a contract or agree­ ment in principle had been executed. Several comments (e.g., 15, 93; 1040) however, urged that the execution of a letter of intent represented a suffi­ ciently definite transaction to satisfy the agencies’ concerns, and so the letter of intent was added to final § 803.5(b).

Several comments (e.g., 1011, 1090) objected to the requirement still pres­ ent in paragraph (b) that a written agreement must be executed before notification can be filed. Comment 1011 suggested that since some acqui* sitions involve no written agreement prior to closing, the rules should permit notification regarding acquisi­ tions not reduced to writing, provided that they are consummated within 180 days after the expiration of the wait­ ing period. Similarly, comment 1019 urged that the affidavit mandated by paragraph (b) is improper since agree­ ments to merge or otherwise acquire voting securities or assets of another company often are not reduce to writ­ ing for some time after they are made. . It suggested that the waiting period should be permitted to commence and expire before finalization of the terms of the acquisition, rather than after the terms have been embodied in a written agreement. Not withstanding the comments, the agencies believe that oral agreements to .engage in sig­ nificant acquisitions are unusual. In view of the important purposes served by the requirement, the suggestions made by these two comments have been rejected.

SECTION 803.6 CERTIFICATION This rule states that the notification required by the act and the response to a request for additional information under section 7A(e) and § 803.20 must be certified and specifies who may perfom that certification. With re­ spect to notification, paragraph (a) provides that any general partner in a partnership or any officer or director of a corporation may do so. When a re­ porting person has neither officers, di­ rectors nor partners, the certification may be provided by any individual ex­ ercising functions similar to those of an officer, director or general partner. A natural person filing notification, or his or her legal representative, must certify a filing by or on behalf of such person.

Paragraph (b) requires that addi­ tional information or documentary material submitted pursuant to a re­ quest under section 7A(e) and § 803.20 must be accompanied by a certifica­ tion in the format appearing at the end of the notification and report form, completed in accordance with paragraph (a) of this rule by the person or individual to whom the re­ quest was directed.

Paragraph (c) requires that the indi­ vidual who certifies the form or a re­ sponse to a request for additional in­ formation must possess actual authori­ ty to provide such certification on behalf of the person filing notification or responding to such request. The certification consists of a sworn statement appearing at the end of the Notification and Report Form, which reads as follows:

This Notification and Report Form, to­ gether with any and all appendices and at­ tachments thereto, was prepared and assem­ bled under my supervision in accordance with instructions issued by the Federal Trade Commission. Subject to the recogni­ tion that, where so indicated, reasonable es­ timates have been made because books and records do not provide the required data, the information is, to the best of my knowl­ edge, true, correct, and complete in accord­ ance with the statute and rules. B ackground Inform ation to § 803.6 The purpose of the certification re­ quirement is twofold. First, the certifi­ cation places upon the individual who signs it the responsibility for deter­ mining that, to the best of that indi­ vidual’s knowledge, the information provided is true, correct, and complete in accordance with the act and the rules. Second, the certification is in­ tended to estop the person on whose behalf the report is filed from later denying the completeness or accuracy of the information provided on the form, in the event that either enforce­ ment agency seeks to introduce any such information into evidence in any proceeding. It is also possible that criminal prosecutions of certifying in­ dividuals might be appropriate if, for example, data has been knowingly fal­ sified. The certification language is similar to that which has been used for a number of years on the reporting FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33512 forms under the Commission’s existing premerger notification program. The certification requirement ap­ peared in original § 803.20 and in re­ vised § 803.5 in substantially the same form as the final rule, except that the listing of who may provide certifica­ tion is somewhat expanded from that appearing in the original rule. Para­ graph (b) of the final rule was inserted to insure that responses to requests for additional information and docu­ mentary material are also certified, for the same reasons applying to the ini­ tial notification.

Several comments in response to the original rules discussed the' certifica­ tion requirement. One (15) suggested deletion of the word “actual” from the phrase “actual authority” in subpara­ graph (b) of the rule, but provided no reason or explanation. The term “actual authority” is meant to insure that the certifying individual possesses the authority to certify. In other words, an individual may not perform a certification unless he or she has been authorized to do so by the person on whose behalf the report is filed. See §§ 801.1(a)(1), 803.2(a). Another comment (28) objected to the certification requirement for an acquired firm, suggesting that this might constitute a warranty of some kind to the acquiring company. The comment did not explain why that result might occur, but in any case no such result is intended by the Commis­ sion.

Two comments (74, 88) suggested that the certification requirement was unreasonable. The former suggested that the certification attest merely “that a good faith effort to produce and deliver the information specified has been made.” That comment also suggested “a modified certification format where certain categories of in­ formation or styles of presentation are practically, but not absolutely, beyond the ability of the reporting person.” Comment 88 suggested that a “sub­ stantially accurate” standard be sub­ stituted for the “true, correct and complete” language in the certifica­ tion. The Commission believes that each of these suggestions is inappro­ priate.

Section 7A(g)(2) requires substan­ tial, rather than complete, compliance with the notification requirement and with any request for additional infor­ mation. It is the function of the rules to define full compliance and to speci­ fy the content of the statement of rea­ sons for noncompliance to be supplied whenever the act and the rules are not fully complied with.

See section 7A(b)(l)(A)(ii), (e)(2)(B), §803.3. The instructions on the Notification and Report Form permit the use of “best estimates” when books and records that provide accurate answers to items RULES AND REGULATIONS on the form are not available. Subject to these exceptions, the rules require full and complete compliance, and the certification at the end of the form at­ tests that this requirement has been satisfied by providing information that is accurate and complete to the best of the knowledge of the individu­ al who signs the form on behalf of the filing person.

SECTION 803.7 EXPIRATION OF NOTIFICATION Section 803.7 provides that notifica­ tion with respect to and acquisition ex­ pires 1 year after the related waiting period expires. Once notification ex­ pires, the situation is just as though notification had not been filed, and the parties must report and wait before any acquisition subject to the act may be consummated. For acquisitions of assets, therefore, the rule means that the acquisition must be consummated within 1 year following the expiration of the waiting period.

For acquisitions of voting securities, the rule works in tandem with §802.21. After an earlier acquisition with respect to which notification was filed, §802.21 exempts, under certain conditions, acquisitions of voting: secu­ rities not meeting or exceeding the next greater notification threshold than that attained in connection with the earlier notification. After notifica­ tion expires, no notification threshold greater than the highest one met or exceeded within 1 year after expira­ tion of the waiting period may be crossed without again filing notifica­ tion, even if notification has been filed regarding a higher threshold. The term “notification threshold” is de­ fined in § 801.1(h).

An example illustrates the rule. For more information, see the statements of basis and purposes to §§ 801.1(h) and 802.21.

B ackground Inform ation to § 803.7 This rule serves two purposes. First, it limits the acquiring person to a rea­ sonable period of time—1 year from the expiration of the waiting period— during which to consummate the ac­ quisition described in the notification. If the acquisition is to be consummat­ ed after that time, the possibility of changed circumstances warrants a fresh review by the enforcement agen­ cies.

Second, the rule minimizes the like­ lihood that filings under the act will be used as a means of testing the agen­ cies’ enforcement intentions with re­ spect to acquisitions that the report­ ing persons have no present intention to make. In this context the rule sup­ plements § 803.5(a)(2), which requires that acquiring persons submit an affi­ davit with the form stating a good faith intention to make the acquisi­ tion.

This rule appears for the first time in the final rules.

SECTION 803.10 RUNNING OF TIME Persons required by the act to file notification of an acqusition must thereafter wait 30 days (or, for a cash tender offer, 15 days) before consum­ mating the transaction. This rule ex­ plains the procedures for determining precisely when this waiting period begins and ends.

Under § 803.10(a), the waiting period begins on the date of receipt of the no­ tification and report form, or, if the form is not completed, upon receipt of the form to the extent completed and a statement or statements of reasons for noncompliance in accordance with § 803.3. Under subparagraph (a)(1), the waiting period for acquisitions to which § 801.30 applies begins when the acquiring person’s form is received by both agencies. Subparagraph (a)(2) provides that for all other acquisi­ tions, the waiting period begins when notification is received from all per­ sons required to file.

Paragraph (b) of the rule describes how to determine the expiration date of the waiting period. Unless extended by a request for additional informa­ tion under section 7A(e) and § 803.20 or by district court under section 7A(g)(2) or terminated under §803.11, the waiting period ends at 11:59 p.m. eastern time on the 30th (or, for cash tender offers, the 15th) calendar day following the beginning of the waiting period. If extended by a request for additional information or documen­ tary material, the waiting period ex­ pires 20 days (or in the case of a cash tender offer 10 days) after the receipt of such information or documentary material by the requesting agency. Not every request for additional informa­ tion extends the waiting period; those directed to the acquired person in a tender offer do not, under section 7A(a)(2) and ,§ 803.20(c). The para­ graph also indicates that § 802.23, the exemption rule relating to amended or renewed tender offers, may provide that the waiting period ends on a dif­ ferent date.

If a request for additional informa­ tion is issued early in the waiting period and is answered promptly, the 20- or 10-day extension could run si­ multaneously with the original wait­ ing period. Subparagraph (b)(2)(ii) provides, however, that unless termi­ nated pursuant to § 803.11, the waiting period cannot expire earlier than it would have expired if no request had been issued. See example No. 1 to the rule.

In the event that requests for addi­ tional information are directed to more than one person, the waiting FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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RULES AND REGULATIONS 33513 period is extended until 20 days after the receipt by the requesting agency of the information requested from all such persons. Example No. 2 to the rule illustrates this point. Subparagraph (c)(1) specifies that the date of receipt of notification, for purposes of determining when the waiting period begins, is the daté on which delivery is effected by hand or by certified or registered mail during normal business hours to the offices designated in the rule. If delivery is ef­ fected after 5 p.m. eastern time (that is, after the close of normal business hours) or on any day other than a reg­ ular business day (such as a Saturday, Sunday, or Federal holiday) the date of receipt is considered to be the next regular business day. If delivery to both agencies is not effected on the same date, the later date is deemed the date of receipt.

Under subparagraph (c)(2), a notifi­ cation and report form, or a response to a request for additional informa­ tion, that does not comply with the rules is insufficient to begin the run­ ning of time. In particular, if any item of the form is not fully completed, or any information or documentary ma­ terial is not completely supplied, a statement of reasons for noncompli­ ance conforming to §803.3 must be submitted. Likewise, the affidavit(s) required by §803.5 must accompany the acquiring person’s notification. If a deficient filing is received, the Com­ mission or the Assistant Attorney General will promptly notify the person of the deficiencies so that the person can rectify them. However, time will not begin to run until the de­ ficiencies are cured.

B ackground I n fo r m a t io n to § 803.10 Section 7A(b)(l) provides that the waiting period “shall begin on the date of receipt by the Federal Trade Com­ mission and the Assistant Attorney General” of the completed notifica­ tion, or the notification to the extent j completed and a statement of reasons /for noncompliance in accordance with §803.3. Section 7A(e)(2) provides that this waiting period may be extended by a request for additional informa­ tion or documentary material for 20 (or, in the case of cash tender offers, 10) days after the appropriate agency receives all requested data. Under sec­ tion 7A(b)(l)(A), the waiting period begins upon receipt of notification from both the acquiring and acquired persons, or, in a tender offer, from the acquiring person only.

Original §803.10 matched the statu­ tory scheme: Only for tender offers woüld the waiting period have begun upon receipt of the acquiring person’s notification. Consequently, for all other acquisitions not involving a twoparty agreement, in which the issuer may be indifferent or hostile, the original rules would have permitted such an issuer to prevent the waiting period from starting, and the transac­ tion from taking plfice, by not filing. As explained in the statement of basis and purpose to § 801.30, with regard to beginning the waiting period the final rules treat all nonconsensual acquisi­ tions similarly to the treatment af­ forded tender offers by the act. Final § 803.10(a)(1) thus makes clear that for all acquisitions to which §801.30 applies, the waiting period begins as soon as the acquiring person files noti­ fication. The acquired person in such transactions must file notification no later than the 15th day (or, in the case of cash tender offers, the 10th day) after the date of receipt of the acquir­ ing person’s notification.

See § 801.30(b)(2).

A request for additional information issued to the acquiring or acquired person before the waiting period ex­ pired automatically extends the wait­ ing period, except for requests direct­ ed to acquired persons in tender offers.

See section 7A(e)(2) and § 803.20(c)(2). Under those sections and subparagraph (b)(2) of this rule, whenever the waiting period for tender offers is extended it expires on the 20th day (or in the case of a cash tender offer, on the 10th day) follow­ ing the receipt from the offeror of all additional information requested. A request for additional information in connection with all other types of ac­ quisitions extends the waiting period for 20 days following the receipt of ad­ ditional information from all persons required to submit it.

Comment 1086 suggested that if a request for additional information is made to the issuer whose stock is being acquired from a third party, the waiting period should be extended only for 20 days from the date the re­ quest is issued. However, the com­ ment’s concern that such an acquired person could indefinitely extend the waiting period by not responding to the request has been addressed by the addition of §803.21 to the final rules. See the statement of basis and pur­ pose to that rule.

Numerous technical changes were made from the revised rule. The time of receipt after which delivery would be deemed effected on the following day was changed from 3 to 5 p.m. to reflect the close of normal business hours. The time of day when the wait­ ing period expires was changed from 5 to 11:59 p.m. This change provides the agencies with the full 30 (or 15) days within which to review the acquisition and reflects the statutory intent that parties wait the full 30 or 15 days . before consummating.

A technical change urged in com­ ment 1059 was rejected. That com-. ment suggested that the date of re­ ceipt of mailed forms and additional information at the mailrooms of the agencies rather than at the premerger notification offices, be deemed the “date of receipt.” The comment ex­ pressed concern that reporting per­ sons should not be subject to the un­ certainty of guessing how long deliv­ ery from the mailrooms to the speci­ fied offices would take and should not bear the risk of delays over which they have no control. While it is true that requiring receipt at the offices that will undertake the review could subject the reporting person to some delay, this procedure will permit the agencies to review the submissions for the full waiting periods. Moreover, guesswork as to the date of receipt is eliminated if delivery is effected by mail with return receipt requested, or by hand. A reporting person that chooses not to employ one of these means of delivery retains the risk of delay.

Subparagraph (c)(2) of the rule pro­ vides that unless the notification and report form is submitted in compli­ ance with the rules, it is not “recieved,” and the waiting period there­ fore does not begin. Similarly, the rule provides that whenever a response to a request for additional information does not comply with the rules, it too is not “received.” In the latter in­ stance, the waiting period remains in effect until the deficiency is cured and for 20 days (in the case of cash tender offers, 10 days) thereafter. The rule is intended to deal with in­ stances of procedural noncompliance such as, for example, when the form or a response to a request for addition­ al information has not been certified; when one or more of the affidavits re­ quired by §803.5 are missing; when a required statement of reasons for noncompliance (see §803.3) is missing or incomplete; or when the data submit­ ted does not reflect the operations of the correct portions of the reporting person’s business as required by §803.2. In these or other instances of procedural noncompliance the Com­ mission will promptly notify the re­ porting person so that the problem(s) can be corrected.

This.provision -generally #ilf not be applicable when all items on the form or questions in a request for additional information have been properly an­ swered or a complete statement of rea­ sons for noncompliance explains any incomplete responses. In these situa­ tions any question of whether there has been substantial compliance with the act and the rules will be resolved by a district court as provided in sec­ tion 7A(g)(2).

FEDERAL REGISTER, V O L 43, NO . 147— M O N D AY, JULY 31, 1978

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33514 SECTION 803.11 TERMINATION OP WAITING PERIOD Section 803.11 implements section 7A(b)(2) of the act. It sets forth the conditions and procedures under which the waiting period for an acqui­ sition may be terminated prior to its normal expiration.

Generally, the Commission and the Assistant Attor­ ney General will terminate a waiting period only if termination has been re­ quested in writing by one of the per­ sons filing notification. Paragraph (a) of the rule sets forth the conditions which must exist before a request for termination of a waiting period Will be considered. First, all per­ sons required by the act and the rules to file notification must have done so. ‘Second, it must have been determined that no request for additional infor­ mation will be made, or if any such re­ quests have been made, the responses must have been received. Third, both the Commission and the Assistant At­ torney General must have agreed that no further action (e.g., request for ad­ ditional information, suit under sec­ tion 7A(g), or action challenging the acquisition) is to be taken during the waiting period.

Paragraph (b) of the rule automati­ cally denies any request for termina­ tion which is pending at the time a re­ quest for additional information is issued to any person, whether the re­ quest for termination accompanied the filing of notification or was sub­ mitted afterwards. In such a situation, no formal notice of denial will normal­ ly be given.

Paragraph (c) provides that a wait­ ing period may be terminated either upon the written request (filed with the offices designated in § 803.10(c)) of any person that has filed notification, or sua sponte by the agencies without regard to the conditions contained in paragraph (a). The sua sponte termi­ nation provision makes it unnecessary to resubmit a request which was denied by operation of paragraph (b). Once a request has been made, it will be treated as continuing. In addition, this provision gives the Commission and the Assistant Attorney General the power, in appropriate circum­ stances, to terminate a waiting period even though a request for additional information remains unanswered. Section 803.11(c) makes termination effective upon notice by telephone to any requesting person, states that written confirmation of termination will be sent to all parties that filed no­ tification, and restates the require­ ment of section 7A(b)(2) that notice of termination must be published in the F ederal R e g is t e r. The Federal Trade Commission has delegated the power to terminate the waiting period under section 7A(b)(2) and this rule to the Director and RULES AND REGULATIONS Deputy Directors of the Bureau of Competition, without power of redele­ gation.

B ackground I n fo r m a t io n to § 803.11 Section 7A(b)(2) provides: The Federal Trade Commission and the Assistant Attorney General may, in individ­ ual cases, terminate the waiting period * * * and allow any person to proceed with any acquisition subject to the (the act), and promptly shall cause to be published in the F ederal R egister a notice that neither in­ tends to take any action within such period with respect to such acquisition. Paragraph (a) of the rule announces the conditions the agencies will re­ quire before a request for early termi­ nation will be granted. Two comments from the same orga­ nization (120; 1059) took issue with the provision in paragraph (c) of the rule that notice of all terminations shall be published in the F ederal R e g ist e r. The comments argued that Section 7A(b)(2) authorizes publication of a notice of termination only when the termination occurs within “the initial * * * 30-day waiting period.” The com­ ments contended that publication of notice that a “supplemental waiting period” (emphasis in comment 120) has been terminated is not authorized by section 7A(b)(2) and would violate the confidentiality quarantees of sec­ tion 7A(h).

This argument was rejected. Section 7A(b)(2) does not merely “authorize” publication of notices of termination. The language of the statute is manda­ tory and imposes an obligation on the Commission and the Assistant Attor­ ney General to publish notice of all such terminations in the F ederal R eg­ is t e r . There is no basis for distin­ guishing between notices terminating waiting periods of ordinary length and those terminating waiting periods that have been extended by requests for additional information. Rather than contemplating an original waiting period followed by a “supplemental” waiting period, section 7A(b)(l)(B) cre­ ates only one waiting period that may be extended by a request for addition­ al information or by a court order under section 7A(g)(2). Since there is only one waiting period, which may or may not be extended, section 7A(b)(2) requires that all notices of termination be published in the F ederal R e g is t e r, regardless of when during that waiting period the termination occurs. In addition, to the extent that any of the contents of published termina­ tion notices constitute “information * • * filed * * * pursuant to (the act)” within the meaning of section 7A(h), the Commission concludes that section 7A(b)(2) makes a necessary exception to section 7A(h).

Comment 1075 suggested that before termination is considered, it should be requested by the acquired person, es­ pecially in third-party (§ 801.30) trans­ actions, or by both parties. The Com­ mission recognizes that in hostile ta­ keovers, the interests of the acquiring and acquired personsl are divergent. But those conflicting interests alone would not appear to. justify a rule which would give an advantage to an acquired company resisting the ta­ keover. If the acquisition may be anti­ competitive, a request for early termi­ nation is unlikely to be granted no matter which party or how many par­ ties request it. If it does not appear an­ ticompetitive, the Commission has no basis upon which to require that re­ quests come from one party or the other, or that they be unanimous. Thus the suggestion was not adopted. The rule retains the flexibility to terminate a waiting period sua sponte chiefly because § 803.20(c)(2) auto­ matically extends the waiting period when a request for additional informa­ tion is issued. The Commission and the Assistant Attorney General may occasionally be able to reach the de­ termination set forth in subparagraph (a)(3) of this rule even though not all requested information has. been pro­ vided by all the parties. In such in­ stances, the waiting period may never­ theless be terminated. See. also the statements of basis and purpose to §§ 803.4 and 803.21.

SECTION 803.20 REQUESTS FOR ADDI­ TIONAL INFORMATION OR DOCUMENTARY MATERIAL Section 7A(e) of the act permits the Commission and the Assistant Attor­ ney General, before the expiration of the waiting period, to require one sub­ mission of additional information or documentary material from each person filing notification with respect to an acquisition. Section 803.20 de­ tails the procedures by which the agencies request additional informa­ tion and persons filing notification comply with them. Paragraph (a) iden­ tifies the persons and individuals sub­ ject to such requests; paragraph (b) describes who may make the request, how the request is to be communicat­ ed, and when the request is effective; paragraph (c) details the impact of such requests on the waiting period; and paragraph (d) provides that all such requests must be clearly identi­ fied and should be distinguished from requests for clarification or amplifica­ tion of responses.

Any person required to file notifica­ tion may be required to respond to one request for additional information or documents, and more than one party to an acquisition may be required to do so. Furthermore, the act and rule specifically provide that such requests may be made of one or more entities within a filing person or of one or FEDERAL REGISTER, V O L 43, N O . 147— M O N D AY, JULY 31, 1978

Page 227

more officers, directors, partners, agents, or employees of the filing person. Thus requests for additional information or documentary material are not limited to the ultimate parent entity (the entity responsible for filing notification under § 803.2(a)), or to an entity authorized to file on its behalf. Although either agency may issue a request for additional information, subparagraph (b)(1) provides that such a request may not be issued by both agencies to the same person or to any entity or individual within that person. The rule provides that the Commission and Assistant Attorney General may delegate the authority to make requests for additional informa­ tion.

Pursuant to subparagraph (b)(2), a written request for additional informa­ tion is effective when received by the ultimate parent entity of the person to which the request is directed (or the entity filing on its behalf). If the re­ quest is communicated in person or by telephone, it is effective when commu­ nicated, provided that a written confir­ mation is mailed within the 30-day waiting period to the ultimate parent entity (or the entity filing on its behalf). A request made to a natural person will be sent to the reporting person to which the individual is relat­ ed; see § 803.20(b)(3). Such a request is effective as to the individual when it is effective as to the reporting person to which he or she is related. In addition, a written copy of the request will be delivered to the individual by hand, or by registered or certified mail. Clause (b)(2)(ii) also requires that the filing person identify an individual who will be available during normal business hours throughout the waiting period, at a telephone number sup­ plied in item 10 of the form, to re­ spond to inquiries concerning notifica­ tion. Telephoned requests for addi­ tional information will be made to that individual; written confirmation will be mailed to the ultimate parent entity of the filing person. Subparagraph (c)(1) provides that, with one exception, the waiting period for an acquisition will remain in effect until all additional information re­ quested has been submitted, even if the waiting period would have expired but for the request. The sole exception is that a request directed to the person whose voting securities are sought to be acquired in a tender offer, or to any officer, director, partner, agent, or em­ ployee of such a person, will not extend the waiting period. The target of the tender offer must still respond to the request within a reasonable time under §803.21, and may be sub­ ject to an enforcement proceeding under section 7A(g).

Subparagraph (c)(2) makes exten­ sion of the waiting period automatic. RULES AND REGULATIONS For cash tender offers, a request for additional information or documen­ tary material extends the waiting period for 10 days after receipt of the requested information from the ac­ quiring person. For all other acquisi­ tions, the waiting period is extended automatically for 20 days from receipt of the requested information from all persons to which a request was ad­ dressed, except the acquired person in a tender offer. See of § 803.10 and the example to § 803.20(c)(2). Subparagraphs (d)(1) and (d)(2) em­ phasize the difference between re­ quests for additional information under section 7A(e) and requests for clarification or amplification of a re­ sponse to an item on the form. All re­ quests for additional information or documentary material must be identi­ fied as such, regardless of the manner in which they are communicated. However, the agencies m ay_ make other inquiries not so identified. These are not to be considered requests for additional information, and they do not extent the waiting period. The Federal Trade Commission has delegated the power to make requests for additional information or docu­ mentary material under section 7A(e> and this rule to the Director, the Deputy Directors, and the Associate Director for Premerger Notification of the Bureau of Competition, without power of redelegation.

B ackground I n fo r m a t io n to § 803.20 Comment 63 questioned whether the act permits the delegation of authori­ ty to make requests for additional in­ formation. The comments suggested that section 7A(e)(2), which provides that “the Federal Trade Commission or the Assistant Attorney General, in its or his discretion, may extend the 30-day waiting period,” contemplates that the discretion of the Commission or Assistant Attorney General must be exercised before the consummation of a merger or acquisition may be post­ poned by a second request. The Com­ mission’s view is that section 7A(e)(2) should be read consistently with estab­ lished agency policy. The Commission, under the authority provided by reor­ ganization plan No. 4 of 1961, may del­ egate certain of its functions to a divi­ sion of the Commission, an individual Commissioner, an administrative law judge, or ah employee or employee board. Pursuant to that authority, the Commission has delegated to (among others) the Director, Deputy Direc­ tors, and Assistant Directors of the Bureau of Competition limited author­ ity to initiate investigations. Since re­ quests for additional information or documentary material may be com­ pared to the initiation of investiga­ tions, decisions to issue such requests are similarly delegable. 33515 Paragraph (c) extends the waiting period for all requests except those di­ rected to acquired persons in tender offers. Requests directed to acquired persons in other transactions listed in §801.30 thus extend the waiting period. For a discussion of the possibil­ ity that such acquired persons can thereby stall the consummation of a transaction, see the statement of basis and purpose to § 803.21. Comments 120 and 1059 argued that the rule’s automatic extension of the waiting period is inconsistent with the provision of section 7A(e)(2) that, if a request for additional information is made, the Commission or Assistant At­ torney General may, “in its or his own discretion,” extend the initial waiting period for “not more than” 20 days (or 10) days in the case of a cash tender offer). These comments interpret this language to require an individualized, discretionary judgment in every case as to whether and for how long the waiting period should be extended. The Commission rejected this sugges­ tion and does not interpret the act in this manner. It believes that this ap­ proach might seriously interfere with the agencies’ review of all relevant in­ formation and thus with the purposes of the act. In many cases, it will be im­ possible to predict, before the informa­ tion is submitted, what materials will be supplied in response and how long it will take to review them. Since any further extension requires an order of a district court, the waiting period must be automatically extended for a full 20 (or 10 days. If the review is completed in less time, the extended waiting period may be terminated early under section 7A(b)(2) and §803.11.

Comment 37 argued that the act does not permit extension of the wait­ ing period while a request for addi­ tional information is outstanding. It argued that a request made late in the waiting period should have to be “rea­ sonable” enough to be capable of a re­ sponse within the original waiting period. This suggestion was rejected, since it would effectively prevent the agencies from making meaningful second requests late in the waiting period—a result not contemplated by the statute. Furthermore, the notion that requests for additional informa­ tion must be answerable within the minimum statutory waiting period is inconsistent with the language of sec­ tion 7A(3)(2), which contemplates ex­ tension of that period. Numerous comments (e.g. 59, 77, 112, 115, 120; 1059) expressed concern that misunderstandings could occur if re­ quests for additional information were issued orally. It should be noted that the rule provides that requests made in person or by telephone are effective only if a written confirmation is subse- FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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33516 quently mailed during the waiting period.

Comment 25 suggested that “clarifi­ cation” and “amplification” be de­ fined; otherwise, if a person construed a request for additional information as a “clarification” or “amplification” it could violate the act if it then consum­ mated a transaction without addition­ al waiting. This ambiguity disappears in light of paragraph (d), which re­ quires specific identification of re­ quests for additional information and documentary material.

SECTION 803.21 ADDITIONAL INFORMA­ TION SHALL BE SUPPLIED WITHIN REA­ SONABLE TIME Section 803.21 requires persons re­ ceiving requests for additional infor­ mation or documentary material to supply the information and documen­ tary material (or, if the request is not fully complied with, a statement of reasons for noncompliance in accord­ ance with § 803.3) within a reasonable time. See section 7A (b)(1)(A) and (e), and § 803.30.

B ackground I n fo r m a t io n to § 803.21 This new rule is designed primarily to prevent an acquired person in a transaction subject to § 801.30 from frustrating the acquisition. Without this provision, an uncooperative ac­ quired person could delay the expira­ tion of the waiting period indefinitely by not responding to a request for ad­ ditional information.

The act addresses this problem only in the context of tender offers. Sec­ tion 7A(e)(2) provides that the waiting period cannot be extended by a re­ quest for additional information to anacquired person in a tender offer. Rather than extend this treatment to all other §801.30 transactions, the Commission opted to impose a general obligation on all recipients to respond within a reasonable time to requests for additional information. This deci­ sion resulted from a balancing of con­ flicting interests. To imitate the statu­ tory treatment of tender offers (i.e., to permit the waiting period to expire before the requesting agency receives the additional information from the* acquired person) would frustrate the congressional intent of assuring that the enforcement agencies have ade­ quate information to analyze the transaction. Although there was also a congressional concern that persons be able to conclude other nonconsensual transactions despite the recalcitrance of the acquired person, the act does not provide treatment for such trans­ actions similar to that regarding tender offers. The Commission deter­ mined that imposing a specific duty on acquired persons to comply with re­ quests for additional information within a reasonable time would create RULES AND REGULATIONS sufficient incentive to assure that nei­ ther congressional interest is frus­ trated.

A second purpose of the rule is to fa­ cilitate investigations of tender offers. In all other types of acquisitions, if the acquired person fails to respond to the request, then the waiting period will remain in effect indefinitely, blocking the acquisition (unless the agencies terminate the waiting period under §803.11, despite the pendency of the request). But since the act pro­ vides that for tender offers the wait­ ing period will not be extended, an ac­ quired person, by failing to respond to a second request, could prevent the agencies from obtaining the informa­ tion necessary to review the acquisi­ tion before it took place. Again, the congressional purpose would be frus­ trated.

Therefore, the rule creates an af­ firmative obligation to submit request­ ed information within a reasonable time. A filing person’s failure to comply with this obligation could sub­ ject that person to civil penalties under section 7A(g)(l) or equitable relief under section 7A(g)(2). What constitutes a reasonable time must be judged on a case-by-case basis, consid­ ering all the facts and circumstances. Comments 1090 and 1108 recom­ mended that the treatment accorded by the act to tender offers be followed, although 1090 mentioned the institu­ tion of a rule like § 803.21 as an alter­ native. Another suggestion offered by comment 1086 is discussed in the statement of basis and purpose to §803.10. All of these suggestions were rejected since the Commission believes that this rule represents the most ap­ propriate balance of the competing in­ terests.

Note that under § 803.11(c) the en­ forcement agencies may terminate a waiting period sua sponte, despite the pendency of a request for additional information. See the example to § 803.20(c)(2). This course of action might be chosen, for example, if the agencies determine from other sources that the acquisition is unlikely to vio­ late the antitrust laws, and if it has become apparent that the acquired person is delaying its response in an attempt to forestall consummation of the acquisition.

SECTION 803.30 FORMAL AND INFORMAL INTERPRETATIONS OF REQUIREMENTS UNDER THE ACT AND THE RULES This rule creates a mechanism for requesting and giving both formal (written) and informal (oral) interpre­ tations of requirements under the act and rules. Paragraph (a) authorizes the Commission staff to consider re­ quests for formal or informal interpre­ tations, and explains how a request for a formal interpretation shall be made and what it must contain. It permits the staff, in its discretion, to render either a formal or an informal re­ sponse to any request, however made, or to decline to render any advice. Paragraph (b) permits the Commis­ sion staff, in its discretion, tq refer to the Commission any request for inter­ pretation, however made. Paragraph (c) specifies that when formal inter­ pretations are given by either the Commission staff or the Commission itself they must be given with the con­ currence of the Assistant Attorney General or his or her designee. Paragraph (d) states that either the Commission or the Assistant Attorney General may rescind any formal inter­ pretation previously given; in that event, the party that originally re­ quested the interpretation must be no­ tified of the rescission in writing. Under paragraph (e), the Commis­ sion will publish in the F ederal R e g is­ ter a summary of formal interpreta­ tions given by the Commission (but not those given by the staff) and any rescissions of formal Commission in­ terpretations.

B ackground I n fo r m a t io n to § 803.30 This rule serves several purposes. First, it authorizes the Commission staff to give both formal and informal interpretations of the act and the rules. It thus recognizes that persons who are or may be subject to the act may frequently require information and advice concerning their obliga­ tions, and that the staff should re­ spond to their needs for the program to function. Requests for advice may be made orally by phone or in person, or they may be made in writing. The same variety of responses is available to the staff, so that straightforward problems can be handled expeditious­ ly, while more difficult questions are giveii more deliberate consideration. Second, the rule permits the staff, within its sole discretion, to refer novel or complex (or any other) ques­ tions to the Commission, thereby giving the Commission the opportuni­ ty to render formal interpretations in response. The rule does not, however, give any person the right to obtain an interpretation directly from the Com­ mission or to “appeal” a staff interpre­ tation to the Commission. Nor does it obligate the Commission to give its in­ terpretation (or to take any action whatsoever) in response to any re­ quest.

A final purpose of § 803.30 is to give the Assistant Attorney General a role in the issuance of formal interpreta­ tions. The reason for participation by the Assistant Attorney General is that under section 7A(d) the rules them­ selves must be promulgated by the Commission with concurrence of the Assistant Attorney General. FEDERAL REGISTER, VOL. 43, NO . 147— M O N D AY, JULY 31, 1978

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Neither the Commission nor the As­ sistant Attorney General is bound by either the formal or the informal in­ terpretations of the staff Under this rule. However, it is envisioned that the Commission or the Assistant Attorney General would, prior to taking any action contrary to a position embodied in a formal interpretation of the staff, first withdraw that opinion and give notice of that rescission to the party that originally requested the interpre­ tation.

The purpose of the F ederal R e g is­ ter summary described in paragraph (e) of the rule is to inform the public of the enforcement agencies’ position on complex or novel issues referred by the staff, so that these interpretations may assist Compliance with the act and the rules. All formal interpreta­ tions will be available for public in­ spection and copying in the Public Reference Branch of the Commission (Room 130 of the main Federal Trade Commission Building in Washington, D.C.).

Revised §803.30 was more limited than the final rule, providing only for formal interpretations, and only by the Commission with the concurrence of the Assistant Attorney General. SECTION 803.90 SEPARABILITY Section 803.90 states that if any pro­ vision of the rules or form is held in­ valid, or the application of the rules or form to any person or circumstances is held invalid, to the extent possible nei­ ther other provisions nor application of the provision in question to other persons or circumstances shall be af­ fected. The reporting and waiting period obligations are to remain in effect to the full extent not specifical­ ly invalidated.

