Premerger Notification; Reporting and Waiting Period Requirements

SUMMARY: This notice proposes amendments to the premerger notification

rules that require the parties to certain mergers or acquisitions to

file reports with the Federal Trade Commission and the Assistant

Attorney General in charge of the Antitrust Division of the Department

of Justice and to wait a specified period of time before consummating

such transactions. The reporting and waiting period requirements are

intended to enable these enforcement agencies to determine whether a

proposed merger or acquisition may violate the antitrust laws if

consummated and, when appropriate, to seek a preliminary injunction in

federal court to prevent consummation.

This notice seeks comments on five proposed rules that would define

or create exemptions to the requirements imposed by the act. These

proposed rules have been developed to clarify the types of transactions

that are in the ordinary course of business of the parties to the

transaction and are exempt under section 7A(c)(1) of the Hart-Scott-

Rodino-Act. They also provide several new exemptions under section

7A(d)(2)(B) for certain types of acquisitions of realty and carbon-

based mineral reserves that appear unlikely to violate the antitrust

laws. These proposed rules are designed to reduce the compliance burden

on the business community by eliminating the application of the

notification and waiting requirements to a significant number of

transactions that, in most cases, are unlikely to violate the antitrust

laws. They will also allow the enforcement agencies to focus their

resources more effectively on those transactions that present the

potential for competitive harm.

DATES: Comments must be received on or before September 29, 1995.

ADDRESSES: Written comments should be submitted to both (1) the

Secretary, Federal Trade Commission, Room 136, Washington, DC 20580,

and (2) the Assistant Attorney General, Antitrust Division, Department

of Justice, Room 3214, Washington, DC 20530.

FOR FURTHER INFORMATION CONTACT:

Melea R. Epps, Attorney, or John M. Sipple, Jr., Assistant Director,

Premerger Notification Office, Bureau of Competition, Room 303, Federal

Trade Commission, Washington, DC 20580. Telephone: (202) 326-3100.

SUPPLEMENTARY INFORMATION:

Regulatory Flexibility Act

The proposed amendments to the Hart-Scott-Rodino premerger

notification rules are designed to reduce the burden of reporting on

the public. The Commission has determined that none of the proposed

rules is a major rule, as that term is defined in Executive Order

12291. The amendments will not result in any of the following: an

annual effect on the economy of $100 million or more; a major increase

in costs or prices for consumers, individual industries, Federal,

State, or local government agencies, or geographic regions; or

significant adverse effects on competition, employment, investment,

productivity, innovation, or on the ability of United States-based

enterprises to compete with foreign-based enterprises in the domestic

market. None of the amendments expands the coverage of the premerger

notification rules in a way that would affect small business.

Therefore, pursuant to section 605(b) of the Administrative Procedure

Act, 5 U.S.C. 605(b), as added by the Regulatory Flexibility Act, Pub.

L. 96-354 (September 19, 1980), the Federal Trade Commission has

certified that these rules will not have a significant economic impact

on a substantial number of small entities. Section 603 of the

Administrative Procedure Act, 5 U.S.C. 603, requiring a final

regulatory flexibility analysis of these rules, is therefore

inapplicable.

Background

Section 7A of the Clayton Act (``the act''), 15 U.S.C. 18a, as

added by sections 201 and 202 of the Hart-Scott-Rodino Antitrust

Improvements Act of 1976, requires parties to certain acquisitions of

assets or voting securities to give advance notice to the Federal Trade

Commission (hereafter referred to as ``the Commission'') and the

Assistant Attorney General of the Antitrust Division of the Department

of Justice (hereafter referred to as ``the Assistant Attorney

General''). The parties must then wait certain designated periods

before the consummation of such acquisitions. The transactions to which

the advance notice requirement is applicable and the length of the

waiting period required are set out respectively in subsections (a) and

(b) of section 7A. This amendment to the Clayton Act does not change

the standards used in determining the legality of mergers and

acquisitions under the antitrust laws.

The legislative history suggests several purposes underlying the

act. Congress wanted to ensure that certain acquisitions were subjected

to meaningful scrutiny under the antitrust laws prior to consummation.

To this end, Congress intended to eliminate the ``midnight merger''

which is negotiated in secret and announced just before, or sometimes

only after, the closing takes place. Congress also provided an

opportunity for the Commission or the Assistant Attorney General (who

are sometimes hereafter referred to as the ``antitrust agencies'' or

the ``enforcement agencies'') to seek a court order enjoining the

completion of those transactions that either agency determines would

present significant antitrust problems. Finally, Congress sought to

facilitate an effective remedy when a challenge by one of the

enforcement agencies proved successful. Thus, the act requires that the

antitrust agencies received prior notification of certain acquisitions,

provides tools to facilitate a prompt, thorough investigation of the

competitive implications of these acquisitions, and assures the

enforcement agencies an opportunity to seek a preliminary injunction

before the parties to an acquisition are legally free to consummate it.

The problem of unscrambling the assets after the transaction has taken

place is thereby reduced.

Subsection 7A(d)(1) of the act, 15 U.S.C. 18a(d)(1), directs the

Commission, with the concurrence of the Assistant Attorney General, in

accordance with 5 U.S.C. 553, to require that the notification be in

such form and contain such information and documentary material as may

be necessary and appropriate to determine whether the proposed

transaction may, if consummated, violate the antitrust laws. Subsection

7A(d)(2) of the act, 15 U.S.C. 18a(d)(2), grants the Commission, with

the concurrence of the Assistant Attorney General, in accordance with 5

U.S.C. 553, the authority to (a) define the terms used in the act, (b)

exempt from the act's notification and waiting period requirements

additional classes of persons 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 section 7A.

The Commission, with the concurrence of the Assistant Attorney

General, promulgated implementing rules (``the rules'') and the

Notification and Report Form (the ``Form'') and issued an accompanying

Statement of

[[Page 38931]]

Basis and Purpose, all of which were published in the Federal Register

of July 31, 1978, 43 FR 33451, and became effective on September 5,

1978.

The rules are divided into three parts which appear at 16 CFR parts

801, 802, and 803. Part 801 defines a number of the terms used in the

act and rules, and explains which acquisitions are subject to the

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 Form, which is completed by persons

required to file notification, is an appendix to part 803 of the rules.

Changes of a substantive nature have been made in the premerger

notification rules or Form on ten occasions since they were first

promulgated: 44 FR 66781 (November 21, 1979); 45 FR 14205 (March 5,

1980); 46 FR 38710 (July 29, 1981); 48 FR 34427 (July 29, 1983); 50 FR

38742 (September 24, 1985); 51 FR 10368 (March 28, 1986); 52 FR 7066

(March 6, 1987); 52 FR 20058 (May 29, 1987); 54 FR 21425 (May 18, 1989)

and 55 FR 31371 (August 2, 1990).

The current set of proposed changes to the rules interprets the act

and expands the current policies of the Commission's Premerger

Notification Office regarding transactions in the ordinary course of

business that are exempt from the notification and waiting requirements

of the act. The proposals also include several new exemptions for

acquisitions of certain types of real property assets and carbon-based

mineral reserves. The Commission, as part of its ongoing review of the

rules, invites interested persons to submit comments on these proposed

rules and the Statement of Basis and Purpose.

Statement of Basis and Purpose for the Commission's Proposed Revisions

to the Premerger Notification Rules

Proposed Secs. 802.1, 802.2, 802.3, 802.4, and 802.5 describe

certain types of acquisitions that would be exempt from the

notification requirements of the act. They would replace and expand

existing Sec. 802.1, which describes certain applications of the

exemption granted by section 7A(c)(1) of the act for acquisitions of

goods or realty in the ordinary course of business. Proposed revisions

to Sec. 801.15 would define when the aggregation rules apply to

acquisitions covered by these newly proposed rules.

In 1985, the Commission proposed three new provisions under part

802. Previously proposed Sec. 802.1 would have addressed the statutory

``ordinary course of business'' exemption; previously proposed

Sec. 802.2 would have exempted certain acquisitions of unimproved land,

office buildings and residential properties; and previously proposed

Sec. 802.3 would have exempted certain acquisitions of carbon-based

mineral reserves.

In response to the 1985 notice of proposed rulemaking, the

Commission received twenty comments that focused wholly or in part on

the then proposed Secs. 802.1, 802.2, and 802.3. The persons who

commented are listed in the Federal Register of March 6, 1987, 52 FR

7066. The comments are available for public inspection in the Federal

Trade Commission's Public Reference Room, Reference number 223.2.1-1-E

and F.

On March 23, 1995, the Chairman of the Commission and the Assistant

Attorney General for the Antitrust Division of the Department of

Justice jointly announced eight initiatives for review of transactions

under the act. One of the initiatives is a reduction in the number of

filings received pursuant to the act. A draft of several revisions to

the Hart-Scott-Rodino rules under consideration by the staff of the

Commission's Premerger Notification Office (PNO) was made available to

the public. Those revisions would eliminate the necessity to file

premerger notification for certain transactions that are not likely to

violate the antitrust laws. The draft reflected careful consideration

by the staff of the comments received in response to the 1985

proposals, the experience of the PNO during the intervening years in

its determinations of the reportability of a large number of

transactions not specifically exempted by the act or the rules an the

experience of the enforcement agencies in conducting their antitrust

review of premerger filings.

