Premerger Notification; Reporting and Waiting Period Requirements

FEDERAL TRADE COMMISSION

16 CFR Parts 801 and 802

Premerger Notification; Reporting and Waiting Period Requirements

AGENCY: Federal Trade Commission.

ACTION: Final rule.

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SUMMARY: The Commission amends 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.

These amendments consist of five rules that define or create

exemptions to the requirements imposed by the Hart-Scott-Rodino Act.

These rules 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 are not

likely to violate the antitrust laws. These 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 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.

EFFECTIVE DATE: April 29, 1996.

[[Page 13667]]

FOR FURTHER INFORMATION CONTACT: John M. Sipple, Jr., Assistant

Director, or Melea R. Epps, Attorney, Premerger Notification Office,

Bureau of Competition, Room 303, Federal Trade Commission, Washington,

DC 20580. Telephone: (202) 326-3100.

SUPPLEMENTARY INFORMATION:

Regulatory Flexibility Act

These 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 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 Sec. 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 in charge 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''

that 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 has reason to

believe 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 receive 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 and

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 and 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 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 to the premerger

notification rules or Form on eleven 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); 55 FR 31371 (August 2, 1990); and 60 FR 40704 (August 9, 1995).

The current amendments interpret the act and expand 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. They also include

several new exemptions for acquisitions of certain types of real

property assets and carbon-based mineral reserves.

Comments

These amendments reflect extensive analysis of comments received in

response to the notice of proposed rulemaking published by the Federal

Trade Commission, in consultation with the Assistant Attorney General,

in the Federal Register of July 28, 1995, 60 FR 38930. The notice

contained the current amendments in a proposed form and provided 60

days for interested persons to submit comments on the proposed rules.

During the 60-day period 29 comments were received. In addition, three

new comments and one supplemental comment were received after the

expiration of the comment period. The commenters are identified below.

[[Page 13668]]

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Date of

Number of comment Commenter comment

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1 American Council of Life 9/7/95

Insurance.

2 Heller Ehrman White & McAuliffe.. 9/15/95

3 Pillsbury, Madison & Sutro on 9/26/95

behalf of Chevron Corporation.

4 The Perkin-Elmer Corporation..... 9/21/95

5 Atlantic Richfield Company....... 9/27/95

6 Pillsbury, Madison & Sutro....... 9/25/95

7 General Motors Corporation....... 9/28/95

8 Boult, Cummings, Conners & Berry. 9/28/95

9 Section of Antitrust Law of the 9/29/95

American Bar Association.

10 Federal Express.................. 9/28/95

11 Ford Motor Company............... 9/28/95

12 BellSouth Corporation............ 9/28/95

13 Equipment Leasing Association of 9/29/95

America.

14 Ronald A. Bloch of McDermott, 9/29/95

Will & Emery.

15 Arter & Hadden on behalf of 9/29/95

Kennecott Corporation.

16 U.S. Chamber of Commerce......... 9/29/95

16A U.S. Chamber of Commerce 11/9/95

(Supplemental Comments).

17 Rinehart & Associates, Investment 9/28/95

Forestry.

18 Timberland Investment Services, 9/28/95

LLC.

19 O'Melveny & Myers on behalf of 9/29/95

Marriott International, Inc..

20 American Hospital Association.... 9/29/95

21 Weil, Gotschal & Manges.......... 9/29/95

22 Latham & Watkins................. 9/29/95

23 International Council of Shopping 9/29/95

Centers.

24 Colorado Oil & Gas Association... 9/29/95

25 ITT Corporation.................. 9/27/95

26 American Hotel & Motel 9/29/95

Corporation.

27 American Transport Association of 9/29/95

America.

28 National Independent Energy 9/29/95

Producers.

29 Latham & Watkins on behalf of 10/6/95

Host Marriott Corporation.

30 Forest Investment Associates..... 9/28/95

31 National Association of Real 11/2/95

Estate Investment Trusts.

32 Association of Private Pension 2/1/96

and Welfare Plans.

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The commenters generally favored the adoption of the exemptions but

also advocated the expansion of certain of the proposals to include

exemptions for other types of transactions which, they argued, raise

few competitive concerns. The final amendments contain revisions to the

proposed rule that address certain commenters' concerns and exclude

from the reporting requirements additional transactions that the

Commission and the Assistant Attorney General found were unlikely to

violate the antitrust laws. A few of the comments contained suggestions

that were outside the scope of the proposed rulemaking; these

suggestions may be considered by the Commission in future rulemaking

efforts.

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

Premerger Notification Rules

Authority: The Federal Trade Commission, with the concurrence of

the Assistant Attorney General, promulgates these amendments to the

premerger notification rules pursuant to section 7A(d) of the

Clayton Act, 15 U.S.C. 18a(d), as added by section 201 of the Hart-

Scott-Rodino Antitrust Improvements Act of 1976, Pub. L. 94-435, 90

Stat. 1390.

The five amendments to the premerger notification rules--

Secs. 802.1, 802.2, 802.3, 802.4, and 802.5--describe certain types of

acquisitions that are exempt or are not exempt from the notification

requirements of the act. They 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

transferred in the ordinary course of business. Revisions to

Sec. 801.15 define when the aggregation rules apply to acquisitions

covered by these 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 of an entity 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 to the

Premerger Notification Office. Amended Sec. 802.1 represents

interpretations of section 7A(c)(1) made by the Premerger Notification

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

exempt additional classes of acquisitions of goods that qualify as

transfers in the ordinary course of business and thus are unlikely to

violate the antitrust laws.

Amended 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 that are operated by the acquired person as

a business undertaking in a particular location or for particular

products or services.'' The sale of all or substantially all of the

assets of a business undertaking is generally equivalent to the sale of

a business. Amended Sec. 802.1(a) recognizes that acquisitions that

transfer the equivalent of a business are not in the ordinary course

and thus are not exempt from the prior notification obligations of the

act.

Amended 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 transactions such as typical acquisitions of new goods and current

supplies is generally unnecessary because buying and 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.

Amended 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 that are not the sale of an

operating unit are made in the ordinary course of business. For

example, an equipment leasing company may be acquiring used durable

goods as current supplies, or the seller may be replacing these assets

to increase or upgrade capacity and to improve efficiencies. However,

many used durable goods acquisitions involving productive assets are

not within the ordinary course of business and thus are not exempt

under Sec. 802.1.

New Secs. 802.2 (concerning real property assets) and 802.3

(concerning carbon-based mineral reserves) are based 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

sections

[[Page 13669]]

provide exemptions for certain acquisitions of assets that are abundant

and are used in markets that are generally 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, new Sec. 802.4 exempts acquisitions of voting

securities of issuers holding assets of two types: (1) assets, the

direct acquisition of which is exempted by section 7A(c)(2) of the act

or Secs. 802.2, 802.3 or 802.5 of the rules, and (2) assets, the direct

acquisition of which is not exempt by section 7A(c)(2) of the act or

Secs. 802.2, 802.3 or 802.5 of the rules, that are valued at $15

million or less. The exemption for the acquisition of the voting

securities of an issuer holding assets, the acquisition of which is

exempt under section 7A(c)(2)--bonds, mortgages, deeds of trust and

other obligations that are not voting securities--is designed to

provide the same treatment for the direct acquisition of such assets (

a transaction which is already exempt from the reporting requirements)

and the acquisition of the voting securities of an issuer holding these

assets.

New Sec. 802.5 exempts acquisitions of investment rental property

assets, the acquisition of which is not already exempted by Sec. 802.2.

Section 802.5 is based on the use to which buyers will put the acquired

assets. The Commission believes that the acquisition of investment

rental property assets--defined in Sec. 802.5(b) as real property that,

except for limited circumstances, will be rented only to entities not

included within the acquiring person and will be held solely for rental

or investment purposes--is unlikely to violate the antitrust laws.

Sections 802.1 through 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]'' 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].'' These exemptions, of course,

relate only to premerger reporting, and transactions exempted from the

reporting requirements by the new rules remain subject to the antitrust

laws.

The Commission is aware that even with the significant coverage of

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

unaddressed. These rules do not and are not intended to interpret or

apply to the entire statutory exemption created by section 7A(c)(1).

For example, certain acquisitions of credit card receivables 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. Section 802.1: Acquisitions of Goods and Realty 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.'' Amended

Sec. 802.1 provides that an acquisition of all the assets of an

operating unit is not an acquisition in the ordinary course of

business. It also defines certain acquisitions of goods that are in the

ordinary course of business and therefore exempt from the reporting

requirements. This section primarily covers exemptions for certain

acquisitions of goods. Exemptions for the acquisition of certain types

of realty are set out in new Sec. 802.2. The realty exemptions are not

subject to the exclusion for acquisitions of an operating unit.

Amended 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 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.

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

ordinary course of business exemption to any transfer of goods and

realty 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: (1) transfers to and from bona fide dealers,

resellers or lessors; (2) transfers by an acquired person that has

replaced the productive capacity of the assets being sold; and (3)

transfers by an acquired person that has outsourced the management and

administrative support services provided by the goods being sold.