B ackground I n fo r m a t io n to § 803.90 Section 803.90 appears for the first time in the final rules. O t h e r C o m m en ts SUNSET RULE Comment 1049 proposed the adop­ tion of a “sunset” provision, providing for the expiration of the rules 4 years from the day they become effective. Comments 1059 and 1063 endorsed this suggestion. The final rules, how­ ever, do not adopt this proposal, and thus, like the original and the revised rules, do not contain a “sunset” or automatic expiration provision. Comment 1049 made three argu­ ments for the inclusion of the “sunset” provision. The comment con­ tended that mandatory periodic review of the rules by the antitrust agencies is desirable because: (1> The rules rep­ resent a new type of undertaking for the agencies and make antitrust en­ forcement more of a “regulatory” RULES AND REGULATIONS process than ever before, (.2) the rules are experimental and complex and only time can tell whether their scope was properly framed, and (3) the pro­ vision that amendments be made by rule with the participation of both agencies is cumbersome and may make change difficult to achieve. The “sunset” provision, the comment de­ clared, would oblige the agencies to ex­ amine the rules after a reasonable period of time and make whatever changes appear necessary. The Commission, though rejecting the mechanism proposed by this sug­ gestion, agrees with certain of its un­ derlying premises. The actual experi­ ence of operating the premerger noti­ fication program will unquestionable suggest changes in the rules and form that cannot be anticipated prior to the effective date. The agencies intend to respond to questions or unexpected difficulties with the rules by means of formal and informal interpretations under §803.30 when appropriate, and by amendment to the rules when nec­ essary. However, the adoption of a “sunset” provision would introduce the possibility of a lapse in coverage. If the rules are to expire at some stated time, a renewed program would have to be promulgated by rule in ad­ vance of that time to insure that no such lapse occurs. The rulemaking scheme of section 7A(d) requires that both agencies agree on a new set of rules, and if no agreement is achieved for some reason, they will be faced with an intolerable problem. In the Commission’s view, the possibility that the program could thus be suspended because no rules implement it—a situ­ ation directly opposed to the intent of the statute, which contains no “sunset” provision and contemplates a permanent program—is unacceptable. Furthermore, section 7A(j) requires that the Commission, with the concur­ rence of the Assistant Attorney Gen­ eral, annually prepare a report to Con­ gress on the operation of the act, in­ cluding an assessment of the effects of the act and of the effects, purpose, and need for the rules, and any recom­ mendations for revision of the act. This annual procedure compels the pe­ riodic review of the workings of the rules and of any necessary changes. Thus, the primary objective of a “sunset” rule is achieved by section 7A(j). It is also achieved in the rulemaking section of the Administrative Procedure Act, pursuant to which the rules are promulgated. Any interested person has the right to petition for the issuance, amendment, or repeal of a rule. 5 U.S.C. 553(e). Anyone who be­ lieves a rule is unworkable, unfair, or unduly burdensome may petition for its amendment or repeal, and anyone who believes a new rule should be added can petition for its addition. Ru- 33517 lemaking petitions afford an opportu­ nity for consideration of any sugges­ tion or review of any rule. One additional comment (1100), while not literally endorsing a “sunset” provision, recommended that the rules should provide for public review and discussion of the program after the first 2 years and regular review thereafter. The Commission does not find it necessary to adopt such a rule. Informal and formal inter­ pretations, annual reports to Congress, and petitions urfder section 553 of the Ad m in istra tiv e Procedure Act should insure adequate public participation. EFFECTIVE DATE OF FINAL RULES At least two comments (1032, 1070) suggested that the Commission pro­ vide a period longer than 30 days be­ tween the publication of the final rules in the F ederal R e g is t e r and their effective date. Thirty days is the m in im u m time allowable under the Administrative Procedure Act, 5 U.S.C. 553(d), except in special circum­ stances. Comment 1032 suggested that the Commission allow a longer period, of unspecified duration, in order to afford other Federal agencies ade­ quate time to conform their regula­ tions to the final rules, as necessary. Comment 1070 proposed a period of at least 90 days so that affected segments of the business community could digest the final rules and institute ap­ propriate compliance^ programs. The comment stated that the complexity of the act and the rules would necessi­ tate more than 30 days, especially for financial institutions with wide-rang­ ing investment, activities. Although the Commission did not adopt these suggestions, the result these comments desire has neverthe­ less been achieved. On February 14, 1978, the Commission tentatively ap­ proved and made public the final ver­ sion of the rules and form. Interested business and government entities were thus made aware of the final rules sev­ eral months before the effective date and have had adequate time to make the appropriate preparations. It is therefore unnecessary to provide an effective date later than 30 days after publication.

RETURN OF MATERIALS SUBMITTED Several comments (e.g., 70,120; 1050, 1059) suggested that the rules should provide that all documents and infor­ mation submitted under the pre­ merger notification program be re­ turned after a decision has been made not to challenge an acquisition, or after the completion of any proceed­ ings opposing the acquisition. Another comment (1023) proposed that tha agencies adopt a policy of prompt return, though it did not specifically suggest adding a rule for this purpose. FEDERAL REGISTER, V O L 43, NO . 147— M O N D AY, JULY 31, 1978

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33518 The comments made several argu­ ments supporting the prompt return of the data submitted. For example, comment 1050 declared that since the legislation was intended solely to allow the agencies to determine whether or not to challenge an acquisition prior to its completion* no statutory purpose would be served by retaining the mate­ rial after this determination has been made. Comment 1023 stressed the “highly sensitive and confidential nature of the data,” apparently fear­ ing that improper disclosure would be more likely to occur if the agencies re­ tained the documents. Comment 1059 asserted that the premerger notifica­ tion program was not intended by Congress as a means of obtaining an economic data base for generalized re­ search and inferred that if the docu­ ments are not to be used for such pur­ poses, they therefore ought to be re­ turned after the agencies decide not to challenge an acquisition. The Commission rejected these pro­ posals because they take an excessive­ ly narrow view of the agencies’ en­ forcement responsibilities and the per­ missible uses of materials received under the act. Section 7A(i)(l) explic­ itly states that an acquisition not chal­ lenged by either agency during the waiting period may still be challenged after its expiration. Nothing in the language or legislative history of the act appears to prohibit the use of data submitted under the act for subse­ quent challenge to a reported acquisi­ tion or, in fact, for any other law en­ forcement purpose. A challenge after the waiting period might result from subsequent developments, such as ad­ ditional acquisitions. Submitted mate­ rial can also be useful in investigations and challenges to other acquisitions. To return the materials after the wait­ ing period expires could seriously hinder later enforcement efforts. The confidentiality issue raised by comment 1023 is not considered a major problem. See section 7A(h) of the act and the statement of basis and purpose under the heading “confiden­ tiality,” below.

DUPLICATION OF FILINGS UNDER EXISTING NOTIFICATION PROGRAM Two comments (1044, 1082) noted that under certain circumstances a firm that has previously filed notifica­ tion of an acquisition under the Com­ mission’s existing premerger notifica­ tion program must file again under the act and rules. Specifically, a trans­ action reported under the old program because the agreement was concluded before the effective date of the act must also be reported under the act if it will be consummated after the effec­ tive date. The comments objected that the dual filing requirement would be burdensome and unfair and would un- RULES AND REGULATIONS necessarily delay the completion of such acquisitions. They suggested that no further filing be required under the act and rules for transactions previ­ ously reported under the existing pro­ gram.

The Commission did not adopt this suggestion, choosing to place all trans­ actions on the same footing under the act. The Commission has already ad­ dressed this issue in the statement of basis and purpose to the transitional rule implementing the act, 42 FR 6365-66 (February 2,1977). However, the Commission has amended its existing premerger notifi­ cation program to provide that, as of the effective date of the premerger no-' tification rules, persons that file, and persons that are not required to file, a notification and report form under the act and the rules need not file a spe­ cial report under the Commission’s ex­ isting premerger notification program. AD HOC EXEMPTIONS Comments 87 and 1063 proposed that a rule permit the agencies, in ap­ propriate circumstances, to grant ad hoc discretionary exemptions from the filing and waiting-period require­ ments. This approach was rejected. Section 7A(d)(2)(B) of the act requires that all exemptions be made by rule in accordance with 5 U.S.C. 553. There­ fore, all exemptions must be of gener­ al application. Ad hoc exemptions of otherwise reportable transactions are apparently not permitted. TRANSACTION SUBJECT TO PUBLIC UTILITY HOLDING COMPANY ACT Comment 1084 recommeded that transactions subject to SEC approval under section 9 of the Public Utility Holding Company Act of 1935, 15 U.S.C. 79i, be granted a limited exemp­ tion on the same terms as the transac­ tions exempted by section 7A(c)(8) of the act and § 802.8 of the rules. .The comment urged conditioning the ex­ emption upon filing copies of all infor­ mation and documentary material filed with the SEC contemporaneously with the antitrust agencies at least 30 days prior to consummation. The com­ ment suggested this exemption in order to provide the agencies with a form of pretransaction notification yet avoid duplicative filings. The transactions to which this com­ ment refers are: (1) direct or indirect acquisitions by publie utility holding companies of “any securities or utility assets or any other interest in any business,” and (2) acquisitions of any securities of a public utility company by any person which is an affiliate of such company as well as of any other public utility or public utility holding company, or becomes such an affiliate as a result of the acquisition. 15 U.S.C. 79i(a). These types of acquisitions re­ quire approval by the SEC before con­ summation.

The Commission rejected this pro­ posal because it is unable to conclude that these acquisitions are unlikely to violate the antitrust laws. It thus be­ lieves that the comment failed to pro­ vide adequate justification for the pro­ posed exemption.

\ CONFIDENTIALITY Several comments made suggestions conceminê the confidential treatment to be accorded materials submitted in response to the form or to requests for additional information. Several of these comments specifically referred to the nondisclosure provision of sec­ tion 7A(h). That subsection exempts all such material from disclosure Under the Freedom of Information Act, and provides as well that: no such information or documentary mate­ rial may be made public, except as may be relevant to any administrative or judicial action or proceeding. Nothing in this section is intended to prevent disclosure to either body of Congress or to any duly authorized committee or subcommittee of the Con­ gress.

One group of comments (e.g., 48, 70, 101, 120; 1050, 1059) urged the Com­ mission to promulgate rules which state the agencies’ interpretation of section 7A(h) and spell out what steps the agencies plan to take to preserve the confidentiality it requires. For ex­ ample, comment 120 suggested, among other things, that the rules provide that all data and documents submitted in the premerger notification program be maintained in a separate file by the Secretary of the Commission and by an appropriate Department of Justice custodian; that they be inspected only at one location at each agency and only by the employees assigned to the particular premerger investigation;

and that no other copies be made. The Commission did not promulgate a rule concerning section 7A(h) be­ cause it did not believe rulemaking to be necessary or appropriate for this purpose. The act is unequivocal that no public disclosure may be made, and the agencies will take appropriate measures to assure this confidential­ ity.

The Commission also rejected the specific suggestions in comment 120 that the documents not be copied, that they be maintained only at one location at each agency, and that they be inspected only by the premerger office employees. The Commission be­ lieves it is not only unnecessary but also inappropriate to restrict access to the documents and information to par­ ticular agency staff members. Confi­ dential information received under this program will be accorded the same treatment accorded to confiden- FEDERAL REGISTER, V O L 43, N O . 147— M O N D AY , JULY 31, 1978

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tial information obtained by other means, such as by subpoena. Comment 1050 cited FTC v. Atlantic Richfield Co., 567 P. 2d 96 (D.C. Cir. 1977), in support of the suggestion that materials received under this pro­ gram should not be made available by the agencies to individuals not in­ volved in the premerger review proc­ ess. The Commission takes the view that the Atlantic Richfield case has no relevance to this situation. In Atlantic Richfield, the court suggested “various plausible arguments” (id. at 103) for the proposition that the FTC rules of practice and the due process clause bar the Commission staff participating in an adjudicative proceeding before an, administrative law judge from ob­ taining access to documents or infor­ mation obtained pursuant to subpoena in a separate FTC investigation, with­ out notice to the parties and approval of the administrative law judge. The court ordered the Commission to make public its own interpretation of its rules, but did not purport to mandate the content of that interpretation. This interpretation was recently issued by the Commission and would in no way bar use of materials ob­ tained through this program in any" other Commission investigation or proceeding.

The Commission interprets the pro­ vision of section 7A(h) that the infor­ mation submitted may be made public ; “as may be relevant to any administra­ tive or judicial action or proceeding” •to authorize making it public, in the ! agency’s discretion, in any proceeding ! brought by or against the Commission ¡or the Assistant Attorney General, [ whether the submitting person is a [ party or not. Nothing in the legislative I history or intent of the act supports the more limited interpretations urged implicitly by comment 1050 and ex­ plicitly by other comments (e.g., 70, 120). Comments 70 and 120 suggested that the materials should only be made public in judicial or administra­ tive proceedings brought by the Gov­ ernment to challenge the particular acquisition that is the subject of the notification and then only when the reporting person is a party. However, comment 120 conceded in a footnote that if the use of the submitted data is not so limited, it should at least be limited to proceedings against the sub­ mitting party. The comment argued 'that to use the data against another party would make a mockery of the statute and would undermine the ef­ fectiveness of the act. The Commission does not agree. The language of the act contemplates that the data may be made public by the Commission or the Assistant Attorney General in any administrative or judi­ cial proceeding to which the Commis­ sion or the Department of Justice is a RULES AND REGULATIONS party. There is no reason to believe that the act's effectiveness will be hampered by such a policy. As long as information is lawfully obtained, it may be used by the agencies for any law enforcement purpose. Comment 1075 suggested that when­ ever material submitted pursuant to the act is to be used in an administra­ tive or judicial proceeding, the submit­ ting person should be given prior notice so that a protective order may be sought in appropriate situations. When the submitting person is a party to the proceeding, no special notice procedures are contemplated since the act contemplates such use by the agencies. The comment was therefore viewed as applying to situations in which the person that submitted the material is not a party to the proceed­ ing in which the material is to be in­ troduced.

Because section 7A(h) does not re­ strict or qualify the ability of the agencies to use submitted material, the Commission does not believe that any formal notice provision is required by the act, and none has been adopted in the final rules. However, the Com­ mission recognizes that reporting per­ sons have an interest in protecting their sensitive competitive data from public disclosure in the course of law enforcement proceedings to which they are not parties. Therefore, as a matter of policy, the Commission and the Assistant Attorney General will in­ struct their staffs in such cases to give persons reasonable notice, when possi­ ble, prior to introduction or other use of such material that would result in its becoming part of the public record of the proceeding.

Two comments (70, 120) urged that 10 days’ notice be provided to the re­ porting party before the data is sub­ mitted to Congress. Within the con­ straints sometimes imposed by con­ gressional requests for data, the Com­ mission and Assistant Attorney Gener­ al will also instruct their staffs to give reporting persons reasonable notice of any release of such data to Congress, when possible.

Comment 120 suggested a rule to limit permissible disclosure to congres­ sional committees or subcommittees to “official” requests made by majority vote containing an intent to respect the confidential nature of the infor­ mation. This suggestion was rejected. It is inappropriate to attempt to pre­ scribe by rule the procedural accept­ ability of a Congressional request. RISK ARBITRAGEURS Comment 1095 urged that acquisi­ tions of voting securities in risk arbi­ trage transactions be entirely exempt­ ed from the act. According to the com­ ment, risk arbitrageurs are investment banking firms or other securities deal- 33519 ers that, upon the announcement of a pending merger, acquisition, or tender offer, buy the securities of the compa­ ny to be acquired or sell short the se­ curities of the acquiring company. They realize a profit if the merger ac­ tually takes place as planned, since or­ dinarily the value of the stock of the acquired person increases and thé value of the acquiring person’s stock declines. The comment stated that ar­ bitrageurs assume substantial capital risks but serve a useful function by helping to stabilize the frequently volatile market resulting from a merger or tender offer announcement. The comment recommended that arbi­ trage transactions be exempted since arbitrageurs do not ordinarily hold voting securities on a long-term basis, nor do they typically have any interest in participating in the business deci­ sions of the companies whose stock they purchase. It argued that they are competitively irrelevant and serve only a market-stabilizing function. This comment was rejected. Arbitra­ geurs should not be treated differently from other institutional investors that enjoy only a limited exemption under § 802.64. Since arbitrageurs may quali­ fy as broker-dealers within § 802.64(a)(9), their purchases of voting securities in the ordinary course of business solely for the pur­ pose of investment may be exempt under the final rules until their hold­ ings reach the level of at least 15 per­ cent of the outstanding stock of the issuer worth at least $25 million. Beyond that point, arbitrageurs, like all other institutional investors, must comply with the act.

Specifically, the Commission was not satisfied that the holdings of arbit ra­ geurs never have anticompetitive con­ sequences. There is no assurance, when an arbitrageur makes a purchase of stock, that it will not hold the shares for a longer period than it an­ ticipates or that it will not act to influ­ ence or control management. In some circumstances, it is possible that the existence of large holdings by arbitra­ geurs may have an effect on manage­ ment. In addition, it seems difficult to define with any degree of accuracy or certainty, for the purpose of drafting an exemption, which transactions are to be considered arbitrage transac­ tions, and the comment did not sug­ gest a solution.

Notification and R eport F orm CONCEPT OF FORM The notification and report form ap­ pears as an appendix to part 803 of the rules. It is designated in § 803". 1 as the notification required by section 7A(a) of the act. Thus, in cases of noncompliance use of § 803.10(c)(2) proce­ dures or the enforcement proceedings specified in sections 7A (g)(1) and FEDERAL REGISTER, V O L 43, N O . 147— M O N D AY, JULY 31, 1978

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33520 (g)(2) may follow if the form is not properly completed and filed. As §803.1(a) states, all persons required by the act to file notification must do so by completing and filing a copy of the form, including any documents re­ quired to be supplied in response to any items on the form. The form is de­ signed to provide the Commission and the Assistant Attorney General with the information necessary and appro­ priate for an initial evaluation of the potential anticompetitive impact of an acquisition. Its completion by all par­ ties required to file will ordinarily permit both agencies to determine whether the waiting period should be allowed to expire, or whether a re­ quest for additional information should be made under section 7A(e) and §803.20, potentially leading to a preliminary injunction or administra­ tive proceeding challenging the acqui­ sition, or to an enforcement action under section 7A(g).

The form is not intended to elicit all potentially relevant information relat­ ing to an acquisition. Relevant infor­ mation not specifically requested by any of the items on the form may be obtained by either agency by means of a request for additional information under section 7A(e) and §803.20. The reporting person may also supply addi­ tional information voluntarily pursu­ ant to § 803.1(b).

The information requested by the form includes, in summary: The identities of the persons in­ volved and the type of acquisition (item 1);

A description of the voting securities or assets to be acquired and of the means by which the acquisition is to be carried out (item 2); The percentage and total dollar amount of the assets and voting secu­ rities of the acquired person to be held by the acquiring person as a result of the acquisition (item 3); Copies of various SEC filings, annual reports and financial statements of the reporting person, as well as studies or analyses of the acquisition (item 4); A listing of dollar revenues derived by the reporting person, broken down separately by industry, product class, and product (item 5);

Information about the entities in­ cluded within the reporting person, as well as information about the share­ holders of the reporting person and the shareholdings of the reporting person in other persons (item 6); Geographic market information re­ lating to industries in which the re­ porting person and another party to the acquisition both derived dollar rev­ enues (item 7);

Information about revenues result­ ing from certain vendor-vendee rela­ tionships existing between the report- RULES AND REGULATIONS ing person and another party to the acquisition (item 8);

Any other recent acquisitions by the acquiring person in an industry from which both it and the acquired person derive dollar revenues (item 9). The purpose of the act is to assist the agencies in identifying, before they are consummated, transactions that may violate the antitrust laws. Section 7A(d)(l) therefore provides that the Commission “shall require that the notification * * * be in such form and contain such documentary material and information relevant to a proposed acquisition as is necessary and appropriate” to enable the agen­ cies “to determine whether such acqui­ sitions may, if consummated, violate the antitrust laws.” The Commission has determined that each of the items on the form fulfills the statutory man­ date.

Another possible course of action, which was rejected by the Commis­ sion, would have been to require only a perfunctory notification and seek de­ tailed data by means of requests for additional information. This course, which several comments (e.g., 1023, 1080) suggested, was rejected for sev­ eral reasons. First, this position mis­ conceives the amount of information necessary to make even a tentative de­ termination of whether a transaction may violate the antitrust laws. The act clearly contemplates that the initial notification should contain all infor­ mation and documents “necessary and appropriate” for the purpose of deter­ mining the competitive impact of the acquisition. It explicitly leaves to the Commission, with the concurrence of the Assistant Attorney General, the determination of what constitutes such information. A perfunctory ini­ tial report would not fulfill the con­ gressional intent expressed in section 7A(d)(l).

Second, to require a shorter initial notification would more frequently lead to the issuance of a request for additional information, with its conse­ quent delay and burden on the report­ ing person or persons. If second re­ quests were issued more frequently, the average waiting period would be longer, rather than shorter, than it would be with a more comprehensive initial notification procedure. In many cases the more data the receipt of which is deferred, the greater would be the ultimate burden on the report­ ing person.

One comment (1059) suggested that the interests of reporting persons would be better served if the most bur­ densome questions were made optional and the reporting person allowed to balance for itself the risk of a second request. The comment argued that for clearly innocuous acquisitions and clearly irrelevant information, the re­ porting burden, and the agencies’ burden of reviewing this information, could thus be mitigated. The Commis­ sion did not adopt this suggestion. The Commission believes that section 7A(e) provides the mechanism of re­ quests for additional information in order to assist the agencies in their ef­ forts to obtain additional information about acquisitions that the agencies believe, based on information con­ tained in the initial report, may re­ quire a petition for judicial or adminis­ trative relief. To permit optional com­ pliance with the provisions of the ini­ tial report would undermine the use­ fulness of the second request mecha­ nism, would seriously hinder the agen­ cies in their efforts to carry out their congressionally mandated review, and would be administratively unworkable. Furthermore, optional compliance with the provisions of the form could create a temptation on the part of re­ porting persons to withhold potential­ ly crucial information concerning an acquisition’s impact on competition. In order to discourage such practices, the agencies would be forced routinely to make second requests for information not supplied on the Form. This result would create longer delays for report­ ing persons, and would defeat the pur­ pose of the suggestion. Several comments (e.g., 1011, 1023) complained about what they felt was an excessive burden of paperwork re­ lated to the form. The Commission has determined that the information required is only that which is neces­ sary and appropriate to implement the congressional mandate to create an ef­ fective premerger notification pro­ gram.

EXPLANATION AND INSTRUCTIONS The explanation and instructions found on pages 1-3 of the notification and report form are intended to supply certain basic information. They must be read in conjunction with the act and the rules. Some of the expla­ nations and instructions for complet­ ing the form are found in the rules themselves, especially in §803.2. The terms used in the form are defined in the rules rather than in the form itself. The definition of one term used in the form but not the rules, “dollar revenues,” has been moved from the “definitions” portion of the form, where it was in the original form, to § 803.2(d). The balance of the terms are defined in § 801.1 As § 803.1(a) implies, one need not necessarily file notification by com­ pleting a preprinted copy of the form provided by one of the agencies. Pho­ tostatic or other equivalent reproduc­ tions are permitted, and many items requiring detailed responses will re­ quire separate additional sheets. FEDERAL REGISTER, VO L. 43, NO . 147— M O N D AY, JULY 31, 1978

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The third paragraph of the instruc­ tions describes how many copies of the form are to be sent to each agency and gives their addresses. The affidavit re­ quired by § 803.5 should be attached to the front page. Without the affidavit, notification is incomplete. See the Statement of Basis and Purpose to §803.5.

A box is provided on the first page of the form for the reporting person to check whether the acquisition is a cash tender offer. This box gives the agency staff immediate notice that the waiting period is only 15 days and begins upon receipt of the acquiring person’s form, as provided in section 7A(b)(l)(B), and that review must therefore be expedited. The “name and date-’ blanks are provided to help the agency staff im­ mediately identify the report as be­ longing to a particular person. The blanks under (b) and (c) call for addi­ tional information when rules are em­ ployed permitting an entity other than the ultimate parent entity to file notification; see the discussions of § 803.2(a) and 803.4 on these instances. The name of the reporting person is repeated at the top of each page of the form in order to assure the identi­ fication of each page should they become accidentally separated. In general, the form employs the Standard Industrial Classification (“SIC”) system employed by the Bureau of the Census. The SIC-based product and industry categories are available in the “Standard Industrial Classification Manual” and other pub­ lications; the instructions provide the exact citation for that volume as well as for additional publications noted as references for 5-digit (SIC-based code) product class and 7-digit (SIC-based code) product. For 7-digit product codes ending in 00, the instructions re­ quest that more detailed information be supplied from appendix A to the Numerical List of Manufactured Prod­ ucts, because codes ending in 00 do not provide sufficient detail on the precise product involved.

The instructions provide that if pre­ cise information is not available, best estimates may be supplied, but must be indicated by the notation “esti” The sources of such estimates must also be indicated. Furnishing an esti­ mate in these circumstances will ordi­ narily not be regarded as a failure to supply a complete response within the meaning of §803.3 and does not re­ quire a statement of reasons for noncompliance as provided in that section. Persons which have information on a fiscal year, rather than calendar year, basis may supply the requested data for the fiscal year which most nearly corresponds to the calendar year speci­ fied.

RULES AND REGULATIONS The final paragraph of the instruc­ tions reminds the individual complet­ ing the form of certain spècial provi­ sions of § 803.2 that may increase or decrease the amount of information required. These provisions are ex­ plained in the Statement of Basis and Purpose to § 803.2.

item i(a) Item 1(a) requires the reporting person to check boxes to indicate the basic character of the reportable transaction.

All applicable boxes should be checked.

it e m i(b ) Item 1(b) requires the reporting person to indicate whether it is the ac­ quiring or acquired person in the transaction, or, when applicable, both. If the reporting person is both an ac­ quiring and an acquired person in a single transaction, it need not submit two entirely separate reports. It may instead file one report as both an ac­ quired and an acquiring person, but must respond to certain items sepa­ rately in each capacity. See § 803.2(b). BACKGROUND INFORMATION TO ITEM l(b ) Original item 1(b) required listing all “active entities” included within the reporting person. The final form re­ quires listing the entities included within the reporting person in re­ sponse to item 6(a). See the Statement of Basis and Purpose to item 6. item i(c) Item 1(c) requires the name and ad­ dress of the preacquisition ultimate parent entity.

it e m i(d ) Item 1(d) requires the reporting person to indicate the legal form or or­ ganization of the reporting person, i.e., corporation, partnership, etc. If a cor­ poration, the reporting person must indicate the state of incorporation; if a partnership, the state of jurisdiction. ITEM l(e) Item 1(e) requires the reporting person to indicate whether the data submitted on the notification and report form is furnished by calendar or fiscal year, and if by fiscal year, the dates of the fiscal year. ITEM 1(f) Item 1(f) need not be completed if the ultimate parent entity is itself the acquiring or acquired entity. If the ac­ quiring or acquired entity is not the ultimate parent entity listed in item 1(c), the reporting person must identi­ fy the name and mailing address of the acquiring or acquired entity, and (if applicable) its state of incorpora­ tion. The percentage of voting securi- 33521 ties of this entity held by the ultimate parent entity described in item 1(c) must also be indicated. If the ultimate parent entity controls the acquiring or acquired entity indirectly, the report must describe this indirect control. DELETION OF REVISED ITEM l(g ) See the Statement of Basis and Pur­ pose to item 6.

it e m 2(a) Item 2(a) requires the reporting person to list the name and mailing address of each acquiring and acquired person, whether or not each such person is itself required to report. The major instance in which fewer than all the parties to an acquisition may be required to file notification is the cre­ ation of a joint venture or other corpo­ ration. See § 801.40(b). Item 2(a) requires a brief description of the assets or voting securities to be acquired, the consideration to be re­ ceived by the acquired person and, if known, the identity of any holders other than the issuer from which the voting securities are to be acquired. Acquisitions from holders other than the issuer may occur in tender offers and the other types of transactions de­ scribed in § 801.30. In tender offers for widely-held entities, as well as in pur­ chases of stock traded on securities ex­ changes, the number of such holders will be extemely large. Item 2(a) thus requires disclosing the identity of non­ issuer holders only when the acquired entity is not widely held. Background Information to Item 2(a) Original item 2(a) required the list­ ing of all other companies “involved in the transaction.” A number of com­ ments (e.g., 25, 28, 71, 112, 120) criti­ cized the use of this phrase as ambigu­ ous, since it could conceivably refer to (among others) law firms, banks, escrow agents, auditors, brokers, or other persons incidentally participat­ ing in the acquisition. The item did not seek to identify so broad a catego­ ry of persons. Final item 2(a) clarifies that only acquiring and acquired per­ sons and, if applicable, non-issuer holders need be listed. it e m 2(b) Item 2(b) requires the reporting person to indicate, if known, the scheduled consummation date of the acquisition. If the date is unknown at the time of filing, an estimated date should be provided and the basis of the estimate explained. If the parties have agreed to a formula by which the closing date will be determined (e.g., “60 days after termination of the wait­ ing period”), this formula should be provided.

FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33522 RULES AND REGULATIONS ITEM 2(C) Item 2(c) requires the reporting person to describe the manner in which the acquisition is to be carried out, including the expected dates of major events in the acquisition, such as stockholders’ meetings, filing of re­ quests for approval, other public fil­ ings, terminations of tender offers, etc. B ackground I n fo r m a t io n to I tem 2(c) Original item 2(c) required the de­ scription of “each necessary step’’ in the transaction. A number of com­ ments (e.g., 71, 89, 112) criticized the use of this phrase as overly broad or unnecessary for law enforcement pur­ poses. In addition, others (e.g., 30; 1098) argued that this provision might require the submission of information not available to the reporting compa­ ny at the time of filing. Two com­ ments (28, 112) recommended that the only vital date for law enforcement purposes should be the prospective closing date of the transaction. The language of final item 2(c) has been clarified. The use of the phrase "necessary steps” has been abandoned. Instead, reporting companies are re­ quired to describe generally the in­ tended course of the transaction in­ cluding the expected dates of major events. The item gives examples of such events.

it e m 2(d)(i) Item 2(d)(i) need be completed only by persons engaged in an assets acqui­ sition; persons engaged in an acquisi­ tion of voting securities need not submit this information. The item re­ quires the reporting person to describe and provide an approximate dollar value for all general classes of assets (other than cash and securities) to be acquired by each party to the acquisi­ tion. If the acquisition is the forma­ tion of a joint venture or other corpo­ ration, the description must include all general classes of assets to be acquired by the joint venture pursuant to agreement among the persons forming the corporation.

For each general class of assets, the reporting person must (when applica­ ble) indicate the page or paragraph number of the contract or other docu­ ment submitted with the form in which the assets are more particularly described.

The term “general classes of assets” refers to general types and catagories of assets, rather than any specific meaning in accounting terminology or otherwise. Examples are land, mer­ chandise inventory, manufacturing in­ ventory, manufacturing plants, retail stores, goodwill and other intangibles. The term “approximate dollar value” refers to an approximation of value, rather than a value resulting from a formal appraisal.

B ackground in fo r m a t io n to I tem 2(d)(i) Original item 2(d)(i) required the re­ porting person to describe “all * * * assets” to be acquired. The final ver­ sion of the item refines this require­ ment to permit the description of gen­ eral classes of assets. A number of comments (e.g. 1057, 1098) criticized item 2(d)(i) on the grounds that the compilation of this data would be too burdensome. The Commission believes that information concerning general classes of acquired assets is necessary and appropriate to antitrust analysis, and is unlikely to constitute a significant burden for re­ porting persons. Another comment (77) suggested that any description of assets be limited to the degree of detail necessary in order to identify the product or service generated by the asset. The latter comment has been adopted in substance in the final version of this item.

Another comment (1086) suggested that reporting companies will have dif­ ficulty determining “approximate dollar values” for classes of assets without undertaking an extensive ap­ praisal of those assets. The “approxi­ mate dollar value” requirement of item 2(d)(i) is intended only to provide the agencies with a rough estimate of the value of each class of acquired assets. It does not require an apprais­ al. The more structured determination of dollar value under §801.10 applies to the aggregate dollar value of all assets to be acquired, and it must be reported under item 3. If the acquired person holds only one class of assets, that value is the proper response to item 2(d)(i) as well as item 3. However, if the acquired person holds more than one class of assets, and the acquiring person is acquiring more than one such class, item 2(d)(1) requires more detail. The aggregate dollar value should in this case be broken down into approximate dollar values for each general class of ac­ quired assets. Alternatively, the book value of each class of the acquired assets can be used if it bears a reason­ able relationship to fair market value. it e m 2(d)(ii) If the acquiring person, at the time of the signing of the agreement to ac­ quire assets of the acquired person, holds any assets of that person that it acquired in the previous 180 days, it must describe and provide a dollar value for each general class of the ear­ lier-acquired assets. The rule applies only if the second acquisition is of assets, not voting securities. See § 801.13(b)(2). The term “dollar value” means “approximate dollar value,” as employed in item 2(d)(i). See the state­ ment of basis and purpose to item 2(d)(i).

ITEM 2(e) Item 2(e) need be completed only by parties to a voting securities acquisi­ tion. The item requires all reporting persons to provide, for each issuer whose voting securities will be , ac­ quired, information oh the classes and dollar values of those issuers’ voting securities. When voting securities of an issuer are being acquired indirectly, those securities are not listed in re­ sponse to this item, although the issu­ ers of such securities will be listed in response to item 6(a) of the acquired person’s form. Similarly, when voting securities are being acquired in a sec­ ondary acquisition, those securities are not listed in response to this item on the form submitted for the primary acquisition, since separate notification and report forms must be submitted for the secondary acquisition. See the statement of basis and purpose to § 801.4. This information must be sub­ mitted for all classes of securities, re­ gardless of whether securities within a particular class will actually be ac­ quired in the transaction. This infor­ mation is relevant to the review proc­ ess since it will assist the agencies in determining the actual degree of con­ trol arising from the acquisition. The required information includes: (i) A list of all classes of voting secu­ rities that will be outstanding after the acquisition (regardless of whether stock in each particular class will be acquired in the transaction), and a list of all classes of non-voting securities that will be acquired in the acquisi­ tion. When more than one class of voting securities is outstanding, the re­ porting person must include a descrip­ tion of the voting rights of each class; (ii) The total number of shares of each class listed under (i) that will be outstanding after the acquisition; (iii) The total number of shares of each class listed under (i) that will be acquired in the acquisition; (iv) The identity of each person ac­ quiring the securities of any class listed under (i);

(v) The dollar value of securities of each class listed under (i) that are to be acquired in the acquisition (for pur­ poses of determining dollar value, the provisions of § 801.10(a) must be fol­ lowed);

(vi) The total number of shares of each class of securities listed under (i) that will be held by the acquiring person(s) after the acquisition; (vii) The percentage of each class of securities listed under (vi) that will be held by the acquiring person(s) after the acquisition;

For subsections (iii)-(vii), if there is more than one acquiring person, sepa- FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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rate data must be submitted for each such person.

B ackground I n fo r m a t io n to I tem 2(e) The version of item 2(a) appearing in the original form required the de­ scription of assets to be received in the transaction. These provisions were re­ designated item 2(d) in the revised and final forms. Revised and final item 2(e) require the description of voting securities to be acquired. A number of comments (e.g., 26, 30; 1098) stated that the information sought was too detailed and would impose an undue burden on the re­ porting person. The Commission dis­ agrees. This type of data is easily available to reporting persons. In order to evaluate fully a voting securi­ ties acquisition, the agencies must be informed of the details of the acquisi­ tion and its effect on the capital struc­ ture of the acquired person. If this in­ formation is not obtained, the agen­ cies’ evaluation will be incomplete. An­ other comment (77) suggested that since item 2(e) does not reflect the transfer of new issues or treasury stock, the form should be amended to require the submission of data con­ cerning the pre- and post-acquisition capital structures of the acquired issuer. The Commission has concluded that the submission of preacquisition data would be unnecessary for law en­ forcement purposes. Any anti competi­ tive effect arising from the transaction will be primarily the result of the post acquisition structure.