Included in the March 23 draft was a series of questions to be

considered in determining whether the revisions under consideration by

the PNO effectively exempted transactions that were unlikely to violate

the antitrust laws and facilitated uncomplicated application of the

rules. In response to an invitation for comment, the staff of the

Commission received extensive input from the private antitrust bar and

worked closely with the Department of Justice to address the questions

raised in the draft. As a result, the draft revisions were reformulated

significantly to enhance their effectiveness in exempting classes of

transactions that are unlikely to create competitive problems, while

ensuring that the enforcement agencies continue to receive notification

of classes of acquisitions that are more likely to present potential

antitrust concerns. The Commission now formally proposes the following

amendments to the premerger notification rules.

Criteria for the Rules. Section 7A(c)(1) of the act exempts

``acquisitions of goods or realty transferred in the ordinary course of

business.'' Existing Sec. 802.1(a) interprets this statutory language

to apply the exemption to acquisitions of voting securities of entities

holding only realty. Existing Sec. 802.1(b) denies the exemption to the

sale of goods or real property if they constitute ``all or

substantially all of the assets of that entity or an operating division

thereof'' unless the entity qualifies for the exemption under existing

Sec. 802.1(a) because its assets consist solely of real property and

assets incidental to the ownership of real property.

The reportability of transfers in the ordinary course of business

has long been a frequent source of questions from the public. Proposed

Sec. 802.1 represents interpretations of section 7A(c)(1) made by the

PNO over the years, and it also broadens these interpretations to

exempt additional classes of acquisitions that are unlikely to violate

the antitrust laws.

Proposed Sec. 802.1(a) preserves the concept of existing

Sec. 802.1(b) and makes the exemption unavailable for acquisitions of

all or substantially all of the assets of an operating unit. Operating

unit is defined as assets operated by the acquired person as a business

undertaking in a particular area or for particular products or

services. The sale of all or substantially all of the assets of a

business is generally equivalent to the sale of a business enterprise.

Although it is possible that the effects of selling capacity might be

to enhance competition, it can also diminish competition, and each

acquisition must be judged individually. The current and proposed rules

therefore require generally that acquisitions that transfer the

equivalent of a business remain subject to the prior notification

obligations of the act.

Proposed Sec. 802.1 also defines categories of acquisitions of

goods that are deemed to be in the ordinary course of business and are

therefore exempt from the notification requirements. Individual review

of such transactions is typically unnecessary because selling goods is

the essence of manufacturing, wholesaling, and retailing businesses.

Sales in the ordinary course of business should not in any way diminish

the capacity of the selling firm to compete.

[[Page 38932]]

Proposed Sec. 802.1 provides that certain acquisitions of used

durable goods qualify for exemption from the reporting requirements as

transfers of goods in the ordinary course of business. These exemptions

for specific types of acquisitions of used durable goods acknowledge

that certain transfers of productive assets are made in the ordinary

course to increase or upgrade capacity and to improve efficiencies.

However, the ordinary course of business exemption generally will not

reach other acquisitions involving productive capacity. The Commission

invites comment regarding other types of transfers of productive

assets, especially those not involving operating units, that may

qualify for the ordinary course of business exemption.

Proposed Sec. 802.2 (concerning real property assets) and proposed

Sec. 802.3 (concerning carbon-based mineral reserves and rights) are

based, for the most part, on the Commission's authority in section

7A(d)(2)(B) of the act to exempt transactions that are unlikely to

violate the antitrust laws. These proposals provide exemptions for

certain acquisitions of assets that are usually abundant and are used

in markets that are unconcentrated. These two factors make it unlikely

that a transfer of these types of assets will have anticompetitive

effects. It is thus not necessary to examine each individual

transaction to determine if it will violate the antitrust laws.

To accommodate parties who choose to structure their transactions

as acquisitions of voting securities rather than as acquisitions of the

underlying assets, proposed Sec. 802.4 exempts acquisitions of voting

securities of issuers whose assets consist solely of the assets

exempted by proposed Secs. 802.2 and 802.3.

Proposed Sec. 802.5 exempts acquisitions by certain investors of

rental real property, the acquisition of which is not already exempted

by Sec. 802.2. Proposed Sec. 802.5 is based on the use to which those

buyers put the acquired assets. It would exempt institutional investors

(as defined in Sec. 802.64) and persons whose sole business is the

acquisition or management of investment rental property from the

requirements of the act when they are acquiring investment rental

property assets. The Commission believes that, so long as the assets

remain as investment rental property assets, the acquisition of these

assets is unlikely to violate the antitrust laws.

Proposed Secs. 802.1, 802.2, 802.3, 802.4 and 802.5 are based on

the Commission's authority in section 7A(d)(2)(A) of the act to

``define the terms used in (section 7A)'' (with the concurrence of the

Assistant Attorney General) and sections 7A(d)(2) (B) and (C) to

``exempt * * * transactions which are not likely to violate the

antitrust laws'' and to ``prescribe such other rules as may be

necessary and appropriate to carry out the purposes of [section 7A].''

However, the Commission reserves the right to investigate certain

transactions exempted from the reporting requirements by the proposed

rules if these transactions are characterized by factors that increase

the likelihood that the consummation of the transactions may violate

the antitrust laws.

The Commission is aware that even with the significant coverage of

the proposed rules, the exempt status of many transactions will remain

unaddressed. These proposed rules do not interpret or apply to the

entire statutory exemption created by section 7A(c)(1); there remain

categories of transactions involving goods and realty that are not

expressly treated under the proposed rules. For example, certain

acquisitions of credit card receivables and certain acquisitions of

assets subject to a lease financing arrangement may qualify for

exemption as transfers in the ordinary course of business. Persons who

desire advice on the exempt status of any transfer of goods, realty or

other assets may contact the Premerger Notification Office, Bureau of

Competition, Room 303, Federal Trade Commission, Washington, DC 20580,

or phone (202) 326-3100.

I. Proposed Section 802.1: Acquisition of Goods in the Ordinary Course

of Business

Section 7A(c)(1) of the act exempts ``acquisitions of goods or

realty transferred in the ordinary course of business.'' Proposed

Sec. 802.1 defines some acquisitions of assets that are in the ordinary

course of business and other acquisitions that are not. This proposed

section only covers transfers of goods. Transfers of realty are covered

in proposed Sec. 802.2.

Proposed Sec. 802.1 defines four categories of acquisitions of

goods: acquisitions of an operating unit, acquisitions of new goods,

acquisitions of current supplies, and acquisitions of used durable

goods. The proposed section states whether and under what circumstances

each type of acquisition is exempt. These four categories of asset

acquisitions are not comprehensive. As noted above, some asset

acquisitions may not fit neatly into any of these defined categories.

Proposed Sec. 802.1 has four paragraphs: Paragraph (a) denies the

ordinary course of business exemption to any transfer of goods that is

equivalent to the sale of a business. The next three paragraphs define

acquisitions of goods that may be exempt. Paragraph (b) exempts the

acquisition of new goods, and paragraph (c) exempts the acquisition of

current supplies. Paragraph (d) defines certain transfers of used

durable goods that are within the ordinary course of business. These

include the following: acquisitions by or from bona fide dealers and

resellers; transfers by an acquired person that has replaced the

productive capacity of the assets being sold; and transfers by an

acquired person that has outsourced an auxiliary function that was

provided by the goods being sold.

In determining whether a given acquisition of goods is in the

ordinary course of business and is therefore exempt under a provision

of Sec. 802.1, one should first determine if the goods constitute an

operating unit. If the goods being sold make up an operating unit of

the seller, the inquiry ends there, and the transaction is not exempt.

If the goods do not constitute an operating unit, then they should be

classified as either new goods, current supplies or used durable goods,

and the appropriate provisions under Sec. 802.1 should be applied.

The organization of Sec. 802.1 is intended to make it easier to

identify routine acquisitions that meet the criteria of section

7A(c)(1) for an exemption as an acquisition of goods transferred in the

ordinary course of business. Sales of new goods and purchases of

current supplies are frequent. The objective of the businesses covered

by paragraphs (b) and (c) is to buy and sell such goods and supplies;

thus such transactions meet the common meaning of transfers in the

ordinary course of business. Exempting these transactions facilitates

acquisitions of new goods that normally expand the supply of products

or expand productive capacity and therefore do not tend to lessen

competition. In contrast, acquisitions of entire businesses have

greater potential to concentrate productive capacity and thereby may

diminish competition.

A. Operating Units. Proposed Sec. 802.1(a) excludes the acquisition

of all or substantially all of the assets of an ``operating unit'' from

the ordinary course of business exemption. An ``operating unit'' can be

thought of as a collection of assets that has been operated as a

business undertaking. The assets of an operating unit can include

realty, current supplies and durable goods. Common examples of

operating units include, but are not limited to,

[[Page 38933]]

regional divisions or company branches, international operations, a

financial group, transportation operations, a factory or an oil

processing facility. Factors important in determining whether a group

of asset constitutes an operating unit include the extent to which the

assets being sold are devoted to producing a certain product, or the

extent to which such assets serve one or more specific geographic

markets.