In determining whether a given acquisition of goods and realty is

in the ordinary course of business and is therefore exempt under a

provision of amended Sec. 802.1, one must first determine if the assets

are substantially all of the assets of an operating unit. If the assets

being sold comprise all or substantially all of the assets of an

operating unit of the seller, the inquiry ends there, and the

acquisition is not exempt as a transfer of goods or realty in the

ordinary course of business. If the assets do not constitute all or

substantially all of the assets of an operating unit, then the goods

should be classified as either new goods, current supplies or used

durable goods.

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, sell or lease 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 operating units

are not within the common meaning of ``ordinary course'' and have the

potential to concentrate productive capacity and thereby diminish

competition.

Proposed Sec. 802.1 addressed only exemptions for acquisitions of

goods in the ordinary course of business. Acquisitions of realty in the

ordinary course of business are also exempted, pursuant to section

7A(c)(1) of the act. Section 802.2 covers certain exemptions for

acquisitions of realty, and it is possible that acquisitions of realty

other than those identified in Sec. 802.2 are transfers of real

property in the ordinary course of business that are exempt. Language

added to Sec. 802.1 concerning realty makes the provision consistent

with the exemption provided in section 7A(c)(1).

A. Operating Unit. Amended Sec. 802.1(a) excludes from the ordinary

course of business exemption any acquisition of all or substantially

all of the assets of an ``operating unit.'' As defined by the amended

provision, an

[[Page 13670]]

operating unit is a collection of assets that has been operated as a

business undertaking and that may include goods, realty and other types

of property. Amended Sec. 802.1(a) also indicates that operating units

are not necessarily separate legal entities. A determination of which

groups of assets constitute an operating unit within a company will

vary significantly among businesses, because the manner in which

businesses are organized is company-specific. Thus, examples of

operating units include, but are not limited to, regional divisions,

company branches, international operations, a hospital, a retail store,

a factory or a processing facility.

The definition of operating unit indicates that the assets that

comprise the unit are operated ``in a particular location or for

particular products or services.'' Proposed Sec. 802.1(a) defined an

operating unit as assets operated ``in a particular geographic area or

for particular products or services.'' The word ``location'' was

substituted for ``geographic area'' since a single location of a

company's business, i.e., a manufacturing plant, a retail store, a

funeral home, constitutes an operating unit. Each location of a

company's operations is viewed as a separate business undertaking, and

the purchase of all of the assets of one of a company's stores or

production facilities is not a transaction within the ordinary course

of business. Because amended Sec. 802.1(a) no longer uses the term

``geographic area,'' the determination of which of the seller's

operations comprise an operating unit is no longer dependent in part

upon whether certain locations are sufficiently proximate to comprise a

business undertaking in a particular geographic area. Example 1 to

Sec. 802.1 illustrates that an operating unit consists of one grocery

store within a company's chain of stores.

A key factor in determining whether a group of assets being sold

constitutes an operating unit is whether the seller, as a result of the

sale, will cease to sell particular products or provide particular

services from a specific location or will exit the business of selling

particular products or providing particular services. The operating

unit definition specifically excludes references to relevant product

markets and relevant geographic markets. Thus, a section 7 antitrust

analysis is unnecessary and inappropriate in determining whether assets

being sold comprise an operating unit for purposes of determining

whether notification is required.

Another probative factor in determining whether a group of assets

constitutes an operating unit is whether the seller derived third party

revenues from the use of the assets. In certain cases, this factor may

distinguish an operating unit from a set of assets that have been used

solely to provide management and administrative support services, such

as in-house accounting or billing services, that generate no third

party revenues directly but support the seller's business operations.

Amended Sec. 802.1(a) 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 certain 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 the ``Tri-State

Division,'' that provides support functions to the business''

manufacturing activities. Such usage is designed to serve the needs of

the business. The term ``operating unit'' has been adopted in order to

make clear that the application of the rule is not dependent on the

terminology used by a business.

Comment 11 suggested that Sec. 802.1(a) be revised to focus on

whether the seller is exiting a line of business or a geographic area.

However, the wording of amended Sec. 802.1(a) makes no explicit

reference to the seller's exit from a line of business or geographic

area. As discussed above, this provision no longer emphasizes the

operation of a business undertaking in a particular geographic area;

instead, the focus is on the location of a specific business

undertaking. Also, while the seller's exit from a business segment can

be a major indication that certain assets constitute an operating unit,

it is not that only possible indication. The extent to which the assets

are used to generate third party revenues is also an important factor

and may determine that a group of assets comprises an operating unit,

even though there may be disagreement as to whether the seller is

actually exiting a business segment. For example, the sale of revenue

generating assets at a specific location can be the sale of an

operating unit even if the seller is continuing in that line of

business at other locations.

Comment 11 also suggested that the operating unit should be defined

as assets operated by the acquired person as a business undertaking

including all similar products or services offered by the acquired

person, or all operations in a geographic area. Interpretation of the

terminology ``similar products or services'' could require a

complicated analysis of the seller's products to determine whether the

assets being sold were used to manufacture those products of the seller

that were sufficiently different from the seller's other products to

deem that an operating unit was being transferred. Thus, the suggested

language was not adopted in order to avoid the necessity of such an

analysis.

B. New Goods. Amended 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, which are typically routine sales of

inventory by manufacturers, wholesalers or retailers conducted in the

ordinary course of business.

Proposed Sec. 802.1(b) exempted acquisitions of new goods

``produced by the acquired person for sale, or * * * held by the

acquired person solely for resale.'' The proposed rule did not exempt

any acquisitions of goods from a seller that purchased or produced the

goods for his own use but decided to sell the goods without using them.

This language was eliminated from amended Sec. 802.1(b) in order to

simplify the rule. Further, the change addresses a concern raised by

Comment 21 that the proposed rule would not exempt acquisitions of new

equipment from companies that ordered the equipment for their own use

but discovered before or upon delivery that they could not use the

equipment. The Commission has concluded that such sales should be

exempt because sales of new equipment that are not part of the sale of

an operating unit are not likely to raise an antitrust concern, even

though the equipment may have been purchased by the seller for use. As

a result of the deletion of this language, the rule no longer focuses

on the purpose for which the acquired person holds the new goods. The

exemption is also available for acquisitions of goods that the seller

in good faith considers to be new, even though he may have used the

goods for demonstration purposes, customer trials or other purposes

that are incidental to the sale of the goods. The term ``new'' implies

that the goods have not been used to generate income.

Comments 9, 13 and 21 suggested that an exemption be included for

acquisitions of new goods produced or held for lease. Amended

Sec. 802.1(b) adopts this suggestion by exempting acquisitions of new

goods regardless of the purpose for which the goods were produced or

acquired. As a result, an equipment leasing company that sells new

inventory that it has been unable to lease may avail itself of the

exemption as long as the inventory of new goods

[[Page 13671]]

does not constitute an operating unit of the company.

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 purchased the entire

inventory of another marine supply wholesaler which owned only an

extensive inventory of hundreds of items from different manufacturers,

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. Amended Sec. 802.1(c) describes another

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

supplies''--that qualifies 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 solely for the

purpose of resale or leasing to an entity not included within the

acquiring person, raw materials, components, maintenance supplies and

the like. Current supplies are generally purchased frequently and are

used for inventory by the purchaser, consumed in the daily conduct of

business or incorporated into a final product. Current supplies may

also consist of used durable goods, discussed in new Sec. 802.1(d),

which, for example, may be purchased as inventory by equipment leasing

companies or used equipment dealers. However, acquisitions of current

supplies are not in the ordinary course of business if they are

acquired as part of an acquisition of all or substantially all the

assets of an operating unit.

In proposed Sec. 802.1(c), the term ``current supplies'' explicitly

excluded used durable goods. Amended Sec. 802.1(c) now redefines

``current supplies'' to eliminate this exclusion, as suggested by

Comments 9 and 21. Although ``used durable goods'' are addressed

explicitly in Sec. 802.1(d), the Commission recognizes that used

assets, as well as new assets, may meet the definition of ``current

supplies'' in Sec. 802.1(c). Parties are permitted to claim the

exemption even if the goods purchased are not new, so long as the

acquired goods are to be held for third-party resale or lease, are to

be consumed by the buyer, or are otherwise incorporated in the

acquiring person's final product.

Amended Sec. 802.1(c)(1) includes additional language to make clear

that the exemption does not apply unless the goods being acquired will

be resold or leased to an entity that is not within the acquiring

person. The addition prevents a buyer from claiming the exemption for

the acquisition from a competitor of used productive equipment which

the buyer in turn resells or leases to a subsidiary.

The used durable goods provision, Sec. 802.1(d), contains a

provision exempting the acquisition of the category of goods described

in proposed Sec. 802.1(c)(1) as goods acquired for the purpose of

resale or leasing. The language of amended Sec. 802.1(c)(1) has been

changed largely to mirror the language of the comparable provision in

the used durable goods exemption, Sec. 802.1(d)(1). Read together, the

amended provisions exempt, with certain exceptions, acquisition of new

goods and used durable and non-durable goods that are acquired and held

solely for the purpose of resale or leasing to entities not within the

acquiring person.