ITEM 2(f)(1) Item 2(f)(i) requires that the report­ ing person furnish copies of final or most recent versions of all documents constituting the agreement between the acquiring and acquired persons. Only documents embodying the actual agreement are requested, and ancillary documents need not be submitted. If only a letter of intent has been signed, it should be provided. In the case of a tender offer, the acquiring person should submit a copy of the tender offer, and the acquired person need not do so. For secondary acquisitions and transactions described by §801.31, the background of the acquisition should be explained, but no docu­ ments need be submitted. If there are no such documents because of the nature of the transaction (for exam­ ple, when the acquiring person intends to acquire voting securities on a stock exchange or exercise a conversion privilege), no submission in response to this item is required. B ackground I n fo r m a t io n to I tem 2 (f)(i) The predecessor of this item, origi­ nal item 2(g), required the reporting person to furnish copies of all docu- RULES AND REGULATIONS ments “relating to” the acquisition. A substantial number of comments criti­ cized this provision.

A number of comments (e.g., 37, 47, 63, 71, 77, 87, 90, 103, 112, 115) criti­ cized the item as too broadly worded and likely to require the production of largely irrelevant documents. Several comments (e.g., 11, 37, 63, 88, 112) sug­ gested possible limitations on the item, including limiting it to docu­ ments that are “governing,” “basic,” “in sufficiently final form” or contain “material terms.” While the suggested terms were considered unworkably im­ precise, they do describe in a general sense those documents that the Com­ mission believes are necessary and ap­ propriate to preliminary review. Ac­ cordingly, the Commission concluded that the scope of the item should be narrowed considerably. Final item 2(f)(i) requires the submission of only those documents that actually consti­ tute the agreement, and no ancillary documents.

Several comments (e.g., 41, 77, 90) suggested that documents containing confidential business and financial in­ formation should be exempt from sub­ mission. The Commission believes that these comments are the result of an erroneous interpretation of the scope and purpose of the act. The act exempts no relevant information from disclosure to the enforcement agen­ cies, regardless of its sensitivity or con­ fidentiality. If anything, a careful reading of the act indicates that the congressional intention was exactly the opposite. Section 7A(h) specifical­ ly exempts information and docu­ ments received by the agencies pursu­ ant to the act from disclosure under the Freedom of Information Act. Thus, it appears that Congress envi­ sioned the submission of confidential information. In light of the statutory language, the final rules take the posi­ tion that no exception will be made under item 2(f)(1) merely because the contents of these documents are alleg­ edly confidential.

it e m 2 (f)(ii) Item 2(f)(ii) requires the reporting person to furnish an index containing a brief description of each ancillary document or class of documents relat­ ed to the agreement underlying the re­ ported acquisition. The phrase “relat­ ed to” is considerably broader than the term “constitute” used in item 2(f)(i). Specific examples of relevant ancillary documents include docu­ ments relating to personnel matters, third-party financing agreements, leases, subleases and other documents relating to the transfer of realty. An index to these documents will permit the agencies to identify particular doc­ uments in a second request. 33523 B ackground I n fo r m a t io n to I tem 2 (f)(ii) Original item 2(g) would have re­ quired the submission of all docu­ ments related to the transaction. This item, which first appeared in the re­ vised form, requires the submission of an index of ancillary documents, rather than the documents them­ selves.

A number of comments suggested that the compilation of such an index was unnecessary (1044, 1104) and too burdensome (1044, 1053). However, an index of ancillary documents is both necessary and appropriate to antitrust review. The information contained in such an index will permit the agencies to identify particular documents ap­ propriate to second requests, should such requests be necessary. Another comment (1028) suggested that the required compilation of an index was beyond the statutory au­ thority because the information con­ tained in the index would be irrelevant to antitrust considerations. The Com­ mission disagrees. Section 7(A)(d)(l) states that the notification shall con­ tain such relevant information and doucmentary material as is necessary and appropriate to enable the agencies to determine whether the acquisition will violate the antitrust laws. The documents required to be indexed in item 2(f)(ii) are expressly limited to those "relating to” the reported acqui­ sition. The agencies have found such documents to be useful in evaluating the legality of past acquisitions. Thus, the information submitted in response to item 2(fKM) falls within the man­ date of section 7A(d)(l). Furthermore, inasmuch as the compilation of an index will be essentially a clerical function, it cannot be said to be an ex­ cessively burdensome task. ITEM 3 Item 3 requires the reporting person to state the percentage of assets and ‘voting securities of the acquired person, and the aggregate total dollar amount of such assets and securities, that will be held by each acquiring person as a result of the acquisiton. In the majority of transactions, reporting persons will respond to either 3(a) or 3(b), but not both. All reporting per­ sons must respond to 3(c). The re­ sponses to item 3 are intended to con­ firm the basis on which the acquisi­ tion meets the size-of-transaction test of section 7A(a)(3).

Item 3 requires only approximations of the percentages and aggregate total dollar amounts of assets and voting se­ curities. Particularly as to those crite­ ria of the 15 percent or 15 million test that are self-evidently either satisfied or not satisfied, precise figures are not required. Furthermore, the reporting persons may concede that certain cri- FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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33524 RULES AND REGULATIONS teria contained in item 3 are satisfied, and submit approximate answers to those criteria that are not satisfied. Background Information to Item 3 Item 3 is intended to be a recapitula­ tion of the 15 percent or $15 million test of section 7A(a)(3). , Several comments (e.g., 5, 120) sug­ gested that information submitted under item 3(b) would be superfluous inasmuch as the same information is required under item 2(e). This inter­ pretation is incorrect. The information contained in item 3 is needed to verify the computations of the reporting per­ sons under section 7A(a)(3) and thus that the act applies to the transaction. The information contained in item 2(e), on the other hand, provides a more detailed picture of the overall capital structure of the acquired person. That information is designed to assist substantive antitrust review by the law enforcement agencies and has no bearing on the reportability of the transaction. For this reason item 3 is not duplicative. Furthermore, since the response to item 3 will require no more than disclosure of the calcula­ tions the reporting person must per­ form under section 7A(a)(3), the item cannot be said to constitute an unrea­ sonable burden upon reporting per­ sons.

c Revised item 3 would have required separate reporting for the holdings of the acquiring ultimate parent entity and its affiliates. Since the final rules defihe the term “affiliate” to exclude persons or entities not included within ' the acquiring person, see § 801.1(d), final item 3 has been amended to remove this separate reporting re­ quirement.

ITEM 4 Item 4 requires the reporting person to furnish copies of a number of docu­ ments commmonly prepared for filing with the SEC or for other corporate purposes. The reporting person must submit copies of its own documents and, if entities included within the re­ porting person have their own docu­ ments that are different from those of the reporting person, copies of those entities’ documents as well. In the heading to the item, the ref­ erence to documents “of the person filing notification” merits explanation. If the person is a corporation that treats all its controlled (as defined in § 801.1(b)) subsidiaries as components of a single unit, then the documents “of the person” naturally will be the documents that apply to that corpora­ tion.

item 4 (a) ♦ Item 4(a) requires the reporting person to furnish copies of certain documents if they were filed with the SEC within 3 years prior to the date of filing the notification and report form, or if they are to be filed contempora­ neously with the SEC in connection with the acquisition. These documents include the most recent proxy state­ ment and most recent form 10-K. In addition, all régistration statements, forms 10-Q and forms 8-K filed Since the end of the period reflected by the most recent form 10-K must be sub­ mitted. If the acquisition is a tender offer, schedule 14D-1 must also be submitted if it has already been filed with the SEC or will be filed with the SEC contemporanously with the filing of the notification and report form with the Commission and the Assist­ ant Attorney General. If schedule 14D-1 has not been filed with the SEC prior to the filing of the notification and report form, and will not be filed contemporanously with the notifica­ tion and report form, it need not be submitted in response to item 4(a). Background Information to Item 4(a) The documents requested by item 4(a) contain information which will prove helpful to the enforcement agencies in evaluating the impact of the acquisition upon competition. Since these documents will be readily at hand, requiring their submission imposes no undue burden on reporting person.

If the reporting person does not have copies of responsive documents readily available, the reporting person may instead identify each document and indicate its date and place of filing.

Item 4(a) has undergone some change since the original form. First, original item 4(a) required the submis­ sion of the most recently filed copies of all enumerated types of documents, regardless of how long ago such docu­ ments may have beeri. filed. Several comments (e.g., 11, 15, 59, 77, 104) argued tfyat only relatively recent doc­ uments would be useful for review purposes. Accordingly, the final item required that such documents be sub­ mitted only if they were filed with the SEC within the 3 years prior to the date of filing of the notification and report form. Second, the revised item required the reporting person to submit all registration statements filed with the SEC during the 3 years prior to the filing of the premerger no­ tification report. Comment 1091 noted that all of this information, to the extent not outdated, would be includ­ ed in the most recent form 10-K. The final version requires the submission of only those registration statements filed since the end of the period re­ flected by the most recent form 10-K. The SEC comment (1058) suggested that problems could arise with regard to the filing of SEC schedule 14D-1, relating to tender offers. The com­ ment suggested that in many cases tender offerors will not have access to all of the information required to be disclosed under schedule 14D-1 at the time* of submission of the notification and report form and thus may not have prepared schedule 14D-1 at tithe of filing the form. Under these circum­ stances, to require the submission of schdule 14D-1 at the time of filing might delay the filing until schedule 14-1 was completed. The comment rec­ ommended that item 4(a) of the notifi­ cation and report form be construed in such a manner as to require schedule 14D-1 to be submitted to the Commis­ sion and the Assistant Attorney Gen­ eral as a supplement to item 4(a) con­ temporaneously with its filing with the SEC.

The final version of item 4(a) does not follow the suggestion of the SEC. The final rules require that the re­ porting person submit schedule 14D-1 in response to item 4(a) only if the schedule has already been filed with the SEC or will be filed with the SEC contemporaneously with the filing of the notification and report form. In­ stead of requiring a supplemental filing, whenever the schedule is un­ available at the time the acquiring person completes item 4(a), the agen­ cies may request it as part of a second request. Furthermore, reporting per­ sons may wish to submit schedule 14D-1 voluntarily as a supplement to item 4(a). See § 803.1(b). Another comment (35) suggested that submission of the requested docu­ ments under item 4(a) was unneces­ sary because these documents are available from the SEC. Although the documents are generally available, the agency staffs- will be under severe time constraints in reviewing filings under the act. Obtaining the required docu­ ments for each reporting person would be extremely time-consuming. The added burden of requiring the agen­ cies to obtain these documents from the SEC would impede the effective and timely review envisioned by the act. By contrast, for reporting persons the burden of submitting copies of these documents should be minimal, if copies are available.

Finally, comment 77 suggested that reporting persons furnish only those documents filed with the SEC that contain primarily financial state­ ments, rather than nonfinancial infor­ mation such as proxy statements. The final version of the item does not follow this suggestion. Regardless of the presence of financial statements, SEC filings are likely to contain infor­ mation concerning the structure, oper­ ations and plans of the person that will facilitate review of the acquisition by the agencies.

FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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ITEM 4(b) Item 4(b) requires the reporting person to furnish copies of the most recent annual reports and annual audit reports of the person filing noti­ fication and of all unconsolidated United States issuers included within the person'. In addition, if the most recent regularly prepared balance sheets of the person or of the unconso­ lidated United States issuers contain information more recent than (and different from) that contained in the most recent annual report and annual audit report, the balance sheets must also be submitted. This situation may arise, for example, when the most recent regularly prepared balancé sheet is a quarterly or monthly bal­ ance sheet prepared after the most recent annual report. The term “un­ consolidated issuer” means an entity whose operations and financial posi­ tion are not reflected in the financial statements of the ultimate parent entity or the entire reporting person. It is immaterial for purposes of item 4(b) whether such unconsolidated issu­ ers are involved in the reported acqui­ sition.

The term “United States issuer” is defined in § 80I.l(e)(l)(ii). Note that all persons must respond to item 4(b) without regard to whether they are required to file reports with the SEC.

B ackground I n fo r m a t io n to I tem 4(b) The annual reports, audit reports, and balance sheets to be submitted in response to item 4(b) constitute basic data that the agencies will employ in gaging the likely impact of the acquisi­ tion upon competition. Original item 4(b) would havé required the submis­ sion of "all documents issued during the 3 years prior to the filing of this report which contain information di­ rectly pertaining to the reported transaction.” A large number of com­ ments (e.g., 15, 28, 30, 37, 41) criticized the breadth and obscurity of this lan­ guage. In response to these comments, the information sought under original item 4(b) is described in more detail in the final version of item 4(c). The revised version of item 4(b) was substantially similar to the final ver­ sion. However, revised item 4(b) would have required the reporting person to furnish information for all unconsoli­ dated entities included within the re­ porting person. Several comments (e.g., 1026, 1094, 1099) criticized the re­ quirement of submitting such docu­ ments for unconsolidated foreign enti­ ties. One comment (1094) suggested that the submission of such docu­ ments for unconsolidated foreign enti­ ties might violate foreign corporate se­ crecy statutes. The Commission reexa­ mined the need for these statements, and determined that information re­ garding foreign entities can be relegat- RULES AND REGULATIONS ed to requests for additional informa­ tion. Accordingly, final item 4(b) re­ quires the submission of annual re­ ports, annual audit reports, and regu­ larly prepared balance sheets only for unconsolidated “United States issuers” included within the reporting person. This amendment renders item 4(b) consistent with items 5, 7 through 9, and the insurance appendix, which re­ quire the submission of information with respect to United States oper­ ations alone. See § 803.2(c). ITEM 4(C) Item 4(c) requires the submission of all studies, surveys, analyses and re­ ports prepared by or for officers or di­ rectors for the purpose of evaluating or analyzing the acquisition with re­ spect to various aspects of competi­ tion.

The reporting person must submit only those documents prepared in con­ nection with the reported acquisition. Documents pertaining to other merg­ ers or acquisitions by the acquiring person, even if in the same market as the acquired person in the reported transaction, need not be submitted. Further, only those documents relat­ ing to markets, competition, competi­ tors, potential for sales growth or ex­ pansion into product or geographic markets, and geographic and product market shares need be supplied. Docu­ ments relating to other matters, such as pension arrangements, labor con­ tracts,, financing agreements or securi­ ties matters need not be supplied. Fi­ nally, only documents prepared “by or for any officer(s) or director(s)” need be submitted. Officers or directors of any entity included within the report­ ing person meet this standard. The language “by or for” embraces docu­ ments prepared by any persons, in­ cluding consultants, for officers or di­ rectors. The date of preparation and name and title of the individual who prepared each document must be indi­ cated if not contained in the document itself.

B ackground I n fo r m a t io n to I tem 4 (c) Item 4(c) requires the submission of documents that the Commission views as essential to perform preliminary evaluations of mergers or acquisitions adequately. Internal documents of the parties to an acquisition provide a per­ spective on matters of antitrust con­ cern that even detailed statistical in­ formation is unlikely to yield. SIC data, while the most satisfactory data available, are occasionally imperfect for determining product markets. Likewise, the other items on the form, while designed to elicit appropriate in­ formation, cannot be expected to answer all of the basic questions in every acquisition. The agencies have 33525 found from past experience that the viewpoints of the participants are ex­ tremely valuable in analyzing the anti­ trust implications of an acquisition and have determined that some of these perceptions are indispensable to the preliminary review envisioned by the act. As later pórtions of this dis­ cussion indicate, the final version of the items represents a substantial re­ duction in the scope of the document request.

Furthermore, the documents sub­ mitted under this item will enable the agency staffs to determine rapidly which statistical information is likely to be important. Since the waiting period may provide a very short time in which to analyze a relatively com­ plex acquisition, acceleration of the review process by means of internal documents is essential. Item 4(c) and its earlier drafts pro­ voked many critical comments. Com­ ment 35, for instance, suggested that any information derived from docu­ ments sought under either version of the item would be speculative at best. Numerous other comments considered the documents more properly the sub­ ject of a request for additional infor­ mation and documentary material (e.g., 59, 85, 87, 94, 111, 115, 120; 1075, 1104), or a discovery motion in the course of litigation (e.g., 112; 1108). The Commission disagrees. Item 4(c) requests the production of a narrow class of documents that is necessary and appropriate for purposes of pre­ liminary antitrust review. As noted by Congressman Rodino on the House floor:

tlln most cases, the Government will be requesting the very data that is already available to the merging parties, and has al­ ready been assembled and analyzed by them. If the merging parties are prepared to rely on it, all of it should be available to the Government.

122 Cong. Rec. H10293 (daily ed. Sept. 16, 1976). Documents analyzing or evaluating a merger generally form the basis of a party’s decision to pro­ ceed with an acquisition. As such, those documents are highly relevant for review purposes. In light of the agencies’ congressional mandate to evaluate reported mergers and acquisi­ tions effectively, any further limita­ tion on the scope of item 4(c) would seriously impair the agencies’ efforts to fulfill their delegated responsibility. A large number of comments (e.g., 37, 59, 63, 70, 77, 78, 101, 109, 111, 112, 120; 1050, 1088) recommended that documents containing sensitive finan­ cial information or trade secrets be exempt from production under item 4(c). This suggestion was rejected. The Commission believes that fears of im­ proper public disclosure of confiden­ tial information are unfounded in light of §7A(h). That subsection pro- FEDERAL REGISTER, VOL. 43, N O . 147— M O N D AY, JULY 31, 1978

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33526 vides that information filed with the agencies is exempt from disclosure under the Freedom of Information Act, and may not be made public except in an administrative or judicial proceeding, or to Congress. Other comments (e.g., 59, 63, 77, 109, 111, 1044, 1058) suggested that docu­ ments protected by the attorney-client or other privileges should be exempt from disclosure under item 4(c). The Commission has declined to follow this suggestion. Section 7A(d)(l) contem­ plates the submission of all relevant documents and provides no exemption for privileged documents. Therefore, none is provided in the rules. If alleg­ edly privileged documents are with­ held, notification is incomplete and a statement of reasons for noncompli­ ance conforming to § 803.3 must be submitted.

Whether a reporting person has substantially complied with the act and rules when allegedly privileged documents have been with­ held will be determined on a case-by­ case basis by the enforcement agen­ cies, and, when necessary, by courts under section 7A(g).

_ Original item 2(h), the predecessor of item 4(c), was considerably broader than the final item. It would have re­ quired submission of all documents prepared within the 3 years preceding notification that “discuss the reasons for or analyze the proposed transac­ tion.” In addition, it would have called for any documents that pertain to markets, competitors, expansion, etc., into any product or service manufac­ tured or sold by the other reporting company.

Most of the comments received were highly critical of this original, broader draft. Numerous comments (e.g., 15, 28, 30, 37, 47, 59, 85, 103, 111, 112, 120) objected that the item was burden­ some. Others (e.g., 47, 59, 78, 112) sug­ gested that much of the information submitted would be irrelevant for pur­ poses of reviewing the antitrust impli­ cations of the reported acquisition. These comments led to a substantially streamlined revised version of the re­ quest. Revised item 4(c) would have re­ quired the submission of documents prepared “by or for any officer(s) or director(s) for the purpose of evaluat­ ing, or analyzing the acquisition with respect to market« shares, competition, competitors, markets, potential for sales growth or expansion into product and geographic markets.” Thus, the revised version would have required the submission of documents prepared for the purpose of evaluating or ana­ lyzing the reported acquisition alone, and excluded documente prepared for other purposes. Although a number of comments (e.g., 1029, 1050, 1075, 1098, 1104, 1108) still objected to the inclu­ sion of the item, this version was adopted unchanged in the final rules. RULES AND REGULATIONS By so limiting the scope of documents required under item 4(c), the Commis­ sion acknowledges that the agencies may not gain access to some relevant documents at the time of their initial review. However, requiring the submis­ sion of a broader range of documents would entail searches of historical files by reporting persons for documents prepared at other times for other pur­ poses, and could producé too large a number of documents for purposes of effective preliminary antitrust review. Since additional documents may be sought by either agency in a request for additional information and docu­ mentary material under section 7A(e) and §803.20 or other discovery proce­ dures, the limitation on the scope of documents required under item 4(c) is unlikely to impede effective review of reported acquisitions.

The proviso in item 4(c) that only those documents prepared “by or for any officer(s) or director(s)” need be submitted also represents a consider­ able limitation of the language con­ tained in its predecessor. Original item 2(h) would have required the submis­ sion of all documents “prepared by or for the company.” Yet a number of comments (e.g., 1053, 1108) urged that the language be further limited to en­ compass only directors or “high-level management.” These suggestions were rejected. The criterion in the item is easily administrable and should yield a reasonable number of genuinely im­ portant documents.

DELETION OF REVISED ITEM 4(d) Item 4(d) first appeared in the re­ vised form, but has been deleted from the final notification and report form. Item 4(d) would have required the re­ porting person to describe its overall planning process and to name the indi­ viduals responsible for planning possi­ ble entry into the product or geo­ graphic markets of other parties to the transaction.

v A number of comments criticized re­ vised item 4(d). In general, these com­ ments described item 4(d) as burden­ some and unnecessary (e.g., 1075, 1086, 1098) and of doubtful relevance for purposes of preliminary antitrust review (e.g., 1057, 1104). The type of information sought in item 4(d) was considered by most comments to be more properly the subject of a request for additional information and docu­ mentary material (e.g., 1059), if not a discovery motion in litigation (e.g., 1044, 1055, 1108). One comment (1075) described the type of information sought as confidential and beyond the scope of discovery.

The Commission has concluded that at the present time the type of infor­ mation requested in item 4(d) does not seem necessary to obtain at the pre­ liminary review stage. Accordingly, item 4(d) has been deleted from the final notification and report form. Should experience under the act indi­ cate that this conclusion should be reexamined at some time in the future, the Commission may consider amending the form to include an item along the lines of revised item 4(d). In addition, persons filing notification may wish to provide such information voluntarily pursuant to § 803.1(b), since the enforcement agencies may request such information as part of a request for additional information or documentary material pursuant to sec­ tion 7A(e) and § 803.20. ITEM 5 Item 5 requires the submission of annual revenue data by single four­ digit standard industrial classification (“SIC”) code industries, and, for man­ ufacturing industries, by five-digit (SIC-based code) product classes and seven-digit (SIC-based code) products. The SIC code is employed by the U.S. Bureau of the Census to identify prod­ ucts and services for which aggregate data is published in the Bureau’s var­ ious economic census and its annual survey of manufactures. Item 5 requires the submission of dollar revenue data for the most recent year and for 1972, the year of the last economic censuses. Upon pub­ lication of the 1977 economic censuses by the Bureau of the Census, item 5 will be amended. The revenue data re­ quested by item 5 is by design similar to that required by the Bureau of the Census in its economic censuses and annual survey of manufactures, so that the data provided in response to item 5 will be reasonably comparable with the aggregate data contained in those publications. Because of the similarity of the inquiry, reporting persons should be generally familar with the derivation of such informa­ tion from their books and records. An important distinction exists, however, between the data submitted to the Bureau of the Census and that required by item 5. Data is submitted to the Bureau of the Census on an es­ tablishment basis (i.e., a separate report is submitted for each plant or other facility operated by the report­ ing firm). By contrast, the information submitted in response to item 5 must be an aggregate figure for all oper­ ations of the reporting person in each relevant four-, five-, or seven-digit cat­ egory. While some companies main­ tain such data on a consolidated basis, others do so only with respect to smaller operating unite, such as divi­ sions or establishments. In the latter situations, the reporting person needs simply to combine by category the dollar revenues of all establishments operated by each entity included within the reporting person, and then FEDERAL REGISTER, VOL. 43, N O . 147— M O N D AY, JULY 31, 1978

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combine by category the dollar rev­ enues of all such entities. The “total dollar revenues” provided in response to the various inquiries in item 5 will thus be an aggregate figure represent­ ing the entire operations of the report­ ing person in each relevant four-, five-, or seven-digit (SIC code) category. A second distinction will arise in cer­ tain cases. The instructions to the form require that reporting persons employ the four-digit industry catego­ ries contained in the 1972 edition of the “Standard Industrial Classifica­ tion Manual,” and the seven-digit (SIC-based code) product categories contained in the numerical list of manufactured products, “1972 Census of Manufactures” (MC72-1.2) (new 1972 SIC basis) or volume II, “Indus­ try Statistics,” “1972 Census of Manu­ factures.” The categories contained in these reference materials reflect the categories employed by the Bureau of the Census in its tabulation and publi­ cation of the 1972 economic censuses. The Commission is aware that compa­ nies reporting for purposes of the 1972 censuses were instructed to report on the basis of the SIC format contained in the 1967 economic censuses and that a number of 1967 census catego­ ries were changed at the time of publi­ cation of the 1972 economic censuses. For those categories in which such changes occurred, reporting persons may be able to comply with item 5 by reviewing underlying records compiled in accordance with the 1967 classifica­ tions for purposes of the 1972 econom­ ic censuses, and retabulating such data according to 1972 classifications. The Commission has determined that any inconvenience so occasioned is unavoidable4n light of the agencies’ need to be able to compare quickly an indi­ vidual company’s submissions with published census aggregate data. ~ Information must be submitted ac­ cording to 1972 classifications in re­ sponse to items 5(a) (revenues by in­ dustry for 1972), 5(b)(i) (revenues by product for 1972), 5(b)(iii) (revenues by product class for most recent year), 5(c) (revenues for nonmanufacturing industries for the most recent year) and, if census classifications are known, 5(b)(ii) (new or deleted prod­ ucts since 1972).

The note above item 5(a) cautions that §803.2 of the rules may require limited or separate responses to item 5 by the person filing notification. The instructions contained in §803.2 are significant in several ways. First, § 803.2(b) requires limited or separate responses by acquired per­ sons filing notification. Acquiring per­ sons must complete item 5 with re­ spect to all entities included within the acquiring person. Acquired per­ sons must complete item 5 with re­ spect to only those assets being ac- RULES AND REGULATIONS quired or that issuer whose securities are being acquired (and all entities controlled by such issuer). Responses not so confined do not comply with the instructions and will be treated as deficient.

Second, § 803.2(c)(1) provides that information need not be provided with respect to operations conducted out­ side the United States. See § 801.l(k). Third, § 803.2(c) also provides that information need not be supplied with respect to assets or voting securities the acquisition of which is exempt. For further explanation of this brief summary, see the statement of basis and purpose to § 803.2. The term “dollar revenues” used in item 5 is defined in § 803.2(d). BACKGROUND INFORMATION TO ITEM 5 A large number of comments were received concerning the submission of data by SIC code categories. First, sev­ eral comments (e.g., 48, 109) suggested that the use of aggregated dollar vol­ umes was unduly burdensome since re­ porting persons are required to fur­ nish data to the Bureau of the Census by establishment and will not have ag­ gregate figures readily available. The Commission finds this argument to be without merit. If, as the comment sug­ gests, reporting persons have unaggre­ gated revenue data available on an es­ tablishment or other basis, the compi­ lation of aggregate figures will require, at most, the simple addition of estab­ lishment and entity figures. This burden is likely to be minimal. Second, a number of comments (e.g., 120; 1050, 1159, 1108) informed the Commission that many companies do not employ SIC-based categories data in their internal accounting proce­ dures. Several of these comments rec­ ommended that if reporting compa­ nies do not normally organize their in­ ternal records by SIC-based categories, those persons should be permitted to report under other systems. Suggested systems included the system employed by the reporting person, if that system approximates the SIC format (e.g., 26, 120; 1050); any generally accepted ac­ counting system (e.g., 1059); or any system used by all of the parties to a transaction (e.g., 1077). Alternatively, another comment (29) suggested that reporting companies be permitted to use the format of Financial Account­ ing Standard No. 14, “Finanpial Re­ porting for Segments of a Business Enterprise”, at least as an option in lieu of seven digit reporting. The Com­ mission has considered these sugges­ tions and concluded that final item 5 should continue to require the submis­ sion of data under the SIC-based cate­ gories. For effective antitrust review, the agency staffs must be able to de­ termine the impact of an acquisition on the market for a particular prod- 33527 uct, group of products, or service. The agency staffs will be able to perform this review only if the data submitted by reporting persons can be compared to data for the entire market. Data for the entire market is difficult to estab­ lish unless all persons submit revenue figures under a basically uniform clas­ sification system. Since there may be as many internal accounting systems as there are reporting persons, data re­ flecting diverse internal accounting systems are not a useful basis for review. Such data would not be readily comparable with the aggregate data published by the Bureau of the Census, which provides, through the SIC code, the most generally available and widely used source of universe data. While the Commission is well aware that the SIC code is not a per­ fect system, it has concluded that in­ formation reported by SIC-based cate­ gories currently provides the only fea­ sible basis for effective preliminary review of reported acquisitions within the time limits imposed by the act. Furthermore, the use of SIC-based categories should not be unduly bur­ densome. Reporting persons are pre­ sumably required to compile SICbased data for submission to the Bureau of the Census. Thus, reporting persons may have available, in addi­ tion to regular accounting books and records, other records compiled to aid in answering comparable inquiries in reports to the Bureau of the Census. In addition, the reporting persons’ ex­ perience in the preparation of Census reports should substantially reduce the burden of completing item 5. Another comment (94) suggested that item 5 be clarified to indicate whether SIC-based data is requested on an “establishment basis” or a “product class basis” as those terms are used by the Bureau of the Census. “Establishment basis” and “product class basis” are methods by which the Bureau of the Census reports data which it has collected and do not affect the method by which data is re­ ported, either to census or on the form. Therefore, this suggestion was not followed. The item requests aggre­ gate data for the person filing notifi­ cation.

Reporting persons may believe that information contained in a previously or contemporaneously submitted Cor­ porate Patterns Report ("CPR”) or Special Report on Mergers and Acqui­ sitions in the Dairy Industry (“Dairy Industry Report”) is responsive to a subpart of item 5. The Commission be­ lieves that because of the definition of “person” contained in the premerger notification rules, § 801.1(a), and the distinction between the reporting per­ son’s obligations as an acquiring or ac­ quired person, § 803.2(b), such in­ stances will be rare. However, if in fact FEDERAL REGISTER, V O L 43, N O . 147— M O N D AY, JULY 31, 1978

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33528 RULES AND REGULATIONS the exact information required by item 5 is contained in a CPR or Dairy Industry Report, the reporting person may complete the applicable subpart of item 5 by identifying the portion of the specific CPR or Dairy Industry Report that contains the responsive data.

The staff is presently reviewing its Special Report on Mergers and Acqui­ sitions in the Pood Distribution Indus­ tries (“Food Industries Report") and will recommend to the Commission that the Pood Industries Report be amended to eliminate any duplication between it and item 5 of the form. CENSUS ACT Other comments (e.g., 15, 59, 115, 120; 1050) suggested that to required submission of revenue data by refer­ ence to SIC-based categories used by the Bureau of the Census is impermis­ sible in view of section 9 of the Census Act, 13 U.S.C. section 9, which pro­ vides, in applicable part, that retained copies of reports filed with the Bureau of the Census may not be required by other Government agencies. This claim is not unique to the pres­ ent form. In litigation concerning the Commission’s Corporate Patterns Survey Report (“CPR”) and Line of Business Report (“LB”), the court re­ jected the same argument and held that the Census Act does not preclude the Commission from requiring an­ swers to questions concerning ship­ ments similar or identical to questions asked in a census report. In re FTC Corporate Patterns Report Litigation, 432 F, Supp. 291, 304-07 (D.D.C. 1977), appeal pending, Nos. 77-1728, et al., (D.C. Cir.). The Commission believes that its request for data based on census classifications is not impermis­ sible under section 9.

In any event, there is a strong statu­ tory basis for the required submission of data according to SIC-based catego­ ries in the notification and report form, regardless of the outcome of the CPR litigation. Item 5 seeks informa­ tion pursuant to the express mandate of the act, in which Congress, aware of the Commission’s use of such classifi­ cations in its previous premerger noti­ fication program, provided in section 7A(d)(l) that the Commission shall require that the notification required (by the act] be in such form and contain such documentary material and information relevant to a proposed acquisition as is nec­ essary and appropriate to enable the Feder­ al Trade Commission and the Assistant At­ torney General to determine whether such acquisitions may, if consummated, violate the antitrust laws.

Congress instructed the Commission to determine what information is nec­ essary and appropriate, and in what form such information should be sub­ mitted, in order for the enforcement agencies to fulfill their statutory man­ date. The Commission has determined that the submission of data according to SIC-based categories is necessary and appropriate in order to make a preliminary determination of the law­ fulness to reported acquisitions under the antitrust laws.

it e m s(a) Item 5(a) requires the reporting person to submit information concern­ ing the four-digit (SIC code) industries in which the reporting person engaged in 1972. For each such four-digit in­ dustry, the reporting person must in­ dicate the industry code number, the census description of the industry cor­ responding with the code, and total dollar revenues for the year 1972. The reporting person must report the revenue derived during 1972 by all entities presently included within the, person filing the notification and report form, regardless of whether such entities were included within the reporting person during 1972. Thus, data submitted in response to item 5(a) will include revenues derived during 1972 from the operations of en­ tities acquired by the reporting person since 1972.

Special instructions are provided for reporting persons engaged in certain non-manufacturing industries. BACKGROUND INFORMATION TO ITEM 5(a) Item 5(a) requests dollar revenues by four-digit (SIC code) industry for 1972 in order to estimate the reporting person’s share of the relevant four­ digit industries. The year 1972 was chosen so that the data provided can be compared to the aggregate figures for the industry published in the 1972 Economic Censuses.

Original\item 5(a) would have re­ quired the submission of four-digit in­ dustry data for both 1972 and the most recent year. The revised version of the form deleted the most recent year data from item 5(a) and added two new items. Item 5(b)(iii) required the submission of most recent year five-digit product class data for manu­ facturing industries. Another new item, 5(c), required the submission of most recent year four-digit industry data for non-manufacturing indus­ tries. The final version of the Form re­ tains this arrangement. Several comments (e.g., 59, 80) stated that compiling four-digit data for 1972 would be cumbersome, timeconsuming and expensive, and might require the reconstruction of docu­ ments no longer available since rec­ ords underlying census reports need only be retained for three years (104). Similarly, another comment (11) sug­ gested that data for 1972 would be outdated and irrelevant and suggested that item 5(a) should require the sub­ mission of four-digit industry data for the past 1 or 2 years alone. These sug­ gestions either are without merit or result from a misunderstanding of the purposes of the act. First, compiling such data should present no undue burden for reporting persons. Item 5(a) requests the submission of four­ digit industry data for 1972 alone. Re­ porting persons should still have avail-, able ordinary books and records for relatively recent years, including 1972. Furthermore, because 1972 was a year for which reporting persons presum­ ably had to collect this type of data for purposes of the economic censuses, reporting persons may also have avail­ able other records complied for use in the preparation of 1972 census reports. Second, the use of 1972 data is essen­ tial at the present time for antitrust review purposes. The last year for which complete data from the eco­ nomic censuses was published by the Bureau of the Census was 1972. Thus, it is the most recent year for which de­ tailed statistical breakdowns of market universes exist.

Another group of comments (e.g., 115; 1050, 1108) suggested that report­ ing persons be permitted to omit dollar revenues totaling less than a threshold figure. This suggestion was also rejected. Small dollar values may, under certain circumstances, consti­ tute a significant share of particular markets. For these markets the impo­ sition of a m in im u m dollar threshold might seriously impair the review process. Moreover, the burden entailed is unlikely to be significant. Finally, one comment (1104) suggest­ ed that the submission of data by four-digit industry for 1972 was super­ fluous because such data would merely be an aggregation of the data for all the seven-digit (SIC-based code) prod­ ucts included within that four-digit in­ dustry, which would be supplied in re­ sponse to item 5(b)(i). In view of the serious time constraints under which the agencies will review reported ac­ quisitions, the Commission has deter­ mined that the minimal burden of ag­ gregation entailed in response to item 5(a) should be borne by reporting per­ sons rather than by the'agencies. ^ ITEM 5(b)(1) Item 5(bXi) requires reporting per­ sons to submit information concerning each seven-digit (SIC-based code) product manufactured by the report­ ing person in 1972. For each seven­ digit product within SIC major groups 20-39, the reporting person must supply the Census description of the product and the total dollar revenues derived during 1972. As noted in the instructions to the form, for seven­ digit product codes ending in 00 the reporting person instead should submit information by the more de- FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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tailed product breakdown provided in appendix A to the Numerical List of Manufactured Products, 1972 “Census of Manufactures” (MC72-1.2). The reporting person must report the revenue derived during 1972 by all entities presently included within tire person filing the notification and report form, regardless of whether such entities were included within the reporting person during 1972. Thus, data submitted in response to item 5(b)(i> will include 1972 revenues of entities and assets acquired by the re­ porting person since 1972. BACKGROUND INFORMATION TO ITEM 5(b)(i) Item 5(b)(i) requests dollar revenues by seven-digit product in order to esti­ mate the reporting person’s share of the relevant seven-digit product mar­ kets. The year 1972 was chosen so that the data provided can be compared to the aggregate figures published for the 1972 Census of Manufactures. A number of comments questioned the use of seven-digit product data for 1972. Several (e.g., 11, 32, 103, lb9; 1059) recommended that seven-digit product data be required only for products in those four-digit industries in which the acquiring and‘ acquired persons both derive revenues, or for products with respect to which a cus­ tomer-supplier relationship exists.