The proposal uses the term ''operating unit'' rather than the term

``operating division'' used in existing Sec. 802.1(b). The latter term

has created some uncertainty because some business entities use the

term ``division'' in a manner that may not be consistent with this

rule. For example, a business might use the term ``division'' to

designate an unincorporated administrative segment of its enterprise,

such as the ``East Coast Division'' or ``Tri-State Division.'' Such

usage is designed to serve the needs of the business. The term

``operating unit'' has been proposed in order to make clear that the

application of the rule is not dependent on the terminology used by a

business.

The term ``operating unit'' is defined in the rule as ``assets that

are operated by the acquired person as a business undertaking in a

particular geographic area or for particular products and services,

even though those assets may not be organized as a separate legal

entity.'' Example 1 to Sec. 802.1 illustrates a combination of assets

that is considered to be an operating unit, the acquisition of which

would be excluded from the ordinary course of business exemption. As

further guidance in determining when a collection of assets constitutes

an operating unit, the following factors are relevant: (1) Whether the

seller is terminating a business function as a result of the sale, such

as ceasing to sell in a geographic region or manufacture products for a

particular business segment; (2) whether the industry perceives the

assets as a separate unit; and (3) whether the sale of assets includes

durable goods and the current supplies that are used in the operation

of those durable goods.

The sale of an operating unit is one kind of transfer that the

premerger notification program was intended to review and thus is not

exempt under the ordinary course of business exemption. During review,

the antitrust agencies consider whether, and to what extent,

concentration of productive capacity may be increased by the sale of a

business and whether competition will be adversely affected by the

acquisition of a business.

B. New Goods. Proposed Sec. 802.1(b) describes the type of

acquisitions of goods that are most commonly referred to as

acquisitions ``in the ordinary course of business.'' This paragraph

exempts acquisitions of new goods that were produced by the seller for

the purpose of sale or that were held by the seller solely for the

purpose of resale.

Paragraph (b) of proposed Sec. 802.1 focuses on the purpose for

which the seller holds the new goods to determine if the transaction is

in the ordinary course of business and is therefore exempt. The sales

of new goods which the paragraph exempts are routine sales of inventory

by manufacturers, wholesalers or retailers conducted in the ordinary

course of business. As a general matter, there is no difficulty

identifying the goods in the two circumstances in which this exemption

applies. Goods that are ``produced'' mean goods not used by the seller

to which he has added value through processing or manufacture and may

include refurbished goods. ``New goods held at all times by the

acquired person solely for resale'' means inventory held for sale that

is not to be used by the seller or others prior to sale. When the

seller uses goods that are held for sale, the exemption does not apply.

The paragraph is specifically worded to deny this exemption to any sale

of goods that were purchased for use, even if the goods are

subsequently sold without being used.

The exemption set forth in paragraph (b) does not apply to any

acquisition of new goods which are sold as part of a transaction that

includes all or substantially all of the assets of an operating unit.

This limitation on the exemption of new goods would apply even if all

the assets transferred were new goods held solely for the purpose of

resale. For example, if a marine supply wholesaler, which owned only an

extensive inventory of hundreds of items from different manufacturers,

sells its entire inventory to one person, the acquisition would not be

exempt even though the sale is composed entirely of new goods. The sale

of all of its inventory would be considered the sale of all or

substantially all of its business since the primary assets of such a

wholesaling business are inventory.

C. Current Supplies. Proposed Sec. 802.1(c) described another

category of asset acquisitions--the acquisition of ``current

supplies''--that qualify for the ordinary course exemption. ``Current

supplies'' is a new term to the rules and is described in subparagraphs

(1), (2) and (3). Current supplies include goods bought for resale, raw

materials, components, maintenance supplies and the like. Current

supplies are purchased frequently and are either consumed in the daily

conduct of business or incorporated into a final product. The proposal

states that current supplies do not include used durable goods, which

are discussed in proposed Sec. 802.1(d).

The acquisition of current supplies is unlikely to create or

extinguish a competitive entity and is therefore exempt unless acquired

as part of an acquisition of an operating unit. Parties are permitted

to claim the exemption even if the goods purchased are not new (so long

as they are not used durable goods), so long as the acquired goods are

to be held for resale, are to be consumed by the buyer, or are

otherwise incorporated in the acquiring person's final product.

In applying paragraph (c), the focus is on the business of the

acquiring person to determine if the exemption is available.

D. Used Durable Goods. Proposed Sec. 802.1(d) provides that certain

acquisitions of used durable goods qualify for the ordinary course of

business exemption. The Commission recognizes that sales of used

durable goods often meet a common sense definition of transfers of

goods in the ordinary course of business and that not all used durable

goods acquisitions have competitive significance. Sales of such used

durable goods may be routine and considered by parties to be in the

ordinary course of their businesses.

Sales of used durable goods may also facilitate the purchase of a

new generation of equipment that will increase the productive capacity

of a business. Therefore, paragraph (d) represents an attempt to

identify certain categories of transfers of used durable goods that

meet a common sense definition of ``ordinary course'' and appear

unlikely to violate the antitrust laws: When goods are being acquired

by or from persons holding the goods solely for resale; when the

acquired person is replacing or upgrading the productive capacity

provided by the goods being sold; and when the acquired person is

outsourcing the auxiliary support functions performed by the goods

being sold. Sales of used durable goods that diminish a company's

productive capacity or sales of productive assets that result in a

company's exit from a given product or geographic market are not

included in the ordinary course of business exemption.

Proposed Sec. 802.1(d) defines an acquisition of used durable goods

as a transaction that is in the ordinary course of business if it meets

specific criteria. The term ``used durable good'' is new to the rules

currently in force. It is defined in proposed Sec. 802.1(d) as a used

good

[[Page 38934]]

which was ``designed to be used repeatedly and has a useful life

greater than one year.''

An acquisition of used durable goods is exempt as within the

ordinary course of business if two requirements are satisfied. The

first requirement is that they must not be acquired as part of a

transfer of an operating unit, defined in paragraph (a) as ``assets

that are operated by the acquired person as a business undertaking in a

particular geographic area or for particular products or services.''

This restriction prevents a company from using Sec. 802.1(d) to

transfer assets that result in the company's exit from a particular

product line or regional market without first observing the reporting

requirements.

The second requirement for exempting an acquisition of a used

durable good is that any one of four criteria set forth in the proposed

rule must be satisfied. The first criterion, that the acquiring person

must hold the goods at all times solely for resale, and the second,

that the acquired person must have held the goods at all times solely

for resale, represent an exemption for dealers whose business is to

purchase and sell used goods. The proposed exemption is unavailable if

the person making the acquisition is in reality an intermediary for

either the seller or another person who intends to use the goods (see

Example 5 to Sec. 802.1). This limitation attempts to forestall abuse

of the dealer exemption by requiring notification in circumstances

where there is any possibility that the dealer might be acting as a

broker or an agent for an acquiring person or a third party. After

considerable assessment of the necessity and applicability of this

exemption, the Commission believes that the exemption should be

included to allow dealers to make transfers within the ordinary course

of their business without having to observe the reporting and waiting

requirements. However, the Commission will closely monitor such

transactions to ensure that the exemption is not being used as a ploy

to circumvent the notification requirements of the act.

The third criterion recognizes that it is in the ordinary course of

business for a company to replace or upgrade productive capacity and to

sell the capacity it is replacing. Thus, an exemption is permitted for

the sale of used durable goods if the productive capacity of these

goods is replaced substantially or upgraded. Such replacements may

result in an increase in the acquired person's productive capacity or

manufacturing efficiencies. The proposed rule allows replacement of the

used durable goods by acquisition or by lease. No minimum lease term is

specified, however, in order for a transfer of the goods being replaced

to be in the ordinary course of business, the replacement goods must be

leased for a period that is substantially long enough to maintain or

increase the company's current productive capacity. Such a period is

industry specific and must be determined in good faith by the acquired

person. Because this proposed provision requires that the productive

capacity must be replaced substantially, the exemption is lost if the

replacement goods result in more than a de minimis decease in the

acquired person's capacity or an exit from a line of business or

specific product or geographic market in which the acquired person

currently operates.

The fourth criterion permits an exemption for sales of used durable

goods if the acquired person is replacing an auxiliary support function

that had been performed internally using the goods being sold by

contracting with the purchaser or a third party to perform

substantially similar functions. This provision essentially provides an

exemption for the transfer of goods by persons that have elected to

outsource certain of their auxiliary support functions. For example, a

company may decide that it would be more cost effective to have a third

party provide its data processing needs. To accomplish this objective,

the company may enter into a contract with a third party for these

services and sell all of the equipment it used internally to provide

this function. Such transfers appear unlikely to pose any competitive

concerns.

Auxiliary support functions include management, accounting, data

processing, legal services, research and development, testing and

warehousing. Although companies will sometimes outsource the

manufacturing of some products they market, the sale of used durable

goods that were used to produce those products does not qualify for

exemption under this provision. Manufacturing, including the

manufacturing of inputs for other products produced by the acquired

person, is not an auxiliary function.

