HSR Act Bringing Offshore Funds Home

Earlier this month, the Federal Trade Commission (“FTC”), with the concurrence of the Antitrust Division of the U.S. Department of Justice, published in the Federal Register proposed changes to the Hart-Scott-Rodino Act (“HSR Act”) regulations regarding foreign entities. The proposed changes are intended to simplify the determination of whether an entity is a foreign person or issuer for premerger notification purposes but may negatively affect certain offshore funds’ exemption from HSR Act filing requirements.

Critically, current rules and regulations exempt certain transactions from the reporting requirements of the HSR Act depending on whether one or both of the parties are “foreign”. Two of the factors used for making this determination are relatively clear: (x) where the party is incorporated and (y) under which law it is organized. The third factor, the location of its “principal office”, is more ambiguous and has not previously been defined in the rules. As a result, the FTC has proposed specifying that an entity will be deemed to have its “principal office” in the U.S. if any of: (1) 50% or more of its officers reside in the U.S., or (2) 50% or more of its directors reside in the U.S., or (3) 50% or more of its assets (including assets of all entities it controls) are located in the U.S., based on a fair market value determination of the assets. The proposed regulation provides that when an entity doesn’t have officers and directors, the analysis is based on individuals exercising similar functions.

This new rule may have particular relevance to offshore funds (depending on how they are organized) which had previously qualified as non-U.S. because of their principal office physical location. This may now change. The proposed rule includes as an example a limited partnership that is not organized under U.S. law, does not have any officers and directors, and does not have 50% or more of its assets in the United States. In the example, the fund has a non-U.S. general partner, but investment decisions are made by a U.S.-organized investment manager under an investment management agreement. Per the new analysis, that would be sufficient to determine that the fund maintains a principal office in the U.S. and it is therefore a U.S. person for HSR filing purposes.

If the new rule goes into effect – parties have until December 30, 2019 to comment – funds will need to be look carefully at their organizational structure to make sure they still qualify as non-U.S. persons for HSR reporting purposes.