These suggestions have been rejected for several reasons.

First, reporting persons may have in­ complete knowledge of whether the other party derives dollar revenues in the same four-digit industry. Particu­ larly, but not only, in acquisitions ac­ complished through tender offers, the reporting person may be unaware of all of the operations of the other re­ porting person. In such cases the agen­ cies would be forced to make requests for additional information and docu­ mentary material under section 7A(e) and §803.20 in an effort to obtain basic rather than supplementary data. Second, a limitation of seven-digit product information to those cases in which there is a four-digit industry overlap would be inappropriate for analysis of vertical or product exten­ sion acquisitions. In such cases the agencies would not necessarily receive any seven-digit product revenue data in those industries between which ver­ tical relationships or product exten­ sions are probable, since a four-digit overlap would be fortuitous. Again, the request for additional information would have to be used to obtain basic, rather than specialized, market data. Other comments (e.g., 29, 104; 1029) suggested that tne seven-digit product data requested in item 5(b)(i) is too de­ tailed, or that such information should be submitted only if annual dollar revenues exceeded a specific RULES AND REGULATIONS threshold figure (e.g., 29, 74, 103, 115; 1050, 1108). Both of these suggestions have been rejected. In order to evalu­ ate fully the possible anticompetitive effects of reported acquisitions, the agencies must have access to reason­ ably detailed and complete informa­ tion. Exclusive reliance on four- and five-digit data or insertion of an arbitraty dollar revenue threshold could seriously impair the agencies’ ability to perform this review and would thus frustrate the purposes of the act. Fur­ thermore, the added burden on report­ ing persons to report all information should be minimal.

Original item 5(b)(i) would have re­ quired the submission of seven-digit product data for both 1972 and the most recent year. It also would have required a statement of the percent­ age of dollar revenues attributable to exports.

Quite a few comments (e.g., 26, 29, 32, 37, 88, 104, 115; 1029) maintained that compiling seven-digit data for years other than census years would be unduly burdensome, asserting that few companies collect or maintain such data at that level of detail except for years for which they are required to respond to Bureau of the Census in­ quiries. Other comments (e.g., 15, 35, 85, 94, 99) protested that since the Bureau of the Census does not require manufacturers to submit separate re­ ports for exports, very few companies maintain separate export records and the compilation of export data would be unduly burdensome to reporting persons.

In response to these comments, re­ vised item 5(b)(1) deleted both the re­ quirement of dollar revenues by sevendigit product in the most recent year and the separate breakdown for export figures. Instead, item 5(b)(iii) was added, requiring reporting persons to submit dollar revenues for the most recent year by five-digit (SIC-based code) product categories. No provision in the form was made for the separate reporting of export information, which can be obtained, if necessary, by a request for additional information or documentary material under § 7A(e) and § 803.20. The final form retains re­ vised item 5(b)(i) without change, except for addition of a clarifying in­ struction.

it e m s(b)(ii) Item 5(b)(ii) requires the reporting person to identify each manufactured product that has been added or de­ leted since 1972. Products must be identified by seven-digit product cate­ gory unless the reporting person is unsure of the proper seven-digit prod­ uct category for a' product added since 1972, in which case the product may be identified in the manner ordinarily used by the reporting person. For each 33529 such product the reporting person must indicate the year of addition or deletion and, for products added, total dollar revenues during the most recent year.

The instructions to item 5(b)(ii) clar­ ify that, while products added due to the acquisition of entities since 1972 should be reported in response to item 5(b)(1), products deleted since 1972 by reason of the disposition of assets or voting securities should be included in response to this item.

B ackground I n fo r m a t io n To I tem 5(b) (ii) Item 5(b)(ii) first appeared in the re­ vised rules, and is similar to item 6(b) of the special report form for the Commission’s existing premerger noti­ fication program. Comment 1023 as­ serted that the information sought under item 5(b)(ii) was irrelevant for purposes of antitrust analysis. This comment is without merit. It is possi­ ble that product lines of reporting per­ sons have changed considerable since 1972, the year of the last census of manufacturers. Effective preliminary antitrust analysis of a merger or acqui­ sition requires review of the most cur­ rent information available. The sub­ mission of such information is thus both necessary and appropriate for review purposes.

it e m s(bXiii) Item 5(b)(iii) requires the reporting person to submit information concern­ ing each five-digit (SIC-based code) product class in which the reporting person is engaged. For each product class within SIC major groups 20-39 (manufacturing industries), the re­ porting person must indicate the prod­ uct class code number, the census de­ scription of the product class and the total dollar revenues derived during the most recent year. Total dollar rev­ enue data should reflect revenues de­ rived by all entities that are included within the reporting person at the time the form is filed. B ackground I n fo r m a t io n to I tem 5(b)(iii) Item 5(b)(iii) requests dollar rev­ enues by five-digit product class for the most recent year in order to obtain information concerning the current activities of reporting persons. By comparing this data to the aggregate figures for the product class published in the annual survey of manufactures, the agencies will be able to approxi­ mate the reporting person’s share of the relevant five-digit product classes. For the origin of item 5(bXiii), see the statement of basis and purpose to item 5(b)(i).

Comment 1077 suggested that a re­ quest for five-digit product class data for the most recent year was inappro- FEDERAL REGISTER, V O L 43, NO . 147— M O N D AY, JULY 31, 1978

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33530 RULES AND REGULATIONS priate because such data would not be comparable to the seven-digit product data for 1972 submitted under item 5(b)(i). However, five-digit dollar rev­ enues for the most recent year can be compared generally to seven-digit dollar revenues for 1972 by simply ag­ gregating all seven-digit revenues for products within the same five-digit product class. While the two types of data might not be strictly comparable because the market changes between 1972 and the most recent year, the comparison will provide the agencies with a useful preliminary evaluation of changes since 1972 in the reporting person’s share of relevant product markets. Should either agency decide to investigate the acquisition in depth, it could secure more comparable data by means of a request for additional information under section 7A(e) and § 803.20, or by other means. ITEM 5(C) Item 5(c) requires reporting persons to submit the dollar revenues derived in the most recent year in four-digit (SIC uode) nonmanufacturing indus­ tries, that is, industries in all SIC major groups other than 20-39. For each four-digit industry, the reporting person must indicate the four-digit code number, the census description of the industry and the total dollar rev­ enues derived in the most recent year. Total dollar revenue data should re­ flect revenues derived by all entities that are included within the reporting person at the time the form is filed. Industries for which dollar revenues totaled less than $1 million may be omitted.

Special instructions are provided for insurance carriers, credit agencies other than banks, security and com­ modity brokers, holding and other in­ vestment offices, and real estate com­ panies.

B ackground I n fo r m a t io n to I tem 5(c) Item 5(c) is designed to provide the agencies with current information con­ cerning the nonmanufacturing activi­ ties of reporting persons. Original item 5(c) would have re­ quired the reporting person to state, by seven-digit product categories, the dollar value of products imported into the United States for resale. A large number of comments criticized this re­ quirement. Several comments (e.g., 35, 99, 115) suggested that few companies kept segregated data concerning im­ ports. Other comments (e.g., 32, 59, 88, 115) suggested that even if such data existed, it would not be maintained by seven-digit (SIC-based code) product categories.

In response to these comments, the Commission reexamined the submis­ sion of import data under item 5(c). While the Bureau of the Census pub­ lishes monthly reports concerning ag­ gregate value for imported products and commodities, the classification system employed in such reports is based on the Tariff Schedules of the United States (“TSUS”), 19 U.S.C. 1202. The TSUS is provided by the Tariff Act of 1930 and bears no rela­ tion to the SIC system. Thus, aggre­ gate data provided in reports employ­ ing the TSUS would not be compara­ ble to aggregate data provided in census publication employing the SIC system. In light of these facts, the Commission has determined that a separate breakdown of import data will not be required at the initial review stage. Should a separate break­ down of imports be desired, either agency may request such information in a request for additional information or documentary material pursuant to section 7A(e) and § 803.20. According­ ly, the provisions of original item 5(c) were deleted from the revised and final versions of the Notification and Report Form.

Comment 1022 suggested that the $1 million threshold in item 5(c) be raised to $10 million. This suggestion was re­ jected. Firms are generally not re­ quired to compile and submit to the Bureau of the Census information concerning their nonmanufacturing activities during noncensus years. The $1 million threshold was thus inserted to lessen the burden for reporting per­ sons that would not otherwise compile annual data by four-digit industry for such years. Inserting a higher thresh­ old might prevent the agencies from being informed of significant economic activities of reporting persons and thus could seriously impair review of acquisitions.

it e m 5(d) Item 5(d) need be completed only by acquiring persons engaged in the for­ mation of a joint venture or other cor­ poration. The item requires the re­ porting person to provide various in­ formation concerning the creation and planned operations of the corporation and the respective interests of all par­ ticipating persons.

Specific information required to be submitted includes:

(i) The identity of the corporation, and its mailing address. (ii) A description of the agreements creating the corporation, including: (A) The value and timing of ,each ac­ quiring person's contribution to the corporation. This description should include contributions in any form, in­ cluding cash, voting securities of any issuer, real estate, equipment, patent rights, trademarks, etc. All contribu­ tions envisioned by the forming par­ ties at the time of formation should be described, regardless of when the con­ tributions will actually be made. (B) Any contracts or agreements to obtain assets or capital for the corpo­ ration from sources other than the persons forming it. Examples of con­ tracts or agreements to obtain assets include contracts for the purchase or lease from third parties of real estate, equipment, patent rights, or trade­ marks by or on behalf of the corpora­ tion. Examples of contracts or agree­ ments to obtain capital include the sale of the securities of the corpora­ tion to third parties, and loans from banks or other sources. (C) Whether and in what amount the persons forming the corporation have agreed to guarantee its credit or obligations. The description of such guarantee arrangements will include guarantees of loans, leases of equip­ ment and real estate, and credit pur­ chases.

(D) The consideration each person forming the corporation will receive in exchange for its contribution(s). This description would include all forms of consideration that the persons form­ ing the corporation will acquire, in­ cluding voting securities, nonvoting se­ curities, debt instruments or other se­ curities. The response should also reveal any rights to future considera­ tion such as rights to patents or tech­ nology, mineral discoveries or other assets developed by the corporation. (iii) A general description of the business in which the corporation will engage, including locations of facilities and geographic market areas. (iv) The four-digit (SIC code) indus­ tries in which the corporation will derive income. For corporations which will be engaged in manufacturing, the five-digit (SIC-based code) product classes in which it will derive revenues must also be identified. Background Information to Item 5(d) Revised item 5(d) required the re­ porting of various types of data from institutional investors. These provi­ sions are subsumed in item 6 of the final version, and former item 5(d) has been deleted.

Item 5(e) of the revised form has been redesignated item 5(d) in the final form. The language of the re­ vised version of item 5(e) has been amended to conform to the final ver­ sion of §801.40, which uses the term “joint venture or other Corporation.” ITEM 6 Item 6 must be completed by all per­ sons required to file notification except acquired persons in transac­ tions in which only assets are to be ac­ quired. It requests three kinds of in­ formation.

In response to paragraph (a) of this item, reporting persons must list the name and headquarters mailing ad­ dress of each entity included within FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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the person filing notification. At the option of the reporting person, entities with total assets of less than $1 mil­ lion may be omitted from this listing. Paragraph (b) requires a separate listing with respect to each entity in­ cluded within the person filing notifi­ cation whose voting securities are held by one or more persons Other than the person filing notification. For each entity meeting this criterion a sepa­ rate list containing the following in­ formation must be provided: The name of the issuer, the designation of each class of voting securities of that issuer which is held by other persons, the name and headquarters mailing address of each other person (if any) which holds 5 percent or more of the outstanding voting securities of the class, and the number and percentage of such securities held by that person. For purposes of this paragraph, per­ centages are computed by class of voting securities, rather than accord­ ing to § 801.12. An example of a listing for each issuer would be: XYZ S ubsidiary Class A common:

ABC Co., 123 Main Street, Chicago, 111. 60603, 5,000 shares (6.2 percent) DEP Corp., 456 Seventh Avenue, New York, N.Y. 10017, 7,500 shares (9.3 per­ cent) Class B common:

GHX Co., and its subsidiaries, 789 Texas Avenue, Dallas, Tex. 75201, 1,000 shares (10 percent) At the option of the reporting person, the listing may be omitted with respect to any entity included in the reporting person the total assets of which are less than $10 million. Paragraph (c) of the item requires a single listing by the reporting person, if that person holds voting securities of any issuer not included within the person. The required listing is an ag­ gregate of those holdings and shows: The issuer and class of securities, the number and percentage of outstanding securities held, and, at the option of the reporting person, the entity within the person filing notification that ac­ tually holds the securities. The filing person is permitted to omit its hold­ ings of less than 5 percent of the out­ standing voting securities of any issuer; in addition, holdings, of any number or percentage of the outstand­ ing voting securities of issuers with total assets of less then $10 million may also be omitted.

B ackground I n fo r m a t io n to I tem 6 This item appears on the notifica­ tion and report form for the first time in the final rules but is derived from items Kb) of the original form and 1(g), 2(e)(ii), 3(b) and 5(d) of the re­ vised form. Item 5(d) of the revised form requested information similar to items 6(a) and 6(c), but only with re- RULES AND REGULATIONS spect to institutional investor entities included within the person filing noti­ fication and holdings of voting securi­ ties by such institutional investors. Item Kb) of the original form re­ quested information similar to item 6(a); the earlier version requested the name, mailing address, and date and state of incorporation (if applicable) of each "active entity” included within the reporting person. The comments criticized the requirement to list active entities on two grounds. First, a number of comments (e.g., 26, 112, 120) suggested that the meaning of the term “active entity” was unclear. That term has been used for some time in the Commission’s existing pre­ merger notification program. For pur­ poses of the final form, however, it makes no difference whether an entity included within the reporting person is an "active entity”; item 6(a) requires a listing of all entities, whether or not they are “active,” although entities with minimal assets may be excluded. A second suggestion in the com­ ments (e.g., 11, 74, 77, 109) was that subsidiaries below a certain size, or foreign subsidiaries not doing a signifi­ cant amount of business in UJS. com­ merce, should be excluded. In re­ sponse, a size threshold of $1 million has been inserted into item 6(a) of the final form. Entities with total assets of less than that amount may be omitted from the listing. If it is easier for the reporting person simply to list all enti­ ties, regardless of whether they are larger than that threshold, that is also permissible. Since item 6 relates to stock holdings, the Commission did not believe that the extent of an enti­ ty’s sales was an appropriate threshold for item 6(a). Since the size of a re­ porting person under the act may be as small as $10 million (assets or sales), the Commission did not believe it appropriate to permit entities larger than $1 million in size—perhaps repre­ senting 10 percent of the reporting person—to be excluded from the re­ quired listing.

The Commission decided not to pro­ vide a separate exclusion for foreign subsidiaries based upon the amount of business done in the United States. One important purpose of the listing in item 0(a) is to permit evaluation of the information requested in item 6(b)—that is, the identification of per­ sons that hold the stock of the report­ ing person or of any entities included within that person. For that purpose, the Commission believes it is not rele­ vant whether the entity included within the reporting person is a for­ eign entity or a domestic entity. Hold­ ings of stock in any entity included within the reporting person may be rèlevant to an assessment of the impact of an acquisition upon competi­ tion. Thus the reporting person is re- 33531 quired to list all of its component enti­ ties.

Item 6(b) applies whenever 5 percent or more of the stock of any entity in­ cluded within the reporting person is held by one or more persons other than the reporting person. In that event, the reporting person is required to list the issuer and class of that issu­ er’s stock, to identify the holder, and to state the number and percentage of those shares so held. The reporting person may, at its option, omit this in­ formation if the issuer’s total assets are less than $10 million. In respond­ ing to item 6(b) the reporting person may find it helpful to consult copies of schedules 13D and 13G filed with the SEC. The SEC requires that copies of such filings be sent to the issuer, 17 CFR 240.13d-l (a) and (b). However, the reporting person should remember that the beneficial owner for purposes of the SEC schedules will not neces­ sarily be the same as the holder for purposes of the rules and form and, in the case of schedule 13 G, that the in­ formation may not be current. The re­ porting person must also list any other 5 percent holders of which it has knowledge, even if no schedules 13D or 13G have been filed with the SEC. The terms “person” and “hold” used here have the same meanings as they do throughout the rules. Item 6(c) requires disclosure of stock of issuers not included within the person filing notification which is held by that person. If the issuer has assets of less than $10 million, or if the hold­ ings do not equal or exceed 5 percent of the outstanding shares of the isssuer, the information need not be sub­ mitted. Again, this optional approach is taken because some reporting per­ sons may find it more convenient to report all holdings than to separate those which do not meet the optional criteria of item 6(c).

The three parts of item 6 are de­ signed to alert the enforcement agen­ cies to situations in which the poten­ tial antitrust impact of the reported transaction does not result solely or di­ rectly from the acquisition, but may arise from direct or indirect sharehold­ er relationships between the. parties to the transaction. This may occur, for example, when a significant share­ holder of the acquiring person already holds shares of the acquired person, or when an entity whose stock is held (but which is not controlled) by the acquiring person either holds stock of the acquired person or is partly con­ trolled by the acquired person. A com­ parison of the acquiring and acquired persons’ responses to items 6(b) and 6(c) should reveal such situations. A similar comparison may also reveal other situations of possible anti­ trust concern. Examples might be oc­ casions when a person known to be a FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33532 competitor or customer or supplier of one of the parties is also a significant shareholder of the other party, or when the acquiring company holds stock in a competitor or customer or supplier of the acquired company or vice versa.

The addition of item 6, coupled with changes in the definition of “affiliate” in § 801.1(d), has made it possible for items 1(g), 2(e)(ii), and 3(b) of the re­ vised form to be deleted. Those items had requested information concerning “affiliates” (as defined in those earlier rules) of the acquiring person, when those affiliates held stock or assets of the acquired person, or when the af­ filiates were doing business in any in­ dustry in which the acquired person was also doing business. The kinds of information required by item 6 are analogous to the kinds of information which the agencies would haVe obtained in response to the origi­ nal and revised versions of the form, if the earlier versions of the definition of “affiliate” had been retained. Item 6 is thus a response to the narrowing of that definition to encompass only enti­ ties included within the reporting person. Item 6 also represents a recog­ nition that the information sought in revised item 5(d), concerning the hold­ ings of institutional investors, is poten­ tially equally relevant to the analysis of transactions not involving an insti­ tutional investor. When entities which are not under common control are nevertheless related to one another by shareholdings, the agencies must assess the relevance of that relation­ ship in the course of their assessment of the competitive impact of an acqui­ sition involving one of those entities directly.

In a transaction in which only assets are to be acquired, the stock holdings of, and stock holdings in, the acquired person would not be affected by the transaction. Thus, the acquired person need not respond to item 6 in this situ­ ation. The acquiring person responds to this item in all cases, and the ac­ quired person must respond whenever any voting securities will be acquired. ITEM 7 Item 7 is designed to provide infor­ mation about geographic markets. Whenever any party to an acquisition knows or has reason to believe that it derives dollar revenues from any of the same four-digit (SIC code) indus­ tries as any other party, it must identi­ fy the geographic areas in which it de­ rives those dollar revenues. The item must be completed separately for each four-digit industry in which such an overlap of dollar revenues occurred during the most recent year. If the transaction is the formation of a joint venture or other corporation, the re­ porting person should compare the RULES AND REGULATIONS four-digit industries in which it de­ rived revenues to those in which the new corporation is expected to derive revenues (without time limit), as well as to those in which other acquiring persons, whether or not required to report, derive revenues. Item 7(a) requires identification, by code number and description, of the four-digit industries in which the over­ lap exists or is believed to exist. Item 7(b) calls for the name of every other party to the transaction which is en­ gaged in that industry. Item 7(c) seeks geographic information about the re­ porting person’s operations in each four-digit industry listed in item 7(a). Each of the five subparts of item 7(c) combines various two-digit ÔIC major groups which, because of their indus­ try characteristics, lend themselves to similar treatment. Note that although item 7(c) refers to two-digit major groups for convenience and brevity, the information is sought by four-digit industry within those groups. Item 7(c)(1) applies to manufactur­ ing industries, those four-digit indus­ tries within SIC major groups 20-39. It calls for geographic information about where manufactured products are sold in substantially the same form, wheth­ er by the person filing notification or by others to whom such products have been sold or resold. If manufactured products are consumed in or incorpo­ rated into the manufacture of other goods, the response should reveal where the product is sold to such man­ ufacturers, and not where the remanu­ factured product is ultimately sold. In other words, the geographic areas sought are all areas in which the prod­ uct is consumed or sold as an identifi­ able unit, rather than as a component of another product. For example, if the manufactured product is axles, the response should disclose where the axles are sold, and not'where the vehi­ cles into which the axles are incorpo­ rated are sold. If the product is simply resold without alteration, all such sales, through the sale to the final purchaser, are sought.

The areas must be identified by States, or, if desired, portions of States. Only the listing by States is re­ quired. The optional finer breakdown is intended to be used whenever the parties believe that the listing by States could be misleading in the anti­ trust analysis of the acquisition. The item specifies a knowledge and belief standard for the response, since manu­ facturers may not know the precise ge­ ographic distribution of their prod­ ucts.

For item 7(c)(ii), which applies to four-digit industries within SIC major groups 1-17 and 40-49, the reporting person must list the States or portions thereof in which the agricultural, mining, or other specified operations are conducted. For item 7(c)(iii), which applies to four-digit wholesale trade industries within SIC major groups 50 and 51, the reporting person must list the States or portions there­ of in which customers are located. For item 7(c)(iv), which applies to four-digit industries in SIC major groups 52-62 and 64-89, the reporting person must furnish a list, arranged by State, county, and city or town, of ad­ dresses of establishments from which dollar revenues were derived. “Estab­ lishment” means any retail location, location where services are offered or rendered, or other business location from which dollar revenues were de­ rived. Item 7(c)(v) calls for a list of the States in which the reporting person is licensed to write insurance. No dollar revenues need be provided in response to any part of this item. Background Information to Item 7 Item 7 is a slightly altered version of item 6 of the revised form. Final item 7(a) and 7(c)(i)-(iii) are substantially similar to the corresponding provisions of revised item 6. Because revised item 6(b)—which sought a complete list of establishments, regardless of the nature of the industry—has been de­ leted, and because many SIC major groups had no specific requirement beyond that, a new item 7(c)(iv) has been added. For those groups, report­ ing persons are required to list their business locations. Item 7(c)(v) is es­ sentially the same as revised item 6(c)(iv).

Some of the comments (e.g., 1053) appear to have interpreted revised items 6(c)(i)-(iii) to require the geo­ graphic analysis by portions of States in all cases. The final version of the item makes clear that a breakdown finer than by States is optional. Com­ ment 1055 suggested that a reporting party should be able to report that it sells nationwide and thereby eliminate the need to list every State. The Com- - mission has no objection to such a practice. In fact, so long as a clearly defined geographic area can be deter­ mined, other simplified methods of re­ porting would also be acceptable, e.g., all States east of the Mississippi River, all States except California and Texas. Not acceptable because of their impre­ cise nature, however, would be such descriptions as the west coast, the Midwest, or Southern New England. Some comments (e.g., 1026, 1040) complained that manufacturers would not be able to supply geographic resale information by plant-of-origin. Nei­ ther revised item 6(c)(i) nor final item 7(c)(i) requires such a breakdown. A number of comments (e.g., 1029, 1053, 1055, 1059, 1075, 1086, 1104, 1108) also suggested that manufacturers general­ ly dov not know where their products are resold, that it would be difficult (if FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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not illegal) for them to obtain that in­ formation, and that the information is in any event irrelevant to an antitrust analysis. There can be no doubt that when the parties to an acquisition are engaged ih the production and sale of the same or a closely related product, an inquiry into where those products are rsold is necessary and appropriate to any antitrust analysis of the trans­ action. Therefore, comments raising issues of relevance and burden must be rejected. Furthermore, the Commis­ sion does not believe that it is illegal, without more, for a manufacturer merely to know or to determine the general geographic areas where its products are resold to their ultimate users. Therefore, comments suggesting that it might be unlawful to collect the required information have also been rejected.

Contrary to the assertions made in the comments regarding the availabil­ ity of information on areas of resale of manufactured products, the Commis­ sion’s experience has been that manu­ facturers invariably know where their products are sold, regardless of the number of intermediate resellers in­ volved. This is not to say that manu­ facturers will always know the name and address of every reseller of every'« product, although this often *aay be the case, especially when the manufac­ turer sells directly to its retailers. Nor is such detailed information necessary for the purpose of responding to this item. Important here is the fact that a manufacturer will always know, at least in general terms (i.e., States or portions thereof), the geographic areas in which its product has pene­ trated the market. Because this infor­ mation is crucial to establishing pro­ duction quotas and marketing plans, opening new sales outlets (either wholesale or retail) and making relat­ ed business decisions, the Commission has little doubt that at this level of generality the requested information will be readily available in all but the most unusual situations. Comments 1029, 1053, 1059, and 1108 argued that responses to this item should not be required unless the re­ porting person (or persons) derived a minimum dollar amount of revenue in the four-digit industry. The suggested amounts range from $1 million to $5 million. The Commission is unable to conclude that geographic areas in which less than such sums are derived from the sale of identical or similar products are competitively irrelevant and therefore need not be reported. Since the transfer of control of a com­ pany as small as $10 million in annual sales may be reportable, a $1 million RULES AND REGULATIONS minimum potentially could eliminate a geographic analysis of roughly 10 per­ cent of the company's business; a $5 million minimum could eliminate nearly half the business of a $10 mil­ lion company and significant portions of the sales of much larger companies which may be direct competitors. In addition, even where such amounts are not a major portion of a reporting per­ son’s sales, they can easily often repre­ sent a major portion of a local or re­ gional market. The suggestion, there­ fore, has been rejected. Comment 1040 requested clarifica­ tion of the location of a sale for pur­ poses of revised item 6(c)(i), now item 7(c)(i). The relevant States are those in which the purchaser will consume or substantially alter the character of the product or incorporate it into an­ other product, or in which the final purchaser of the original product is lo­ cated. The location of the sales office that sold the goods or , the plant that shipped the goods is not relevant to this item.

it e m 8 Item 8 requests information on any vendor-vendee (customer-supplier) re­ lationships existing in the most recent year between an acquiring person and an acquired person with respect to any manufactured product that the vendee either resells or consumes in or incor­ porates into the manufacture of a prod­ uct. Manufactured products that the vendee does not resell or use in the manufacturing process, such as office supplies and equipment, need not be included in the response. However, the vendor need not have been the manu­ facturer of the product. If the acquisition is the formation of a joint venture or other corporation, the reporting person must determine whether the new corporation will supply any of the persons forming it— the acquiring persons under § 801.40— with any manufactured product which any of the persons forming the corpo­ ration purchased from any other of those persons in the most recent year. The persons forming the joint venture must respond to the item if they should reasonably believe that the joint venture will commence supplying a product in the future, without time limit.

If such a relationship exists or will exist, reporting persons' which are vendees of any such product, and only such persons, are required to list the following information: the product purchased, the vendors of the product that are party to the acquisition, and the dollar amount purchased from each such vendor during the most 33533 recent year. Manufactured products are defined as those within two-digit SIC major groups 20-39. The reporting person may, at its option, omit from this listing any products purchased in annual amounts of less than $1 mil­ lion.

The item states that products, the manufacture, consumption, or use of which by the vendee is not attributa­ ble to the assets to be acquired (in an asset acquisition) or to the issuer whose voting securities are to be ac­ quired (in a-stock acquisition), may also be omitted. Thus, if a person ac­ quires a subsidiary of the person from which it purchases a certain manufac­ tured product, it need not list that product in item 8 unless the subsidiary (or any issuer it controls) sells the product.

B ackground I n fo r m a t io n to I tem 8 The purpose of item 8 is to identify certain instances in which a reported acquisition may result in vertical fore­ closure or in an increase in vertical in­ tegration in an industry. Only vendees are required to respond to this item because vendors may not know the purpose for which the vendee pur­ chases the product. The item is limit­ ed to manufactured products because the Commission believes those vertical relationships are more likely to violate the antitrust laws.

The item is virtually identical to item 7 of the revised form, with edito­ rial changes necessitated by the alter­ ation in final §801.40 relating to the formation of joint venture and other corporations. Revised item 7, however, had considerably narrowed the scope of the analogous items 8 (a) and 8 (b) of the original form.

Items 8(a) and 8(b) of the original form inquired more broadly into po­ tential vertical antitrust issues pre­ sented by a transaction. They request­ ed data on all products or services manufactured or sold by either the ac­ quiring or the acquired person (regard­ less of the buyer) that were used or consumed by the other party (regard­ less of the seller). Final item 8, on the other hand, is limited to manufac­ tured products, not services, and only to those products sold directly by one reporting person to another party to the transaction.

Several comments on the original rules (11, 37, 59, 74, 103) noted that a company often has little or no infor­ mation on who the final purchasers of its products are (in the case of an indi­ rect sales relationship) and that com­ pilation of the requested data would thus be extremely burdensome. The Commission decided to adopt the sug- FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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33534 RULES AND REGULATIONS gestion made in comment 59 and to limit the question to direct vendorvendee situations.

Several comments (e.g., 35, 37, 63, 103, 1022, 1029) urged that the $1 mil­ lion reporting floor for sales of any product by one person to another be raised to $5 million or $10 million. The Commission did not adopt these sug­ gestions. Since the size of a reporting person under the act may be as small as $10 million in assets or sales, raising this threshold might eliminate the re­ porting of a vendor-vendee relation­ ship in a particular product which ac­ counts for 50 percent or even 100 per­ cent of a person’s sales. The purpose of the $1 million floor is to eliminate the reporting of transactions or rela­ tionships which are less likely to be significant. Setting this figure any higher might exclude some highly sig­ nificant relationships. Comments 1086 and 1098 argued that, even as revised and limited, this item is excessively burdensome for re­ porting persons that are vendees. The Commission did not accept this argu­ ment.

Ordinarily, information on major suppliers, the products supplied, the dollar volume, and the uses made by the company of the product is read­ ily available in most companies. As ex­ plained above, this information is nec­ essary and appropriate to the agen­ cies’ consideration of the vertical as­ pects of a proposed transaction, and completion of this item will therefore be required, regardless of burden. ITEM 9 Item 9 is to be answered only by the acquiring person and requires it to supply information about certain prior acquisitions. In particular, it must report its domestic acquisitions (within the previous 10 years) of the voting securities or assets of other companies which derived dollar rev­ enues in any industry in which both it and the acquired person in the present transaction are also substantially en­ gaged.

The acquiring person is asked to go through a two-step process. First, it is to determine each four-digit (SIC code) industry in which it derived $1 million or more in dollar revenues in the most recent year. Of those four­ digit (SIC code) industries, it should determine those in which, in the case of a stock acquisition, to its knowledge or belief the issuer whose stock will be acquired also derived $1 million or more in dollar revenues in the same year, or, in the case of an assets acqui­ sition, those in which, to its knowledge or belief, $1 million or more in rev­ enues was attributable to the assets to be acquired. If the acquiring person identifies any industries through this procedure, it must provide certain specified information.

This second step consists of listing the acquiring person’s previous acqui­ sitions of entities or assets engaged in any of the four-digit (SIC code) indus­ tries identified in the first step. It must list acquisitions within the past 10 years of voting securities of U.S. is­ suers which derived any dollar rev­ enues from any industry it has identi­ fied, as well as of assets located in the United States to which any dollar rev­ enues in that industry were attributa­ ble. The term “U.S. issuer” is. defined in § 801.1(e). In addition, the acquiring person is required to provide, for each such prior acquisition, the name and address of the entity acquired, its total assets and net sales in the year prior to the acquisition, the type of acquisi­ tion (securities or assets), the date of the acquisition, and the particular four-digit industry or industries in­ volved. Only acquisitions of more than 50 percent of the voting securities or assets of entities which had annual net sales or total assets greater than $10 million in the year prior to the ac­ quisition need be reported. Background Information to Item 9 The purpose of this item is to assist the agencies in identifying any prior acquisitions by the acquiring person that may suggest a pattern of acquisi­ tions in a particular industry by that person. The present transaction may frequently take on competitive signifi­ cance in the light of others in the same industry involving the same ac­ quiring person. Such a pattern may in­ dicate a significant anticompetitive trend and thus may be an important factor in the agencies’ ultimate deci­ sion as to whether to challenge the ac­ quisition. Reporting persons are un­ likely to find the inquiry burdensome, since a somewhat broader inquiry has been complied with routinely in the Commission’s existing premerger noti­ fication program.

The 10-year limit was felt to demark a reasonable period for which to obtain this information on the form, even though earlier acquisitions may be of significance. Information regard­ ing earlier acquisitions can be obtained by requests under section 7A(e) and § 803.20 when necessary. The item per­ mits the omission of prior transactions that did not involve the acquisition of more than 50 percent of the voting se­ curities or assets of a person with preacquisition sales or assets of $10 million, since smaller acquisitions are likely .to be less significant from an antitrust standpoint.

This item contains a major change from both its predecessors, item 7 of the original form and item 8 of the re­ vised form. Both of the earlier drafts required information about both do­ mestic and foreign mergers and acqui­ sitions.

Several comments (e.g., 11, 15, 59, 63, 70, 99, 109) objected to this require­ ment and suggested limiting its scope to prior acquisitions of companies with some connection to U.S. commerce. A number of comments on the revised form (e.g., 1044, 1048, 1094, 1099, 1109) similarly made the argument that some minimum amount of U.S. reve­ nue should be required before a prior acquisition became reportable in re­ sponse to this item.

The final rules require information only with respect to prior acquisitions of voting securities of U.S. issuers and of assets located in the United States. This change as made partly in re­ sponse to the comments and partly to reflect the reasoning behind the for­ eign commerce exemptions in the rules, particularly §§ 802.50 and 802.51. It should be noted, however, that cer­ tain acquisitions excluded under item 9 may not be exempt under § 802.50 or §802.51 or any other rule. For exam­ ple, an acquisition by a U.S. person of the voting securities of a foreign com­ pany with assets in the United States greater than $10 million is not exempt under §802.50, but need not later be included in a response to item 9, since only prior acquisitions of voting secu­ rities of U.S. issuers must be reported under this item.

Another reason for this limitation in item 9 is that it makes the coverage of this item consistent with the general instructions applicable to items 5, 7 through 9, and the insurance appendix contained in § 803.2(c)(1). These, as noted above, require information only with respect to operations conducted within the United States. The reason for this instruction is that census data relating to SIC codes is collected only with respect to revenues derived from establishments located within the United States. See the statement of basis and purpose to § 803.2(a). In addition to the change relating to foreign mergers and acquisitions, the final version of this item also contains several editorial revisions. The struc­ ture of the question has been reword­ ed to suggest the two-step process, which should assist reporting persons in correctly answering the item. ITEM 10 Item 10 asks for the name, title, business address, and business tele­ phone number of the individual to contact regarding the notification and report form. Section 803.20(b)(2)(ii) provides that a request for Additional information or documentary material is effective if telephoned and a written confirmation is mailed during the waiting period. It therefore requires that the reporting person keep a desig­ nated individual reasonably available during normal business hours throughout the waiting period to re- FEDERAL REGISTER, V O L 43, NO . 147— M O N D AY, JULY 31, 1978

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RULES AND REGULATIONS 33535.

ceive such a telephoned request. The request is effective, and the waiting period is extended, as soon as this indi­ vidual receives the telephoned request (providing the written confirmation is thereafter mailed during the original waiting period). Requests for clarifica­ tion pursuant to § 803.20(d)(2) may also be telephoned to the individual named.