The exemption for the transfer of goods in connection with the

outsourcing of auxiliary functions may include the sale of goods, such

as machinery, that may constitute a discrete business unit. However,

such a transfer does not constitute the acquisition of an operating

unit unless the goods being sold are also used to derive revenues by

providing services to entities not included within the acquired person.

A company division that only provides auxiliary support services to the

company's operating units is not itself an operating unit. A company

unit that provides auxiliary services supports or benefits the

company's operating units. For example, in a company containing a unit

that only provides the company's internal data processing needs, that

unit would be deemed to provide auxiliary support functions. However,

if that unit derived revenues from providing data processing services

to third parties, then the unit would be considered to be an operating

unit. The distinction between an operating unit and a unit providing

auxiliary support functions is, to some extent, industry specific.

The replacement and outsourcing exemptions both require that before

the exemptions apply, the acquired person has already taken definitive

steps to replace the goods being sold or obtain the auxiliary support

functions that the goods being sold formerly provided. In addition,

these steps must have been taken in good faith; this requirement

prevents sham contracts that the acquired person cancels after

transferring the productive capacity without observing the notification

requirements and without replacing the capacity.

II. Proposed Section 802.2: Certain Acquisitions of Real Property

Assets

Proposed Sec. 802.2 identifies six categories of real property

acquisitions that would be exempt from the reporting requirements of

the act. It would exempt certain acquisitions of new facilities,

unproductive real property, office and residential property, hotels and

motels, agricultural property, and rental retail space and warehouses.

Some of these proposed provisions would create entirely new

exemptions, and they result in part from an extensive review by the

enforcement agencies of categories of real property acquisitions that

appear ``not likely to violate the antitrust laws.'' Certain of the

categories expand the exemption provided in current section 7A(c)(1)

for acquisitions of realty in the ordinary course of business. For the

most part, the types of real property assets that are included within

this exemption are abundant, and their holdings are widely dispersed.

Transfers of these categories of real property are generally small

relative to the total amount of holdings, and entry into regional and

local markets for these types of real property assets is usually easy.

The exemptions for new facilities, unproductive real property,

office and residential property, hotels and motels,

[[Page 38935]]

agricultural property, rental retail space and warehouses state that

any non-exempt assets that are being transferred as part of an

acquisition of the exempt assets are separately subject to the

requirements of the act and the rules. This approach to non-exempt

portions of acquisitions is also used in Sec. 802.3.

A. New Facilities. Proposed Sec. 802.2(a) exempts the acquisition

of new facilities, which may include real estate, equipment and assets

incidental to the ownership of the new facility. The term ``new

facility'' is new to the rules, and reflects the position of the PNO

that transfers of ``turnkey'' facilities, i.e., new facilities capable

of commencing operations immediately, are acquisitions of realty in the

ordinary course of business and thus are exempt under 7A(c)(1).

Although the provision is intended primarily to exempt turnkey

facilities, it does not require that the facility be ready for

immediate occupancy. The facility may need additional construction or

outfitting at the time it is purchased and still qualify for the

exemption.

The exemption applies only to new facilities that have not produced

income. It also applies only if the acquired person has held the

facility at all times solely for sale. The language of the exemption

allows holders of the new facilities to be either builders of the

facility (``constructed by the acquired person for sale'') or other

persons, such as a creditor, who take possession of a new facility with

the intention of selling it (``held at all times by the acquired person

solely for resale''). These limitations prevent the sale by an acquired

person of capacity constructed for the acquired person's use, as

Example 1 to Sec. 802.2 illustrates.

Proposed Sec. 802.2(a) requires separate valuation of non-exempt

assets being purchased in an acquisition of a new facility. If the

value of the non-exempt assets exceed $15 million, and no other

exemptions apply, then the purchase of these assets are subject to the

notification requirements.

B. Unproductive property. Proposed Sec. 802.2(b) exempts certain

acquisitions of unproductive real property. The primary purpose of this

exemption is to eliminate filing requirements for acquisitions of

properties that have not generated a significant amount of income

during a certain period of time. The exemption incorporates the

concepts of undeveloped, non-income producing property, the acquisition

of which is in the ordinary course of business, and abandoned property,

which is no longer used to generate revenues.

Unproductive real property is real property that has not produced

revenues of $5 million during the 36 months preceding the transaction

and includes raw land, structures or other improvements and natural

resources. Structures and improvements are additions to the real

property that add value and include, for example, buildings, parking

lots, recreational facilities (e.g., golf courses), orchards and

vineyards. Natural resources refers to any assets growing or appearing

naturally on the land, such as timber and mineral deposits. Proposed

Sec. 802.2(b) excludes from the exemption acquisitions of manufacturing

and non-manufacturing facilities that have not yet begun operations

(turnkey facilities)--these are addressed in Sec. 802.2(a)--as well as

facilities that began operations within twelve months before the

acquisition. Production machinery and equipment are not included in the

definition of structures and improvements.

The revenue test will exempt most wilderness and rural land that is

not used commercially and urban land that is vacant or contains

structures that have generated a minimal amount of income during the

most recent three-year period.

C. Office and residential property. Proposed Sec. 802.2(c) exempts

acquisitions of office and residential property. The definition of

office or residential property has two components: (1) Real property,

the acquisition of which is not exempt under any other provision of the

act; and (2) real property used primarily for office or residential

purposes. Although the proposed rule does not specify the meaning of

``primarily,'' it is contemplated that at least 75 percent of the space

in the qualifying property, excluding common areas and parking

facilities, is used for office or residential purposes. Under this

definition, the total space being measured should consist of non-exempt

property. Therefore, in determining whether a building is being used

primarily for office or residential purposes, any portion of the

building consisting of rental retail space, the acquisition of which is

exempt under Sec. 802.2(f), should be excluded from the determination.

This proposal represents a broader exemption than the current PNO

policy, which exempts office and residential property only if the value

of the retail space being acquired in the same Standards Metropolitan

Statistical Area does not exceed $15 million.

If the acquisition includes assets other than office or residential

property, the acquisition of those assets is separately subject to the

notification requirements. For example, if the acquiring person is also

purchasing a factory for $20 million, the acquisition of the factory is

separately subject to the reporting requirements. The proposed rule

also specifies that if the purchaser is acquiring a business that is

conducted on the office or residential property, the acquisition of the

business, including the space in which the business is conducted, is

subject to the notification requirements of the act. If the value of

the business and the space in which the business is conducted exceeds

$15 million, the acquisition is reportable.

The inclusion of ``assets incidental to the ownership of office and

residential property'' is derived from the language of existing

Sec. 802.1. Although incidental assets may have value apart from the

real property, they are often necessary for the continued and

uninterrupted use of the property. Therefore, incidental assets are

included in the description in proposed Sec. 802.2(c) of office and

residential property and are exempt assets.

D. Hotels and motels. Proposed Sec. 802.2(d) exempts from the

reporting requirements acquisitions of hotels and motels, except when

these assets are to be acquired in connection with the acquisition of a

ski resort or a casino or other gaming facility. The proposed exemption

is based on the Commission's observation that acquisitions of hotels

and motels, except for those excluded from the exemption, are unlikely

to violate the antitrust laws. These types of assets are plentiful and

widely held, and often they are owned by investor groups that hire

management firms or national chains to operate the facilities. Even in

local market entry appears to be relatively easy.

This exemption would include the acquisition by a national hotel

chain of hotel assets of another hotel chain. However, if the

acquisition includes assets other than hotels and motels, e.g., the

selling firm's trademark or its hotel management business, these assets

must be separately valued to determine whether their acquisition is

subject to the notification requirements.

E. Agricultural property. This section exempts acquisitions of

agricultural property and associated assets integral to the

agricultural business activities conducted on the property.

Agricultural property that is intended to be covered by this exemption

is real property that generally derives revenues under Major Groups 01

and 02 of the 1987 Standard Industrial Classification (SIC) Manual.

Associated assets integral to the agricultural business activities

[[Page 38936]]

conducted on the property to be acquired include equipment, structures,

(e.g., barns used to house livestock and other animals), fertilizer,

animal feed inventory (e.g., livestock, poultry, crops, fruits,

vegetables, milk, and eggs),

As described in the proposed rule, the exemption for the

acquisition of agricultural property does not include processing

facilities, even though revenues from processing facilities located on

a farm may be reported under SIC codes starting with 01 or 02. If a

dairy or poultry processing market is concentrated in a given local

area, the transfer of in-house processing capacity may have a

significant effect on the market. For this reason, the Commission

believes that such transfers should be reviewed prior to consummation

so the enforcement agencies can determine whether the proposed

acquisition will affect competition adversely.

This exemption reflects the Commission's continuing efforts to

develop exemptions for categories or acquisitions that are not likely

to violate the antitrust laws. In the case of agricultural property

exempted by Sec. 802.2, there is an abundance of real property assets

with widely dispersed ownership. Such acquisitions are unlikely to have

adverse effects on competition.