Amended Sec. 802.1(c) also adds goods acquired for lease to the

categories of assets comprising current supplies. These changes, also

suggested in Comments 9 and 21, make the exemption available for

inventory purchases of equipment by leasing companies.

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. 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. Amended Sec. 802.1(d) provides that certain

acquisitions of used durable goods qualify for the ordinary course of

business exemption. The term ``used durable good'' is new to the rules

currently in force. It is defined as a used good which was ``designed

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

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 some categories of used durable goods acquisitions

lack 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.

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: (1) when the goods are being acquired and held solely for the

purpose of resale or leasing to an entity not within the acquired

person; (2) when the goods are being acquired from an acquired person

holding the goods solely for resale or leasing to an entity not within

the acquired person; (3) when the acquired person is replacing or

upgrading the productive capacity provided by the goods being sold; and

(4) when the acquired person is outsourcing the management and

administrative support services provided by the goods being sold.

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 an

acquisition of an operating unit as defined in Sec. 802.1(a). Thus, if

the used durable goods constitute, or are being acquired as part of a

group of assets that constitute, a business undertaking in a particular

location or for particular products or services, the ordinary course

exemption does not apply.

The second requirement for exempting an acquisition of a used

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

rule must be satisfied. The first criterion, that the goods must be

acquired and held solely for the purpose of resale or leasing to an

entity not within the acquiring person (i.e., current supplies as the

term is used in Sec. 802.1(c)(1)), and the second, that the acquired

person must have held the goods at all times solely for resale or

leasing to an entity not within the acquired person, represent an

exemption for dealers whose business is to purchase and sell used goods

and for equipment leasing companies which buy used goods for leasing

purposes. After considerable assessment of the necessity and

applicability of Sec. 802.1(d)(1) and (2), the Commission believes that

the exemption should be included to allow dealers to make transfers

within the ordinary course of their business, in good faith

transactions conducted on their own behalf, 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 by two or more parties acting in concert to

circumvent the notification requirements of the act.

[[Page 13672]]

Comment 9 recommended that proposed Sec. 802.1(d)(1) and (2) apply

even when the acquiring person is an intermediary, since dealers often

search for used equipment at the request of the ultimate buyer. The

Commission declines to adopt this recommendation, which would permit

potentially anticompetitive transfers of used equipment to occur

without a reporting requirement if the dealer brokers the transaction

for the seller or the ultimate buyer. Thus, the exemption is

unavailable if the person making the acquisition is in reality an

intermediary for either the seller or another person who intends to

hold the goods (see Example 6 to Sec. 802.1). This limitation attempts

to forestall abuse of the dealer exemption by requiring notification in

circumstances where the dealer is acting as a broker or an agent for a

purchaser or a seller. In these instances, the dealer generally does

not take beneficial ownership of the goods and thus is not actually

acquiring the goods. The true parties to the acquisition--the seller

and the person that will have beneficial ownership of the goods as a

result of the acquisition--should be subject to the notification

requirements.

In proposed Sec. 802.1(d), the first criterion, (d)(1), limited the

exemption to purchases of goods acquired and held solely for resale,

and the second criterion, (d)(2), exempted acquisitions of goods

purchased from a seller who had acquired and held the goods solely for

resale. Amended Sec. 802.1(d) exempts acquisitions of goods acquired

and held solely for the purpose of resale or leasing and acquisitions

of goods from a seller who had acquired and held the goods solely for

resale or leasing. The provision now exempts inventory purchases and

sales by leasing companies of used durable goods that they have leased

or held for lease to third parties, as long as the goods are not being

purchased or sold as part of the transfer of an operating unit. Such

transactions are within the ordinary course of business of leasing

companies, which typically acquire goods for leasing and sell goods

which they have held for leasing. The revisions address concerns raised

in Comments 6, 11, 13, 16 and 21 about the inclusion in the used

durable goods provisions of exemptions for sales and purchases of

leased goods.

Amended Sec. 802.1 (d)(1) and (d)(2) change the language of the

proposals to clarify that the exemptions within these provisions are

available only if (1) the buyer acquires the goods to resell or lease

to an entity that is not within it, or (2) the buyer acquires goods

that the seller has held only to resell or lease to entities not within

it. As noted above, this change was also made to Sec. 802.1(c)(1), one

of the current supplies provisions.

In proposed and amended Sec. 802.1(d)(2), the exemption applies

only if the goods are acquired from an acquired person who held the

goods solely for resale or leasing. The limitation that the goods be

held solely for resale or lease is designed to guard against transfers

by a seller who has used the goods to maintain a competitive presence

and is now selling productive capacity.

The third criterion in Sec. 802.1(d) 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 all or

substantially all of the productive capacity of these goods is being

replaced. Such replacements may result in an increase in the acquired

person's productive capacity or manufacturing efficiencies. The

exemption will not apply unless the acquired person has already

replaced the capacity or taken definitive steps to replace the capacity

of the goods being sold. 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.

Proposed Sec. 802.1(d)(3) imposed no time limit between the

replacement of the capacity and the sale of the capacity being

replaced. However, a key factor in determining whether the goods being

sold represent productive capacity that has been or will be replaced is

whether the sale is sufficiently contemporaneous with the past or

future purchase of replacement goods such that the goods being sold

represent a bona fide sale of replaced capacity. To insure that the

replacement of capacity is sufficiently contemporaneous,

Sec. 802.1(d)(3) has been modified to require either that the capacity

has been replaced within the six months prior to the sale of the goods

being replaced, or that a contract has been executed in good faith to

replace the capacity within six months.

Proposed Sec. 802.1(d)(3) allowed use of the exemption if the

acquired person had executed either a contract, agreement in principle

or letter of intent to replace the capacity of the goods being sold.

The exemption now requires an executed contract for the purchase of the

replacement equipment, since only the contract imposes a binding

obligation on the seller to acquire the equipment to replace the

capacity of the goods being sold.

Normally companies that intend to remain in a particular business

do not sell capacity prior to replacing that capacity or making

contractual arrangements to replace the capacity. If the replacement of

capacity is not sufficiently proximate to the sale of the goods

representing the capacity replaced, a firm could experience an absence

from the market that would have a detrimental effect on its competitive

position. The six-month windows will permit firms to integrate the new

replacement equipment into its operations for a reasonable period of

time before selling the used equipment. The six-month windows will also

allow a company to operate without the replacement capacity but only

for a brief period of time so as not to affect adversely its

competitive presence in the market.

The rule allows replacement of the productive capacity of the used

durable goods being sold by acquisition or by lease. No minimum lease

term is specified; however, in order for an acquisition 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 productive capacity.

Such a period is industry specific and must be determined in good faith

by the acquired person. Because this provision requires that all or

substantially all of the productive capacity be replaced, the exemption

is lost if the replacement goods result or will result in more than a

de minimis decrease in the acquired person's capacity or an exit from a

line of business in which the acquired person currently operates.

The fourth criterion permits an exemption for sales of used durable

goods if (1) the goods are used by the acquired person solely to

provide management and administrative support services for the acquired

person's business operations, and (2) the acquired person has in good

faith executed a contract to outsource the management and

administrative support services provided by the goods being sold.

Management and administrative support services include services such as

accounting, legal, purchasing, payroll, billing and repair and

maintenance of the acquired person's own equipment. For example, a

company that has equipment in-house to provide its administrative data

processing needs may decide that it would be more cost effective to

have a third party provide these services. To accomplish this

objective, the company

[[Page 13673]]

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 concern.

Proposed Sec. 802.1(d)(4) used the term ``auxiliary functions'' to

describe the services provided by the goods being sold. That term has

been changed in new Sec. 802.1(d)(4) to ``management and administrative

support services.'' This term is more descriptive and conveys more

clearly that these services support the business operations of the

acquired person and are not integral to the person's business

operations.

The rule does not define ``management and administrative support

services'' but instead lists certain services that are included within

that term and other services that are not included.

Although companies will sometimes outsource the manufacturing of

some products they market, the sale of used durable goods that were

used to manufacture 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 a management

and administrative support service within the meaning of this

exemption. Thus, if a company decides to sell the equipment it had used

to manufacture a product, even if it had entered into a contract for a

third party to manufacture the product, the sale of that equipment is

not exempt under Sec. 802.1(d)(4). The loss of the company's control

over the manufacturing of the product may raise competitive concerns

warranting investigation by the enforcement agencies.

In the Statement of Basis and Purpose to the proposed rules,

research and development, testing and warehousing were listed as

auxiliary support functions. The Commission does not consider these

activities to be management and administrative support services; they

are integral to a company's product design, development, production and

distribution and thus are tied directly to the competitive business

activities of the company. In an analysis of a given industry, these

activities may have a significant impact on issues involving

innovation, entry and product distribution.