B ackground I n fo r m a t io n to I tem 10 This item, which appeared below the certification on the original form, and as item 9 on the revised form, attract­ ed no comments and was retained with only minor editorial changes. For fur­ ther information, see the statement of basis and purpose to § 803.20. CERTIFICATION See the statement of basis and pur­ pose to § 803.6.

APPENDIX TO NOTIFICATION AND REPORT fo r m : in su r a n c e Whenever voting securities of an in­ surance carrier are to be acquired di­ rectly or indirectly, each reporting person that contains an entity operat­ ing as an insurance carrier (SIC major group 63) must provide information concerning various types of insurance operations during the most recent year. The information required by the insurance appendix should be submit­ ted for SIC major group 63 in lieu of the data required under item 5(c). However, reporting persons that com­ plete the insurance appendix must also complète item 5(c) with respect to their activities in industries other than SIC major group 63. For life insurance operations, report­ ing persons must provide the amount of premium receipts (calculated on an accrual basis) and new insurance issued in the United States for specific types of life and health insurance and annuities. For property liability insur­ ance the reporting person must pro­ vide, for each line of insurance speci­ fied in part 2 of the underwriting and investment exhibit of the carrier’s annual convention statement, the amount of direct and net premiums written. For title insurance, the re­ porting person must provide, for each line of insurance specified in part 2 of the underwriting and investment ex­ hibit of the carrier’s annual conven­ tion statement, the amount of net direct insurance premiums written and the amount of direct insurance premi­ ums earned.

B ackground I n fo r m a t io n to I n su ra nce A p p e n d ix The Bureau of the Census does not publish revenue data for insurance op­ erations. Thus, no “universe” figures for entire markets exist under the SIC system. The categories employed in the insurance appendix are derived from categories found in various trade publications. These include the “Life Insurance Fact Book”, published by the American Council of Liffe Insur­ ance; “Insurance Facts”, published by the Insurance Information Institute; publications of the A. M. Best Co.; and reports of various State insurance commissions. Thus, the data requested in the insurance appendix should be generally comparable to the universe figures revealed in those publications. The insurance appendix is based on an appendix to the special report re­ quired under the Commission’s exist­ ing premerger notification program. No comments addressed the insur­ ance appendix.

Comments Received in response to Dec. 20, 1976, publi­ cation of proposed rules im plem enting title II of the Hart-Scott-Rodino Antitrust Im provements Act of 1976 relating to pre­ merger notification (comment period Dec. 20, 1976-Jan. 19, 1977) No.

Date of Organization letter 12-30-76 Federal Home Loan Bank Board.

12-29-76 American Council of Life Insurance.

12-28-76 Exchange Oil & Gas Corp. 12-17-76 U.S. Senate, Committee on the Judiciary, Subcommittee on Antitrust and Monopoly (Howard E. O’Leary, Jr., Esq.).

1-17-77 Getty Oil Co.

1-14-77 Pillsbury, Madison & Sutro (Wallace L. Kaapcke, Esq.). 1- 6-77 Investment Co. Institute. 1-11-77 Texas Pacific Oil Co., Inc. 1-11-77 Skadden, Arps, Slate, Meagher & Flom (Stephen M. Ax inn, Esq.).

1-17-77 National Realty Committee. 10A 1-11-77 Do.

1-14-77 American Standard, Inc. 1-19-77 Foley & Lardner (Edwin P. Wiley, Esq.).

1-17-77 Stanley M. Dub, Esq. 1-19-77 The Association of the Bar of the City of New York, Committee on Trade Regulation (Eleanor M. Fox, Esq., and Peter D. Standish, Esq.).

1-15-77 Ohio State Bar Association, Antitrust and Corporate Counsel Sections (David Holmquist, Esq., and John F. McClatchey, Esq.).

1-21-77 Marathon Oil Co. 1-14-77 American Petrofina, Inc. 1-14-77 Skadden, Arps, Slate, Meagher & Flom (Stephen M. Ax inn. Esq.).

1-13-77 David Lasky, Esq. 1-14-77 American Insurance Association.

1-11-77 Miller, Anderson, Nash, Yerke & Wiener (John J. DeMott, Esq.).

1-19-77 Nixon, Hargrave, Devans & Doyle.

1- 3-77 Prof. Stanley E. Boyle. 1-21-77 General American Oil Co. of Texas.

1-19-77 The B. F. Goodrich Co. 1-17-77 The Gulf Cos.

Comments—Continued Received in response to Dec. 20, 1976, publi­ cation of proposed rules im plem enting title II of the Hart-Scott-Rodino Antitrust Improvements Act o f 1976 relating to pre­ merger notification (comment period Dec. 20, 1976-Jan. 19, 1977) No.

Date of letter Organization 1-27-77 Federal Communications Commission.

1-18-77 The Nestle Co., Inc. 1-18-77 American Institute of Certified Public Accountants.

1-19-77 Winthrop, Stimson, Putnam & Roberts (Terence H. Benbow, Esq.).

1-19-77 Uhited States League of Savings Associations.

1-18-77 Allis-Chalmers Corp. 32A 1-19-77 American Life Insurance Association.

1-19-77 Dresser Industries, Inc. 1-18-77 National Exploration Co. 34A 1- 8-77 Do.

1-19-77 Union Oil Co. of California. 1-19-77 Do.

Undated Chadwell, Kayser, Ruggles, McGee & Hastings, Ltd.

(David A. Nelson, Esq.). 1-17-77 C. Daniel Ward, Esq. 1-13-77 Interstate Commerce Commission.

1-17-77 United States Steel Corp. 1-17-77 Suburban Propane Gas Corp. 1-19-77 Federal Communications Commission.

1-19-77 Arnold & Porter (Robert B. Hummel, Esq.).

1-21-77 Financial Accounting Standards Board.

1-18-77 Sperry Rand Corp. 1-19-77 American Gas Association. Undated Holiday Inns, Inc. * 48 1-19-77 General Counsel of the U.S. Department of Commerce. 1- 8-77 American Financial Corp. 1-19-77 Chamber of Commerce of the United States.

1- 7-77 Federal Maritime Commission. 1-19-77 General Counsel of the Treasury.

1-18-77 Federal Maritime Commission. 1- 5-77 National Association o i Manufacturers.

1-18-77 Comptroller of the Currency. 1-31-77 Federal Deposit Insurance Corporation.

* ,57 1-18-77 American Natural Gas Service Co.

1-18-77 Minnesota Mining & Manufacturing Co.

Undated National Association of Manufacturers.

2- 7-77 Intereal Co.

2- 7-77 The Associated General Contractors of America. 2-11-77 Cook & Henderson, P.C. (Marlow W. Cook, Esq., and James F. Falco, Esq.).

2- 9-77 Sec. 7 (Clayton Act) Committee of the ABA Antitrust Section (Eleanor M. Fox, Esq.). 2-10-77 Thelen, Marrin, Johnson & Bridges (Frank D.

MacDowell, Esq.).

2- 9-77 Gatenbey, Spuller & Law (Cooperative Food Distributors of America). 2- 1-77 Civil Aeronautics Board. 2-16-77 Motion Picture Association of America, Inc.

2-14-77 Investment Co. Institute. 2-14-77 Perini Corp.

2- 9-77 General Mills, Inc. 2-16-77 Allied Chemical. 2-15-77 Columbia Gas System Service Corp.

2-115-77 David H. Marks, Esq. 2-17-77 Ashland Oil, Inc. FEDERAL REGISTER, VO L. 43, N O . 147— M O N D AY, JULY 31, 1978

Page 248

33536 RULES AND REGULATIONS C omments—C on tin u ed Received in response to Dec. 20, 1976, publi­ cation of proposed rules im plem enting title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 relating to pre­ merger notification (.comment period Dec. 20 ,1976-Jan. 1 9 ,1977) No.

Date of Organization letter 2-15-77 Texas Pacific Oil Co., Inc. 2-15-77 American General Insurance Co.

2-17-77 Aetna Life & Casualty Co. 2-18-77 Association of the Bar of the City of New York, Committee on Trade Regulation.

2-16-77 N ational A ssociation of Independent Insurers.

2-16-77 Minnesota Mining St Manufacturing Co.

2-18-77 Skadden, Arps, Slate, Meagher St Flom (Blaine V. Fogg, Esq.).

2-16-77 Cadwalader, W ickersham & Taft (Horace P. Moulton, Esq.).

2-17-77 American Council of Life Insurance.

2-18-77 Howrey St Simon (William J. Boyd, Esq.).

2-17-77 International Telephone & Telegraph Corp.

2-18-77 Department of Army Engineers.

2-18-77 Covington St Burling (Exxon Corp.).

2-18-77 W. R. Grace & Co. 2-18-77 Sullivan St Cromwell. 2-18-77 Shearman & Sterling (Citicorp).

2-18-77 Board of Governors of the Federal Reserve System. 2-14-77 McBride, Baker, Wienke Sc Schlosser (James H. Ryan, Esq.).

2-16-77 Association of the Bar of the City of New York, Committee on Securities Regulation (John E. Merow, Esq.). 2-18-77 Glassman-Oliver Economic Consultants, Inc.

2-18-77 Hon. John F. Seiberling, Member of Congress.

2-18-77 Hon. Edward M. Kennedy, U.S. Senator.

2-18-77 American Bankers Association. 2-17-77 American Insurance Association.

2-14-77 Borden, Inc.

2-16-77 Dillingham Corp. 2-17-77 Financial Executives Institute. 2-17-77 Foley St Lardner (Edwin P. Wiley, Esq.).

2-18-77 Grocery Manufacturers of America.

2-18-77 Haskins & Sells, Certified Public Accountants.

2-18-77 Hill, Christopher and Phillips, P.C. (Association of Closed- End Investment Companies). 2-18-77 Independent Bankers Association of America. 2-17-77 Investment Counsel Association of America, Inc. 2-18-77 Investors Diversified Services, Inc.

2-18-77 Machinery St Allied Products Institute.

2-15-77 Metropolitan Life Insurance Co.

2-18-77 Morgan Stanley & Co., Inc. 2-18-77 Nixon, Hargrave, Devans St Doyle.

2-17-77 Ropes St Gray (Edward P. Lawrence, Esq.).

2-16-77 Thelen, Marrin, Johnson St . Bridges (Frank D. McDowell, Esq.).

2-16-77 Union Carbide Corp. C omments— Con tin u ed Received in response to Dec. 20, 1976, publi­ cation of proposed rules im plem enting title II of the Hart-Scott-Rodino A ntitrust Improvements Act of 1976 relating to pre­ merger notification (comment period Dec. 20, 1976-Jan. 19, 1977) No.

Date of Organization letter 2-18-77 Weil, Gotshal St Manges (Columbia Pictures Industries, Inc.).

2-16-77 Westinghouse Electric Corp. 2-22-77 Chairman of the Board of Governors, Federal Reserve System.

2-18-77 Department of the Army, Office of the Chief of Engineers.

2-18-77 Chamber of Commerce of the United States.

f 2-18-77 U.S. Department of the Interior.

2-18-77 American Gas Association. 123* 2-28-77 International Council of Shopping Centers 124* 2-27-77 American Insurance Association.

125* 3-21-77 Securities and Exchange Commission.

126* 3- 9-77 Hon. Peter W. Rodino, Jr., Member of Congress (to Hon. Griffin B. Bell, Attorney General).

127* .

3-28-77 Donald I. Baker, Assistant Attorney General.

128* 3-18-77 American Insurance Association.

129* 5-31-77 Hon. Peter W. Rodino, Jr., Member of Congress (to Michael Pertschuk, Chairman, Federal Trade Commission).

130* 5-31-77 Hon. Peter W. Rodino, Jr., Member of Congress (to John H. Shenefield, Acting Assistant Attorney General). 131* 6-14-77 Independent Bankers Association of America. 132* 6-17-77 J. C. Penney Co., Inc. 133** 12- 7-76 Covington St Burling (Exxon Corp.).

•This comment was received after the comment period.

••This comment was received before the com­ ment period.

C omments Received in response to Aug. 1, 1977, publi­ cation of revised proposed rules im ple­ m enting title II of the Hart-Scott-Rodino A ntitrust Improvements Act of 1976 relat­ ing to premerger notification (comment period Aug. 1-Sept 30, 1977) No.

Date of letter Organization 8- 8-77 Covington St Burling (Exxon Corp.).

8- 8-77 American Council of Life Insurance.

8- 4-77 American Insurance Association.

Undated Federal Communications Commission.

8-15-77 American Bankers Association. 8-12-77 Association of the Bar of the City of New York, Committee on Trade Regulation (Peter D. Standish, Esq.).

8-17-77 Grocery Manufacturers of America, Inc.

8-18-77 Arnold St Porter (Robert B. Hummel, Esq.).

C omments—Con tin u ed Received in response to Aug. 1, 1977, publi­ cation of revised proposed rules im ple­ m enting title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 relat­ ing to premerger notification (comment period Aug. 1-Sept 30, 1977) No.

Date of letter Organization 8-19-77 Cleary, Gottlieb, Steen St Hamilton (J. Eugene Marans, Esq.).

8-17-77 German American Chamber of Commerce.

8-17-77 Sperry Rand Financial Corp. 8-16-77 Sec. 7 (Clayton Act) Committee of the ABA Antitrust Section (Stephen M. Axinn, Esq.). 8-18-77 International Trade Committee of the ABA Antitrust Section (Barry E. Hawk, Esq.). 8-19-77 Shaw, Pittman, Potts St Trowbridge (Institute of Foreign Bankers).

8-19-77 Department of the Army, Office of the Chief of Engineers.

8-18-77 Sullivan St Cromwell. 8-23-77 W. R. Grace St Co. 8-22-77 Getty Oil Co.

8-26-77 Texas Pacific Oil Co., Inc. 8-29-77 Investment Co. Institute. 8-24-77 Stuart Paul Jasper, Esq. 8-29-77 Union Oil Co. of California. 8-26-77 Dresser Industries, Inc. 8-25-77 The Gulf Cos.

8-26-77 Tenneco Oil.

8-24-77 Union Carbide Corp. 8-29-77 Pillsbury, Madison St Sutro (Wallace L. Kaapcke, Esq.). 8-24-77 Suburban Propane Gas Corp. 8-26-77 Chadwell, Kayser, Ruggles, McGee St Hastings, Ltd. (David A. Nelson, Esq.). 8-26-77 American Natural Service Co. 8-30-77 National Association of Independent Insurers., 8-29-77 8-25-77 Federal Home Loan Bank Board.1601033 .

Hunt Oil Co.

8-30-77 Shank, Irwin, Conant. Williamson & Grevelle (Ray B. Williamson, Esq., and Karen S. Bedell, Esq.). 8-16-77 BOC International, Ltd. 1035A 2- 7-77 Do.

8-23-77 Imperial Group, Ltd. 8-26-77 The Depository Trust Co. 8-26-77 Sidley St Austin (Mark E. MacDonald, Esq.).

8-31-77 Metropolitan Life Insurance Co.

8-26-77 Diamond Shamrock Corp. 8-29-77 Gatenbey, Spuller St Law (Cooperative Food Distributors of America). 8-29-77 Cadwalader, Wickersham St Taft (Horace P. Moulton, Esq.).

8-29-77 Prof. Roy A. Schotland. 8-30-77 American Standard, Inc. 8-30-77 Medusa Corp.

8-29-77 General American Oil Co. of Texas.

9- 2-77 U.S. Department of the Interior (Office of the Secretary).

8-31-77 General Mills, Inc.I601049 8-30-77 Prof. Donald I. Baker. 9- 7-77 Standard Oil Co. (Indiana). 9-13-77 Hill, Christopher St Phillips, P.C. (Association of Publicly Traded Investment Funds). 9-12-77 Sambo’s Restaurants, Inc. 9-13-77 Allis-Chalmers Corp. 9-20-77 Comptroller of the Currency. 9-20-77 International Telephone St Telegraph Corp.

9-21-77 Exchange Oil St Gas Corp. 9-26-77 General Mills, Inc. FEDERAL REGISTER, V O L 43, NO . 147— M O N D AY, JULY 31, 1978

Page 249

33537 C omments—Continued Received in response to Aug. 1, 1977, publi­ cation of revised proposed rules im ple­ menting title II o f the Hart-Scott-Rodino A ntitrust Improvements Act o f 1976 retat­ im i to premerger notification (comment period Aug. 1-Sept 301977 ) No.

Date of Organization tetter t®5® 9-29-7? Securities and Exchange Commission.

9-29-77 Chamber of Commerce of .the United States.

i960 9-29-77 General Crude Oil Co. 1V71 9-27-77 Aetna Life & Casualty Co. 9-20-77 Shearman & Sterling , (Citicorp).

9-29-77 Covington & Burling (Exxon Corp.).

9-30-77 Winston Si Strawn (International Council Of Shopping Centers).

9-29-77 Building Owners & Managers Association International. 9-29-77 Motion Picture Association of America.

9-29-77 Investment Council Of America, Inc.

9-27-77 Continental Oil Co. 9-30-77 Texaco Inc.

9-30-77 American Council of Lite Insurance.

9-30-77 Morgan Guaranty Trust Co. 9-30-77 U.S. Department of State. 9-28-77 Bank of America. 9-29-77 National Association of Small Business Investment Companies.

9-29-77 Allied Chemical. 9-29-77 The Nestle Co.. Inc. 9-29-77 Ashland Oil, Inc. 9-30-77 Independent Bankers Association of America.

9-28-77 Soufre, Sanders & Dempsey (Edward J. DeBartolo Corp.). 9-26-77 McCormick 8s Co., Inc. 9-29-77 Coastal States Gas Corp. 9-26-77 Doherty, Rumble & Butler (Thomas E. Röhricht, Esq.). 9-29-77 Board of Governors of the Federal Reserve System.

9-28-77 Columbia Gas System Service Corp.

1885 , 9-26-77 The Rouse Co.

9-30-77 Financial Executives Institute. 1086A 10-12-77 Do.

9-30-77 Independent Petroleum Association of America.

9-29-77 Marathon Oil Co. 9-30-77 American Bankers Association. 9-30-77 Association of the Bar of the City of New York, Committee on Securities Regulation (Leonard M. Leiman, Esq.). 9-30-77 Sullivan 8c Cromwell. 9-30-77 The Associated -General Contractors of America.

9-26-77 Montgomery Ward & Co,, Inc. 9-28-77 Nestle Enterprises, Inc. 9-30-77 Breed, Abbott Si Morgan. 9-30-77 American Petroleum Institute. 9-29-77 Transco Cos., Inc. 9-29-77 Winthrop, Stimson, Putnam Si Roberts (Terence H. Benbow, Esq.).

9-30-77 International Trade Committee of the ABA Antitrust Section (Barry E. Hawk, Esq.).

9-29-77 Association of the Bar of the City of New York, Committee on Trade Regulation (Peter D. -Standish, Esq.).

9-30-77 Morgan Stanley & Co., Inc. 9-30-77 Ohio State Bar Association. Antitrust and Corporate Counsel Sections (Victor Marsh, Jr., Esq., and John F. McClatchey, Esq.).

9-30-77 American Insurance Association.

RULES AND REGULATIONS C omments—Continued Received in response to Aug. 1, 1977, publi­ cation of revised proposed ru les im ple­ menting title II of the Hart-Scott-Rodino A ntitrust Improvements Act of 1976 relat­ in g to premerger n otification (comment period Aug. 1-Sept. 30, 1977) Wo.

Date of letter Organization 9-28-77 Borden, Inc.

9-30-77 Shaw, Pittman, Potts 8s 'Trowbridge (institute o t Foreign Bankers').

9-29-77 Husky Oil Co.

9-29-77 United Energy Resources, Inc. 10- 3-77 Kellogg Co.

uosa 10- 3-77 Do.

9-29-77 Lord, Day 8s Lord (Stephen M. Hudspeth, Esq.).

10- 7-77 American Financial Corp. H it 10- 2-77 Continental Bank. 10- 5-77 Dillingham Corp. 9-28-77 Hon. Charles McC. Mathias, Jr., US. Senator.

1118Ä 10-14-77 Federal Trade Commission. 9-29-77 Associated General Contractors of America, Inc. (Oregon Columbia Chapter).

10-11-77 The Gulf Cos.

1116* 11-25-77 Fair Trade Commission (Japan) (Jotaro Yabe, Counselor). * This comment -was received after the comment period.

Pursuant to section 7AM5 of the act, 15 U.S.G. 18a(d), the Federal Trade Commission, with the concurrence of the Assistant Attorney General, hereby formally promulgates the fol­ lowing rules to amend title 16, chapter 1, by adding new parts 601, 802, and 803 as set forth below.

Issued July 18, 1978.

By direction of the Commission. Carol M. T homas, Secretary.

The Federal Trade Commission pro­ mulgates the rules contained in this part (801) pursuant to section 7A(d) of the Clayton Act, 15 U.S.C. 18A(d), as added by section 201 of the Hart- Scott-Rodino Antitrust Improvements Act of 1976, Pub. L. 94-435, 90 Stat. 1390.

PART 801— CO VERAGE RULES Sec.

801.1 Definitions.

801.2 Acquiring and acquired persons. 801.3 Activities in or affecting commerce. 801.4 Secondary acquisitions. 801.10 Value of voting securities and assets to be acquired.

801.11 Annual net sales and total assets. 801.12 Calculating percentage of voting se­ curities or assets.

801.13 Voting securities or assets to be held as a result of acquisition. 801.14 Aggregate total amount of voting securities and assets.

801.15 Aggregation of voting securities and assets the acquisition of which was exempt.

801.20 Acquisitions subsequent to exceed­ ing threshold.

801.21 Securities and cash not considered assets when acquired.

801.30 Tender offers and acquisitions of voting securities from third parties. 801.31 Acquisitions of voting securities by offerees in tender offers. 801.32 Conversion and acquisition. 801.40 Formation of joint venture or other corporations.

801.90 Transactions or devices for avoid­ ance.

A u th o r ity: Sec. IMxL) ¡of th e Clayton Act, 15 ILS.C. 18A(d), as added by sec. 201 of the Hart-Scott-Rodino Antitrust Improvements Act of 1076, Pub. L. 94-435, 90 Stat. 1390. § 801.1 Definitions.

When used in the act and these rules— (aXl) Person. Except as provided in paragraphs (a) and (b) of § 801.12, the term “person’” means an ultimate parent entity and all entities which it controls directly or indirectly. Examples: 1. In the case of corporations, “person” encompasses the entire corporate structure, including all parent corporations, subsidiaries and divisions (whether consoli­ dated or unconsolidated, and Whether incor­ porated or unincorporated), and all related corporations under common control with any of the foregoing.

* 2. Corporations A and B are each directly controlled by the same foreign state. They are not included within the same “person,” although the corporations are under common control, because the foreign state whidh controls them is not an “entity” (see § 801.1(a)(2)). Corporations A and B* are the ultimate parent entities within persons “A”, and “B” which include any entities each may control.

3. Since a natural person is an entity (see § 801.1(aX2)3, a natural person and a corpo­ ration which he or she controls aVe part of the same “person.” If that natural person controls two otherwise separate corpora­ tions, both corporations and the natural person are all part of the same “person.” 4. See the example to § 801.2(a), (2) Entity. The term “entity” means any natural person, corporation, com­ pany, partnership, joint venture, asso­ ciation, joint-stock company, trust, foundation, fund, institution, society, union, club or other group organized for any purpose, whether incorporated or not, wherever located and of what­ ever citizenship; or any receiver, trust­ ee in bankruptcy or similar official or any liquidating agent for any of the foregoing, in his or her capacity as such; or any joint venture or other corporation which has not been formed but the acquisition of the voting securities or other interest in which, if already formed, would re­ quire notification under the act and these rules: Provided, however, That the term “entity” shall not include any foreign state, foreign government, or agency thereof (other than a corpo­ ration engaged in commerce), nor the • Throughout the examples to the rules, persons are designated (“A", “B,” etc.) with quotation marks. And entities are designated (A, B, etc.) without quotation marks. FEDERAL REGtSTER, V O L 43, NO . 147— M O N D AY, JULY 31, 1978

Page 250

33538 United States, any of the States there­ of, or any political subdivision or agency of either (other than a corpo­ ration engaged Jn commerce). (3) Ultimate parent entity. The term “ultimate parent entity” means an entity which is not controlled by any other entity.

Examples: 1. If corporation A holds 100 percent of the stock of subsidiary B, and B holds 75 percent of the stock of its subsidi­ ary C, corporation A is the ultimate parent entity, since it controls subsidiary B directly and subsidiary C indirectly, and since it is the entity within the person which is not controlled by any other entity. 2. If corporation A is controlled by natural person D, natural person D is the ultimate parent entity.

3. P and Q are the ultimate parent entities within persons “P” and “Q.” If P and Q eaeh own 50 percent of the voting securities of R, then P and Q are both ultimate par­ ents of R, and R is part of both persons “P” and “Q.”

(b) Control. The term “control” (as used in the terms “control(s),” “con­ trolling,” “controlled by,” and “under common control with”) means either (1) holding 50 percent or more of the outstanding voting securities of an issuer; or (2) having the contractual power presently to designate a major­ ity of the directors of a corporation, or in the case of unincorporated entities, of individuals exercising similar func­ tions.

Example: Corporation A holds 100 percent of the stock of corporation B, 75 percent of the stock of corporation C, 50 percent of the stock of corporation D, and 30 percent of the stock of corporation E. Corporation A controls corporations B, C and D, but not corporation E. Corporation A is the ulti­ mate parent entity of a person comprised of corporations A, B, C and D, and each of these corporations (but not corporation E) is “included within the person.” (c) Hold. (1) Subject to the provi­ sions of subparagraphs (2) through (8) of this paragraph, the term “hold” (as used in the terms “hold(s),” “holding,” ""holder” and “held”) means beneficial ownership, whether direct, or indirect through fiduciaries, agents, controlled entities or other means. Example: If a stockbroker has stock in “street name” for the account of a natural person, only the natural person (who has beneficial ownership) and not the stockbro­ ker (which may have record title) “holds” that stock.

(2) The holdings of spouses and their minor children shall be holdings of each of them.

(3) Except for a common trust fund or collective investment fund within the meaning of 12 CFR 9.18(a) (both of which are hereafter referred to in this paragraph as “collective invest­ ment funds”), and any revocable trust or an irrevocable trust in which the settlor retains a reversionary interest in the corpus, a trust, including a pen- RULES AND REGULATIONS sion trust* shall hold all assets and voting securities constituting the corpus of the trust.

Example: Under this subparagraph the trust—and not the trustee—“holds” the voting securities and assets constituting the corpus of any irrevocable trust (in which the settlor retains no reversionary interest, and which is not a collective investment fund). Therefore, the trustee need not ag­ gregate its holdings of any other assets or voting securities with the holdings of the trust for purposes of determining whether the requirements of the act apply to an ac­ quisition by the trust. Similarly, the trustee, if making an acquisition for its own account, need not aggregate its holdings with those of any trusts for which it serves as trustee. (However, the trustee must aggregate any collective investment funds which it admin­ isters; see subparagraph (6) of this para— graph.) (4) The assets and voting securities constituting the corpus of a revocable trust or the corpus of an irrevocable trust in which the settlor(s) retain(s) a reversionary interest in the corpus shall be holdings of the settlor(s) of such trust.

(5) Except as provided in subpara­ graph (4) of this paragraph, beneficia­ ries of a trust, including a pension trust or a collective investment fund, shall not hold any assets or voting se­ curities constituting the corpus of such trust.

(6) A bank or trust company which adm inisters one or more collective in­ vestment funds shall hold all assets and voting securities constituting the corpus of each such fund. Example: Suppose A, a bank or trust com­ pany, administers collective investment funds W, X, Y and Z. Whenever person “A” is to make an acquisition, whether of not on behalf of one or more of the funds, it must aggregate the holdings of W, X, Y and Z in determining whether the requirements of the act apply to the acquisition. (7) An insurance company shall hold all assets and voting securities held for the benefit of any general account of, or any separate account administered by, such company.

(8) A person holds all assets and voting securities held by the entities included within it; in addition to its own holding, an entity holds all assets and voting securities held by the enti­ ties which it controls directly or indi­ rectly.

(d) Affiliate. An entity is an affiliate of a person if it is controlled, directly or indirectly, by the ultimate parent entity of such person.

(e) (l)(i) United States person. The term “United States person” means a person the ultimate parent entity of which— (A) Is incorporated in the United States, is organized under the laws of the United States or has its principal offices within the United States; or (B) If a natural person, either is a citizen of the United States or resides in the United States.

(ii) United States issuer. The term “United States issuer” means an issuer which is incorporated in the United States, is organized under the laws of the United States or has its principal offices within the United States. (2)(i) Foreign person. The term “for­ eign person” means a person the ulti­ mate parent entity of which— (A) Is not incorporated in the United States, is not organized under the laws of the United States and does not have its principal offices within the United States; or (B) If a natural person, neither is a citizen of the United States nor resides in the United States.

(ii) Foreign issuer. The term “for­ eign issuer” means an issuer which is not incorporated in the United States, is not organized under the laws of the United States and does not have its principal offices within the United States.

(f)(1) Voting securities. The term “voting securities” means any securi­ ties which at present or upon conver­ sion entitle the owner or holder there­ of to vote for the election of directors of the issuer, or of an entity included within the same person as the issuer, or, with respect to unincorporated en­ tities, individuals exercising similar functions.

(2) Convertible voting security. The term “convertible voting security” means a voting security which present­ ly does not entitle its owner or holder to vote for directors of any entity. (3) Conversion. The term “conver­ sion” means the exchange, without the payment of additional considera­ tion, of voting securities which do not presently entitle the owner or holder to vote for directors of the issuer, or of an entity included within the same person as the issuer, for securities which do so entitle the owner or holder; Transfer costs and fees, and any payments made to complete frac­ tional shares, shall not be additional consideration within the meaning of this subparagraph.

Examples: L The acquisition of convert­ ible debentures which are convertible into common stock without the payment of addi­ tional consideration is an acquisition of “voting securities.”

However, § 802.31 exempts the acquisition of such securities from the requirements of the act. 2. Options and warrants are not “voting securities” for purposes of the act, since the payment of additional consideration is nec­ essary to exercise the options or warrants. Notification need not be filed prior to the acquisition of options and warrants, but may be required prior to exercising them. (g)(1) Tender offer.

The term “tender offer” means any offer to pur­ chase voting securities which is a tender offer within the meaning of FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

Page 251

section 14 of the Securities Exchange Act of 1934,15 UJ3.C. 78n. (2) Cash tender' offer. The term “cash tender offer” means a tender offer in which cash is the only consid­ eration offered to the holders of the voting securities to be acquired. (31 Non-cash tender offer. The term “non-cash tender offer” means any tender off ear which is not & cash ténder offer.

(h) Notification threshold. The term “notification threshold” means: (1) Fifteen percent of the outstand­ ing voting securities of an issuer, or an aggregate total amount of voting secu- - Titles and assets of the acquired person valued in excess of $15 million; (2) Fifteen percent of the outstand­ ing voting securities of an issuer, if valued in excess of $15 million; (3) Twenty-five percent of the out­ standing voting securities of an issuer; or (4) Fifty percent of the outstanding voting securities of an issuer. (i) (l) Solely for the purpose of invest­ ment. Voting securities are held or ac­ quired “solely for the purpose of in­ vestment” if the person holding or ac­ quiring such voting securities has no intention of participating in the for­ mulation, determination, or direction of the basic business decisions of the issuer.

Example: If a person holds stock “solely for the purpose of investment” and thereaf­ ter decides to influence or participate in management of the issuer of that stock, the stock in no longer held “solely for the pur­ pose of investment.”

(2) Investment assets. The term “in­ vestment assets” means cash, deposits in financial institutions, other money market instruments, and instruments evidencing government obligations. m Engaged in manufacturing. A person is “engaged in manufacturing” if it produces and derives annual sales or revenues in excess of $1 million from products within industries 2000- 3999 as coded in the Standard Indus­ trial Classification Manual (1972 edi­ tion) published by the Executive Office of the President, Office of Man­ agement and Budget.

(k) United Stales. The term “United States” shall include the several States, the territories, possessions, and commonwealths of the United States, and the District of Columbia. Ü) Commerce. The term ‘‘commerce” shall have the meaning ascribed to that term in section 1 of the Clayton Act, 15 UJS.C, 12, or section 4 of the Federal Trade Commission Act, 15 U,S.€L 44.

(m) The act. References to “the act” refer to section 7A of the Clayton Act, IS U.S.C. 18A, as added by section 201 of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Pub. L. 94- 435, 90 Stat. 1390. References to “ sec- RULES AND REGULATIONS tion 7AO” refer to subsections thereof. References to “this section” refer to the section of these rules in which the term appears.

§ 801.2 Acquiring and acquired persona. (a) Any person which, as a result of an acquisition, will hold voting securi­ ties or assets, either directly or indi­ rectly, or through fiduciaries, agents, ©r other entities acting on behalf of such person, is an acquiring person. Example: Assume that corporations A and B, which are each ultimate parent entitles of their respective “persons,” created a joint venture, corporation V, and that each holds half of V’s shares. Therefore, A and B each control V (see § 801.1(b)), and V is included within two persons, “A” and “B.” Under tJhig section, if V is to acquire corporation X, both “A” and “B” are acquiring persons. (b) Except as provided in paragraphs (a) and (b) of § 801.12, the person(s) within which the entity whose assets or voting securities are being acquired is included, is an acquired person. Examples: 1. Assume that person “Q” will .acquire voting securities of corporation X held by “P ” and that X is not included within person “P,” Under this section, the acquired person is the person within which X is included, and is not “P,” 2.

In the example to paragraph (a) of this section, if V were to he acquired by X. then both “A” and “B” would be acquired per­ sons.

<e) For purposes of the act and these rules, a person may be both an acquir­ ing person and an acquired person in a single transaction.

Example: Corporation A (an entity within person “A”) plans to transfer certain of its assets to corporation B (an entity within person “B”) in return for voting securities of B. Since corporation A is acquiring voting securities, “A” is an acquiring person; since corporation B is acquiring assets, '“B” is also an acquiring person. In addition, both “A” and "B” are acquired persons, since the assets of A are being acquired, and the voting securities of B are being acquired. (d) A merger, consolidation, or other transaction combining all or any part of the business of two or more persons shall be an acquisition subject to the act, and each party to such a transac­ tion shall be both an acquiring and an acquired person.

(e) Whenever voting securities are to be acquired from an acquiring person in connection with an acquisition, the acquisition of voting securities from the acquiring person shall be separate­ ly subject to the act.

Example: Suppose that corporations A and B are to merge, and that “A” and *‘B" have filed notification. A will be the surviv­ ing corporation, and the shareholders of B will receive stock of A in exchange for their B shares. Under this section, the acquisition of A shares by the shareholders of B is sepa­ rately subject to the act. Thus, if “C,” a shareholder of B, will receive sufficient shares of A to satisfy section 7A(a)(3), and if 33539 “A” and “C” meet ¡the criteria of section 7A(a) ÇU and (2), then “C’s” acquisition of A’s voting securities would be separately subject to the requirements of the act. Before “C” may acquire the voting securi­ ties of “A,” “C” must file notification as an acquiring person, “A” Can acquiring person in the merger) must Me notification as an acquired person, and “U” and “A” must ob­ serve a waiting period with respect to the acquisition of A shares by “C”—which is separate from the waiting period with re­ spect to “A” and “B.”

