February 1, 2001 marks the effective date of the recently enacted Hart-Scott-Rodino reform legislation, which will exempt thousands of previously reportable venture financings and acquisitions from costly and time-consuming HSR filings. Raising the transaction threshold over which filings are required to $50 million was a big win for the venture capital industry and the entire entrepreneurial community given the fact individual VC firms now routinely invest more than $15 million – the old HSR threshold – in single portfolio companies.
While the new $50 million threshold is welcome relief, some argue that a more realistic threshold – in light of the government’s interest in preventing anticompetitive conveyances of voting securities or assets – should be closer to $100 million. The hard political reality, however, is that $50 million was as high a threshold as the HSR administering agencies (the Federal Trade Commission and the Antitrust Section of the Justice Department) were willing to support. Any attempt to go beyond that would have deteriorated the legislation’s bipartisan support and drawn the opposition of the Clinton Administration.
With passage of the reform legislation, we can now all proceed with deals and arrange for many of our M&A exits free from the hassle, delay and cost of the HSR act’s “report and wait” requirement. The National Venture Capital Association (NVCA) worked hard for passage of the legislation, which was a atop their public policy priority list for the year. But that’s not the end of the story. More, targeted HSR relief may be within reach in the congressional session that has just commenced.
Anyone familiar with the HSR act knows that is it a dazzlingly complex statute around which individual attorneys build their entire practice. Along with the transaction threshold exemption for filings, there are a host of other exemptions available. One such exemption provides relief to those who are defined as “passive investors” in a company. The “passive investor exemption” permits an acquisition of voting stock above the new $50 million threshold without a filing if the stock purchase will result in the buyer holding less than 10% of the outstanding voting securities of the issuer and if made “solely for the purpose of investment.” However, per an FTC interpretation, this exemption is voided if the individual investor takes a board seat on the company.
Many within the FTC, and on Capitol Hill believe this interpretation is too narrow and should be changed. Granted, with a $50 million transaction threshold, it will not be as large an issue as it has been under the old threshold. But with the recent rise in round sizes, seeking a reinterpretation would still have merit.
Another potential area of reform is the fee that accompanies HSR filings. The standard filing fee since the late 1980s has been $45,000 to be paid by the acquiring party. This fee will remain as is for transactions valued between $50 million and $100 million. As mentioned above, the new reforms will exempt thousands of smaller transactions from the filing requirement. To make up the lost fee revenue – which funds the administering agencies’ operating budgets – Congress created two new fee levels for bigger deals. While the agencies had sought even higher fees, Congress, at the urging of the NVCA and other industry groups, resisted those efforts and settled on the following new fee tiers: a $125,000 fee for transactions valued between $100 million and $500 million; and a $280,000 fee for transactions in excess of $500 million.
Obviously, no one in industry was happy to see these fees go up. More importantly, all parties would like to see them go away. Many people on Capitol Hill share the industry view that the fees amount to little more than a tax on business. The agencies dislike the fees as well since their operating budgets ride the roller coaster that mirrors fluctuating M&A activity in the marketplace. They would prefer to eliminate the fees and be funded out of general government revenues. Taking a piece out of general revenues is never popular among the myriad other interests that are competing for government dollars. However, this may be do-able in the age of bipartisanship, budget surpluses and tax cuts.
The HSR reform that becomes effective this month was a significant and opportune achievement. It comes at a time of ever-larger venture deals and increasing M&A activity. While the threshold increase was the big prize, good things can always be made better. Stay tuned.
John Martinson is Managing Partner of Edison Venture Fund in Lawrenceville, N.J. He is also Past-Chairman of the National Venture Capital Association Board of Directors.