F. Rental retail space; warehouse. Proposed Sec. 802.2(f) exempts

acquisitions of two other categories of real property, rental retail

space and warehouses. Rental retail space includes structures that

house retail establishments, such as shopping centers, strip smalls,

and stand alone buildings. These types of assets are abundant and

widely held by insurance companies, banks, other institutional

investors and individual investors as investments and rental property.

The Commission believes that acquisitions of these types of real

property assets are unlikely to violate the antitrust laws.

However, the proposed rule provides that if the acquiring person is

also acquiring a business that is conducted on the real property, the

acquisition of that business, including the portion of the real

property on which the business is conducted, is separately subject to

the notification requirement of the act. For example, if any purchaser

(including a department store chain) proposed to acquire from any

seller (including another department store chain) several shopping

centers and the stores of the seller located in the shopping centers,

the acquisition of the stores including the portion of the shopping

centers in which the stores were located, would be separately subject

to the notification requirements. However, the acquisition of the

portion of the shopping centers that housed other retail establishments

would be exempt under this proposed rule. Example 8 illustrates that

the exemption for the acquisition of warehouses is lost if warehouses

are being acquired in connection with the acquisition of a wholesale

distribution business.

The proposed rule also provides that if an acquisition of rental

retail space or a warehouse includes other assets, those other assets

are separately subject to the reporting requirements of the act.

III. Proposed Section 802.3: Acquisition of Carbon-Based Mineral

Reserves

Proposed Sec. 802.3 adds an exemption for certain acquisitions of

carbon-based mineral reserves, whether such reserves are currently in

production or have ever been in production. The Commission proposes to

exempt acquisitions of carbon-based mineral reserves valued at $200

million or less.

This proposal is designed to exempt acquisitions of producing

reserves. If the reserves being acquired are not yet producing, or are

producing at a level below the income threshold in Sec. 802.2(b), the

acquisition may be exempted by Sec. 802.2(b) as an acquisition of

unproductive real property. If the reserves qualify as unproductive

property, their acquisition is exempt, regardless of the value of the

reserves. Producing reserves are governed by the valuation requirement

of Sec. 802.3 and are not exempt if their value exceeds $200 million.

The Commission's studies of the coal and oil and gas industries

have shown that the value of the reserves in these industries are

substantial compared with asset holdings in other industries. The

holdings of reserves in these industries are widely dispersed, and

individual acquisitions have had minimal effect on concentration.

However, the Commission believes that an unlimited exemption for

reserves in these industries is inappropriate, because the scale of the

largest acquisitions of reserves warrants an examination of the

potential effects on competition.

The $200 million threshold in proposed Sec. 802.3 applies to

reserves, rights to the reserves and associated exploration or

production assets. The acquisition of these associated assets is not

separately reportable because these assets generally have no

competitive significance separate from the reserves. In many instances,

producing reserves contain dedicated equipment that may have a market

value exceeding $15 million but have no practical value absent the

reserves. In addition, the wide availability of used equipment in the

oil and gas and coal industries makes it unlikely that a servicer of

oil fields or coal mines could purchase reserves to restrict supply of

available equipment in a given region. Thus, the Commission believes

that the inclusion of associated exploration and production assets is

necessary to facilitate meaningful application of the exemption.

Associated exploration or production assets are defined in the

current proposal to include equipment, machinery, fixtures and other

assets that are integral to the exploration or production activities of

the reserves. In the oil and gas industry, examples of associated

exploration or production assets include proprietary or licensed

geological and geophysical data, wells, pumps, compressors, easements,

permits and rights of way. Excluded from these assets are flow and

gathering pipelines, distribution pipelines, interests in pipelines,

processing facilities and refineries. Acquisitions of these assets in

certain local markets have, from time to time, raised competitive

concerns prompting investigations by the enforcement agencies, and the

Commission does not believe that such acquisitions as a class are not

likely to violate the antitrust laws.

In the coal industry, associated production assets are facilities

and equipment that are dedicated exclusively to production of the

reserves being transferred. For example, in surface mining in the

western U.S., such assets may consist of various load out facilities,

including storage barns and railroad spurs, and heavy equipment such as

draglines. Associated production assets would also include the long-

term coal contracts and federal leases related to the reserves.

It has been suggested that any exemption for carbon-based mineral

reserves be expanded to included all mineral reserves and renewable

natural resources. The perceived need for such an exemption regarding

non-producing reserves may be lessened by the inclusion in these

proposals of Sec. 802.2(b), which would exempt acquisitions of other

such reserves that are either not yet producing or have generated

revenues below the threshold amount. Regarding producing reserves, the

Commission has not included these in Sec. 802.3 because it does not

have an adequate factual basis for determining that these categories of

transactions should be exempt from the requirements of the act or

subject to a threshold higher than the $15 million threshold that is

identified in Sec. 802.20.

[[Page 38937]]

IV. Proposed Section 802.4: Acquisitions of Voting Securities of

Issuers Holding Only Real Property and Carbon-Based Mineral Reserves

Proposed Sec. 802.4 is designed to exempt the acquisition of voting

securities of certain real estate companies that hold real property

assets the direct acquisition of which are exempt from the reporting

requirements pursuant to proposed Secs. 802.2 and 802.3. This provision

derives in part from existing Sec. 802.1(a) which exempts ``an

acquisition of the voting securities of an entity whose assets consist

solely of real property'' and related assets, if a direct acquisition

of those real property and related assets would be exempt.

As the Commission stated when it promulgated existing

Sec. 802.1: (T)he applicability of (existing 802.1(a)) should not

depend upon the form of the acquisition. At least from an antitrust

standpoint, whether real estate is acquired directly or by acquiring

voting securities would seem to make no difference * * *. 43 FR

33488, July 31, 1978.

Proposed Sec. 802.4(a) retains this approach with regard to new

facilities, unproductive real property, office and residential

property, hotels and motels, agricultural property, rental retail space

and warehouses. Proposed Sec. 802.4(b) contains a comparable exemption

for carbon-based mineral reserves.

V. Proposed Section 802.5: Acquisitions of Investment Rental Property

Assets by Certain Investors

Proposed Sec. 802.5 would exempt acquisitions of investment rental

property by institutional investors (as defined by Sec. 802.64 of the

rules) and by persons whose sole business is the acquisition or

management of investment rental property. This exemption is based in

part on section 7A(c)(11) of the act which exempts ``acquisitions,

solely for the purpose of investment, by a bank, bank association,

trust company, investment company, or insurance company, of * * * (B)

assets in the ordinary course of its business.'' It is designed to

exempt most types of real property acquisitions typically made by

institutional investors or real estate development and management

companies that are not exempted by proposed Sec. 802.2. The proposed

rule supplements proposed Sec. 802.2 by recognizing that there may be

additional categories of assets that, when transferred to certain

parties, are not likely to violate the antitrust laws.

Institutional investors, such as financial institutions, insurance

companies, pensions plans and REITs, typically acquire for investment

real property such as hotels and shopping centers. Acquisitions of

these types of assets are exempt under Sec. 802.2(d) and

Sec. 802.2(f)(1), respectively. Proposed Sec. 802.5 is intended to

exempt acquisitions of other types of real estate, such as industrial

parks, that institutional investors and real estate development and

management companies often purchase.

This exemption is applicable only to institutional investors or

persons engaged solely in the business of acquiring or managing

investment rental property. It applies only to acquisitions of real

property that will be held by the purchaser solely for rental or

investment purposes. Thus, the intent of the purchaser at the time of

the acquisition must be considered to determine whether the exemption

is available.

Acquisitions of real property by institutional investors and real

estate development and management companies are typically made solely

for investment. These investors play no active role in the business

conducted on these properties and seek only to profit from their

investment in the real estate. In order to reduce risk of loss in the

value of the real estate they hold, purchasers of numerous properties

generally do not concentrate their investments in a single geographic

market. In many cases, these properties are purchased from persons who

already maintain them as investment rental property. Given the size and

unconcentrated nature of the real estate market, such acquisitions are

not likely to violate the antitrust laws.

The requirement that real property, in order to come within the

definition of ``investment rental property assets,'' be held solely for

rental or investment purposes is designed to exclude from the exemption

acquisitions of rental property that may reduce competition. In one

such scenario, the acquiring person purchases property that is leased

to a competitor of an entity within the same person as the

institutional investor, and then chooses not to renew the competitor's

lease in order to disadvantage the competitor. Since the purchaser

intends to use its ownership of the property to disadvantage a

competitor, the property will not be held solely for rental or

investment purposes, and the Sec. 802.5 exemption is not available. The

requirement that property will be rented only to entities not included

within the acquired person is also designed to assure that the

exemption will not be available for any acquisition that is designed to

achieve business objectives that are not related to the real estate

market.

For some acquisitions, in order to determine prior to the

acquisition whether the buyer's use requirement will be fulfilled post-

acquisition, it may be necessary to examine the acquisition intent of

the acquiring person, particularly if that investor is controlled by a

person that also controls entities engaged in other businesses. The

acquisition intent can be inferred from the context of the transaction

and from actions by the acquiring person before the acquisition.