The exemption requires that the goods have been used ``solely'' to

provide the acquired person with management and support services for

its business operations. The transfer of goods that solely provide

internal management and administrative support services does not

constitute the acquisition of an operating unit. A company division

that only provides management and administrative support services to

the company's operating units is not itself an operating unit; it

supports or benefits the company's operating units. For example, in a

company containing a division that only provides the company's internal

data processing needs, that division would be deemed to provide

management and administrative support services. The limitation on the

sale of an operating unit contained in Sec. 802.1(a) would not exclude

from the exemption under Sec. 802.1(d)(4) the sale of all of the

equipment from that division. However, if that division derived

revenues from providing data processing services to third parties, then

the unit would be considered to be an operating unit. Further,

equipment used to derive third party revenues would not have been used

solely to provide management and administrative support services for

the business operations of the acquired person.

Proposed Sec. 802.1(d)(4), like proposed Sec. 802.1(d)(3),

permitted the use of the exemption if the acquired person had a

contract, agreement in principle or letter of intent to obtain the

administrative and management support services provided by the goods

being sold. New Sec. 802.1(d)(4) requires that the acquired person

execute in good faith a contract for the services to be outsourced. The

contract gives rise to a binding obligation on the acquired person to

outsource the services provided by the goods being sold.

Comment 14 suggested that a sale of goods pursuant to the decision

to downsize or discontinue a management and administrative support

service should also be included within the exemption. The

recommendation was not adopted because the Commission does not have

sufficient information and knowledge at this time to conclude that the

elimination--as opposed to the outsourcing--of management and

administrative support services in every business setting is unlikely

to raise competitive concerns.

Comment 7 suggested that examples to Sec. 802.1(d)(4) that

distinguish between goods that perform a management and administrative

support service and goods that are an integral part of operations that

affect competition be changed to reflect a more objective standard,

such as goods that generate third party revenues. This suggestion was

not adopted because of the variation among industries of the factors

that distinguish goods that perform management and administrative

support services from goods that are integral to the business

operations of the company. In a vertically integrated company, for

example, equipment it used for componentry manufacture would not be

considered goods that perform a management and administrative support

service, even though the company derived no third party revenues from

the sale of the components, but used the components in the manufacture

of its final products. Example 12 illustrates a similar application of

Sec. 802.1(d)(4). Therefore, if a company has an internal operation

that also derives third party revenues, that operation will not be

considered a management and administrative support service; however,

the fact that a company's internal operation does not derive third

party revenues does not automatically make the operation a management

and administrative support service.

Comments 10 and 27 recommended an exemption for transfers of used

airplanes that do not qualify for the exemption in Sec. 802.1(d)(3).

Comment 27 presented statistics showing that there may be little

correlation between used equipment sold by air carriers and new

equipment that they purchase. The commenter stated that this absence of

correlation would make the exemption in Sec. 802.1(d)(3) unavailable

for most potentially reportable sales of used aircraft. Comment 10

suggested an exemption for acquisitions of less than 15 percent of an

air carrier's total productive capacity, while Comment 27 stated that

exempt acquisitions of used aircraft and spare parts should be limited

to less than 15 percent of an air carrier's total productive assets.

Although a specific exemption for acquisitions of used aircraft has

not been added to the final rules, the recommendations and concerns

raised by Comments 10 and 27 are still under consideration. In

providing certain limited exemptions for transfers of used durable

goods in this rulemaking, the Commission's primary concern is that the

acquisitions that qualify for these exemptions are ordinary course of

business transactions and do not constitute either significant

downsizing or substantial transfers of productive capacity without

replacement. The recommendations made by Comments 10 and 27 suggest a

less restrictive exemption for sales of aircraft that would not require

replacement and would permit limited downsizing. The Commission has no

experience in implementing HSR exemptions based on the sale of a

limited percentage of the acquired person's capacity or assets or a

basis to conclude that such acquisitions do not pose competitive

[[Page 13674]]

concerns. Moreover, an exemption based on the sale of capacity would

present difficulties in determining the appropriate measure to use in

applying the exemption. However, Comments 10 and 27 have raised issues

that may be unique to the airline industry, and the Commission believes

that further consideration is needed.

Other additions to Sec. 802.1(d) that were suggested by commenters

include a recommendation in Comment 3 to exempt purchases of goods for

the purpose of demolition, disassembly and sale of usable parts (e.g.,

an oil tanker being sold for scrap and parts) and goods that can no

longer lawfully be used for the purpose for which they were used by the

acquired person (e.g., oil tankers no longer allowed to call on U.S.

ports because of hull restrictions that are sold for other lawful

uses). Specific provisions to address these types of transactions were

not adopted. Most purchases of used equipment for scrap and parts

should be exempt as an acquisition of current supplies under

Secs. 802.1(c)(1) and 802.1(d)(1). With regard to the second exemption

suggested, the Commission does not have evidence to show that such

transactions occur with sufficient frequency to warrant the addition of

the exemption, and it is not confident that a clearly-bounded exemption

could be created to cover a category of transactions not likely to

violate the antitrust laws.

II. Section 802.2: Certain Acquisitions of Real Property Assets

New Sec. 802.2 exempts eight categories of real property

acquisitions from the reporting requirements of the act. These include

acquisitions of new facilities, certain used facilities by the original

lessee in a lease financing arrangement, unproductive real property,

office and residential property, hotels and motels, recreational

property, agricultural property, and rental retail space and

warehouses.

This new rule creates new exemptions for several categories of real

property acquisitions that the enforcement agencies, after extensive

review, have concluded ``are not likely to violate the antitrust

laws.'' Section 7A(d)(2)(B) of the act. 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.

Previously, the Premerger Notification Office had interpreted

section 7A(c)(1) of the act as exempting certain acquisitions of new

facilities, undeveloped realty, office buildings and residential

property as transfers of realty in the ordinary course of business.

Although new Sec. 802.2 is not based on section 7A(c)(1) of the act,

certain acquisitions of realty exempted by this new exemption may also

qualify for exemption as transfers of realty in the ordinary course of

business. The primary difference between new Sec. 802.2, that exempts

the acquisition of certain types of realty, and amended Sec. 802.1,

that exempts the acquisition of goods and realty in the ordinary course

of business, is that the former--because it is not based on the

``ordinary course'' concept--does not limit the exemption to

acquisitions that are not acquisitions of operating units. In fact,

several categories of realty exempted by new Sec. 802.2, e.g., hotels,

motels and agricultural land, may qualify as operating units, but they

are exempt under this provision.

The exemptions for new facilities, certain used facilities,

unproductive real property, office and residential property, hotels and

motels, certain recreational land, 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. The Commission recognizes that this approach may result, as

Comment 9 has pointed out, in ``a more fragmented analysis * * *

generating value allocation issues.'' However, the Commission believes

that this inconvenience is offset by an approach that results in an

expanded exemption for realty acquisitions.

A. New Facilities. New 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 the Commission has concluded that

acquisitions of new facilities are not likely to violate the antitrust

laws. Although the provision is intended primarily to exempt

``turnkey'' facilities, i.e., new facilities capable of commencing

operations immediately with minimal additional capital investment, 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. However, if the

facility requires a substantial amount of additional construction or

outfitting, it may not be classified as a new facility but may qualify

as unproductive real property as defined in new Sec. 802.2(c).

The new exemption is unchanged from proposed Sec. 802.2(a), and it

applies only to new structures 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 the holder of the

new facility to be either a builder 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.

New 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 exceeds $15 million, and no other exemptions

apply, then the purchase of these non-exempt assets is separately

subject to the notification requirements.

B. Used facilities. New Sec. 802.2(b) exempts the acquisition of a

used facility by a lessee that has had sole and continuous possession

and use of the facility since it was first built, from a lessor that

holds title to the facility for financing purposes in the ordinary

course of its business. This provision was not contained in the

proposed rules. It is being adopted in response to Comment 6.

New facilities are often acquired through lease financing

arrangements. In a lease financing arrangement a creditor, in a bona

fide credit transaction entered into in the ordinary course of its

business, acquires a new facility and immediately leases it to a lessee

that will have sole and continuous use and possession of the facility,

usually under a long-term lease. The lessee generally has the option to

purchase the facility from the lessor at or before the end of the lease

term. Currently, there is no exemption for this acquisition even though

the acquisition of the new facility may have been exempt under

Sec. 802.2(a) if the lessee had acquired the facility directly when it

first began operation and had financed the purchase through an

installment sales arrangement.

