Member Article

Recently, the Premerger Notification Office (“PNO”) issued a statement to clarify the use of escrows in connection with transactions subject to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”). The statement supersedes all previous informal interpretations and advice from the PNO. In sum, the current PNO view is that escrows generally do not shield a buyer from obtaining beneficial ownership of the escrowed assets or voting securities.

At the time of the adoption of the rules promulgated under the HSR Act, the Federal Trade Commission and the Department of Justice Antitrust Division (the “Agencies”) stated that an escrow agent does not become the beneficial owner of assets or voting securities held in escrow, but an acquisition in escrow was reportable if beneficial ownership of escrowed assets or voting securities changed hands. Subsequently, in informal interpretations and advice, the PNO indicated a willingness to permit the use of escrow arrangements in acquisitions under certain circumstances.

Today, the PNO’s view is that an acquisition using an escrow to close before the end of the applicable HSR waiting period is likely to transfer beneficial ownership of assets or voting securities to the acquiring party in violation of the HSR Act. Such violation can lead to civil penalties of $16,000 per day.

If the parties to a transaction believe they are facing “exceptional circumstances” that warrant using an escrow, they should consult with the PNO in advance. The PNO stated that when consulted in advance it may, in very limited instances, advise that it would not recommend enforcement in connection with a specified escrow arrangement. However, the statement does not describe specific circumstances where an escrow may be used. At a minimum, the escrow must prevent the acquirer, to the extent possible, from exercising beneficial ownership of the assets or voting securities. In addition, the following circumstances are not sufficient to justify the use of an escrow:

• having different time periods for primary and secondary acquisitions;
• in the context of a foreign tender offer, conflicts between foreign law time frame requirements to take up the tendered shares and the HSR waiting period;
• in executive compensation acquisitions, where the stock options must be exercised, if at all, before the expiration of the HSR waiting period.

For more information on this topic or compliance with the HSR Act generally, please contact one of the following Haynes and Boone attorneys.