Circumstances or conduct such as the following may be scrutinized

separately or in combination to determine whether the acquiring person

has an intent that is fully consistent with holding property solely as

investment rental property assets: (1) The acquiring person undertook,

prior to the acquisition, a study of the cost of converting the

property for use by one of its businesses; (2) the property is to be

converted for use by the acquiring person; (3) the property will be

transferred to an entity within the acquiring person which would not

qualify for an exemption under Sec. 802.5; (4) prior to the

acquisition, the property is being leased to or used by entities

included within the acquiring person; (5) a portion of the acquired

property is being leased at the time of the acquisition to a competitor

of the acquiring person; and (6) the purchase price reflects the value

of a business operated on the property rather than the investment

rental value of the property.

The investment rental property exemption may apply to real

property, such as office or residential property, hotels and motels,

that is also exempt under proposed Sec. 802.2. However, the important

distinction between Sec. 802.2 and Sec. 802.5 is that Sec. 802.2

exempts acquisitions of specific classes of assets by any acquiring

person and does not incorporate the intent-based test of Sec. 802.5.

Proposed Sec. 802.5 exempts any type of asset that can be classified as

investment rental property, but it is available only to institutional

investors and real estate development and management companies. In

addition, the exemptions for acquisition of real property under

Sec. 802.2 apply even if the acquiring person occupies the property for

any purpose; proposed Sec. 802.5 permits the acquiring person to use

the acquired investment rental property assets only to manage or

operate real property.

VI. Aggregation Rules

Section 801.15 states that the aggregation rules of Sec. 801.13 do

not apply to specified classes of transactions. At present,

transactions exempted by section 7A(c)(1) of the act fall within one of

the classes listed. As a result of Sec. 801.15(a), in determining

[[Page 38938]]

whether the more than $15 million size-of-transaction criterion of

section 7A(a)(3) is met, the value of assets acquired in the ordinary

course of business is never counted. Because proposed Sec. 802.1 merely

declares that certain acquisitions are and are not considered in the

ordinary course of business under section 7A(c)(1), it does not appear

necessary to list proposed Sec. 802.1 separately in Sec. 801.15(a).

However, to eliminate possible confusion, proposed Sec. 802.1 is listed

in proposed Sec. 801.15(a), along with 7A(c)(1), to make clear that

assets exempted pursuant to Sec. 802.1(a), (b) and (c)(1) are not

deemed to be held as the result of an acquisition for aggregation

purposes. Therefore, a acquisition of current supplies valued at $8

million is not aggregated with later acquisitions from the same person

to determine if a proposed acquisition would exceed the $15 million

size-of-transaction notification threshold, since the current supplies

are exempt pursuant to section 7A(c)(1) and Sec. 802.1(b).

The other proposed exemptions based on section 7A(c)(1) and other

sections of the act, e.g., section 7A(d)(2)(B), are listed separately

in Sec. 801.15 to make clear whether and under what circumstances the

assets they describe must be aggregated pursuant to Sec. 801.13.

Proposed Sec. 802.2, which would exempt acquisitions of new facilities,

unproductive real property, office and residential property, hotels and

motels, agricultural property, rental retail space and warehouses, is

also listed in Sec. 801.15(a), because Sec. 802.2 sets no dollar limit

on the amount of exempt assets that may be acquired without prior

notification. Proposed Sec. 802.4(a), which exempts acquisitions of

voting securities of issuers holding assets whose purchase would be

exempt under Sec. 802.2, and proposed Sec. 802.5, which exempts

acquisitions of investment rental property by certain investors, also

appear in proposed Sec. 801.15(a).

Proposed Sec. 802.3, which exempts acquisitions of carbon-based

mineral reserves, and proposed Sec. 802.4(b), which exempts

acquisitions of voting securities of issuers holding exempt assets

under Sec. 802.3, appear in Sec. 801.15(b). This provision requires

parties to aggregate the value of otherwise exempt assets that are

transferred in separate acquisitions. Section 801.15(b) provides that

the aggregation rules of Sec. 801.13 are to be applied if, as a result

of a proposed subsequent transaction, the assets from that transaction

and an earlier transaction will exceed a quantitative limitation on the

exemption of assets of that kind. Thus the $200 million carbon-based

mineral reserves limitation in Sec. 802.3 which was not reached in an

earlier acquisition may be exceeded by a subsequent acquisition of

reserves.

Example 4 of Sec. 801.15 amends the current Example 4, in which the

acquiring person is purchasing two mines. The existing example does not

indicate whether the mines contain carbon-based minerals. Based on the

value of the mines stated in the example, proposed Sec. 802.3 would

exempt their acquisition, if they are carbon-based mineral reserves. To

avoid possible confusion, the acquired assets have been changed to

manufacturing plants.

List of Subjects in 16 CFR Parts 801 and 802

Antitrust.

Proposals

The Commission proposes to amend title 16, chapter I, subpart H,

the Code of Federal Regulations as follows:

PART 801--COVERAGE RULES

1. The authority citation for part 801 continues to read as

follows:

Authority: Sec. 7A(d), Clayton Act, 15 U.S.C. 18a(d), as added

by sec. 201, Hart-Scott-Rodino Antitrust Improvements Act of 1976,

Pub. L. 94-435, 90 Stat. 1390.

2. Section 801.15(a) (2) and (b) are revised to read as follows:

Sec. 801.15 Aggregation of voting securities and assets the

acquisition of which was exempt.

* * * * *

(a) * * *

(2) Sections 802.1, 802.2, 802.4(a), 802.5, 802.6(b)(1), 802.8,

802.31, 802.35, 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 acquisition (or would have been exempt, had the act and

these rules been in effect), or the present acquisition of which is

exempt, under section 7A(c)(9) and Secs. 802.3, 802.4(b), 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

acquisition would be exceeded, in which case the assets or voting

securities so acquired will be held; and

* * * * *

3. Section 801.15, Example 4 is revised, and Example 5 is added to

read as follows:

Sec. 801.15 Aggregation of voting securities and assets the

acquisition of which was exempt.

* * * * *

Examples: * * *

4. Assume that acquiring person ``B,'' a United States person,

acquired from corporation X two manufacturing plants located abroad,

and assume that the acquisition price was $40 million. In the most

recent year, sales in the United States attributable to the plants

were $15 million, and thus the acquisition was exempt under

Sec. 802.50(a)(2). Within 180 days of that acquisition, ``B'' seeks

to acquire a third plant from X, to which United States sales of $12

million were attributable in the most recent year. Since under

Sec. 801.13(b)(2), as a result of the acquisition, ``B'' would hold

all three plants of X, and the $25 million limitation in

Sec. 802.50(a)(2) 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 of all three plants before acquiring the third plant.

5. ``A'' acquires $100 million in coal rights from ``B.'' Two

months later, ``A'' agrees to acquire oil and gas rights valued at

$75 million from ``B.'' Paragraph (b) of this section and

Sec. 801.13 require aggregating the previously exempt acquisition of

coal rights with the second acquisition. If the two acquisitions,

when aggregated, exceed the $200 million limitation on the exemption

for carbon-based mineral reserves in Sec. 802.3, ``A'' and ``B''

would be required to file notification for the latter acquisition,

including within the filings the earlier acquisition. Since, in this

example, the total value of the assets in the two acquisitions, when

aggregated, is less than $200 million, both acquisitions are exempt

from the notification requirements.

PART 802--EXEMPTION RULES

1. The authority citation for part 802 continues to read as

follows:

Authority: Sec. 7A(d), Clayton Act, 15 U.S.C. 18a(d), as added

by sec. 201, Hart-Scott-Rodino Antitrust Improvements Act of 1976,

Pub. L. 94-435, 90 Stat. 1390.

2. Section 802.1 is revised to read as follows:

Sec. 802.1 Acquisitions of goods in the ordinary course of business.

Acquisitions of goods in the ordinary course of business are,

pursuant to section 7A(c)(1), exempt from the notification requirements

of the act. This section identifies certain acquisitions of goods that

are exempt as transfers in the ordinary course of business. This

section also identifies certain acquisitions of goods that are not in

the ordinary course of business and, therefore, do not qualify for the

exemption.

(a) Operating unit. An acquisition of all or substantially all the

assets of an operating unit is not an acquisition in the ordinary

course of business. An operating unit means assets that are operated by

the acquired person as a business undertaking in a particular

[[Page 38939]]

geographic area or for particular products or services, even though

those assets may not be organized as a separate legal entity.

(b) New goods. An acquisition of new goods produced by the acquired

person for sale, or of new goods held by the acquired person solely for

resale, is in the ordinary course of business, except when acquired as

part of an acquisition described in paragraph (a) of this section.

(c) Current supplies. An acquisition of current supplies is in the

ordinary course of business except when acquired as part of an

acquisition described in paragraph (a) of this section. The term

``current supplies'' includes the following kinds of assets:

(1) Goods acquired for the purpose of resale (e.g., inventory),

(2) Goods acquired for consumption in the acquiring person's

business (e.g., office supplies, maintenance supplies or electricity),

and

(3) Goods acquired to be incorporated in the final product (e.g.,

raw materials and components).

The term ``current supplies'' does not include used durable goods

(see paragraph (d) of this section.