New Sec. 802.2(b) will effectively treat the subsequent acquisition

by the original lessee of a used facility that the lessee originally

took possession of as a new facility through a lease financing

arrangement the same as the direct

[[Page 13675]]

purchase of a new facility through a more traditional credit

arrangement. This new exemption also will effectively treat this

category of acquisitions the same as an acquisition of a leased

facility by a lessee subject to a sale/leaseback arrangement. In a

sale/leaseback arrangement the owner of a facility sells the facility

to a creditor that acquires it in a bona fide credit transaction in the

ordinary course of its business. The creditor immediately leases the

facility back to the owner, now lessee, under a long-term lease. The

arrangement is often used as method of raising capital. Since the

original owner/lessee held beneficial ownership of the facility prior

to the sale/leaseback arrangement and the lessor typically receives

only title and a security interest in the facility, the Premerger

Notification Office generally has informally interpreted the rules to

require no notification for the subsequent repurchase because the

original owner/lessee did not relinquish beneficial ownership when it

entered into the sale/leaseback arrangement.

C. Unproductive real property. New Sec. 802.2(c) exempts

acquisitions of unproductive real property. Subject to the limitations

of Sec. 802.2(c)(2), unproductive real property is real property,

including raw land, structures or other improvements, associated

production and exploration assets as defined in Sec. 802.3(c), natural

resources and assets incidental to the ownership of the real property,

that has not produced revenues of more than $5 million during the 36

months preceding the transaction. Structures and improvements are

additions to the real property that add value and include, for example,

buildings and parking lots. Production machinery and equipment are not

included in the definition of structures and improvements, and their

acquisition must be analyzed separately to determine whether

notification is required. Natural resources refers to any assets

growing or appearing naturally on the land, such as timber and mineral

deposits.

New Sec. 802.2(c)(2) excludes from the exemption acquisitions of

manufacturing and non-manufacturing facilities that have not yet begun

operations as well as facilities that have been in operation at any

time during the twelve months preceding the acquisition. The exclusion

for manufacturing and non-manufacturing facilities that have not begun

operations is narrow and applies to facilities that are held by a

person who neither constructed the facility for sale nor held the

facility at all times for resale. The acquisition of a new structure

from a person who built the facility to sell or held it solely for

resale is exempt under new Sec. 802.2(a), the exemption for new

facilities. The exclusion in Sec. 802.2(c)(2)(i) is also intended to

apply to ``turnkey'' facilities, i.e., new facilities capable of

commencing operations immediately with minimal additional capital

investment; whether acquisition of a ``turnkey'' facility is exempt is

determined under Sec. 802.2(a). A new facility that is partially

complete, is not ready to commence operation in the immediate future

and requires substantial additional capital investment is not yet a

manufacturing or non-manufacturing facility within the meaning of

Sec. 802.2(c)(2)(i). Such a facility may qualify as unproductive real

property.

New Sec. 802.2(c)(2)(iii) also excludes real property that is

either adjacent to or used in conjunction with real property that does

not qualify as unproductive real property and is part of the

acquisition. This exclusion is intended to make Sec. 802.2(c)

unavailable for the acquisition of vacant land adjoining productive

property, such as a factory, a poultry processing facility or a meat

packing plant, which is also part of the acquisition. This exclusion

was not in the proposed rule. Without this exclusion, it might have

been argued that the acquisition of the vacant land should be exempt

under Sec. 802.2 if income has been derived only from the factory and

not from activities taking place on the vacant land. However, this

exemption is not permitted under Sec. 802.2(c) because the vacant land,

due to its adjacency to the factory, is considered to be part of the

productive property that is being acquired. If the vacant land were not

adjoining the factory but were used in connection with the factory

operations, the Sec. 802.2(c) exemption would still be unavailable for

the acquisition of the vacant land because it was used in conjunction

with the factory. Example 7 illustrates this exclusion from

Sec. 802.2(c).

The primary purpose of new Sec. 802.2(c) is to eliminate filing

requirements for acquisitions of formerly productive property, which is

no longer used to generate revenues, and undeveloped, non-income

producing property. New Sec. 802.2(c) will exempt most wilderness and

rural land that is not used commercially, and urban land that is vacant

or contains facilities that have ceased operations more than twelve

months prior to the acquisition and that have generated a minimal

amount of income during the most recent three-year period.

``Associated production and exploration assets as defined in

Sec. 802.3(c),'' was added to the definition of unproductive real

property in response to Comments 15 and 24. This addition will include

within the exemption for acquisitions of unproductive real property any

machinery or equipment associated with a formerly productive coal mine

or oil and gas reserve that has not been in operation for twelve months

prior to the acquisition and has not generated revenues of more than $5

million during the thirty-six months prior to the acquisition.

New Sec. 802.2(c)(2) incorporates a suggestion made by Comment 14

that the language of the proposed rule's exclusion for manufacturing

and non-manufacturing facilities ``that began operation within the

twelve (12) months preceding the acquisition'' be modified. Comment 14

pointed out that the proposed exemption excludes from the definition of

unproductive real property facilities that began operation during the

twelve-month period prior to the acquisition but includes operations

that were commenced more than twelve months before the acquisition. One

of the concepts underlying this exemption is to exclude from the

reporting requirements formerly productive facilities, i.e., facilities

whose operations have ceased and are no longer being used to generate

revenues. The exemption was not intended to apply to manufacturing and

non-manufacturing operations begun more than twelve months prior to the

acquisition and continuing to operate during the twelve-month period

prior to the acquisition. The language suggested by Comment 14 excludes

from the exemption manufacturing and non-manufacturing facilities that

were in operation at any time during the twelve months preceding the

acquisition. Because this language is more consistent with the

``formerly used/abandoned facilities concept'' underlying this

exemption, the Commission has decided to adopt this suggestion in the

final rule.

Comment 14 also suggested that language be added to Sec. 802.2(c)

that, for purposes of this provision, no revenues be deemed generated

by any real property used solely to provide management and

administrative support services (formerly ``auxiliary support

functions'') for the business operations of the acquired person. The

commenter expressed concern that while the acquisition of goods used by

the seller to provide these support services would be exempt under

Sec. 802.1(d)(4), the acquisition of a facility used only to house

equipment that provides these support services may not be exempt from

the notification requirements. The

[[Page 13676]]

Commission agrees that if the acquisition of the equipment providing

the management and administrative support service is exempt under

Sec. 802.1(d)(4), then the acquisition of a facility used solely to

house the equipment should be exempt. However, in most cases this type

of facility can be classified as office property, the acquisition of

which is exempt under Sec. 802.2(d).

D. Office and residential property. New Sec. 802.2(d) exempts

acquisitions of office and residential property. ``Office or

residential property'' is defined as real property that is used

primarily for office or residential purposes.

The rule specifies that in determining whether real property is

used primarily for office or residential purposes, the total space

being measured should consist of real property, the acquisition of

which is not exempted by other provisions of the act or rules.

Therefore, in making this determination, any portion of the building

consisting of, for example, rental retail space, the acquisition of

which is exempt under Sec. 802.2(f), should be excluded.

The language of new Sec. 802.2(d)(2) differs somewhat from the

language in the proposed rule in order to make clearer the procedure

for determining whether real property is used primarily for office and

residential purposes. Although new Sec. 802.2(d) does not specify the

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

of the space in the qualifying property is used for office or

residential purposes. Example 8 applies this threshold to exempt the

acquisition of a multi-use building.

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.

New Sec. 802.2(d)(3) 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 separately subject to the notification

requirements of the act. For example, if a company owns an office

building in which it operates a department store and the purchaser of

that building is acquiring not only the space that the store occupies

but also the retail operations of the department store, the acquisition

of the department store business as well as the space that the store

occupies 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 of the department store business

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 new Sec. 802.2(d) of office and

residential property and are exempt assets.

Comment 14 suggested that language be added to new Sec. 802.2(d) to

exempt structures that house equipment that provide management and

administrative support services to the seller and owner of the

structure. As mentioned above, the Commission believes that the common

meaning of office space includes space used solely to provide

management and administrative support services to the acquired person.

For example, if an acquired person owns a building that primarily

houses the computer equipment used to provide its administrative data

processing needs, and the acquired person, in good faith, executed a

contract for substantially the same services, the sale of the equipment

would be exempt pursuant to Sec. 802.1(d)(4). The sale of the building

also would qualify for exemption as an acquisition of office property,

since the building is not housing a ``business'' that is being

transferred but office equipment that is being sold.

E. Hotels and motels. New Sec. 802.2(e) exempts from the reporting

requirements acquisitions of hotels and motels, and improvements to

those facilities, such as golf, swimming, tennis, restaurant, health

club or parking facilities (but excluding ski facilities), and assets

incidental to the ownership of those facilities. The exemption,

however, excludes the acquisition of a hotel or motel that includes a

gambling casino.

The exemption is based on the Commission's review of past HSR

notifications and observation that acquisitions of hotels and motels,

except for those excluded from the exemption, are unlikely to violate

the antitrust laws. Several commenters affirmed the Commission's

understanding that 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 markets

entry appears to be relatively easy.

The proposed exemption for the acquisition of hotels and motels

excluded hotels ``acquired as part of the acquisition of a ski

resort.'' This exclusion raised questions concerning the treatment of a

ski resort containing a hotel versus a hotel that has ski facilities

along with other recreational improvements. The wording of the new

exemption excludes ski facilities from improvements included with a

hotel or motel which may be acquired without observing the reporting

requirements. As a result, in an acquisition of a hotel with ski

facilities, the acquisition of the hotel is exempt, but the ski

facilities must be valued separately to determine if their acquisition

is subject to the notification requirements.