§ 801.3 Activities in or affecting com­ merce.

Section 7A(a)(l) is satisfied if any entity included within the acquiring person, or an entity included within the acquired person, is engaged in commerce or in any activity affecting commerce.

Examples: 1. A foreign subsidiary erf a U.S. corporation seeks to acquire a foreign busi­ ness. The acquiring person includes the U.S. parent corporation. If the U.S. corporation, or the foreign subsidiary, or any entity con trolled by either one of them, is engaged in commerce or in any activity affecting com­ merce. section 7A<aMl) is satisfied. Note, however, that .§§ 802.50-802.52 may exempt certain acquisitions of foreign businesses or assets.

. 2. Even if none of the entities within the acquiring person is engaged in ¡commerce or in any activity affecting commerce, the ac­ quisition nevertheless satisfies section 7A(a)(l) if any entity included within the acquired person is so engaged. § 801.4 Secondary acquisitions. (a) Whenever as a result of an acqui­ sition (the “primary acquisition”) an acquiring person will obtain control of an issuer which holds voting securities of another issuer which it does not control, then the acquisition of the other issuer’s voting securities is a sec­ ondary acquisition and is separately subject to the act and these rules. (b) Exemptions. (1) No secondary ac­ quisition shall be exempt from the re­ quirements of the act solely because the related primary acquisition is exempt from the requirements of the act.

(2) A secondary acquisition may itself be exempt from the require­ ments of the act under section 7Aie) or these rules.

Examples:

1. Assume that acquiring person “A” proposes to acquire all the voting securities of corporation B. This sec­ tion provides that the acquisition of voting securities of issuers held but not controlled by B or by any entity which B controls are secondary acquisitions by “A.” Thus, if B holds more than $15 million of the voting securities of corporation X (but does not control X), and “A” and “X” satisfy sections 7A (a)(1) and (a)(2), “A” must file notifica­ tion separately with respect to its secondary acquisition of voting securities of X. “X” must file notification within fifteen days after “A” files, pursuant to § 801.80. 2.

If in the previous example “A” acquires only 50 percent of the voting securities of B, FEDERAL REGISTER, VOL. 43, NO . 147— M O N D AY, JULY 31, 1978

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32540 I the result would remain the same. Since “A” would be acquiring control of B, all of B’s holdings in X would be attributable to "A.”

3. In the previous examples, if “A’s” acqui­ sition of the voting securities of B is exempt, “A” may still be required to file no­ tification with respect to' its secondary ac­ quisition of the voting securities of X, unless that acquisition is itself exempt. § 801.10 Value of voting securities and assets to be acquired.

Except as provided in § 801.13, the value of voting securities and assets to be acquired shall be determined as fol­ lows:

(a) Voting securities. (1) If the secu­ rity is traded on a national securities exchange or is authorized to be quoted in an interdealer quotation system of a national securities association regis­ tered with the U.S. Securities and Ex­ change Commission— (1) And the acquisition price has been determined, the value shall be the market price or the acquisition price, whichever is greater; or if (ii) The acquisition price has not been determined, the value shall be the market price.

(2) If subparagraph (1) of this para­ graph is inapplicable— (i) But the acquisition price has been determined, the value shall be the ac­ quisition price; or if (ii) The acquisition price has not been determined, the value shall be the fair market value.

(b) Assets. The value of assets to be acquired shall be the fair market value of the assets, or, if determined and greater than the fair market value, the acquisition price.

(c) For purposes of this section and § 801.13(a)(2):

(1) Market price, (i) For acquisitions subject to § 801.30, the market price shall be the lowest closing quotation, or, in an interdealer quotation system, the lowest closing bid price, within the 45 calendar days prior to the receipt of the notice required by § 803.5(a) or prior to the consummation of the ac­ quisition.

(ii) For acquisitions not subject to § 801.30, the market price shall be the lowest closing quotation, or, in an in­ terdealer quotation system, the lowest closing bid price, within the 45 or fewer calendar days which are prior to the consummation of the acquisition but not earlier than the day prior to the execution of the contract, agree­ ment in principle or letter of intent to merge or acquire.

(iii) When the security was not traded within the period specified by this subparagraph, the last closing quotation or closing bid price preced­ ing such period shall be used. If such closing quotations are available in more than one market, the person RULES AND REGULATIONS filing notification may select any such quotation.

(2) Acquisition price. The acquisi­ tion price shall include the value of all consideration for such voting securi­ ties or assets to be acquired. (3) Fair market value. The fair market value shall be determinded in good faith by the board of directors of the ultimate parent entity included within the acquiring person, or, if un­ incorporated, by officials exercising similar functions; or by an entity dele­ gated that function by such board or officials. Such determination must be made as of any day within 60 calendar days prior to the filing of the notifica­ tion required by the act, or, if such no­ tification has not been filed, within 60 calendar days prior to the consumma­ tion of the acquisition.

Example: Corporation A, the ultimate parent entity in person “A,” contracts to ac­ quire assets of corporation B, and the con­ tract provides that the acquisition price is not to be determined until after the acquisi­ tion is effected. Under paragraph (b) of this section, for purposes of the act the value of the assets is to be the fair market value of the assets. Under paragraph (c)(3), the board of directors of corporation A must in good faith determine the fair market value. That determination will control for 60 days whether “A” and “B” must observe the re­ quirements of the act; that is, “A” and “B” must either file notification or consummate the acquisition within that time. If “A” and “B” neither file nor consummate within 60 days, the parties would no longer be entitled to rely on the determination of fair market value, and, if in doubt about whether re­ quired to observe the requirements of the act, would have to make a second determi­ nation of fair market value. Note that since item 2(d)(1) of the Notification and Report Form only requests the approximate dollar value of assets, a second formal determina­ tion of the fair market value would not be necessary for that purpose. § 801.11 Annual net sales and total assets. (a) The annual net sales and total assets of a person shall include all net sales and all assets held, whether for­ eign or domestic, except as provided in paragraph (d) of this section. (b) Except for the total assets of a joint venture or other corporation at the time of its formation which shall be determined pursuant to § 801.40(c), the annual net sales and total assets of a person shall be as stated on the fi­ nancial statements specified in para­ graph (c) of this section: Provided: (1) That the annual net sales and total assets of each entity included within such person are consolidated therein. If the annual net sales and total assets of any entity included within the person are not consolidated in such statements, the annual net sales and total assets of the person filing notifi­ cation shall be recomputed to include the nonduplicative annual net sales and nonduplicative total assets of each such entity; and (2) That such statements, and any restatements pursuant to subpara­ graph (1) of this paragraph (insofar as possible), have been prepared in ac­ cordance with the accounting princi­ ples normally used by such person, and are of a date not more than 15 months prior to thé date of filing of the notification required by the act, or the date of consummation of the ac­ quisition.

Example: Person “A” is composed of entity A, subsidiaries B1 and B2 which A controls, subsidiaries Cl and C2 which B1 controls, and subsidiary C3 which B2 con­ trols. Suppose that A’s most recent financial statement consolidates the annual net sales and total assets of Bl, Cl, and C2, but not B2 or C3. In order to determine whether person “A” meets the criteria of section 7A(a)(2>, as either an acquiring or an ac­ quired person, A must recopipute its annual net sales and total assets to reflect consoli­ dation of the nonduplicative annual net sales and nonduplicative total assets of B2 and C3.

<c) Subject to the provisions of para­ graph (b) of this section: (1) The annual net sales of a person shall be as stated on the last regularly prepared annual statement of income and expense of that person; and (2) The total assets of a person shall be as stated on the last regularly pre­ pared balance sheet of that person. Example: Suppose “A” sells assets to “B” on January 1. “A’s” next regularly prepared balance sheet, dated February 1, reflects that sale. On March 1, “A” proposes to sell more assets to “B.” “A’s” total assets on March 1 are “A’s” total assets as stated on its February 1 balance sheet. (d) No assets of any natural person, other than investment assets, voting securities and other income-producing property, shall be included in deter­ mining the total assets of a person. § 801.12 Calculating percentage of voting securities or assets.

(a) Voting securities. Whenever the act or these rules require calculation of the percentage of voting securities to be held or acquired, the issuer whose voting securities are being ac­ quired shall be deemed the “acquired persons.”

Example: Person “A” is composed of cor­ poration A1 and subsidiary A2; person “B” is composed of corporation Bl and subsidi­ ary B2. Assume that A2 proposes to sell assets to Bl in exchange for common stock of B2. Under this paragraph, for purposes of calculating the percentage of voting securi­ ties to be held, the “acquired person” is B2. For all other purposes, the acquired person is “B.” (For all purposes, the “acquiring per­ sons” are “A” and “B.”) (b) Percentage of voting securities. Whenever the act or these rules re­ quire calculation of the percentage of voting securities of an issuer to be held or acquired, the percentage shall FEDERAL REGISTER, VO L. 43, NO. 147— M O N D AY, JULY 31, 1978

Page 253

be the ratio, expressed as a percent­ age, which— (1) The number of votes for directors of the issuer which voting securities presently entitle the holder to cast, or, as a result of the acquisition, will enti­ tle the acquiring person to cast, bears to; and (ii) The total number of votes for di­ rectors of the issuer which presently may be cast, or which will be entitled to be cast, after the acquisition, which­ ever is greater.

(2) Authorized but unissued voting securities and treasury voting securi­ ties shall not be considered securities presently entitled to vote for directors of the issuer.

(3) For purposes of determining the number of outstanding voting securi­ ties of an issuer, a person may rely upon the most recent information set forth in filings with the U.s' Securi­ ties and Exchange Commission, unless such person knows or has reason to be­ lieve that the information contained therein is inaccurate.

E xam ples: 1. In th e ex am p le to p a ra g ra p h (a), to d eterm in e th e p ercen tag e of B 2’s voting secu rities w h ich will be h eld by “A " a fte r th e tran sactio n , all v oting secu rities of B2 h eld by “A ,” th e “acq u irin g p erso n ” (in ­ cluding A2 an d all o th e r en tities included in person “A ”), m u st be aggregated. If “A ” holds convertible secu rities of B2 w hich m eet th e d efin itio n of v oting secu rities in § 801.1(f), th ese secu rities a re to be d isre­ garded in calcu latin g th e p ercen tag e of voting secu rities h eld by “A.” 2. U nder th is fo rm u la, an y votes o b tain ed by m eans of p roxies fro m o th e r p erso n s are also disregarded in calcu latin g th e p e rcen t­ age of voting secu rities to be h eld o r ac­ quired.

(c) Assets. Any person whose assets are being acquired shall be deemed an “acquired person” in calculating the percentage of assets to be held or ac­ quired for purposes of section 7A(a)(3)(A).

E xam ple: In th e ex am p le to p a ra g ra p h (a), fo r pu rp o ses of calcu latin g th e p e rcen t­ age of assets to be h eld, th e “acquired person” is “A .”

(d) Percentage of assets. Whenever the act or these rules require calcula­ tion of the percentage of assets of a person to be held or acquired, the per­ centage shall1 be the ratio, expressed as a percentage, which— (1) The book value (on the books of the acquired person) of the assets to be acquired (see § 801.13(b)(1)), bears to; and (2) The total assets of the acquired person, determined in accordance with §801.11.

E xam ple: In th e exam p le to p ara g ra p h (a), th e p ercen tag e of assets to be acquired by “B ” is d eterm in ed by dividing th e book value of A2’s assets being acquired, by th e to tal assets of “A ,” d eterm in ed in accord­ ance w ith §801.11.

RULES AND REGULATIONS § 801.13 Voting securities or assets to be held as a result of acquisition. (a) Voting securities. (1) Subject to the provisions of § 801.15, all voting se­ curities of the issuer which will be held by the acquiring person after the consummation of an acquisition shall be deemed voting securities held as a result of the acquisition. The value of such voting securities shall be the sum of the value of the voting securities to be acquired, determined in accordance with § 801.10(a), and the value of the voting securities held by the acquiring person prior to the acquisition, deter­ mined in accordance with subpara­ graph (2) of this paragraph. (2) The value of voting securities of an issuer held prior to an acquisition shall be— (i) If the security is traded on a na­ tional securities exchange or is author­ ized to be quoted in an interdealer quotation system of a national securi­ ties association registered with the United States Securities and Exchange Commission, the market price calcu­ lated in accordance with § 801.10(c)(1); or (ii) If subdivision (i) of this subpara­ graph is not applicable, the fair market value determined in accord­ ance with § 801.10(c)(3). E xam ples:

1.

A ssum e th a t acquiring p erso n “A ” h olds $19 m illion of th e voting secu rities of X , an d is to acquire a n o th e r $1 m illion of th e sam e voting securities. S ince u n d e r p a ra g ra p h (a) of th is ru le all voting secu rities “A ” will hold a fte r th e acquisition a re h eld “as a re su lt o f” th e acquisition, “A ” w ill h o ld $20 m illion of th e voting securities of X as a re su lt of th e acquisition. “A ” m u st th e re fo re observe th e req u irem en ts of th e a c t b efo re m aking th e acquisition, unless th e p re se n t acquisition is ex em p t u n d e r § 7A(c), § 802.21 o r an y o th e r rule. 2. See §801.15 a n d th e exam ples to th a t rule.

3. S ee §801.20 an d th e exam ples to th a t ru le.

(b) Assets. (1) All assets to be ac­ quired from the acquired person shall be assets held as a result of the acqui­ sition. The value of such assets shall be determined in accordance with § 801.10(b).

(2)(i) If the acquiring person has signed a letter of intent or entered into a contract or agreement in princi­ ple to acquire assets from the acquired person, and (ii) Subject to the provisions of § 801.15, if the acquiring person has ac­ quired. any assets from the acquired person within the 180 calendar days preceding the signing of such agree­ ment and such assets are presently held by the acquiring person, then only for purposes of section 7A(a)(3)(B) and § 801.1(h)(1), both the acquiring and the acquired persons shall treat such assets as though they had not previously been acquired and are being acquired as part of the pres* 3 3 5 4 1 ent acquisition. Thfe value of any assets previously acquired which are subject to this subparagraph shall be determined in accordance with § 801.10(b) as of the time of their prior acquisition.

E xam ple: A cquiring p erso n “A ” proposes to m ake tw o acquisitions of assets fro m ac­ qu ired p erson “B ,” 90 days a p a rt, an d w ishes to d eterm in e w h e th e r n o tificatio n is necessary p rio r to th e second acquisition. F o r purposes of th e p ercen tag e te s t of § 7A(a)(3)(A), “A ” w ould h o ld only th e assets it acquired in th e second acquisition. F o r purposes of th e $15 m illion te s t of § 7A (a)(3)(B ), how ever, “A ” m u st aggregate b o th of its acquisitions an d m u st value each as of th e tim e of its occurrence. § 801.14 Aggregate total amount of voting securities and assets.

For purposes of section 7A(a)(3)(B) and § 801.1(h)(1), the aggregate total amount of voting securities and assets shall be the sum of:

(a) The value of all voting securities of the acquired person which the ac­ quiring person would hold as a result of the acquisition, determined in ac­ cordance with § 801.13(a); and (b) The value of all assets of^the ac­ quired person which the acquiring person would hold as a result of the acquisition, determined in accordance with §801.13(b).

E xam ples: 1. A cquiring p erson “A ” previ­ ously acquired $6 m illion of th e voting secu­ ritie s (n o t convertible voting securities) of co rp o ratio n X . “A” now in ten d s to acquire. $8 m illion of X ’s assets. U n d er p ara g ra p h (a) of th is section, “A ” looks to § 801.13(a) an d d eterm in es th a t th e voting securities are to be h eld “as a re u lt o f” th e acquisi­ tion. S ection 801.13(a) also provides th a t “A ” m u st d eterm in e th e p resen t value of th e previously acquired- securities. U nder p a ra g ra p h (b) of th is section, “A ” looks to § 801.13(b)(1) an d d eterm in es th a t th e assets to be acquired will be h eld “as a re su lt o f” th e acquisition, an d a re valued u n d er § 801.10(b) a t $8 m illion. T h erefo re, if th e voting securities h av e a p re se n t value of m ore th a n $7 m illion, th e asset acquisition is su b je ct to th e req u irem en ts of th e ac t since, as a re su lt of it, “A ” w ould hold an ag­ g reg ate to ta l am o u n t of th e voting securi­ ties an d assets of “X ” in excess of $15 m il­ lion.

2. In th e previous exam ple, assum e th a t th e assets acquisition occurred first, an d th a t th e acquisition of th e voting securities is to occur w ith in 180 days of th e first acqui­ sition. “A ” now looks to § 801.13(b)(2) an d d eterm in es th a t because th e second acquisi­ tio n is of voting secu rities an d n o t assets, th e asset an d voting se cu rities acquisitions a re n o t tre a te d as one tran sactio n . T h e re ­ fore, th e second acquisition w ould n o t be su b je ct to th e req u irem en ts of th e ac t by reaso n of section 7A (a)(3)(B ) since th e value o f th e secu rities to be acquired does n o t equal o r exceed $15 m illion. FEDERAL REGISTER, VOL. 43, N O . 147— M O N D AY, JULY 31, 1978

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§ 801.15 Aggregation of voting securities and assets the acquisition of which was exempt.

Notwithstanding §801.13, for purposes of section 7A(aX(3) and $801.1(h), none of the following will be held as a result of an acquisition:

(a) Assets or voting securities the acquisition of which was exempt at the time of acquisition (or would have been exempt, had the act and these rules been in effect), or the present acquisition of which is exempt, under—

(1) Sections 7A(c) (1), (5), (6), (D, (8), and (11)(B);

(2) Sections 802.8, 802.31, 802.50(a)(1), 802.51(a), 802.52, 802.53, 802.63, and 802.70;

(b) Assets or voting securities the acquisition of which was exempt at the time of acquistion (or would have been exempt, had the act and these rules been in effect), or the present. acquisition of which is exempt, under section TA(c)(9) and §§ 802.50(a)(2), 802.50¢b), 802.51(b) and 802.64 unless the limitations contained in section 7A(c)(9) or those sections do not apply or as a result of the acquisiton would be exceeded, in which case the assets or voting securities so acquired wiil be held; and

(ce) Voting securites the acauistion of which’was exempt at the time of acquisiton (or would have been exempt, had the act and these rules been in effect), or the present acquisition of which is exempt, under section TA(cX11)A) unless additional voting securities of the same issuer have been or are being acquired.

Examples: 1. Assume that acquiring person “A” is simultaneously to acquire $50 million of the convertible voting securities of X and $12 million (which is less than 15 percent) of the voting common stock of X. Although the acquistion of the convertible voting securities is exempt under § 802.31, since the overall value of the securities to be acquired is greater than $15 million, “A” must determine whether it is obliged to file notification and observe a waiting period before acquiring the common stock. Because $802.31 is one of the exemptions listed in paragraph (a)(2) of this rule, “A” would not hold the convertible voting securities as a result of the acquisition. Therefore, since as a result of the acquisition “A" would hold only the common stock, the test of section %ACaX3) would not be satisfied, and “A” need not observe the requirements of the act before acquiring the common stock.

(Note, however, that the $50 million of convertible voting securities would be reflected in “A's” next regularly prepared balance sheet, for purposes of § 801,11.)

2. In the previous example, the rule was applied to voting securities the present acquisition of which is exempt, Assume instead that “A” had acquired the convertible voting securities prior to its acquisition of the common stock. “A” still would not hold the convertible voting securities as a result of the acquisition of the common stock, because the rule states that voting securities the previous acquisition of which was

RULES AND REGULATIONS

exempt also fall within the rule. Thus, the test of section 7A(aX3) would again not be satisfied, and “A” need not observe the requirements of the act before acquiring the common stock.

3. In example 2, assume instead that “A” acquired the convertible voting securities in 1975, before the act and rules went into effect, Since the rule applies to voting securities the acquisition of which would have been exempt had the act and rules been in effect, the result again would be identical. If the rules had been in effect In 1975, the acquisition of the convertible voting securities would have been exempt under § 802.31.

4. Assume that acquiring person “B,” a United States person, acquired from corporation X two mines located abroad, and assume that the acquisition price was $40 million. In the most recent year, sales in the United States attributable to the mines were $6 million, and thus the acquisition was exempt under § 802.50(a)(2). Within 180 days of that acquisition, “B’’ seeks to acquire a third mine from X, to which United States sales of $7 million were attributable in the most recent year. Since under $801.13(b)(2), as a result of the acquisition, “B" would hold all three mines of X, and the $10 million limitation in §802.50(ax2) would be exceeded, under paragraph (b) of this rule, “B" would hold the previously acquired assets for purposes of the second acquisition. Therefore, as a result. of the second acquisition, “B” would hold assets of XK exceeding $15 million, would not qualify for the exemption in §802.50¢ax2), and must observe the requirements of the act before consummating the acquisition.

§ 801.20 Acquisitions subsequent to exceeding threshold.

Acquisitions meeting the criteria of section 7A(a), and not otherwise exempted by section 7A(c) or § 802.21 or any other of these rules, are subject to the requirements of the act-even though:

(a) Earlier acquisitions of assets or voting securities may have been subject to the requirements of the act;

(bo) The acquiring person’s holdings initially may have met or exceeded a notification threshold before the effective date of these rules; or

(ec) The acquiring person's holdings initially may have met or exceeded a notification threshold by reason of increases in market values or events other than acquisitions,

Examples: 1. Person “A” acquires $10 million of the voting securities of person “B” before the effective date of these rules. If “A” wishes to acquire an additional $6 million of the voting securities of "B” after the effective date of the rules, notification will be required by reason of section 7A(a)(3)(B).

2. In example 1, assume that the value of the voting securities of "B’ originally acquired by “A” has reached a present value exceeding $15 million. If A” wishes to acquireaT3 any additional voting securities or

assets of “B,” notification will be required. See § 801.13(a),

$801.21 Securities and cash not considered assets when acquired.

For purposes of section TA(a)(3) and §§ 801.10h)(1), 801.12(d)(1) and 801.13(b):

(a) Cash shall not be considered an asset of the person from which it is acquired; and ,

(b) Neither voting or nonvoting securities nor obligations referred to in section TA(c)(2) shall be considered assets of another person from which they are acquired.

Examples: 1. Assume that acquiring person “A” acquires voting securities of issuer X from "'B,” a person unrelated to X. Under this subparagraph, the acquisition is treated only as one of voting securities, requiring “A" and ““X"’ to comply with the requirements of the act, rather than one in which “A” acquires the assets of “B,” requiring “A” and “B” to comply. See also example 2,to $801.30. Note that for purposes of section 7A(aX2)—that, is, for the next reeularly prepared balance sheet of “A” referred to in §801.11—the voting securities of X must be reflected after their acquisition: see § 801.11(c 2).

2. In the previous example, if “A” acquires nonvoting securities of X from “B,” then under this section the acquisition would be treated only as one of nonvoting securities of X (and would be exempt under section TA(e)2)), rather than one in which “A” acquires assets of ‘‘B,” requiring “A” and “B” to comply. Again, the nonvoting securities of X would have to be reflected in ‘A's’ next reguiarly prepared balance sheet for purposes of section TA(a)(2).

3. In example 1, assume that “B” receives only cash from “A” in exchange for the voting securities of X. Under this section, “B’s" acquisition of cash is not an acquisition of the “assets” of “A,” and “‘B” is not required to file notification as an acquiring person.

§ 801.30 Tender offers and acquisitions of voting securities from third parties.

(a) This section applies to:

(1) Acquisitions on a national securities exchange or through an interdealer quotation system registered with the United States Securities and Exchange Commission;

(2) Acquisitions § 801.31; .

(3) Tender offers;

(4) Secondary acquisitions;

(5) Al acquisitions (other than mergers and consolidations) in which voting securities are to be acquired from a holder or holders other than the issuer or an entity included within the same person as the issuer;

(6) Conversions; and

(7) Acquisitions of voting securities resulting from the exercise of options or warrants which are—

(i) Issued by the issuer whose voting securities are to be acquired (or by any entity included within the same person as the issuer); and

(ii) The subject of a currently effective registration statement filed with the United States Securities and Ex-

described by

FEDERAL REGISTER, VOL. 43, NO. 147—MONDAY, JULY 31, 1978

Page 255

RULES AND REGULATIONS 3 3 5 4 3 change Commission under the Securi­ ties Act of 1933.

(b) For acquisitions described by paragraph (a) of this section: (1) The waiting period required under the act shall commence upon the filing of notification by the acquir­ ing person as provided in § 803.10(a); and (2) The acquired person shall file the notification required by the act, in accordance with these rules, no later the 5 p.m. eastern time on the 15th (or, in the case of cash tender offers, the 10th) calendar day following the date of receipt, as defined by § 803.10(a), by the Federal Trade Com­ mission and Assistant Attorney Gener­ al of the notification filed by the ac­ quiring person. Should the 15th (or, in the case of cash tender offers, the 10th) calendar day fall on a weekend day or federal holiday, the notification shall be filed no later than 10 a.m. eastern time on the next following business day.

E xam ples: 1. A cquiring p erson “A ” p ro ­ poses to acquire fro m co rp o ratio n B th e voting secu rities of B ’s w holly ow ned subsid­ iary, co rp o ratio n S. S ince “A” is acquiring th e sh a res of S fro m its p a ren t, th is section does n o t apply, an d th e w aiting period does n o t begin u n til b o th “A” an d “B ” file n o tifi­ cation.

2. A cquiring p erso n M A ” proposes to ac­ quire $20 m illion of th e v oting secu rities of corporation X on a secu rities exchange. T h e w aiting period begins w h en “A ” files n o tifi­ cation. “X ” m u st file n o tificatio n w ith in 15 calendar days th e re a fte r. T h e seller of th e X sh ares is n o t su b ject to an y obligations u n d er th e act.

3. Suppose th a t acq u irin g p erso n “A” p ro ­ poses to acquire 50 p ercen t of th e voting se­ curities of co rp o ratio n B w hich in tu rn owns 30 p ercen t of th e voting secu rities of corpo­ ratio n C. T h u s “A’s” acquisition of C ’s voting secu rities is a secondary acquisition (see § 801.4) to w hich th is section applies be­ cause “A” is acquiring C ’s voting secu rities from a th ird p a rty (B). T h erefo re, th e w ait­ ing period w ith resp ect to “A’s ” acquisition of C ’s voting secu rities begins w h en “A” files its se p ara te N o tificatio n an d R e p o rt F orm w ith resp ect to C, an d “C ” m u st file w ith 15 days th e re a fte r. “A ’s ” p rim ary an d secondary acquisitions of th e v oting secu ri­ ties of B an d C are su b ject to se p ara te w ait­ ing periods: see § 801.4. § 801.31 Acquisitions of voting securities by offerees in tender offers. Whenever an offeree in a noncash tender offer is required to, and does, file notification with respect to an ac­ quisition described in § 801.2(e): (a) The waiting period with respect to such acquisition shall begin upon filing of notification by the offeree, pursuant to §§801.30 and 803.10(a)(1); (b) The person within which the issuer of the shares to be acquired by the offeree is included shall file notifi­ cation as required by § 801.30(b); (c) Any request for additional infor­ mation or documentary material pursuant to section 7A(e) and §803.20 shall extend the waiting period in ac­ cordance with § 803.20(c); and (d) The voting securities to be ac­ quired by the offeree may be placed into escrow, for the benefit of the of­ feree, pending expiration or termina­ tion of the waiting period with respect to the acquisition of such securities; Provided however, That no person may vote any voting securities placed into escrow pursuant to this subpara­ graph.

E xam ple: A ssum e th a t “A ,” w hich h as an n u al n e t sales exceeding $100 m illion, m akes a te n d e r o ffer fo r voting securities of co rp o ratio n X . T h e co n sid eratio n fo r th e te n d e r o ffer is to be voting securities of A. "S ,” a sh a re h o ld e r of X w ith to ta l assets ex­ ceeding $10 m illion, w ishes to te n d e r its h oldings of X an d in exchange w ould re ­ ceive sh a re s of A valued a t $16 m illion. U n d er th is section, “S ’s ” acquisition of th e sh a res of A w ould be an acquisition sepa­ ra te ly su b ject to th e req u irem en ts of th e act. B efore “S ” m ay acquire th e voting secu­ rities of A, “S ” m u st first file n o tificatio n an d observe a w aiting period—w hich is sepa­ ra te fro m an y w aiting period th a t m ay ap p ly w ith resp ect to “A ” an d “X .” Since § 801.30 applies, th e w aiting period applica­ ble to “A ” an d “S ” begins up o n filing by “S ,” an d “A ” m u st file w ith resp ect to “S ’s ” acquisition w ith in 15 days p u rsu a n t to § 801.30(b). S h o u ld th e w aiting period w ith resp ect to “A” an d “X ” expire o r be term i­ n a te d p rio r to th e w aiting period w ith re ­ sp ect to “S ” an d “A ,” “S ” m ay w ish to te n d e r its X -shares an d place th e A -shares in to a no n v o tin g escrow u n til th e ex p iratio n o r te rm in a tio n of th e la tte r w aiting period. § 801.32 Conversion an acquisition. A conversion is an acquisition within the meaning of the act.

E xam ple: A ssum e th a t acquiring p erson “A” w ishes to convert co n v ertib le voting se­ cu rities of issuer X , an d is to receive com m on stock of X valued a t $20 m illion. If “A ” an d “X ” satisfy th e ,c rite ria of section 7 A (a)(l) an d section 7A (a)(2), th e n “A ” and “X ” m u st file n o tifica tio n an d observe th e w aiting perio d before “A ” com pletes th e ac­ q u isitio n of th e X com m on stoek, unless ex em p ted by section 7A(c) o r th ese rules. S ince §801.30 applies, th e w aiting period begins u p o n n o tificatio n by “A ,” an d “X ” m u st file n o tifica tio n w ith in 15 days. § 801.40 Formation of joint venture or other corporations.

(a) In the formation of a joint ven­ ture or other corporation (other than in connection with a merger or consoli­ dation), even though the persons con­ tributing to the formation of a joint venture or other corporation and the joint venture or other corporation itself may, in the formation transac­ tion, be both acquiring and acquired persons within the meaning of § 801.2, .the contributors shall be deemed ac­ quiring persons only, and the joint venture or other corporation shall be deemed the acquired person only. (b) Unless exempted by the act or any of these rules, upon the formation of a joint venture or other corpora­ tion, in a transaction meeting the cri­ teria of section 7A (a)(1) and (a)(3) (other than in connection with a merger or consolidation), an acquiring person shall be subject to the require­ ments of the act if:

(1) (i) The acquiring person has annual net sales or total assets of $100 million or more;

(ii) The joint venture or other corpo­ ration will have total assets of $10 m il, lion or more; and (iii) At least one other acquiring person has annual net sales or total assets of $10 million or more; or (2) (i) The acquiring person has annual net sales or total assets of $10 million or more;

(ii) The joint venture or other corpo­ ration will have total assets of $100 million or more; and (iii) At least one other acquiring person has annual net sales or total assets of $10 million or more. (c) For purposes of paragraph (b) of this section the assets of the joint ven­ ture or other corporation shall in­ clude:

(1) All assets which any person con­ tributing to the formation of the joint; venture or other corporation has agreed to transfer or for which agree­ ments have been secured for the joint venture or other corporation to obtain at any time, whether or not such person is subject to the requirements of the acts; and (2) Any amount of credit or any obli­ gations of the joint venture or other corporation which any person contrib­ uting to the formation has agreed to extend or guarantee, at any time. (d) The commerce criterion of sec­ tion 7A(a)(l) is satisfied if either the activities of any acquiring person are in or affect commerce, or the person filing notification should reasonably believe that the activities of the joint venture or other corporation will be in or will affect commerce.

E xam ple: P erso n s “A,” “B ,” an d “C ” agree to create new co rp o ratio n N, a jo in t v enture. “A ” h a s m ore th a n $100 m illion in a n n u al n e t sales. “B ” h a s m ore th a n $10 m illion in to ta l assets. B o th “C ” ’s to ta l assets an d its an n u a l n e t sales are less th a n $10 m illion. “A ,” “B ,” an d “C ” are each engaged in com ­ m erce. T h e co rp o ratio n s have agreed to m ake an aggregate initiqj co n trib u tio n to th e new e n tity of $6 m illion in assets an d to m ake ad d itio n al co n trib u tio n s of an aggre­ g ate $6 m illion in each of th e n e x t th re e years. U nder p a ra g ra p h (c), th e assets of th e new co rp o ratio n a re $24 m illion. U nder p a ra g ra p h (b), only “A ” m u st file n o tifica­ tion, an d only th e n if “A” m eets a criterio n of section 7A (a)(3)—th a t is, if it will be ac­ quirin g 15 p ercen t o r $15 m illion of th e voting securities of th e new e n tity . N need n o t file n otification; see § 802.41. FEDERAL REGISTER, V O L 43, NO. 147— M O N D AY, JULY 31, 1978

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3 3 5 4 4 § 801.90 Transactions or devices for avoid­ ance.

Any transaction(s) or other device(s) entered into or employed for the pur­ pose of avoiding the obligation to comply with the requirements of the act shall be disregarded, and the obli­ gation to comply shall be determined by applying the act and these rules to the substance of the transaction. E xam ples: 1. S uppose co rp o ratio n s A an d B w ish to fo rm a jo in t v en tu re. A an d B con­ te m p late a to ta l in v estm en t of $30 m illion in th e jo in t v en tu re; p erso n s “A” an d “B ” each have to ta l assets in excess of $100 m illion. In stead of filing n o tificatio n p u rsu a n t to §801.40, A creates a new subsidiary, A l, w hich issues h a lf of its au th o rized sh a res to A. A ssum e th a t A l h a s to ta l assets of $1,000. “A” th e n sells 50 p ercen t of its A l stock to “B ” fo r $500. T h e re a fte r, “A ” an d “B ” each co n trib u te $15 m illion to A 1 in ex ch an g e fo r th e rem ain in g au th o rized A l stock (onefo u rth each to “A ” an d “B ” ). A ’s creatio n of A l w as ex em p t u n d er § 802.30; its sale of A l stock to “B ” w as ex em p t u n d er § 802.20; an d th e second acquisition of stock in A l by "A ” an d “B ” w as ex em p t u n d er § 802.30 an d sec­ tio n s 7A(c) (3) an d (10). S ince th is schem e ap p ears to be fo r th e p urp o se of avoiding th e req u irem en ts of th e act, th e sequence of tran sactio n s will be disregarded. T h e tra n s ­ actions will be view ed as th e fo rm atio n of a jo in t v en tu re co rp o ratio n by “A ” an d “B ” having over $10 m illion in assets. S u ch a tra n sa c tio n w ould be covered by § 801.40 an d “A” an d “B ” m u st file n o tifica tio n an d ob­ serve th e w aiting period. 2. S uppose “A” w holly ow ns an d o p erates a ch ain of tw en ty re ta il h ard w are stores, each of w h ich is se p ara te ly in co rp o rated an d h as assets of less th a n $10 m illion. T h e aggregate fa ir m ark et value of th e assets of th e tw en ty sto re co rp o ratio n s is $60 m illion. “A” proposes to sell th e sto res to “B ” fo r $60 m illion. F o r various reaso n s it is decided th a t “B ” will buy th e sto ck of each of th e sto re co rp o ratio n s fro m “A ”. In ste a d of filing n o tificatio n an d observing th e w aiting period as co n tem p lated by th e act, “A ” an d “B ” e n te r in to a series of five stock p u r­ chase-sale ag reem en ts fo r $12 m illion each. U n d er th e term s of each co n tra c t th e stock of fo u r sto res will pass fro m “A” to “B ”. T h e five ag reem en ts are to be co n su m m ated o n five successive/days. B ecause, a fte r each of th ese tran sactio n s, th é sto re co rp o ratio n s are no longer p a rt of th e acq u ired p erso n (§ 801.13(a) does n o t ap p ly because co n tro l h a s passed, see § 801.2), an d because § 802.20(b) ex em p ts th e acquisition of con­ tro l of each of th e sto re co rp o ratio n s, n o n e of th e co n tem p lated acquisitions w ould be su b je ct to th e req u irem en ts of th e act. H ow ­ ever, if th e stock of all of th e sto re co rp o ra­ tio n s w ere to be p u rch ased in one tra n sa c ­ tio n , ,no ex em p tio n w ould be applicable, an d th e a c t’s req u irem en ts w ould h av e to be m et. B ecause it ap p ears th a t th e p urpose of m aking five se p a ra te c o n tracts is to avoid th e req u irem en ts of th e act, th is sectio n w ould ignore th e fo rm of th e se p ara te tra n s ­ actions an d consider th e su b stan ce to be one tra n sa c tio n req u irin g com pliance w ith th e act.