(d) Used durable goods. A good is ``durable'' if it is designed to

be used repeatedly and has a useful life greater than one year. An

acquisition of used durable goods is an acquisition in the ordinary

course of business if the goods are not acquired as part of an

acquisition described in paragraph (a) of this section and any of the

following criteria are met:

(1) The goods are acquired and held by the acquiring person solely

for resale; or

(2) The goods are acquired from an acquired person who acquired and

has held the goods solely for resale; or

(3) The productive capacity of the goods being sold has been

replaced substantially by the acquired person, by acquisition or lease,

or the acquired person has in good faith executed a contract, agreement

in principle or letter of intent to replace substantially, by

acquisition or lease, the productive capacity of the goods being sold;

or

(4) The goods have been used by the acquired person to provide

auxiliary functions, such as management services, accounting, data

processing, and legal services, that support its primary business

functions, and the acquired person has in good faith executed a

contract, agreement in principle or letter of intent to obtain

substantially similar auxiliary functions as were provided by the goods

being sold.

Examples: 1. Stereo Corporation, which manufacturers cassette

and compact disc players, decides to sell all of the assets of its

Customer Service Division to ``X'' for $16 million. This division

repairs the company's products and products manufactured by others.

The division's assets include a repair facility valued at $10

million and an inventory of replacement parts valued at $6 million.

The combined assets constitute an operating unit of Stereo

Corporation. Thus, no part of the acquisition is exempt as an

acquisition in the ordinary course of business.

2. ``A,'' a manufacturer of airplane engines, agrees to pay $20

million to ``B,'' a manufacturer of airplane parts, for certain

engine components to be used in the manufacture of the airplane

engines. The acquisition is exempt under Sec. 802.1(b) as new goods

as well as under Sec. 802.1(c)(3) as current supplies.

3. ``A,'' a power generation company, proposes to purchase from

``B,'' a coal company, $25 million of coal under a long-term

contract for use in its facilities to supply electric power to a

regional public utility and steam to several industrial sites. This

transaction is exempt under Sec. 802.1(c)(2) as an acquisition of

current supplies. However, if ``A'' proposed to purchase coal

reserves rather than enter into a contract to acquire output of a

coal mine, the acquisition would not be exempt as an acquisition of

goods in the ordinary course of business. The acquisition may still

be exempt pursuant to Sec. 802.3 as an acquisition of reserves of

carbon-based minerals if the requirements of that section are met.

4. ``A,'' a national producer of canned fruit, preserves, jams

and jellies, agrees to purchase from ``B'' for $25 million a total

of 10,000 acres of orchards and vineyards in several locations

throughout the U.S. ``A'' plans to harvest the fruit from the

acreage for use in its canning operations. The acquisition is not

exempt under Sec. 802.1 because orchards and vineyards are real

property, not ``goods.'' If, on the other hand, ``A'' had contracted

to acquire from ``B'' the fruit and grapes harvested from the

orchards and vineyards, the acquisition would qualify for the

exemption as an acquisition of current supplies under

Sec. 802.1(c)(3). Although the transfer of orchards and vineyards is

not exempt under Sec. 802.1, the acquisition would be exempt under

Sec. 802.2 as an acquisition of agricultural property.

5. ``A,'' a major passenger airline, proposes to sell two of its

used aircraft for $15.5 million to ``B,'' a used airplane dealer who

purchases planes from the major U.S. airline companies. ``B's''

acquisition of the used airplanes is exempt under Sec. 802.1(d)(1)

provided that ``B'' is not acting as a broker or as the agent for

the seller or the ultimate purchaser of the used airplanes.

6. ``A,'' a passenger airline, plans to sell for $18 million two

of its used airplanes to ``B,'' a cargo airline. ``A'' will also

sell three of its used airplanes for $25 million to ``C,'' a

regional passenger air carrier. ``A'' has, in good faith, executed a

contract to acquire planes with essentially the same capacity from

an airplane manufacturer to replace the planes it is selling to

``B'' and ``C.'' Since ``B'' and ``C'' are acquiring goods that the

seller, ``A,'' has contracted to replace, both acquisitions are

exempt under Sec. 802.1(d)(3).

7. ``A,'' a manufacturing company, has acquired several new

machines that will replace equipment on one of its production lines.

``A's'' capacity to produce the same products will increase modestly

when the integration of the new equipment is completed. ``B,'' a

manufacturing company that produces products similar to those

produced by ``A,'' has entered into a contract to acquire for $18

million the machinery that ``A'' is replacing. Since ``A'' is

replacing with new machinery the productive capacity of the used

equipment it is selling, the acquisition by ``B'' is exempt under

Sec. 802.1(d)(3).

8. ``A'' will sell to ``B'' for $16 million all of the equipment

``A'' uses to perform ``A's'' data processing requirements. ``A''

and ``B'' also entered into a contract which requires ``B'' to

perform ``A's'' data processing requirements. Although the assets

``B'' will acquire make up essentially all of the assets of one of

``A's'' auxiliary support services divisions, the acquisition

qualifies for the exemption in Sec. 802.1(d)(4) because auxiliary

support functions, however organized, are not an operating unit as

defined by Sec. 802.1(a). Auxiliary functions are not a ``business

undertaking'' as that term is used in Sec. 802.1(a). Rather,

auxiliary functions provide support and benefit to the company's

operating units and support the company's primary business

activities. However, if the assets being sold also derived revenues

from providing data processing services to third parties, then the

transfer of these assets would not be exempt under Sec. 802.1(d)(4),

since the equipment is being used in connection with a business

undertaking of ``A,'' in addition to providing auxiliary functions

to ``A''.

In this example, the acquisition by ``B'' is exempt under

Sec. 802.1(d)(4) because ``A'' has entered into a contract for the

provision of the auxiliary functions provided by the goods being

sold. The exemption would apply even if ``A'' were contracting for

the provision of these services with a party other than ``B.''

9. ``A,'' an automobile manufacturer, is discontinuing its

manufacture of metal seat frames for its cars. ``A'' enters into a

contract with ``B,'' a manufacturer of various fabricated metal

products, to sell its seat frame production lines and to purchase

from ``B'' all of its metal seat frame needs for the next five

years. This transfer of productive capacity by ``A'' is not exempt

pursuant to Sec. 802.1(d)(4). ``A's'' sale of production lines is

not the transfer of goods that provide auxiliary functions to

support the primary business activities of ``A''; this manufacturing

equipment is an integral part of ``A's'' production operations and

thus comprises an operating unit.

3. Part 802 is amended by adding Secs. 802.2, 802.3, 802.4 and

802.5 to read as follows:

Sec. 802.2 Certain acquisitions of real property assets.

(a) New facilities. An acquisition of a new facility is exempt as a

transfer of realty in the ordinary course of business. A new facility

is a structure that has not produced income and was

[[Page 38940]]

either constructed by the acquired person for sale or held at all times

by the acquired person solely for resale. The new facility may include

realty, equipment or other assets associated with the operation of the

new facility. In an acquisition that includes a new facility, the

transfer of any other assets shall be subject to the requirements of

the act and these rules as if they were being acquired in a separate

acquisition.

(b) Unproductive real property. An acquisition of unproductive real

property shall be exempt from the requirements of the act. In an

acquisition that includes unproductive real property, the transfer of

any assets that are not unproductive real property shall be subject to

the requirements of the act and these rules as if they were being

acquired in a separate acquisition.

(1) Unproductive real property is any real property, including raw

land, structures or other improvements and natural resources, that has

not generated total revenues in excess of $5 million during the thirty-

six (36) months preceding the acquisition.

(2) Unproductive real property does not include manufacturing and

non-manufacturing facilities that have not yet begun operation or

manufacturing or non-manufacturing facilities that began operation

within the twelve (12) months preceding the acquisition.

(c) Office and residential property. (1) An acquisition of office

or residential property shall be exempt from the requirements of the

act. In an acquisition that includes office or residential property,

the transfer of any assets that are not office or residential property

shall be subject to the requirements of the act and these rules as if

such assets were being transferred in a separate acquisition.

(2) Office and residential property is real property, the

acquisition of which is not exempt under another provision of the act,

that is used primarily for office and residential purposes and

includes:

(i) Office buildings,

(ii) Residences,

(iii) Common areas on the property, including parking and

recreational facilities, and

(iv) Assets incidental to the ownership of such property, including

cash, prepaid taxes or insurance, rental receivables and the like.

(3) If the acquisition includes the purchase of a business

conducted on the office and residential property, the transfer of that

business, including the space in which the business is conducted, shall

be subject to the requirements of the act and these rules as if such

business were being transferred in a separate acquisition.

(d) Hotels and motels. (1) An acquisition of a hotel or motel shall

be exempt from the requirements of the act. In an acquisition that

includes a hotel or motel, the transfer of any assets that are not a

hotel or motel shall be subject to the requirements of the act and

these rules as if they were being acquired in a separate acquisition.

(2) An acquisition of a hotel or motel that includes a casino, or a

hotel or motel that is being acquired as part of the acquisition of a

ski resort, shall be subject to the requirements of the act and these

rules.

(e) Agricultural property. An acquisition of agricultural property

and associated agricultural assets shall be exempt from the

requirements of the act. Agricultural property is real property and

assets that primarily generate revenues from the production of crops,

fruits, vegetables, livestock, poultry, milk and eggs.