Ski facilities are not included within the exemption for

acquisitions of hotels and motels because the Commission does not have

a basis for concluding that the acquisition of a ski facility is not

likely to violate the antitrust laws. In addition, ski facilities do

not appear to be characterized by the same ease of entry as hotels

generally. Gambling casinos are also excluded from the exemption

because they involve services other than lodging, and their acquisition

may affect competition in certain local markets. Also, certain areas

may have licensing requirements for gambling casinos that serve as an

impediment to entry.

Comments 9 and 14 suggested that the exemption for hotels and

motels be expanded to included the acquisition of related improvements,

such as golf courses, swimming and tennis facilities and restaurants.

The Commission agrees that the inclusion of these improvements, as well

as health clubs and parking facilities, does not raise antitrust

concerns and, thus, has included such related improvements as

qualifying for the exemption. The Commission also has added language

exempting the acquisition of assets incidental to the ownership of the

hotel or motel being acquired to make clear that all related permits

and tangible personal property used directly in the operation of the

facility are included within the exemption.

In the Statement of Basis and Purpose accompanying the proposed

rule, the Commission made clear that ``this exemption would include the

acquisition by a national hotel chain of hotel assets of another hotel

chain.'' The Statement of Basis and Purpose went on to say that ``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

[[Page 13677]]

the notification requirements.'' Comments 19, 26 and 29 suggested that

the exemption for hotels and motels be expanded to included the

acquisition of trademarks and hotel management businesses. These

comments assert that hotel and motel assets are plentiful and that

entry into the hotel/motel business is relatively easy, justifying a

broader exemption to cover all hotel and motel asset acquisitions. The

Commission has learned that acquisitions of hotel and motel assets

typically include the transfer of the hotel management contracts in

effect at the time of the acquisition as well as licenses to use the

trademarks associated with the hotel or motel being acquired. Thus new

Sec. 802.2(e) explicitly includes these contracts and licenses among

the list of assets incidental to the operation of the hotel or motel.

However, the exemption does not include the acquisition of hotel

management businesses or the purchase of a hotel trademark. Such

acquisitions, even if made in connection with the purchase of a hotel

or motel, are not considered to be transfers of incidental assets

associated with a hotel or motel and are therefore separately subject

to the requirements of the act.

F. Recreational Land. New Sec. 802.2(f) exempts the acquisition of

recreational land, which is defined as real property used primarily as

golf, swimming, or tennis club facilities and assets incidental to the

ownership of such property. If an acquisition includes any property or

assets other than recreational land, the acquisition of these other

assets is separately subject to the notification requirements.

This exemption was not originally included in proposed Sec. 802.2

and is being added to the final rule in response to Comment 14 that

suggested an exemption for certain types of recreational land. The

Commission has received HSR filings for a very small number of

acquisitions of recreational land, primarily golf courses. Based on

this experience, the Commission believes that the acquisition of

certain types of recreational land is not likely to violate the

antitrust laws. This exemption is limited to the types of recreational

realty the acquisition of which is exempt as improvements when acquired

as part of a hotel or motel under Sec. 802.2(e). Recreational land

under Sec. 802.2(f) does not include, for example, ski facilities,

multi-purpose arenas, stadia, racetracks and amusement parks.

G. Agricultural property. New Sec. 802.2(g) exempts acquisitions of

agricultural property, assets incidental to the ownership of the

property and associated assets integral to the agricultural business

activities conducted on the property. Agricultural property that is

covered by this exemption is real property that primarily derives

revenues under Major Groups 01 and 02 of the 1987 Standard Industrial

Classification (SIC) Manual. Associated assets integral to the

agricultural business activities conducted on the property to be

acquired include structures (e.g., barns used to house livestock),

fertilizer, animal feed and inventory (e.g., livestock, poultry, crops,

fruits, vegetables, milk, and eggs). In an acquisition that includes

assets that are covered by this exemption, the transfer of any other

assets is separately subject to the notification requirements.

Associated agricultural assets do not include processing equipment

or facilities. If a meat packing 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 agencies can determine whether

the proposed acquisition will affect competition adversely.

The proposed rule exempting acquisitions of agricultural property

included within the definition of associated agricultural assets

``equipment dedicated to the income-generating activities conducted on

the real property.'' New Sec. 802.2(g) omits this equipment from the

definition of associated agricultural assets because in certain cases

the equipment may be part of a processing facility, the acquisition of

which is not exempt under Sec. 802.2(g).

The final rule also changes the proposed rule by including a

parenthetical reference to SIC Major Groups 01 and 02 in the definition

of agricultural property. This inclusion is intended to make clear that

acquisitions of agricultural land on which other activities involving

farm products are conducted, e.g., activities included within SIC Major

Groups 20 (e.g., meat packing plants, poultry slaughtering and

processing, milk processing, and corn wet milling), 42 (farm product

storage and warehousing) and 51 (buying and marketing of farm products)

are not included within the exemption.

New Sec. 802.2(g)(2), which has been added to the proposed rule,

provides that ``agricultural property does not include any real

property and assets either adjacent to or used in conjunction with

facilities that are not associated agricultural assets and that are

included in the acquisition.'' This provision excludes from the

exemption, for example, acquisitions of any real property and assets

that are either adjacent to or used in conjunction with poultry or

livestock slaughtering, processing or packing facilities that are also

being acquired. Thus, if a meat packing plant is surrounded by vacant

land that serves as a buffer zone for environmental purposes or as an

area for grazing cattle in connection with the plant operations, and an

acquiring person intends to purchase the plant and the surrounding

property, the acquisition of the vacant land is not exempt either as an

acquisition of agricultural land or an acquisition of unproductive real

property [see discussion of Sec. 802.2(c)(2)]. The vacant land is

considered to be part of the business of the plant, and its

acquisition, along with that of the plant, is subject to the reporting

requirements.

H. Rental retail space; warehouses. New Sec. 802.2(h) exempts

acquisitions of two other categories of real property, rental retail

space and warehouses. Rental retail space includes structures that

house and are rented to retail establishments and include real property

assets such as shopping centers, strip malls, 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 new rule provides that if the retail rental space or

warehouses are to be acquired in an acquisition of a business conducted

on the real property, the acquisition of the retail rental space or

warehouses is not exempt. Thus, if an 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 a department

store chain proposed to acquire from another department store chain

several shopping centers and the department store business conducted by

the seller in several stores located in these shopping centers, the

acquisition of the seller's department store business and the portion

of the shopping centers in which the stores are located would be

subject to the notification requirements. The acquisition of the

portion of the shopping centers that housed other retail establishments

would be exempt under this rule. Similarly, as illustrated in Example

12, the exemption for the acquisition of warehouses is lost if

[[Page 13678]]

warehouses are being acquired in connection with the acquisition of a

wholesale distribution business.

The new 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. New

Sec. 802.2(h) differs from the proposed rule only in the addition to

the exemption of assets incidental to the ownership of retail rental

space or warehouses. Without this addition, it would be necessary to

value separately any incidental assets associated with the ownership of

the property, contrary to the treatment of real property assets

included in other provisions of Sec. 802.2.

III. Section 802.3: Acquisitions of Carbon-Based Mineral Reserves

New Sec. 802.3 adds exemptions for certain acquisitions of carbon-

based mineral reserves. Specifically, Sec. 802.3(a) exempts the

acquisition of reserves of oil, natural gas, shale and tar sands or the

rights to such assets if the value of the reserves, the rights and

associated exploration and production assets to be held as a result of

the acquisition do not exceed $500 million. Similarly, Sec. 802.3(b)

exempts the acquisition of reserves of coal or rights to coal reserves

if the value of the reserves, the rights and associated exploration and

production assets to be held as a result of the acquisition do not

exceed $200 million. Associated exploration and production assets are

defined in new Sec. 802.3(c) to mean, with certain specified

exceptions, equipment, machinery, fixtures, and other assets that are

integral and exclusive to current or future exploration or production

activities associated with the carbon-based mineral reserves that are

being acquired.

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

have shown that the values 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 of coal and oil and gas is inappropriate, because acquisitions

of carbon-based mineral reserves above the newly established thresholds

may warrant an examination of their potential effects on competition.

New Sec. 802.3 differs from proposed Sec. 802.3 in that new

Sec. 802.3(a) expands the exemption for oil, natural gas, shale and tar

sands by increasing the value of the reserves that will be held as a

result of the acquisition that qualify for the exemption from $200

million to $500 million. This increase is based on statistical

information provided by Comments 5 and 9 indicating that the ownership

of oil and gas reserves in the United States and worldwide is

relatively unconcentrated. Moreover, the acquisition of $500 million of

crude oil reserves in the United States would amount to about 1/10 of 1

percent of domestic oil reserves. Such an acquisition, if made by the

leading commercial owner of domestic reserves, would result in an

increase in the HHI of about 2 points in an unconcentrated market. The

Commission has concluded that acquisitions of oil and gas reserves

valued at $500 million or less are unlikely to violate the antitrust

laws. However, the $200 million threshold for transactions involving

coal reserves was retained from proposed Sec. 802.3. The Commission

does not have sufficient information to support a higher threshold for

coal reserves acquisitions. Also, because acquisitions of coal reserves

may tend to affect local or regional markets, a higher threshold may

exempt transactions that should be reviewed for their impact on such

markets.