The Federal Trade Commission pro­ mulgates the Rules contained in this part (802) pursuant to section 7A(d) of the Clayton Act, 15 U.S.C. 18A(d), as added by section 201 of the Hart- RULES AND REGULATIONS Scott-Rodino Antitrust Improvements Act of 1976, Pub. L. 94-435, 90 Stat. 1390.

PART 802— EXEMPTION RULES Sec.

802.1 Acquisitions of goods or realty in the ordinary course of business. 802.6 Federal agency approval. 802.8 Certain supervisory acquisitions. 802.9 Acquisitions solely for the purpose of investment.

802.10 Stock dividends and splits. 802.20 Minimum dollar value. 802.21 Acquisitions of voting securities not meeting or exceeding greater, notifica­ tion threshold.

802.23 Amended or renewed tender offers. 802.30 Intra-person transactions. 802.31 Acquisitions of convertible voting securities.

802.40 Exempt formation of joint venture or other corporations.

802.41 Joint venture or other corporations at time of formation.

802.50 Acquisitions of foreign assets or of voting securities of a foreign issuer by United States persons.

802.51 Acquisitions by foreign person. 802.52 Acquisitions by or from foreign gov­ ernmental corporations.

802.53 Certain foreign banking transac­ tions.

802.60 Acquisitions by securities underwrit­ ers.

802.63 Certain acquisitions by creditors and insurers.

802.64 Acquisitions of voting securities by certain institutional investors. 802.70 Acquisitions subject to order. 802.71 Acquisitions by gift, intestate suc­ cession or devise, or by irrevocable trust. A u t h o r it y : Sec. 7A(d) of the Clayton Act, 15 U.S.C. 18A(d), as added by sec. 201 of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, Pub. L. No. 94-435, 90 Stat. 1390.

§ 802.1 Acquisitions of goods or realty in the ordinary course of business. (a) Acquisitions of voting securities of entities holding only realty. For purposes of section 7A(c)(l), an acqui­ sition of the voting securities of an entity whose assets consist or will con­ sist solely of real property and assets incidental to the ownership of real property (such as cash, prepaid taxes or insurance, rentals receivable and the like) shall be deemed an acquisi­ tion of realty.

(b) Certain acquisitions of assets. No acquisition of the goods or realty of an entity (except for entities described in paragraph (a) of this section) shall be made “in the ordinary course of busi­ ness” within the meaning of section 7A(c)(l), if, as a result thereof, the ac­ quiring person will hold all or substan­ tially all of the assets of that entity or an operating division thereof. § 802.6 Federal agency approval. For the purposes of section 7A (c)(6) and (c)(8), the term “information and documentary material” includes one copy of all documents, application forms, and all written submissions of any type whatsoever. In lieu of provid­ ing all such information and documen­ tary material, or any portion thereof, one copy of an index describing such information and documentary materi­ al may be provided, together with a certification that any such informa­ tion or documentary material not pro­ vided will be provided within 10 calen­ dar days upon request by the Federal Trade Commission or Assistant Attor­ ney General, or a delegated official of either. Any material submitted pursu­ ant to this section shall be submitted to the offices specified in § 803.10(c). § 802.8 Certain supervisory acquisitions. A merger, consolidation, purchase of assets, or acquisition requiring agency approval under sections 403 or 408(e) of the National Housing Act, 12 U.S.C. 1726, 1730a(e), or under section 5 of the Home Owners’ Loan Act of 1933, 12 U.S.C. 1464 shall be exempt from the requirements of the Act, including specifically the filing requirement of section 7A(c)(8), it the agency whose approval is required finds that approv­ al of such merger, consolidation, pur­ chase of assets, or acquisition is neces­ sary to prevent the probable failure of one of the institutions involved. § 802.9 Acquisition solely for the purpose of investment.

An acquisition of voting securities shall be exempt from the require­ ments of the act pursuant to section 7A(c)(9) if made solely for the purpose of investment and if, as a result of the acquisition, the acquiring person would hold ten percent or less of the outstanding voting securities of the issuer, regardless of the dollar value of voting securities so acquired or held. E xam ples:

1.

S uppose th a t acquiring p erso n “A ” acquires 6 p e rcen t of th e voting secu rities of issuer X , valued a t $30 m illion. If th e acquisition is solely fo r th e purpose of in v estm en t, it is ex em p t u n d e r section 7A(c)(9).

2. A fter th e acquisition in exam ple 1, “A” decides to acquire a n ad d itio n al 7 p ercen t of th e voting secu rities of X . R egardless of “A” ’s in ten tio n s, th e acquisitio n is no t ex em p t u n d e r section 7A(c)(9). 3. A fter th e acquisition in exam ple 1, ac­ q u irin g perso n “A ” decides to p artic ip a te in th e m an ag em en t of issuer X . A ny subse­ q u e n t acquisitions of X stock by“A” would n o t be ex em p t u n d e r section 7A(c)(9). § 802.10 Stock dividends and splits. The acquisition of voting securities, pursuant to a stock split or pro rata stock dividend, shall be exempt from the requirements of the act under sec­ tion 7A(c)(10).

§ 802.20 Minimum dollar value. An acquisition which would be sub­ ject to the requirements of the act and which satisfies section 7A(a)(3)(A), but FEDERAL REGISTER, V O L 43, NO . 147— M O N D AY, JULY 31, 1978

Page 257

which does not satisfy section 7A(a)(3)(B), shall be exempt from the requirements of the act if as a result of the acquisition the acquiring person would not hold:

(a) Assets of the acquired person values at more than $10 million; of (b) Voting securities which confer control of an issuer which, together with all entities which it controls, has annual net sales or total assets of $10 million or more. Examples: 1, Acquiring person “A” intends to acquire 66 percent of the voting securities of corporation X from X’s ultimate parent entity, W, and “A” holds no other assets or voting securities of acquired persons “W”. X has no subsidiaries and does not have annual net sales or total assets of $10 mil­ lion. If the postacquisition value of “A” ’s holdings of voting securities of X would be $15 million or less, the acquisition would be exempt under this section.

2. Assume that acquiring person “B” holds voting securities of corporation Q valued at $9. million. “B” now intends to acquire assets of Q valued at $7 million. Since the aggregate total amount of voting securities and. assets of “Q” to be held by “B” would exceed $15 million, section 7A(a)(3)(B) would be satisfied, and the acquisition would not be exempt under this section. 3. Assume that acquiring person “C” holds $5 million of the voting securities of corpo­ ration R, an entity included within person “T.” "C” now proposes to acquire $8 million of the assets of corporation S, also an entity included within person “T,” representing 20 percent of “T’s” total assets. Section 7A(a)(3)(B) is not satisfied because the ag­ gregate total amount of “C’s” holdings in acquired person “T” will be less than $15 millidn. Although section 7A(a)(3)(A) would be satisfied by the asset acquisition, it will nevertheless be exempt under paragraph (a) of this section.

§ 802.21 Acquisitions of voting securities not meeting or exceeding greater noti­ fication threshold.

An acquisition of voting securities shall be exempt from the require­ ments of the act if:

(a) The acquiring person and all other persons required by the act and these rules to file notification filed no­ tification with respect to an earlier ac­ quisition of voting securities of the same issuer;

(b) The waiting period with respect to the earlier acquisition has expired, or been terminated pursuant to §803.11, and the acquisition will be consummated within 5 years of such expiration or termination; and (c) The acquisition will not increase the holdings of the acquiring person to meet or exceed a notification threshold greater than the greatest notification threshold met or exceeded in the earlier acquisition. Examples: 1. Corporation A acquires 15 percent of the voting securities of corpora­ tion B and both “A” and “B” file notifica­ tion as required. Within five years of the ex­ piration of the original waiting period, “A” acquires additional voting securities of B but not in an amount sufficient to meet or RULES AND REGULATIONS exceed 25 percent of the voting securities of B. No additional notification is required. 2. In example 1, “A” continues to acquire B’s securities. Before “A’s” holdings meet or exceed 25 percent of B’s outstanding voting securities, “A” and “B” must file notifica­ tion and wait the prescribed period, regard­ less of whether the acquisition occur within five years after the expiration of the earlier waiting period.

3. In example 2, suppose that “A” and “B” file notification at the 25 percent level and that, within 5 years after expiration of the waiting period, “A” continues to acquire voting securities of B. No further notifica­ tion is required until “A” plans to make the acquisition that will give it 50 percent own­ ership of B. (Once “A” holds 50 percent, further acquisitions of voting securities are exempt under section 7A(c)<3). 4. Assume that “C” is an institutional in­ vestor whose prior acquisitions of corpora­ tion D’s voting securities were exempt under § 802.64. “C” now proposes to purchase addi­ tional voting securities of D which will result in holdings exceeding 15 percent and $25 million. “C” and “D” therefore file noti­ fication and observe the waiting period. Under this section within the 5 years follow­ ing the expiration of the waiting period “C” may further increase its holdings in D to any amount below 25 percent (regardless of dollar value) without again filing notifica­ tion. Section 802.64 exempted “C” from filing notification at the thresholds defined in subparagraphs (1) or (2) of § 801.1(h); thereafter, since “C” filed notification with respect to an acquisition which resulted in its holding more than 15 percent of D’s yoting securities valued at more than $25 million, the next notification threshold “greater than the greatest notification threshold met or exceeded in the earlier ac­ quisition” is 25 percent of D’s voting securi­ ties. (See paragraph (c) of this section and § 801.1(h)(3).) 5. This section also allows a person to re­ cross any of the threshold notification levels—15 percent/$15 million, 15 percent if greater than $15 million, 25 and 50 per­ cent—any number of times within 5 years of the expiration of the waiting period follow­ ing notification for that level. Thus, if in ex­ ample 1, “A” had disposed of some voting securities so that it held less than 15 per­ cent of the voting securities of B, and there­ after had increased its holdings to more than 15 percent but less than 25 percent of B, notification would not be required if the increase occurred within 5 years of the expi­ ration of the original waiting period. Simi­ larly, in examples 2 and 3, “A” could de­ crease its holdings below, and then increase its holdings above, 25 percent and 50 per­ cent, respectively without filing notifica­ tion, if done within 5 years of the expiration of those respective waiting periods. § 802.23 Amended or renewed tender offers.

Whenever a tender offer is amended or renewed after notification has been filed by the offeror, no new notifica­ tion shall be required, and the running of the waiting period shall be unaf­ fected, except as follows:

(a) If the number of voting securities to be acquired pursuant to the offer is increased such that a greater notifica­ tion threshold would be met or ex- 33545 ceeded, only the acquiring person need again file notification, but a new wait­ ing period must be observed; (b) If a noncash tender offer is amended to become a cash tender offer, (1) one copy of the amended tender offer shall be filed in the manner prescribed by § 803.10(c) with the Federal Trade Commission and As­ sistant Attorney General, and (2) sub­ ject to the provisions of § 803.10(b)(1), the waiting period shall expiré on the 15th day after the date of receipt (de­ termined in accordance with § 803.10(c)) of the amended tender offer, or on the 30th day after filing notification, whichever is earlier; or (c) Jf a caush tender offer is amended to become a noncash tender offer, (1) one copy of the amended tender offer shall be filed in the manner prescribed by § 803.10(c) with the Federal Trade Commission and Assistant Attorney General, and (2) subject to the provi­ sions of § 803.10(b)(1), the waiting period shall expire on the 15th day after the date of receipt (as deter­ mined in accordance with § 803.10(c)) of the amended tender offer, or on the 30th day after filing notification, whichever is later.

Examples: 1. Assume that corporation A makes a tender offer for 20 percent of the voting securities of corporation B and that “A” files notification. Under this section, if A subsequently amends its tender offer only as to the amount of consideration offered, the waiting period so commenced is not af­ fected, and no new notification need be filed.

2. In the previous example, assume that A makes an amended tender offer for 27 per­ cent of the voting securities of B. Since a new notification threshold will be crossed, this section requires that “A” must again file notification and observe a new waiting period. Paragraph (a) of this section, howev­ er, provides that “B” need not file notifica­ tion again.

* 3. Assume that “A” makes a tender offer for shares of corporation B. “A” includes its voting securities as part of the considera­ tion. “A” files notification. Pive days later, “A” changes its tender offer to a cash tender offer, and on the same day files copies of its amended tender offer with the offices designated in § 803.10(c). Under para­ graph (b) of this section, the waiting period expires (unless extended or términated) 15 days after the receipt of the amended offer (on the 25th day after filing notification), since that occurs earlier than the expiration of the original waiting period (which would occur on the 13th day after filing). 4. Assume that “A” makes a cash tender offer for shares of corporation B and files notification. Six days later, “A” amends the tender offer and adds voting securities as consideration, and on the same day files copies of the amended tender offer with the offices designated in § 803.10(c). Under para­ graph (c) of this section, the waiting period expires (unless extended or terminated) on the 13 th day following the date of filing of notification (determined under § 803.10(c)), since that occurs later than the 15th day after receipt of the amended tender offer (which would occur on the 21st day). FEDERAL REGISTER, V O L 43, NO . 147— M O N D AY, JULY 31, 1978

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33546 § 802.30 Intra-person transactions. An acquisition (other than the for­ mation of a joint venture or other cor­ poration the voting securities of which will be held by two or more persons) in which, by reason of holdings of voting securities, the acquiring and acquired persons are (or as a result of forma­ tion of a wholly owned entity will be) the same person, shall be exempt from the requirements of the act. Examples: t, Corporation A merges its two wholly owned subsidiaries SI and S2. The transaction is exempt under this section. 2. Corporation B creates a new wholly owned subsidiary.

The transaction is exempt under this section. 3. Corporation A, which controls corpora­ tion B by a contract giving A the power to name a majority of B’s directors, but which holds no voting securities of B, proposes to acquire 15 percent of B’s voting securities. The transaction is not exempt under this section, since “A” and “B” are not the same person “by reason of holdings of voting se­ curities.”

4. Corporation A repurchases a portion of its voting securities in a series of transac­ tions involving numerous sellers. All of these acquisitions are exempt under this section. The redemption or retirement of se­ curities would likewise be exempt under this section.

5. Corporations A and B (which are not in­ cluded within the same person) form a new corporation, C. A and B will each hold C’s voting securities upon formation. This sec­ tion is inapplicable, and the acquisitions of C’s voting securities by A and B are not exempt.

§ 802.31 Acquisitions of convertible voting securities.

Acquisitions of convertible voting se­ curities shall be exempt from the re­ quirements of the act.

Example: This section applies regardless of the dollar value of the convertible voting securities held or to be acquired and even though they may be converted into 15 per­ cent or more of the issuer’s voting securi­ ties. Note, however, that subsequent conver­ sions of convertible voting securities may be subject to the requirements of the act. See § 801.32.

§ 802.40 Exempt formation of joint ven­ ture or other corporations. Acquisitions of the voting securities of a joint venture or other corporation at the time of formation under § 801.40 shall be exempt from the re­ quirements of the act if the joint ven­ ture or other corporation will be not for profit within the meaning of Sec­ tions 501(c)(l)-(4), (6)—( 15), (17)-(20) or (d) of the Internal Revenue Code. § 802.41 Joint venture or other corpora­ tions at time of formation. Whenever any person(s) contribut­ ing to the formation of a joint venture or other corporation are subject to the requirements of the act by reason of § 801.40, the joint venture or other cor- RULES AND REGULATIONS poration need not file the notification required by the act and § 803.1. Examples: 1. Corporations A and B, each having sales of $100 million, each propose to contribute $10 million in cash in exchange for 50 percent of the voting securities of a new corporation, N. Under this section, the new corporation need not file notification, although both “A” and “B” must do so and observe the waiting period prior to receiving any voting securities of N. 2. In addition to the facts in example 1 above, A and B have agreed that upon cre­ ation N will purchase 100 percent of the voting securities of corporation C for $15 million. Because N’s purchase of C is not a transaction in connection with N’s forma­ tion, and because in any event C is not a contributor to the formation of N, “A,” “B” and “C” must file with respect to the pro­ posed acquisition of C and must observe the waiting period.

§ 802.50 Acquisitions of foreign assets or of voting securities of a foreign issuer by United States persons. (a) Assets. In a transaction in which assets located outside the United States are being acquired by a U.S. person:

(1) The acquisition of assets located outside the United States, to which no sales in or into the United States are attributable, shall be exempt from the requirements of the act; and (2) The acquisition of assets located outride the United States, to which sales in or into the United States are attributable, shall be exempt from the requirements of the ' act unless as a result of the acquisition the acquiring person would hold assets of the ac­ quired person to which such sales ag­ gregating $10 million or more during the acquired person’s most recent fiscal year were attributable. Examples: 1. Assume that “A” and “B” are both U.S. persons. “A” proposes selling to “B” a manufacturing plant located abroad. Sales in- or into the United States attributable to the plant totaled $8 million in the most recent fiscal year. The transac­ tion is exempt under this paragraph. 2. Sixty days after the transaction in ex­ ample 1, “A” proposes to sell to “B” a second manufacturing plant located abroad; sales in or into the United States attributa­ ble to this plant totaled $5 million in the most recent fiscal year. Since “B” would be acquiring the second plant within 180 days of the first plant, both plants would be con­ sidered assets of “A” now held by “B.” See § 801.13(b)(2). Since the total annual sales in or into the United States exceed $10 million, the acquisition of the second plant would not be exempt under this paragraph. (b) Voting securities. An acquisition of voting securities of a foreign issuer by a U.S. person shall be exempt from the requirements of the act unless the issuer (including all entities controlled by the issuer) either:

(1) Holds assets located in the United States (other than investment assets and voting or nonvoting securi­ ties of another person) having an ag­ gregate book value of $10 million or more; or (2) Made aggregate sales in or into the United States of $10 million or more in its most recent fiscal year. Example: "A,” a U.S. person, is to acquire the voting securities of C, a foreign issuer. C has no assets in the United-States, but made aggregate sales into the United States of $12 million in the most recent fiscal year. The transaction is not exempt under this sec­ tion.

§ 802.51 Acquisitions by foreign persons. An acquisition by a foreign person shall be exempt from the require­ ments of the act if:

(a) The acquisition is of assets locat­ ed outside the United States; (b) The acquisition is of voting secu­ rities of a foreign issuer, and will not confer control of:

(1) An issuer which holds assets lo­ cated in the United States (other than investment assets) having an aggre­ gate book value of $10 million or more, or (2) A U.S. issuer with annual net sales or total assets of $10 million or more;

(c) The acquisition is of less than $10 million of assets located in the United states (other than investment assets); or (d) The acquired person is also a for­ eign person, the aggregate annual sales of the acquiring and acquired persons in or into the United States are less than $110 million, and the ag­ gregate total assets of the acquiring and acquired persons located in the United States (other than investment assets) are less than $110 million. Examples: 1. Assume that “A” and “B” are foreign persons with aggregate annual sales in or into the United States of $200 million. If “A” acquires the assets of “B,” and if no assets in the United States or voting securities of U.S. issuers will be ac­ quired, the transaction is exempt under paragraphs (a) and (c).

2. In example 1, assume that “A” is acquir­ ing “B’s” stock and that included within “B” is issuer C, a U.S. issuer whose total assets are valued at $12 million. Since C’s voting securities will be acquired indirectly, and since “A” thus will be acquiring control of a U.S. issuer with total assets of more than $10 million, the acquisition cannot be exempt under this section. 3. In the previous examples, assume that “A” is a U.S. person. This section does not apply, since the acquiring person must be a foreign person.

§ 802.52 Acquisitions by or from foreign governmental corporations. An acquisition shall be exempt from the requirements of the act if: (a) The ultimate parent entity of either the acquiring person or the ac­ quired person is controlled by a for­ eign state, foreign government, or agency thereof; and FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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(b) The acquisition is of assets locat­ ed within that foreign state or of voting securities of an issuer organized under the laws of that state. Example: The government of foreign country X has decided to sell assets of its wholly owned corporation, B, all of which are located in foreign country X. The buyer is “A,” a U.S. person. Regardless of the ag­ gregate annual sales in or into the United States attributable to the assets of B, the transaction is exempt under this section. (If such aggregate annual sales were less than $10 million, the transaction would also be exempt under § 802.50.) §802.53 Certain foreign banking transac­ tions.

An acquisition which requires the consent or approval of the Board of Governors of the Federal Reserve System under section 25 or section 25(a) of the Federal Reserve Act, 12 U.S.C. 601, 615, shall be exempt from the requirements of the act if copies of all information and documentary ma­ terial filed with the Board of Gover­ nors are contemporaneously filed with the Federal Trade Commission and As­ sistant Attorney General at least 30 days prior to consummation of the ac­ quisition. In lieu of such information and documentary material or any por­ tion thereof, an index describing such material may be provided in the manner authorized by § 802.6. § 802.60 Acquisitions by securities under­ writers.

An acquisition of voting securities by a person acting as a securities under­ writer, in the ordinary course of busi­ ness, and in the process of underwrit­ ing, shall be exempt from the require­ ments of the act.

§ 802.63 Certain acquisitions by creditors and insurers.

(a) Creditors. An acquisition of col­ lateral or receivables, or an acquisition in foreclosure, or upon default, or in connection with the establishment of a lease financing, or in connection with a bona fide debt work-out shall be exempt from the requirements of the act if made by a creditor in a bona fide credit transaction entered into in the ordinary course of the creditor’s business.

(b) Insurers. An acquisition pursuant to a condition in a contract of insur­ ance relating to fidelity, surety, or cas­ ualty obligations shall be exempt from the requirements of the act if made by an insurer in the ordinary course of business.

Examples: 1. A bank makes a loan and takes actual or constructive possession of collateral in any form. Since the bank is not the beneficial owner of the collateral, the bank’s receipt of it is not an acquisition which is subject to the requirements of thè act. However, if upon default the bank be­ comes the beneficial owner of the collateral, RULES AND REGULATIONS that acquisition is exempt under this sec­ tion.

2.

This section exempts only the acquisi­ tion by the creditor or insurer, and not the subsequent disposition of the assets or voting securities. If a creditor or insurer sells voting securities or assets that have come into its possession in a transaction which is exempt under this section, the re­ quirements of the act may apply to that dis­ position.

§ 802.64 Acquisitions of voting securities by certain institutional investors. (a) Institutional investor. For pur­ poses of this section, the term “institu­ tional investor” means any entity of the following type:

(1) A bank within the meaning of 15 U.S.C. 80b-2(a)(2);

(2) Savings bank;

(3) Savings and loan or building and loan company or association; (4) Trust company;

(5) Insurance company;

(6) Investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1’ et seq.);

(7) Finance company;

(8) Broker-dealer within the mean­ ing of 15 U.S.C. 78c(a)(4) or (a)(5); (9) Small Business Investment Com­ pany or Minority Enterprise Small Business Investment Company regu­ lated by the U.S. Small Business Ad­ ministration pursuant to 15 U.S.C. 662; (10) A stock bonus, pension, or profit-sharing trust qualified under section 401 of the Internal Revenue Code;

(11) Bank holding company within the meaning of 12 U.S.C. 1841; (12) An entity which is controlled di­ rectly or indirectly by an institutional investor and the activities of which are in the ordinary course of business of the institutional investor; (13) An entity which may supply in­ cidental services to entities which it controls directly or indirectly but which performs no operating func­ tions, and which is otherwise engaged only in holding controlling interests in institutiimal investors; or (14) A nonprofit entity within the meaning of sections 501(c)(l)-(4), (6)- (15), (17)-(20), or (d) of the Internal Revenue Code.

(b) Exemption. An acquisition of voting securities shall be exempt from the requirements of the act, except as provided in paragraph (c) of this sec­ tion, if:

(1) Made directly by an institutional investor;

(2) Made in the ordinary course of business;

(3) Made solely for the purpose of investment;

<4) As a result of the acquisition the acquiring person would not control the issuer; and 33547 (5) As a result of the acquisition the acquiring person would hold either: (i) Fifteen percent or less of the out­ standing voting securities of the issurer; or (ii) Voting securities of the issuer valued at $25 million or less. (c) Exception to exemption. Notwith­ standing paragraph (b) of this section: (1) No acquisition of voting securi­ ties of an. institutional investor of the same type as any entity included within the acquiring person shall be exempt under this section; and (2) No acquisition by an institutional investor shall be exempt under this section if any entity included within the acquiring person which is not an institutional investor holds any voting securities of the issuer whose voting securities are to be acquired. Examples: 1. Assume that A and its sub­ sidiary, B, are both institutional investors as defined in paragraph (a) of this section, that X is not, and that the conditions set forth in subparagraphs (2), (3) and (4) of paragraph (b) of this section are satisfied. Either A or B may acquire voting securities of X worth in excess of $25 million as long as the aggregate amount held by person “A” as a result of the acquisition does not equal or exceed 15 percent of X’s outstanding voting securities. If the aggregate holdings would equal or exceed 15 percent, “A” may acquire no more' than* $25 million worth of voting securities without being subject to the requirements of the act. 2. In example 1, assume that B plans to make the acquisition, but that corporation B’s parent, corporation A, is not an institu­ tional investor and is engaged in manufac­ turing. Subparagraph (c)(2) provides that acquisitions by B can never be exempt under this section if A owns any amount of X’s voting securities.

3. In example 1, the exemption does not apply if X is also an institutional investor of the same type as either A or B. 4. Assume that H is a holding company which controls a life insurance company, a casualty insurer and a finance company. The life insurance company controls a data processing company which performs ser­ vices for the two insurers. Any acquisition by any of these entities could qualify for ex­ emption under this section. 5. In example 4, if H also controls a manu­ facturing entity, H is not an institutional in­ vestor, and only the acquisitions made by the two insurance companies, the finance company and the data processing company can qualify for the exemption under this section.

§ 802.70 Acquisitions subject to order. An acquisition shall be exempt from the requirements of the act if: (a) The voting securities or assets are to be acquired from an entity or­ dered to divest such voting securities or assets by order of the Federal Trade Commission or of any Federal court in an action brought by the Fed­ eral Trade Commission or the Depart­ ment of Justice; or (b) The acquiring person or entity is subject to an order of the Federal FEDERAL REGISTER, V O L 43, NO . 147— M O N D AY, JULY 31, 1978

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33548 Trade Commission or of any Federal court requiring prior approval of such acquisition by the Federal Trade Com­ mission, such court, or the Depart­ ment of Justice, and such approval has been obtained.

§ 802.71 Acquisitions by gift, intestate suc­ cession or devise, or by irrevocable trust.

Acquisitions resulting from a gift, in­ testate succession, testamentary dispo­ sition or transfer by a settlor to an ir­ revocable trust shall be exempt from the requirements of the act. The Federal Trade Commission pro­ mulgates the Rules contained in this Part (803), and Notification and Report Form set forth in the appendix to this Part (803), pursuant to section 7A(d) of the Clayton Act, 15 U.S.C. 18A(d), as added by section 201 of the Hart-Scott-Rodino Antitrust Improve­ ments Act of 1976, Pub. L. 94-435, 90 Stat. 1390.

PART 803— TRANSMITTAL RULES Sec.

803.1 Notification and Report Form. 803.2 Instructions applicable to Notifica­ tion and Report Form.

803.3 Statement of reasons for noncompli­ ance.

803.4 Foreign persons refusing to file noti­ fication.

803.5 Affidavits required. 803.6 Certification.

803.7 Expiration of notification. 803.10 Running of time.

803.11 Termination of waiting period. 803.20 Requests for additional information or documentary material. 803.21 Additional information shall be sup­ plied within reasonable time. 803.30 Formal and informal interpreta­ tions of requirements under the act and the rules.

803.90 Separability.

Appendix—Antitrust Improvements Act No­ tification and Report Form for Certain Mergers and Acquisitions. A u th o r ity: Sec. 7A(D) of the Clayton Act, 15 U.S.C. 18A(D), as added by sec. 201 of the Hart-Scott-Rodino Antitrust Im­ provements Act of 1976, Pub. L. 94-435, 90 Stat. 1390.

§ 803.1 Notification and Report Form. (a) The notification required by the act shall be the Notification and Report Form set forth in the appendix to this Part (803), as amended from time to time. All acquiring and ac­ quired persons required to file notifi­ cation by the act and these rules shall do so by completing and filing the No­ tification and Report Form, or a pho­ tostatic or other equivalent reproduc­ tion thereof, in accordance with the instructions thereon and these rules. Copies of the Notification and Report Form may be obtained in person from the Public Reference Branch, Room 130, Federal Trade Commission, Sixth Street and Pennsylvania Avenue NW„ RULES AND REGULATIONS Washington, D.C., or by writing to the Premerger Notification Office, Room 303, Federal Trade Commission, Wash­ ington, D.C. 20580.

(b) Any person filing notification may, in addition to the submissions re­ quired by this section, submit any other information or documentary ma­ terial which such person believes will be helpful to the Federal Trade Com­ mission and Assistant Attorney Gener­ al in assessing the impact of the acqui­ sition upon competition. § 803.2 Instructions applicable to Notifica­ tion and Report Form.

(a) The notification required by the act shall be filed by the preacquisition ultimate parent entity, or by any entity included within the person au­ thorized by such preacquisition ulti­ mate parent entity to file notification on its behalf. In the case of a natural person required by the act to file noti­ fication, such notification may be filed by his or her legal representative: Pro­ vided however, That notwithstanding § 801.1(c)(2) and §801.2, only one noti­ fication shall be filed by or on behalf of a natural person, spouse and minor children with respect to an acquisition as a result of which more than one Such natural person will hold voting securities of the same issuer. Example: Jane Doe, her husband and minor child collectively hold more than 50 percent of the shares of family corporation F. Therefore, Jane Doe (or her husband or minor child) is the “ultimate parent entity” of a “person” composed to herself (or her husband or minor child) and F; see para­ graphs (a)(3), (b) and (c)(2) of § 801.1. If cor­ poration F is to acquire corporation X, under this paragraph only one notification is to be filed by Jane Doe, her husband and minor child collectively. (b) (1) Except as provided in subpara­ graph (2) of this paragraph and para­ graph (c) of this section, items 5-9 and the Appendix to the Notification and Report Form must be completed— (i) ^By acquiring persons, with re­ spect to all entities included within the acquiring person;

(ii) By acquired persons, in the case of an acquisition of assets, only with respect to the assets to be acquired; (iii) By acquired persons, in the case of an acquisition of voting securities, with respect to only the issuer whose voting securities are being acquired, and all entities controlled by such issuer; and (iv) By persons which are both ac­ quiring and acquired persons, sepa­ rately in the manner that would be re­ quired of acquiring and acquired per­ sons under this paragraph, if differ­ ent.

<2) For purposes of items 7-9 of the Notification and Report Form, the ac­ quiring person shall regard the ac­ quired person in the manner described in subdivisions (ii) and (iii) of the pre­ vious subparagraph.

Example: Person “A” is comprised of enti­ ties separately engaged in grocery retailing, auto rental, and coal mining. Person “B” is comprised of entities separately engaged in wholesale magazine distribution, auto rental and book publishing. “A” proposes to pur­ chase 100 percent of the voting securities of “B” ’s book publishing subsidiary. For pur­ poses of item 5, under clause (b)(l)(i), “A” reports, the activities of all its entities; under clause (bXIXiii), “B” reports only the operations of its book publishing subsidiary. For purposes of items 7-9, under subpara­ graph (2) of this paragraph “A” must regard “B” as consisting only of its book publishing subsidiary, and must disregard the fact that “A” and “B” are both engaged in the auto rental business.

(c) In response to items 5, 7, 8, and 9 and the appendix to the Notification and Report Form— (1) Information shall be supplied only with respect to operations con­ ducted within the United States; and (2) Information need not be supplied with respect to assets or voting securi­ ties to be acquired, the acquisition of which is exempt from the require­ ments of the act.

(d) The term “dollar revenues,” as used in the Notification and Report Form, means value of shipments for manufacturing operations, and sales, receipts, revenues, or other appropri­ ate dollar value measure for oper­ ations other than manufacturing, f.o.b. the plant or establishment less returns, after discounts and allowances and excluding freight charges and excise taxes. Dollar rev­ enues including delivery may be sup­ plied if delivery is an integral part of the sales price. Dollar revenues in­ clude interplant transfers. § 803.3 Statement of reasons for noncom­ pliance.

A complete response shall be sup­ plied to each item on the Notification and Report Form and to any request for additional information pursuant to section 7A(e) and §803.20. Whenever thé person filing notification is unable to supply a complete response, that person shall provide, for each item for which less than à complete response has been supplied, a statement of rea­ sons for noncompliance which in­ cludes at least the following informa­ tion:

(a) Why the person is unable to supply a complete response; (b) What information would have been required for a complete response; (c) Who, if anyone, has the required information, and a description of all efforts made to obtain it. § 803.4 Foreign persons refusing to file notification.

(a) In an acquisition to which §801,30 does not apply, and in which FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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no assets (other than investment assets) located in the United States and no voting securities of a United States issuer will be acquired directly or indirectly, if a foreign acquired person refuses to file notification, then any other person which is a party to the acquisition may file noti­ fication on behalf of the foreign person. Such notification shall consti­ tute the notification required of the foreign person by the act and these rules.

(b) Any person filing on behalf of the foreign person pursuant to this section must state in the affidavit re­ quired by § 803.5(b) that such foreign person has refused to file notification and must explain all efforts made by the person filing on behalf of the for­ eign person to obtain compliance with the act and these rules by such foreign person.

(c) Any notification filed on behalf of a foreign person pursuant to this section must contain all information and documentary material reasonably available to the person filing on behalf of the foreign person which such for­ eign person would be required to pro­ vide. Whenever information or docu­ mentary material is not reasonably available, the person filing on behalf of the foreign person shall so indicate on the Notification and Report Form, and need not supply the statement of reasons for noncompliance required by § 803.3.

(d) Any foreign person on whose behalf notification has been filed by another person pursuant to this sec­ tion shall be a “person filing notifica­ tion” for purposes of the act and these rules. Nothing in this section shall exempt a foreign person from the re­ quirements of the act or these rules with respect to a request for addition­ al information or an extension of the waiting period pursuant to section 7A(e) and these rules.

§ 803.5 Affidavits required. (a)(1) Section 801.30 acquisitions. For acquisitions to which §801.30 ap­ plies, the notification required by the act from each acquiring person shall contain an affidavit, attached to the front of the notification, attesting that the issuer whose voting securities are to be acquired has received notice in writing by certified or registered mail, by wire or by hand delivery, at its principal executive offices, of: (i) The identity of the acquiring person;

(ii) The fact that the acquiring person intends to acquire voting secu­ rities of the issuer;

(iii) The. specific classes of voting and nonvoting securities of the issuer, and the number of securities of each such class sought to be acquired; RULES AND REGULATIONS (iv) The fact that the acquisition may be subject to the act, and that the acquiring person will file notification under the act with the Federal Trade Commission and Assistant Attorney General;

(v) The anticipated date of receipt of such notification under § 803.10(c); and (vi) The fact that the person within which the issuer is included may be re­ quired to file notification under the act.

(2) The affidavit required by this paragraph must also state the good faith intention of the person filing no­ tification to make the acquisition, and, in the case of a tender offer, that the intention to make the tender offer has been publicly announced. Example: This subparagraph permits the tender offeror to file notification at any time after the intention to make the tender offer has been publicly announced. (b) Non-section 801.30 acquisitions. For acquisitions to which § 801.30 does not apply, the notification required by the act shall contain an affidavit, at­ tached to the front of the notification, attesting that a contract, agreement in principle or letter of intent to merge or acquire has been executed. § 803.6 Certification.

