What is the Hart-Scott-Rodino (HSR) Act?

Takeaway: The Hart-Scott-Rodino (HSR) Act, a law aiming to preserve market competition, may require startups involved in large acquisitions to file a Notification and Report Form with federal agencies and observe a waiting period for transaction review, potentially adding complexity to the acquisition process.

There are various laws and regulations ensure fair competition and protect against monopolies. One such piece of legislation is the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act), which can play a significant role in startup acquisitions. This post will provide an overview of the HSR Act and explain its implications for startups planning to be acquired.

The HSR Act, named after senators Hart, Scott, and Rodino, was enacted to prevent companies from acquiring too much power and control in their respective markets. It aims to protect competition by requiring companies to notify the Federal Trade Commission (FTC) and the Department of Justice (DOJ) of large transactions that would result in the acquiring party holding a significant amount of assets or voting securities of the acquired party.

Once the HSR Act applies to a transaction, the companies involved are required to file a Notification and Report Form with the FTC and DOJ and pay a filing fee. This process is often referred to as making an "HSR filing." The HSR filing must include details about each company's business, the proposed transaction, and data to assess the potential impacts on competition. It can be quite a bit of legal work to prepare these filings.

After filing, the parties must observe a mandatory waiting period before they can complete the transaction. This period is typically 30 days. During this time, the FTC and DOJ review the transaction to determine whether it could substantially lessen competition. If the regulators deem that the transaction could harm competition, they can request more information, extend the waiting period, or take legal action to block the transaction.

Now, how does this apply to startups? In the context of startup acquisitions, the HSR Act can add complexity and time to the acquisition process. Startup transactions can fall under the purview of the HSR Act if they meet the current thresholds for size-of-transaction and size-of-person. As of 2023, the size-of-transaction threshold is $111.4 million, meaning any transaction valued at or above this amount could trigger an HSR filing requirement.

However, exemptions might apply. For instance, some acquisitions of voting securities or assets are exempt from HSR filing requirements, depending on how they are structured. Additionally, the HSR Act has different rules for various types of transactions, such as acquisitions resulting from stock splits or dividends, acquisitions of convertible voting securities, and acquisitions of production assets.

In conclusion, the HSR Act plays a crucial role in preserving competition and preventing monopolies in the marketplace, and it can significantly impact the process and timeline of startup acquisitions. Startups considering a merger or acquisition should consult with legal counsel to understand whether their transaction will require an HSR filing and to navigate the HSR review process successfully.