Sections 802.3(a) and 802.3(b) primarily are designed to exempt

acquisitions of producing reserves, but also may exempt some

acquisitions of non-producing reserves that may also be exempt as

unproductive real property under Sec. 802.2(c). Because the exemption

is not based on the ``ordinary course'' concept, the exemptions also

apply if the reserves and associated assets being transferred

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

If the reserves being acquired are not yet producing, the acquisition

also is likely to be exempt under Sec. 802.2(c) as an acquisition of

unproductive real property. For formerly producing reserves that have

not been in production during the twelve months preceding the

acquisition and have not generated revenues in excess of $5 million

during the 36 months preceding the acquisition, their acquisition would

qualify as unproductive real property. If the reserves qualify as

unproductive property, their acquisition is exempt, regardless of the

value of the reserves. Currently producing reserves are governed by the

valuation requirements of Sec. 802.3. Example 1, which involves an

acquisition consisting of non-producing gas reserves, producing oil

reserves and assets associated with the producing reserves, illustrates

the application of Sec. 802.2(c) and Sec. 802.3 to the separate

components of the acquisition.

The $500 million threshold in Sec. 802.3(a) and the $200 million

threshold in Sec. 802.3(b) apply 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

Sec. 802.3(c) to include equipment, machinery, fixtures and other

assets that are integral to the exploration or production activities of

the reserves. Such assets do not include any intellectual property

rights that may be transferred with 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.

As in the oil and gas industry, exploration or production assets

associated with coal reserves may include proprietary or licensed

geological and geophysical data, easements, permits and rights of way.

In surface mining in the western U.S., associated production assets may

consist of various load out facilities, including storage barns and

silos, dryer barns and railroad spurs, and heavy equipment such as

draglines and crushers. Such assets would also include the long-term

coal contracts and federal leases related to the reserves.

New Sec. 802.3 also changes the categories of assets that are

excluded from the definition of associated production or exploration

assets as it relates to oil and natural gas reserves. Proposed

Sec. 802.3 excluded from associated production or exploration assets

all flow and gathering pipelines, distribution pipelines, interests in

pipelines, processing facilities and refineries, because acquisitions

of these assets in certain local markets have, from time to time,

raised competitive

[[Page 13679]]

concerns prompting investigations by the enforcement agencies. However,

Comments 3, 5, 9 and 24 recommended including in the definition of

associated exploration or production assets pipeline systems and field

treating facilities that serve a particular producing property and have

no competitive significance apart from the oil and natural gas reserves

being acquired. The Commission has concluded that acquisitions of these

systems and facilities in connection with the reserves to which they

are dedicated are unlikely to violate the antitrust laws because they

do not have the potential for competing in the provision of services to

third parties. Therefore, the definition of associated exploration or

production assets now clearly delineates dedicated facilities from

facilities serving third parties by excluding ``any pipeline and

pipeline system or processing facility which transports or processes

oil and gas after it passes through the meters of a producing field;

and any pipeline or pipeline system that receives gas directly from gas

wells for transportation to a natural gas processing facility or other

destination.''

Comments 17, 18 and 30 proposed an exemption for acquisitions of

timberland, noting that the raw material supply and manufacturing

resources in the forestry industry are abundant, and ownership of

timberland is fragmented. However, because there has been enforcement

interest in a number of transactions involving timberland in the

western United States, the Commission declined to include an exemption

for acquisitions of timberland to insure that the enforcement agencies

continue to receive notification of those acquisitions of timberland

that may present competitive concerns.

Comment 9 noted that the enforcement agencies, as they obtain

additional experience and information about other natural resources,

will perhaps identify ways of expanding Sec. 802.3 to include other

types of producing reserves without posing undue risk to competition.

For non- producing reserves of other minerals and renewable natural

resources, Sec. 802.2(c) will exempt acquisitions of these reserves if

they qualify as unproductive real property. Regarding producing

reserves, the Commission has not included these in Sec. 802.3 at this

time because it does not have an adequate factual basis for determining

that acquisitions of other types of mineral reserves and renewable

natural resources should be exempt from the requirements of the act or

subject to a reporting level higher than the statutory $15 million

threshold. However, the Commission will continue to collect information

about other minerals and renewable natural resources and determine at a

later date if expansion of Sec. 802.3 to include acquisition of

reserves of these resources is warranted.

IV. Section 802.4: Acquisitions of Voting Securities of Issuers Holding

Certain Assets the Direct Acquisition of Which Is Exempt

New Sec. 802.4 exempts the acquisition of voting securities of

issuers that hold certain assets the direct acquisition of which is

exempt under the act or the rules. New Sec. 802.4(a) exempts the

acquisition of voting securities of an issuer whose assets, together

with those of all entities controlled by the issuer, consist of assets

whose direct purchase is exempt from the notification requirements

pursuant to section 7A(c)(2) of the act or Secs. 802.2, 802.3 and 802.5

of the rules. New Sec. 802.4(b) defines ``issuer'' as used in

Sec. 802.4 to mean a single issuer, or two or more issuers controlled

by the same person. The exemptions provided by new Sec. 802.4 are

available so long as the acquired issuer or issuers do not in the

aggregate hold exempt assets that exceed the threshold limitations of

the cited rules and non-exempt assets with a fair market value of more

than $15 million. New Sec. 802.4(c) states that fair market value as

determined in accordance with Sec. 801.10 (c)(3) of the rules is the

standard to apply in determining the value of assets held by an issuer

whose voting securities are being acquired pursuant to Sec. 802.4. New

Sec. 802.4 applies to acquisitions resulting in the holding of a

minority interest as well as a controlling interest in the acquired

issuer's outstanding voting securities.

Section 802.4 derives in part from original Sec. 802.1(a) which

exempted ``an acquisition of the voting securities of an entity whose

assets consist solely of real property'' and related assets, if a

direct acquisition of that real property and those related assets would

be exempt. The rationale for original Sec. 802.1(a) and new Sec. 802.4

is that the applicability of an exemption should not depend on the form

of the acquisition. The antitrust analysis would seem to be the same

whether assets or voting securities are acquired. See Statement of

Basis and Purpose to Sec. 802.1(a), 43 FR 33488 (July 31, 1978).

Proposed Sec. 802.4(a) extended this approach by exempting

acquisitions of voting securities of issuers whose assets consist

solely of assets exempt under proposed Sec. 802.2: new facilities,

unproductive real property, office and residential property, hotels and

motels, agricultural property, rental retail space and warehouses.

Proposed Sec. 802.4(b) contained a comparable exemption for issuers

whose assets consist solely of carbon-based mineral reserves exempt

under proposed Sec. 802.3.

New Sec. 802.4 differs in five respects from the proposal. First,

new paragraph (a) no longer requires that the issuer whose voting

securities are being acquired hold solely exempt assets. New

Sec. 802.4(a) provides that the issuer also may hold up to $15 million

of non-exempt assets in addition to the exempt assets. Second, proposed

paragraph (b) has been merged into new paragraph (a). In the proposed

exemption, the aggregation principles of Sec. 801.15(b) applied only to

Sec. 802.4(b), while Sec. 801.15(a) applied to Sec. 802.4(a). Because

of the new provision that an issuer whose voting securities are being

acquired pursuant to Sec. 802.4 also may hold up to $15 million of non-

exempt assets, Sec. 801.15(b) applies to all transactions under

Sec. 802.4. New Sec. 802.4(a) now describes all classes of acquisitions

that are exempt pursuant to Sec. 802.4.

Third, new Sec. 802.4(a) has been expanded and now provides an

exemption for voting securities acquisitions of issuers that hold

assets the direct acquisition of which are exempt pursuant to section

7A(c)(2) of the act and Sec. 802.5 of the rules. Fourth, new

Sec. 802.4(b) has been added to the rule to make clear that the term

``issuer'' as used in Sec. 802.4(a) means a single issuer or two or

more issuers controlled by the same person. Lastly, new Sec. 802.4(c)

has been added to make clear that the value of assets held by an issuer

whose voting securities are being acquired pursuant to Sec. 802.4 is

the fair market value determined in accordance with Sec. 801.10(c)(3)

of the rules.