(a) The notification required by the act shall be certified: (1) In the case of a partnership, by any general partner thereof; (2) In the case of a corporation, by any officer or director thereof; (3) In the case of a person lacking officers, directors, or partners, by any individual exercising similar functions; (4) In the case of a natural person, by such natural person or his or her legal representative.

(b) Additional information or docu­ mentary material submitted in re­ sponse to a request pursuant to sec­ tion 7A(e) and § 803.20 shall be accom­ panied by a certification in the format appearing at the end of the Notifica­ tion and Report Form, completed in accordance with paragraph (a) of this section by the person or individual to whom it was directed.

(c) In all cases, the certifying indi­ vidual must possess actual authority to make the certification on behalf of the person filing notification. § 803.7 Expiration of notification. Notification with respect to an ac­ quisition shall expire 1 year following the expiration of the waiting period. If the acquiring person’s holdings do not, within such time period, meet or exceed the notification threshold with respect to which the notification was filed, the requirements of the act must thereafter be observed with respect to any notification threshold not met or exceeded.

33549 Example: A files notification that 26 per­ cent of the voting securities of corporation B are to be acquired. One year after the ex­ piration of the waiting period, A has ac­ quired only 22 percent of B’s voting securi­ ties. Although §802.21 will permit “A” to purchase any amount of B’s voting securi­ ties short of 25 percent within 5 years from the expiration of the waiting period, A’s holdings may not meet or exceed the 25 per­ cent notification threshold without "A” and “B” again filing notification and observing a waiting period.

§ 803.10 Running of time. (a) Beginning of waiting period. The waiting period required by the act shall begin on the date of receipt of the notification required by the act, in the manner provided by these rules (or, if such notification is not complet­ ed, the notification to the extent com­ pleted and a statement of the reasons for such noncompliance in accordance with § 803.3) from:

(1) In the case of acquisitions to which §801.30 applies, the acquiring person;

(2) In the case of all other acquisi­ tions, all persons required by the act and these rules to file notification. (b) Expiration, of waiting period. (1) For purposes of section 7A(b)(l)(B), the waiting period shall expire at 11:59 p.m. Eastern Time on the 13th (or in the case of a cash tender offer, the 15th) calendar day (or if §802.23 ap­ plies, such other day as that section may provide) following the beginning of the waiting period as determined under paragraph (a) of this section, unless extended pursuant to section 7A(e) and §803.20, or section 7A(g)(2), or unless terminated pursuant to sec­ tion 7A(b)(2) and § 803.11. (2) Unless further extended pursu­ ant to section 7A(g)(2), or terminated pursuant to section 7A(b)(2) and §803.11, any waiting period which has been extended pursuant to section 7A(e)(2) and §803.20 shall expire at 11:59 p.m. Eastern Time— (i) On the 20th (or, in the case of a cash tender offer, the 10th) day fol­ lowing the date of receipt of all addi­ tional information or documentary material requested from all persons to whom such requests have been direct­ ed (or, if a request is not fully com­ plied with, the information and docu­ mentary material submitted and a statement of the reasons for such noncompliance in accordance with § 803.3), by the Federal Trade Commission or Assistant Attorney General, whichever requested additional information or documentary material, at the office designated in paragraph (c), or (ii) As provided in subparagraph (1) of this paragraph, whichever is later. (c) (1) Date of receipt and means of delivery. For purposes of this section the date of receipt shall be the date on which delivery is effected to the desig- FEDERAL REGISTER, VOL. 43, NO . 147— M O N D AY, JULY 31, 1978

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3355® nated offices < Premerger Notification Office, Room 303, Federal Trade Com­ mission, Washington, D.C. 20580, and Director of Operations, Antitrust Divi­ sion, Room 3214, Department of Jus­ tice, Washington, D.C. 20530) during normal - business hours. Delivery ef­ fected after 5 p m. eastern time on a regular business day, or at any time on any day other than a regular business day, shall be deemed effected on the next following regular business day. Delivery should be effected directly to the designated office(s), either by hand or by certified or registered mail. If delivery of all required filings to all offices required to receive such filings is not effected on the same date, the date of receipt shall be the latest of the dates on which delivery is effect­ ed.

Examples: 1. In an acquisition other than a cash tender offer, assume that a request for additional information is issued to a person on the second day of the waiting period, and that the person supplies the re­ sponse 5 days later. Under subparagraph (bKSXHI, the waiting period remains in effect through the 30th day, even though the 20th day after receipt of such additional inf ormation would occur earlier. €2) Deficient filings. If notification or a response to a request for addition­ al information or documentary materi­ al received by the Commission or As­ sistant Attorney General does not comply with these rules, the Commis­ sion or the Assistant Attorney General shall promptly notify the person filing such notification or response of the deficiencies in such filing, and the date of receipt shall be the date on which a filing which complies with these rules is received. § 803.11 Termination of waiting period. (a) Except as provided in paragraph (c) of this section, no waiting period shall be terminated pursuant to sec­ tion 7A(b)(2) unless— <1) All notifications required to be filed with respect to the acquisition by the act and these rules f or, if such no­ tification is not completed, the notifi­ cation to the extent completed and a statement of the reasons for such noncompliance in accordance with § 803.3) have been received, <2) It has been determined that no additional information or documen­ tary material pursuant to section 7A(e) and § 803.20 will be requested, or, if such additional information or documentary material has been re­ quested, it (or, if a request is not fully complied with, the information and documentary material submitted and a statement of the reasons for such noncompliance in accordance with §803.3) has been received, and (3) The Federal Trade Commission and the Assistant Attorney General have concluded that neither intends to RULES AND REGULATIONS take any further action within the watting period.

(6) Any request for additional infor­ mation or documentary material pur­ suant to section 7A(e) and § £03.20 shall constitute a denial of all pending requests for termination of the wait­ ing period.

(c) The Federal Trade Commission and the Assistant Attorney General may in their discretion terminate a waiting period upon the written re­ quest of any person filing notification, or, notwithstanding paragraph (a) of this section, sua sponte. A request for termination of the waiting period shall foe sent to the offices designated in § 803.10(c). Termination shall be effec­ tive upon notice to any requesting person by telephone, and such notice shall be given as soon as ¡possible. .Such notice shall also be confirmed in writ­ ing to each person which has filed no­ tification, and notice thereof shall be published in the F ederal R egister in accordance with section 7A(h)(2). Example: See the example to § 803.20(c). § 803.20 Requests for additional informa­ tion or documentary material. (a) (1) Persons and individuals sub­ ject to request Pursuant to section 7A(e)(l), the submission of additional information or documentary material relevant to the acquisition may be re­ quired from one or more persons re­ quired to Ole notification, and, with respect to each such person, from one or more entities included therein, or from one or more officers, directors, partners, agents, or employees there­ of, if so required by the same request. Example: A request Cor additional infor­ mation may require a corporation and, in addition, a named officer or employee to provide certain information or documents, if both ike corporation and the officer or em­ ployee are named in the same request. See subparagraph (b)(3) of this section. (2) All the information and docu­ mentary material required to he sub­ mitted pursuant to a request under paragraph (aXl) of this section shall be supplied to the Commission or to the Assistant Attorney General, whichever made such request, at the office designated in § 803.10(c), or, if such request is not fully complied with, a statement of reasons for noncompliance pursuant to § 803.3 shall be provided for each item or portion of such request which is not fully com­ plied with.

(b) (1) Who may require submission. A request for additional information or documentary material with respect to an acquisition may be issued by the Federal Trade Commission or its dés­ ignas, or by the Assistant Attorney General or his or her designee, but not by both to the same person, any enti­ ties included therein, or any officers, directors, partners, agents, or employ­ ees of that person.

(2) When request effective. A request for additional information or docu­ mentary material shall be effective— (i) In the case of a written request, upon receipt of the request by the ulti­ mate parent entity of the person to which the request is directed, (or, if another entity included within the person filed notification pursuant to § 803.2(a), then by such entity ), within the original 30-day (or, in the case of a cash tender offer, 15-day) waiting period (or, if §802.23 applies, such other period as that section provides); or (ii) In the case of a request commu­ nicated in person or by telephone, upon communication of the request, provided that a written confirmation of the request is mailed within the original 30-day (or, in the case of a cash tender offer, 15-day) waiting period (or, if § 802.23 applies, such other period as that section provides). The person filing notification shall keep a designated individual reason­ ably available during normal business hours throughout the waiting period through the telephone number sup­ plied on the certification page of the Notification and Report Form. A re­ quest for additional information or documentary material need be commu­ nicated by telephone only to that indi­ vidual. The written confirmation of the request shall be mailed to the ulti­ mate parent entity of the person filing notification, or, if another entity in­ cluded within the person filed notifica­ tion pursuant to § 803.2(a), then to such entity.

(3) Requests to natural persons. A re­ quest addressed to an individual, re­ quiring that he or she submit addition­ al information or documentary materi­ al, shall be transmitted to the person filing notification of which the indi­ vidual is an ultimate parent entity, of­ ficer, director, partner, agent or em­ ployee, and shall be effective as to that individual when effective as to the person filing notification pursuant to subparagraph (2) of this paragraph. A written copy of the request shall also be delivered to the individual by hand, or by registered or certified mail at his or her home or business address. Example: A designee of the Federal Trade Commission sends, by certified letter which is received within the 30-day waiting period, a written request for additional information to corporation W, the ultimate parent entity within a person which filed notifica­ tion. The request is effective under clause (b)(2Xi). If the letter also addressed a re­ quest for documentary material to the sec­ retary of corporation W, a named individu­ al, under .subparagraph (b)(3), the request would likewise be effective as to the individ­ ual upon receipt of the letter by W. In the latter case, the Federal Trade Commission also would send a copy of the request to the FEDERAI REGISTER, V O L 43, N O . 147— M O N D AY, JULY 31, 1978

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Secretary of the corporation at his or her home or business address. (c) Waiting period extended. (1) During the time period when a request for additional information or docu­ mentary material remains outstanding to any person other than, in the case of a tender offer, the person whose voting securities are sought to be ac­ quired by the tender offeror (or any officer, director, partner, agent or em­ ployee thereof), the waiting period shall remain in effect, even though the waiting period would have expired (see § 803.10(b)) if no such request had been made.

(2) A request for additional informa­ tion or documentary material to any person other than, in the case of a tender offer, the person whose voting securities are being acquired pursuant to the tender offer (or any officer, di­ rector, partner, agent or employee thereof) shall in every instance extend the waiting period for a period of 20 (or, in the case of a cash tender offer, 10) calendar days from the date of re­ ceipt (as determined under § 803.10) of the additional information or docu­ mentary material requested. Example: Acquiring person “A” desires to acquire voting securities of corporation X on a securities exchange, and files notifica­ tion. Under § 80L30, the waiting period begins upon filing by “A,” and “X” must file within 15 days thereafter. Assume that before the end of the waiting period, the As­ sistant Attorney General issues a request for additional information to "X.” Since the transaction is not a tender offer, under subparagraph (c)(1) the waiting period is ex­ tended until “X” supplies the requested in­ formation; under subparagraph (c)(2), the waiting period is extended for 20 days beyond the date on which “X” responds. RULES AND REGULATIONS Note that under § 803.21 “X” is obliged to respond to the request within a reasonable time; nevertheless, the Federal Trade Com­ mission and Assistant Attorney General could, notwithstanding the pendency of the request for additional information, termi­ nate the waiting period sua sponte pursuant to § 803.11(c).

(d)(1) Identification of requests. Every request for additional informa­ tion or documentary material shall be clearly identified as such, whether communicated in person, by telephone or in writing, and shall clearly identify the person, entity or entities, or individual(s) to which it is addressed. (2) Request for clarification. No re­ quest for clarification or amplification of a response to any item on the Noti­ fication and Report Form, whether communicated in person, by telephone or in writing, shall be considered a re­ quest for additional information or documentary material within the meaning of section 7A(e) and this sec­ tion.

§ 803.21 Additional information shall be supplied within reasonable time. All additional information or docu­ mentary material requested pursuant to section 7A(e) and §•803.20 (or, if such request is not fully complied with, the information or documentary material submitted and a statement of the reasons for such noncompliance in accordance with §803.3) shall be sup­ plied within a reasonable time. § 803.30 Formal and informal interpreta­ tions of requirements under the Act and the rules.

(a) The Commission staff may con­ sider requests for formal or informal interpretations as to the obligations under the act and these rules of any 33551 party to an acquisition. A request for a formal interpretation shall be made in writing to the offices designated in § 803.10(c), and shall state: (1) All facts which the applicant believes to be ma­ terial, (2) the reasons why the require­ ments of the act are or may be appli­ cable and (3) the question(s) that the applicant wishes resolved. The Com­ mission staff may, in its discretion, render a formal or informal response to any request, however made, or may decline to render such advice. (b) In the sole discretion of the staff, any request for interpretation may be referred to the Commission. (c) Formal interpretations by the Commission staff or by the Commis­ sion shall be rendered with the con­ currence of the Assistant Attorney General or his or her designee. (d) Any formal interpretation shall be without prejudice to the right of either the Commission or the Assist­ ant Attorney General to rescind any such interpretation rendered pursuant to this section. In the event of such re­ scission, the party which requested the interpretation shall be so notified in writing.

(e) The Commission shall publish a summary of formal interpretations by the Commission, and any rescissions thereof, in the Federal Register. § 803.90 Separability.

If any provision of the rules in this Subchapter (H) (including the Notifi­ cation and Report Form) or the appli­ cation of any such provision to any person or circumstances is held inval­ id, neither the other provisions of the rules nor the application of such pro­ vision to other persons or circum­ stances shall be affected thereby. FEDERAL REGISTER, V O L 43, NO. 147;— M O N D AY, JULY 31, 1978

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33552 RULES AND REGULATIONS

Approved by GAO B~180229 (R0516)

PART 603 -- APPENDIX Expires 5-31-81

ANTITRUST IMPROVEMENTS ACT NOTIFICATEON AND REPORT FORM

FOR CERTAIN MERGERS AWD ACQUISTTTONS—

THIS PORM TS REQUIRED BY LAW and must be Filed Separately by each person which, by ceason of a merger, consolida-~ tion or acquisition, is subject to § 7A of the Clayton Act, 15 U.S.C. § 18A, as added by Section 201 of the Hart-Scott- Rodino Antitrust Improvements Act of 1976, Pub, L. No. 94-435, 90 Stat. 1390, and cules promulgated thereunder thereinafter teferred to as “the rules* or by ‘section number). The statute and rules are set forth in the Federal Register at page

# the rules may also be found at 16 CFR Parts 801-03. failure to file this Notification and Report Form, and to observe the cequired waiting period before consummating the acquisition, in accordance with the applicable provisions of 15 U.S.C. § 1@A and the tules, subjects any “person,” as defined in the rules, or any individuals tesponsibdle for noncompliance, to liability for a penalty of not more than $10,000 for each day during which such person is in viclation of 15 U.S.c. § 1BA.

All information and documentary material filed in or with this form ig confidential. {t is exempt from disclosure under the Freedom of information Act, and may be made public onty in an administrative or judicial proceeding, or disclosed to Congress or to a duly authorized committee or subcommittee of Congress.

Complete and ceturn two notarized copies (with one set of Gocumentary attachments) of this Botification and Report Porm to Premerger Notification Office, Bureau of Competition, Room 303, Federal Trade Commission, Washington, D.C. 20580, and three notarized copies (with one set of documentary attachments) to Director of Operations, Antitrust Division, Roam 3214, Department of Justice, Washington, D.C, 20530. ‘The central office for information and assistance with cespect to matters in connection with this Notification and Report Form is Room 303, Federal Trade Commission, Washington, D.C. 20580, Phone (202) 523-3694.

APPTOAYIT

Be sure that the affidavit requiced by § 803.5 is attached to this page.

CASH TENDER OFFERS

If this acquisition is a cash tender offer, check: Z 7

fat. Porm Ce (t/7B) ?

FEDERAL REGISTER, VOL. 43, NO. 147—MONDAY, JULY 31, 1978

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RULES AND REGULATIONS 33553 Notification and Report Form (Part 803 — Appendix) Continued INSTRUCTIONS Each answer should id e n tif y the item to which i t is addressed. Attach -separate a d d itio n a l sh e e ts as necessary in answering each item; each a d d itio n a l sheet should id e n tif y the item to which i t is addressed. Voluntary submissions pursuant to S 803.1(b) should be so i d e n t i f i e d . I f unable to answer any item f u l l y , giv e such information as i s , a v a i l ­ able and explain why the answer is incom plete, as provided by S 80 3 .3 .

I f books and records which provide accurate answers are not a v a ila b le , enter b est estim a tes and in d ic a te the sources or bases of such e s tim a te s. Estimated data should be followed by the n o ta tio n , " est." A ll f in a n c ia l information should be rounded to the n ea rest thousand d o lla r s . All referen ces to "year* refer to calenda'r year. I f the data are not a v a ila b le on a calendar year b a s is , supply the requested data for the f i s c a l year reporting period which most nearly corresponds to the calendar year s p e c i f i e d . Refer­ ences to "most recent year* mean the most recent calendar or f i s c a l year for which the requested information i s a v a ila b le . This N o tific a tio n and Report Form req u ests information regarding d o lla r revenues and l i n e s o f commerce at three le v e ls .

All persons must submit c e r ta in data at the 4 - d i g i t (SIC code) industry l e v e l . To the e x ten t th a t d o lla r revenues are derived from manufacturing o p eration s (SIC major groups 2 0 -3 9 ), data must a ls o be submitted at the 5 - d i g i t product c la s s and 7 - d i g i t product l e v e l s (SIC-based codes)-. -In reporting by " 4 -d ig it (SIC code) industry" you should refer to the 1972 e d it io n of the Standard In d u stria l C l a s s i f i c a t i o n Manual published by the Executive O ffic e of the President, O ffice of Management and Budget.

In reporting information by * 5 - d ig it (SIC-based code) product c la s s ," and by " 7 -d ig it (S-IC-based code) product," you should refer to one or both of the fo llo w in g referen ce p u b lic a tio n s published by the U.S. Bureau of the Census:

(a) Numerical L is t of Manufactured Products,' 1972 Census o f Manufactures (MC72-1.2) (New 1972 SIC b a s is ) ; (b) Volume I I , "Industry S t a t i s t i c s , ” 1972 Census of Manufactures. In reporting inform»tion by " 5 -d ig it (SIC-based code) product cla ss" you may a ls o refer to the code appearing in the "Product Class Reference List" shown in the In str u c tio n Manual for the Annual Survey of Manufactures. In reporting information by " 7 -d ig it (SIC-based code) p rod u ct*you may a lso refer to the a p p lica b le "Product Reference L ists" appearing in the In str u c tio n Manual of the various Current In d u stria l Reports surveys (monthly, q u a rte rly , or annual) conducted by the U.S. Bureau of the Census.

For product codes ending in 00, submit inform ation by product as l i s t e d in Appendix A to the Numerical List of Manufactured Products c ite d above.

In responding to items 5, 7, 8 and 9 and the Insurance Appendix - - — supply information only with resp ect to op eration s conducted w ithin the United S t a t e s , in clu d in g i t s commonwealths, t e r r i t o r i e s , p o sse ssio n s and the D i s t r i c t of Columbia. See SS 801. l ( k ) , 8 0 3 .2 ( c ) ( 1 ) ;

— information need not be supplied with resp ect to A ssets or vo ting s e c u r i t i e s cu rren tly being acquired, the a c q u isi­ tion of which i s exempt under the s t a t u t e or r u le s . See S 8 0 3 .2 ( c ) ( 2 ) .

In responding to items 5-9 and the Insurance Appendix, lim ited or separate responses may be required of a person f i l i n g n o tif ic a t io n .

See 5 8 0 3 .2 (b ).

FEDERAL REGISTER, V O L 43, NO . 147— M O N D AY, JULY 31, 1978

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33554 RULES AND REGULATIONS N o tifica tio n and Report For* (Part 803 - - Appendix) Continued Name___________________________________________________ _____________ Date If Corporation:

S ta te of in corp oration_____________________ Daté of in corporation______________________ If partnership or other:

J u r is d ic t io n under which formed Date of formation 1(e) Check whether data furnished by:

calendar year / ________ / f i s c a l year / / If f i s c a l yea r, s p e c ify period:

from______________(month/day) to ______________ (month/day). 1 (f) I f the person f i l i n g n o t i f i c a t i o n is an acquiring person, and i f the e n t i t y making the the a c q u is itio n is not the p r e -a c q u isitio n u ltim ate parent e n t i t y l i s t e d in item 1(c) above, provide the information requested below with resp ect to the e n t i t y making the a c q u is it io n . I f the person f i l i n g n o t i f i c a t i o n i s an acquired person, and i f the e n t i t y whose a s s e t s or v o ting s e c u r i t i e s are being acquired is not the p r e -a c q u isitio n u ltim ate parent e n t i t y l i s t e d in item 1(c) above, provide the information requested below with resp ect to the e n t i t y whose a s s e t s or voting s e c u r i t i e s are being acquired. ( i ) Name and m ailing address of i t s headquarters o f f i c e ; ( i i ) I f a corp oration , the date and s t a t e of incorp oration; ( i i i ) The percentage of i t s v o ting s e c u r i t i e s held by the e n t i t y named in item 1(c) above. ( I f co n trol is e f fe c te d by means other than the d ir e c t holding of the e n t i t y ' s voting s e c u r i t i e s , d esc rib e the interme­ d ia r ie s or the con tra ct through which co n trol is e f f e c t e d ; see $ 8 0 1 .1 ( b ) .) N o tific a tio n and Report Form (Part - - 803 Appendix) Continued Name________________________________________________________________ Date 2(e) D escription of voting s e c u r i t i e s to be a cq u ired . Furnish the follow in g information se p a r a tely for each issuer whose voting s e c u r i t i e s ( other than c o n v e r tib le voting s e c u r i t i e s ) w i l l be acquired in the a c q u isitio n : ( i ) L ist each c la s s of voting se c u r ity (in clu d in g co n v ertib le vo ting s e c u r i t i e s ) which w ill be outstanding after the a c q u isitio n has been completed; 1 / a lso l i s t each c l a s s of non-voting s e c u r ity which w i l l be acquired in the a c q u isitio n ;

( i i ) Total number of each c l a s s o f se c u r ity l i s t e d under ( i ) above which w i l l be outstanding a f te r the a c q u isitio n has been completed;

( i i i ) Total number o f each c l a s s o f s e c u r ity l i s t e d under ( i ) above which w i l l be acquired in t h i s a c q u is it io n ; 2 / ( iv ) Id en tity of each person acquiring any s e c u r i t i e s of any c l a s s l i s t e d under ( i ) above; 2 / (v) Dollar value of s e c u r i t i e s of each c l a s s l i s t e d under ( i ) above to be acquired in t h i s a c q u is it io n (see S 801.10); 2 / ( v i) Total number of each c l a s s o f se c u r ity l i s t e d under ( i ) above which w i l l be held by acquiring p erson(s) a fter the a c q u isitio n has been completed; 2/ and ( v i i ) Percentage o f each c l a s s of se c u r ity l i s t e d under ( v i) above which w i l l be held by acquiring p erson(s) a fte r the a c q u isitio n has been completed (see S 8 0 1 .1 2 ( b ) ) . 2 / 1 / I f there i s more than one c l a s s of vo ting s e c u r it y , include a d e sc r ip tio n of the v o tin g r ig h ts o f each c l a s s . 2 / I f there is more than one acquiring person for any c l a s s of s e c u r ity , show data se p a r a tely for each acquiring person.

FEDERAL REGISTER, VOL. 43, NO. 147— M O N D AY, JULY 31, 1978

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RULES AND REGULATIONS 33555 Notification and Report Form (Part 803 — Appendix) Continued. Name ______- __________________________________________________ ___ Date Documents prepared by person f i lin g no t i f i c a t i o n . Furnish one copy of each of the fo llo w in g documents of the person f i 1 ing n o tif ic a t T o n .■ For each e n t i t y included w ithin the person f i l i n g n o t i f i c a t i o n which has prepared i t s own such documents d i f f e r e n t from those furnished by the person f i l i n g n o t i f i c a ­ t io n , furnish in ad d itio n one copy of each document from each such other e n t i t y . Furnish co p ies ofs (a) a l l of the fo llo w in g f i l e d with the United S ta te s S e c u r it ie s and Exchange Commission three years prior to the date of f i l i n g of t h i s n o t i f i c a t i o n (or to be contemporaneously in connection with t h is a c q u is it io n ):

the most recent proxy statem ent, most recent Form a l l r e g is tr a t io n statem ents and a l l Forms 10-Q and 8-R f i l e d s in c e the end o f the period by the most recent Form 10-K, and, i f the a c q u is itio n i s a tender o f f e r . Schedule 14D-1.; t i v e l y , i f the person f i l i n g n o t i f i c a t i o n does not have co p ies of resp onsive documents r a v a ila b le , id e n t i f i c a t io n of such documents and c i t a t i o n to date and p lace of f i l i n g wil tu te compliance;

(b) the most recent annual reports and most recent annual audit reports and, i f d iff e r e n most recent reg u la rly prepared balance sh eet of the person f i l i n g n o t i f i c a t i o n and of ea unconsolidated United S ta te s issu er included w ithin such person; (c) a l l s t u d ie s , surveys, an a ly ses and rep orts which were prepared by or for any o f f i c e r d ir e c t o r ( s ) (o r, in the case of unincorporated e n t i t i e s , in d iv id u a ls e x e r c is in g sim ila r for the purpose o f ev a lu a tin g or analyzing the a c q u is itio n with resp ect to market shares t io n , com p etitors, markets, p o te n t ia l for s a l e s growth or expansion in to product or geog markets, and in d ic a te ( i f not contained in the document i t s e l f ) the date of p reparation name and t i t l e of the in d iv id u a l who prepared each such document. w ith in , f i le d 10-K, r e f le c t e d a lt e r n a - ' e a d ily 1 c o n s t i t , the ch (s). or f u n c t io n s ) , com petiraphic and the Notification and Report Form (Part 803 — Appendix) Continued Name_________________________________________________________________Date 5 ( b ) ( i) Dollar revenues by manufactured product.

Provide the fo llo w in g information on the aggregate operations o f the person f i l i n g n o t i f i c a t i o n for T972 for each 7 - d i g i t (SIC-based code) product of the person w ith ­ in 2 - d i g i t SIC major groups 20-39 (manufacturing i n d u s t r i e s ) . Do not provide 7 - d i g i t data for product codes ending in 00.

These are summary codes.

Revenues derived in such c a te g o r ie s should be provided by product as l i s t e d in Appendix A to the Numerical L ist of Manufactured P r o d u c ts .• See I n s tr u c tio n s to - N o t ific a t io n and Report Form.

All persons f i l i n g n o t i f i c a t i o n should include the t o t a l d o lla r revenues for 1972 derived by a l l e n t i t i e s which are included w ithin the person f i l i n g n o t i f i c a t i o n at the time t h is N o t ific a t io n and Report Fprm is prepared (not as of 1972). 7-DIGIT (SIC-BASED CODE) PRODUCT 1972 TOTAL DOLLAR REVENUES PRODUCT CODE DESCRIPTION 5 (b )( i i ) Within 2 - d i g i t SIC major groups 20-39 (manufacturing in d u s t r i e s ) , id e n tif y each product of the person f i l i n g n o t i f i c a t i o n added or d eleted subsequent to 1972, in d ica te the year of d e le t io n or a d d itio n , and g ive t o t a l d o lla r revenues for the most recent year for each product that has been added. Products may be id e n tif ie d e it h e r by 7 - d i g i t SIC-based code or in the manner o r d in a r ily used by the person f i l i n g n o t i f i c a t i o n .

Do not include products added sin ce 1972 by reason of mergers or a c q u is it io n s occurring sin ce 1972.

However, i f an e n t i t y acquired sin c e 1972 by the person f i l i n g n o t i f i c a t i o n (and now included within that person) i t s e l f added any products sin ce 1972, those products and the d o lla r revenues derived therefrom should be l i s t e d h ere.

Dollar revenues derived in 1972 by e n t/itle s a cq u ired .sin ce th a t.tim e should be included in response to item 5 ( b ) ( i ) .

Products d eleted by reason of d i s p o s it i o n s of a s s e t s or voting s e c u r i t i e s sin c e 1972 should be included in response to t h is item , 5 ( b ) ( i i ) . FEDERAL REGISTER, V O L 43, N O . 147— M O N D AY, JULY 31, 1978

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33556 RULES AND REGULATIONS Notification and Report Porm (Part 803 — Appendix) Continued Name •___________- ______ ________ ___ ¿i__ 5(c) Dollar revenues bv non-manufacturing in d ustry.

Provide the fo llow in g information « „ tN . 9qre?. t ^ o p e t . . tio n s of the person f ilin g " t ^ tT fF c a tlo n for the most recent year for each -« - d ig it (SIC code) In d u s tr ^ in STr manor arouos other than 20-39 in which the person engaged. I f such data have nf^ for the m^st decent y n T T M t H St m Tof d o lla r revenues by 4 - d i g i t ^ ^ f t L ^ l S r ^ r e v i S u t s t o t a ? ^ d escrib in g the method of estim a tio n i s furnished. In d u str ie s persons f i l i n g n o t i f i c a t i o n l e s s than one m illio n d o lla r s in the most recent year may be om itted. A ll persons t i g

^ are should include the t o t a l d o lla r revenues for the most recent yea Y .

. Form is prepared, included w ithin the person f i l i n g n o t i f i c a t i o n at the time t h i s N o t if ic a t io n a P Insurance c a r r ie r s ( 2 - d i g i t SIC major group 63) should supply ^ ' S / B K ? to in d u s tr ie s not w ithin SIC major group 63, and, i f v o ting s e c u r i t i e s of acauired d i r e c t l y or in d ir e c t ly should complete the Insurance Appendix to t h i s Porm. Credit a g en cies S & i & r i S S ? se c u r ity „ d co .i.o d ity b i o t . c . d . . l . r . , ^

.

other investment o f f i c e s ( 2 - d i g i t SIC ma3or group 61, 62, and 67 > ? d o lla r s a l e s SIC major group 65) should id e n tif y or ex p la in the d o lla r revenues reported ( e . g . d o lla r s a l e s . r e c e ip t s , e t c . ).

4-DIGIT (SIC CODE) INDUSTRY INDUSTRY CODE DESCRIPTION TOTAL DOLLAR REVENUES (SPECIPY YEAR! N o tific a tio n and Report Form (Part 803 Appendix! Continued Name _____________ ______________________________ _______________ Date This item need not be completed by a person f i l i n g n o t i f i c a t i o n only as an acquired person i f only a s s e t s are to be acquired.

• (a) (b) E n t itie s w ithin person e n t it y included within m illio n may be omitted f i l i n q n o t i f i c a t i o n .

L ist the name and headquarters m ailing address of each the person flT in g n o t i f i c a t i o n .

E n t it ie s with t o t a l a s s e t s of l e s s than $1 Shareholders of person f i l i n a n o t i f i c a t i o n . For each e n t i t y included w ithin the person ca tio n the v o tin g se cu r i t i e s o f whic h T F ^ h e I d (see 9 8 0 1 .1 (c )) by one or more other p ersons, l i s t the issu er and c l a s s of voting s e c u r i t i e s , the name and headquarters m ailing address *acj' person which holds f i v e percent or more of the outstanding vo ting s e c u r i t i e s o f the c l a s s , and the number and percentage held by that person.

Holders need not be l i s t e d for e n t i t i e s with t o t a l a ss e ts of l e s s than $10 m illio n .

(C) Holdings O f person f i l i n a n o t i f i c a t i o n . I f the person f i l i n g n o t i f i c a t i o n holds vo ting s e c u r i t i e s of any issu er not Included w ithin the person f i l i n g n o t i f i c a t i o n , l i s t the issu er f l a s s , the number and percentage h eld , and (o p tio n a lly ) the e n t i t y within the person f i l i n g n o t i f i c a t i o n which holds the s e c u r i t i e s .

Holdings of l e s s than f i v e p ercent o f the outstanding voting s e c u r i t i e s of any iss u e r , and h old ings of iss u e r s with t o t a l a s s e t s of l e s s than $10 m illio n , may be om itted. N o tific a tio n and Report Porm (Part 803 — Appendix) Continued N a m e ___________________________________________;_______;________ Date Did the acquired person and an acquiring person maintain a vendor-vendee r e la t io n s h ip during the recent year with resp ect to any manufactured product (o r , i f the a c q u is it io n i s the £ormaticm of a so in t venture or other corporation (see S 8 0 1 .4 0 ), w i l l the j o i n t venture or other corporation supply to^any of the persons forming i t any manufactured product which such person purchased from another such Person during the most recent year) which the vendee e ith e r r e s e l l s or consumes in or incorp orates in to the manufacture of any product? I f s o , persons f i l i n g n o t i f i c a t i o n which are vendees o f Pr<^«ct(s) should l i s t each product purchased, id e n tif y each vendor which i s a party to the a c q u is it ion from which the product was purchased, and s t a t e the d o lla r amount of the product purchased from that vendor during the most recent y ea r.

Manufactured products are those w ithin 2 - d i g i t SIC major g r o u p s'20-39. Any product purchased from the vendor in an aggregate annual amount not exceeding $1 m illio n , or the manufacture, consump­ tio n or use of which i s not a t tr ib u t a b le to the a s s e t s to be acquired, or to the issu er whose v o ting s e c u r i t i e s are to be acquired (in clu d in g e n t i t i e s c o n tr o lle d by the is s u e r ) , may be om itted. FEDERAL REGISTER, VOL. 43, N O . 147— M O N D AY, JULY 31, 1973

Page 269

RULES AND REGULATIONS 33557 N o tifica tio n and Report Form (Part 803 — Appendix) Continued Name__________ ’ .___________________________________________ Date 10.

Print or type the name and t i t l e , address, and telephone number of the in d iv id u a l to contact regarding t h i s N o tifi cation and Report Form, See S 803.20(b )( 2 ) ( i i ).

(Name and T it l e ) (Business Address) (Business Telephone Number) CERTIFICATION (see S 803.6) This N o t ific a t io n and Report Form, togeth er with any and a l l appendices and attachments th e r e to , was prepared and assembled under my su p erv isio n in accordance with in str u c tio n s issued by the- Federal Trade Commission.

Subject to the reco g n itio n t h a t , where so in d ica ted , reasonable e stim a te s have been made because books and records do not provide the required d a ta , the inform ation i s , to the b est of my knowledge tru e, co r r e c t, and complete in accordance with the s t a t u te and r u le s . (TYPE OR PRINT NAME AND TITLE) (Signature) (D ate) Subscribed and sworn to before me at the City o f ____________ _________ , S ta te of ________________________ th is ___________________________day o f ___________________ ^_______, 19__ , _________ -___________ ___ _____________ (Notary P u b lic ) My Commission Expires___________________________________________________________________________________ __________ N o tifica tio n and Report Form (Part 803 — Appendix) Continued 2.

Property Liabi l i t y Insurance A A.

Provide for the most recent year the amount of d ir e c t premiums w ritten in the United S ta te s for each lin e of insurance sp e c ifie d in Part 2 of the Underwriting and Investment E xhibit of your c a r r i e r 's annual convention statem ent.

B.

Provide for the most recent year the amount of net premiums w ritten in the United S ta te s for each l in e of insurance sp e c ifie d in Part 2 of the Underwriting and Investment Exhibit of your c a r r i e r 's annual convention statem ent.

3.

T it le Insurance A.

Provide for the most recent year the amount of net d ir e c t t i t l e insurance premiums w ritten in the United S ta t e s . B.

Provide for the most recent year the amount of d ir e c t t i t l e insurance premiums earned in the United S ta t e s . [FR Doc. 78-20466 Filed 7-28-78; 8:45 am]