(1) Associated agricultural assets are assets integral to the

agricultural business activities conducted on the property. Associate

agricultural assets include, but are not limited to, inventory (e.g.,

livestock, poultry, crops, fruit, vegetables, milk, eggs); equipment

dedicated to the income-generating activities conducted on the real

property; structures that house livestock and other animals raised on

the real property; and fertilizer and animal feed. Associated

agricultural assets do not include processing facilities, such as

poultry slaughtering and processing facilities.

(2) If an acquisition of agricultural property includes processing

facilities and other assets that are not associated agricultural

assets, these facilities and assets are subject to the requirements of

the act and these rules as if they were being acquired in a separate

acquisition.

(f) Retail rental space; warehouses. An acquisition of retail

rental space (including shopping centers) or warehouses shall be exempt

from the requirements of the act, except when the retail rental space

or warehouse is to be acquired in an acquisition of a business

conducted on the real property. In an acquisition of retail rental

space or warehouses, the transfer of any assets that are neither retail

rental space nor warehouses shall be subject to the requirements of the

act and these rules as if such assets were being transferred in a

separate acquisition.

Examples: 1. ``A,'' a major automobile manufacturer, builds a

new automobile plant in anticipation of increased demand for its

cars. The market does not improve and ``A'' never occupies the

facility. ``A'' then sells the facility to ``B,'' another automobile

manufacturer. This acquisition is not exempt as an acquisition of an

new facility, even though the facility has not produced any income,

since ``A'' did not construct the facility for sale. Also, the

acquisition is not exempt as an acquisition of unproductive property

since manufacturing facilities that have not yet begun operations

are explicitly excluded from that exemption.

2. ``A'' proposes to acquire a $100 million tract of wilderness

land from ``B.'' Copper deposits valued at $17 million and timber

reserves valued at $20 million are situated on the land and will be

conveyed as part of this transaction. During the last three fiscal

years preceding the sale, the property generated $50,000 from the

sale of a small amount of timber cut from the reserves. ``A's''

acquisition of the wilderness land from ``B'' is exempt as an

acquisition of unproductive real property because the property did

not generate annual revenues exceeding $5 million during the thirty-

six months preceding the acquisition. The copper deposits and timber

reserves are by definition unproductive real property and, thus, are

not separately subject to the notification requirements.

3. ``A'' proposes to purchase from ``B'' for $40 million an old

steel mill that is not currently operating to add to ``A's''

existing steel production capacity. The mill has not generated

revenues during the 36 months preceding the acquisition but contains

equipment valued at $16 million that ``A'' plans to refurbish for

use in its operations. ``A's'' acquisition of the mill and the land

on which it is located is exempt as unproductive real property.

However, the transfer of the equipment and any other assets other

than the unproductive property is not exempt and is separately

subject to the notification requirements of the act.

4. ``A'' proposes to purchase two downtown lots, Parcels 1 and

2, from ``B'' for $40 million. Parcel 1 contains no structures or

improvements. A hotel is located on Parcel 2 and has generated $9

million in revenues during the past 3 years. The purchase of Parcel

1 is exempt if it qualifies as unproductive real property; i.e., it

has not generated annual revenues in excess of $5 million in the

three fiscal years prior to the acquisition. Parcel 2 is not

unproductive real property, but its acquisition is exempt under

Sec. 802.2(d) as the acquisition of a hotel.

5. ``A'' intends to purchase a poultry farm from ``B.'' The

acquisition of the poultry farm is a transfer of agricultural

property that is exempt pursuant to Sec. 802.2(e). If, however,

``B'' has a poultry slaughtering and processing facility on his

farm, ``A'' would be required to file notification for the

acquisition of the processing facility if the higher of the

acquisition price or the fair market value of the facility exceeds

$15 million.

6. ``A'' proposes to purchase the prescription drug wholesale

distribution business of ``B'' for $50 million. The business

includes six regional warehouses used for ``B's'' national wholesale

drug distribution business. Since ``A'' is acquiring the warehouses

in connection with the acquisition of ``B's'' prescription drug

[[Page 38941]]

wholesale distribution business, the acquisition of the warehouses in

not exempt.

Sec. 802.3 Acquisitions of carbon-based mineral reserves.

(a) An acquisition of carbon-based mineral reserves (oil, natural

gas, coal, shale or tar sands) or rights to carbon-based mineral

reserves, whether such reserves are presently in production or have

ever been in production, and associated exploration or production

assets shall be exempt from the requirements of the act if the value of

the carbon-based mineral reserves, the rights and the associated

exploration or production assets to be held as a result of the

acquisition does not exceed $200 million. In an acquisition that

includes carbon-based mineral reserves, rights to carbon-based mineral

reserves and associated exploration or production assets, the transfer

of any other assets shall be subject to the requirements of the act and

these rules as if they were being acquired in a separate acquisition.

(b) Associated exploration or production assets means equipment,

machinery, fixtures and other assets that are integral to current or

future exploration or production activities associated with the carbon-

based mineral reserves that are being acquired. Associated exploration

or production assets do not include any pipeline system or processing

facility.

Example: 1. ``A'' proposes to purchase from ``B'' for $250

million gas reserves that are not yet in production and have not

generated any income. ``A'' will also acquire from ``B'' for $180

million producing oil reserves and associated assets such as wells,

compressors, pumps and other equipment. The acquisition of the gas

reserves is exempt as a transfer of unproductive property under

Sec. 802.2(b). The acquisition of the oil reserves and associated

assets is exempt pursuant to Sec. 802.3, since the acquisition price

does not exceed the $200 million limitation.

2. ``A,'' an oil company, proposes to acquire oil reserves

currently in production, several associated processing facilities

and a gathering pipeline system for $180 million. The acquisition of

the reserves is exempt. However, ``A'' must determine the value of

the processing facilities and the gathering pipeline system, since

these assets are excluded from the exemption in Sec. 802.3 for

transfers of associated exploration or production assets. If their

value exceeds $15 million, and their acquisition is not otherwise

exempt, ``A'' must file with respect to the transfer of the

facilities and the pipeline system.

3. ``A,'' an oil company, proposes to acquire a coal mine and

associated production assets for $90 million from ``B,'' an oil

company. ``A'' will also purchase from ``B'' oil reserves valued at

$100 million and an oil refinery valued at $13 million. The

acquisition of the coal mine and the oil reserves is exempt pursuant

to Sec. 802.3. Although the refinery is excluded from the exemption

in Sec. 802.3 for transfers of associated exploration and production

assets, ``A's'' acquisition of the refinery is not subject to the

notification requirements of the act because its value does not

exceed $15 million.

Sec. 802.4 Acquisitions of voting securities of issuers holding

certain real property assets.

(a) An acquisition of voting securities of an issuer whose assets

consist solely of assets whose purchase would be exempt from the

requirements of the act pursuant to Sec. 802.2 is exempt from the

reporting requirements.

(b) An acquisition of voting securities of an issuer whose assets

consist or will consist solely of assets whose purchase would be exempt

from the requirements of the act pursuant to Sec. 802.3 is exempt from

the reporting requirements.

Example 1. ``A,'' a real estate investment company, proposes to

purchase 100 percent of the voting securities of Company C, a

wholly-owned subsidiary of ``B,'' a construction company. C's assets

are a newly constructed, never occupied hotel, including fixtures,

furnishings and insurance policies. The hotel qualifies as a new

facility under Sec. 802.2(a), and is also exempt under

Sec. 802.2(d). Therefore, the acquisition of the voting securities

of C is exempt pursuant to Sec. 802.4(a).

Sec. 802.5 Acquisitions of investment rental property assets by

certain investors.

(a) Acquisitions of investment rental property assets, or of voting

securities of an entity the assets of which consist solely of

investment rental property assets, by an institutional investor (as

defined by Sec. 802.64) or by any person whose sole business is the

acquisition or management of investment rental property assets, shall

be exempt from the requirements of the act.

(b) Investment rental property assets. Investment rental property

assets means real property that:

(1) Will be rented only to entities not included within the

acquiring person; and

(2) Will be held solely for rental or investment purposes.

Investment rental property assets include:

(i) Property currently rented,

(ii) Property held for rent but not currently rented,

(iii) Common areas on the property,

(iv) Assets incidental to the ownership of property, which may

include cash, prepaid taxes or insurance, rental receivables and the

like, and

(v) Space occupied by the acquiring person for the sole purpose of

maintaining, managing, or supervising the operation of real property.

Example: 1. Insurance Company ``A'' proposes to acquire a

hospital currently leased to and operated by ``B,'' a major for-

profit hospital corporation. ``A'' intends to continue ``B's'' lease

with the exception of one floor of the hospital, which ``A'' will

lease to an independent radiology clinic which the hospital will use

for its outpatient radiology needs. This acquisition is an exempt

acquisition of investment rental property assets since ``A'' intends

to rent the facility to the hospital and an independent clinic and,

thus, is holding the hospital solely for rental and investment

purposes.

By direction of the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 95-18596 Filed 7-27-95; 8:45 am]

BILLING CODE 6750-01-M