The first change responds to Comments 2, 5 and 9, which noted that

the requirement in proposed Sec. 802.4 that the acquired issuer could

hold solely assets exempt under Secs. 802.2 and 802.3 was very limiting

and caused the proposed exemption to fall short of the goal of treating

voting securities acquisitions the same as asset purchases. Proposed

Secs. 802.2 and 802.3 provided an exemption for asset acquisitions

involving the purchase of certain types of realty and carbon-based

mineral reserves and required that the acquisition of any non-exempt

assets be separately analyzed to determine whether notification was

required prior to their purchase. Thus, under proposed Secs. 802.2 and

802.3, a person could acquire certain exempt assets and non- exempt

assets valued at $15 million or

[[Page 13680]]

less and would not be required to file. However, in contrast, the

requirement in proposed Sec. 802.4 that the acquired issuer hold solely

exempt assets precluded the exemption if the issuer held any assets not

exempt under Secs. 802.2 and 802.3.

The Commission agrees that this limitation seemed to undercut the

rationale underlying Sec. 802.4 to reduce the extent to which the form

of the transaction affects the requirement to file notification. For

this reason, as noted previously, the Commission has modified proposed

Sec. 802.4 to exempt acquisitions of issuers that hold assets exempt

under section 7A(c)(2) of the act and new Secs. 802.2, 802.3, and

802.5, and non-exempt assets with a fair market value of $15 million or

less.

Comment 2 also suggested that proposed Sec. 802.4 be amended to

exempt acquisitions of voting securities of issuers that hold

``incidental assets,'' i.e., assets incidental to the ownership of the

exempt assets, in addition to the assets that are exempt pursuant to

proposed Secs. 802.2 and 802.3. The commenter pointed out that since

incidental assets were not included in every provision of the proposed

rules as exempt assets, the ownership of incidental assets by an

acquired issuer would limit the application of Sec. 802.4. As noted

previously, the Commission has modified the language of proposed

Sec. 802.4 to include within the exemption acquisitions of voting

securities of issuers holding assets exempt under the cited rules and

non-exempt assets with a fair market value of $15 million or less. The

Commission also has included within the various subsections of

Secs. 802.2 and 802.3 language that will include within the exemptions,

assets incidental to the ownership of the exempt assets. The Commission

believes that since the ownership of incidental assets has little

effect on competition, the value of incidental assets should not be

included in the determination of whether the acquired issuer holds non-

exempt assets with a fair market value exceeding $15 million. The

Commission believes that these modifications adequately address the

concerns raised by this comment.

The second change was made because the provisions of Sec. 801.15(b)

that address aggregation of previous acquisitions now govern all voting

securities acquisitions of issuers holding assets exempt under the

sections included within new Sec. 802.4(a). Proposed Sec. 802.4(a)

contained exemptions that did not require aggregation because the

exemptions were not based on the holding of assets valued at less than

a set threshold amount. For instance, the exemption for certain types

of realty provided in Sec. 802.2 is applicable regardless of the value

of the exempt assets to be acquired. However, since new Sec. 802.4(a)

has eliminated the restriction that an issuer whose voting securities

are to be acquired hold solely exempt assets and now permits the

acquired issuer to hold non-exempt assets valued at $15 million or

less, the principles of Sec. 801.15(b) apply, and aggregation is

required to determine whether this limitation will be exceeded.

The third change from the proposed rules reflects a suggestion by

Comment 9 that section 7A(c)(2) of the act be included within

Sec. 802.4. Section 7A(c)(2) exempts acquisitions of ``bonds,

mortgages, deeds of trust, and other obligations which are not voting

securities.'' The Commission agrees that the acquisition of these types

of assets are of little antitrust concern, whether acquired in the form

of an asset or voting securities acquisition, and has added section

7A(c)(2) of the act to new Sec. 802.4(a).

Similarly, an exemption for acquisitions of voting securities of

issuers holding assets the direct acquisition of which would be exempt

under Sec. 802.5 is now included in Sec. 802.4(a) as a result of

revisions to Sec. 802.5 (see discussion, below). Because proposed

Sec. 802.5 included a limitation on the type of purchaser that

qualified for the exemption, comparable voting securities acquisitions

could not be included within Sec. 802.4 and thus were exempted within

proposed Sec. 802.5. New Sec. 802.5 has been revised to remove the

limitation, and the exemption for the equivalent voting securities

acquisition has been moved to Sec. 802.4. Therefore, acquisitions of

the voting securities of issuers holding investment rental property

plus non-exempt assets valued at $15 million or less will be exempt

pursuant to Sec. 802.4(a).

The addition of Sec. 802.4(b) stems from the rationale underlying

this exemption that voting securities acquisitions and asset purchases

be treated similarly for purposes of Sec. 802.4. The first step toward

achieving similar treatment was to modify proposed Secs. 802.4(a) and

(b) to include within the exemption the acquisition of issuers that

hold exempt assets and non-exempt assets valued at $15 million or less.

The Commission believes that, in addition to this modification,

purchasers should be required to aggregate acquisitions of voting

securities of different issuers controlled by the same acquired person.

Otherwise, the form of the transaction will affect the notification

requirement. For this reason, new Sec. 802.4(b) defines issuer, for

purposes of Sec. 802.4, to mean a single issuer or multiple issuers

controlled by the same acquired person. Thus, when the voting

securities of more than one issuer controlled by the same person are

being acquired, aggregation of the non-exempt assets held by these

issuers and aggregation of the carbon-based mineral reserves for which

there are threshold limitations is required. For example, if ``A''

proposed to acquire the voting securities of three subsidiaries of

``B'' and each subsidiary held $200 million of oil and gas reserves,

the acquisition would not be exempt under Sec. 802.4(a) because the

acquired issuers hold in the aggregate $600 million of oil and gas

reserves. If the acquisition were structured as an asset acquisition

with ``A'' purchasing the oil and gas reserves held by ``B's'' three

subsidiaries, the acquisition would not qualify for exemption under new

Sec. 802.3(a) since the value of the reserves to be acquired exceeds

$500 million.

Similarly, if ``A'' proposed to acquire the voting securities of

three of ``B's'' subsidiaries and each held, respectively, (1) two

hotels and $10 million of non-exempt assets, (2) two hotels and $7

million of non-exempt assets and (3) three hotels and $3 million of

non-exempt assets, ``A'' would be required to aggregate the value of

the non-exempt assets to determine whether the acquired issuers hold in

the aggregate non-exempt assets exceeding $15 million in value. Since

the value of the non-exempt assets exceeds $15 million, ``A's''

proposed acquisition would not be exempt under Sec. 802.4(a). If the

acquisition were structured as an asset acquisition with ``A''

purchasing the hotels and the non-exempt assets directly, ``A's''

acquisition of the hotels would be exempt under Sec. 802.2(e) but ``A''

would be required to file notification for the acquisition of the non-

exempt assets. The Commission recognizes that in this situation the

holdings of non-exempt assets exceeding $15 million in the voting

securities acquisition negated the availability of the exemption for

the entire acquisition, whereas in the asset acquisition filing would

be required only for the acquisition of the non-exempt assets. However,

since voting securities acquisitions are by their nature different than

asset acquisitions because voting securities represent an interest in

the undivided totality of the underlying assets, this difference in

outcome is unavoidable but reasonable.

New Sec. 802.4(c) has been added to make clear that the value of

the exempt and non-exempt assets held by the issuer is fair market

value determined in

[[Page 13681]]

accordance with Sec. 801.10(c)(3). The Commission recognizes that this

requirement may be difficult to meet when the acquisition is hostile or

the acquiring person proposes to acquire a minority interest through

the acquisition of voting securities from third party holders, e.g.,

open market purchases. However, Sec. 801.10(c)(3) requires that the

acquiring person make a good faith determination of the fair market

value of the assets of the issuer whose voting securities are to be

acquired. The acquired person cannot rely on the absence of data to

make a good faith determination that the fair market value of the

assets held by the acquired issuer(s) does not exceed threshold

limitations.

The modifications that have been made to proposed Sec. 802.3,

providing different thresholds for oil and gas reserves and coal

reserves, and proposed Sec. 802.4, expanding the exemption to include

issuers holding non-exempt assets with a fair market value of $15

million or less, complicate the application of the rules requiring

aggregation of acquisitions of voting securities of different issuers

controlled by the same acquired person. The previous discussion

addressed the issue of aggregation when the voting securities of

different issuers are acquired in the same transaction. The following

discussion addresses some of the intricacies of aggregation involving

subsequent acquisitions from the same acquired person of voting

securities of the same issuer (and of different issuers) holding assets

exempt under Secs. 802.2, 802.3 and 802.5 and section 7A(c)(2) of the

act.

To address the issue of aggregation involving subsequent

acquisitions from the same issuer of voting securities governed by the

exemptions provided by Sec. 802.4, Sec. 801.15(b) has been revised to

include Secs. 802.3 and 802.4. Section 801.15(b) provides that voting

securities, the acquisition of which was exempt under certain

identified exemptions, are not held as a result of an acquisition

unless in a subsequent acquisition the limitations contained in those

specified exemptions are exceeded. For example, ``A'' acquires for $40

million, in an exempt transaction, 20 percent of the voting stock of B,

which holds petroleum reserves valued at $300 million and subsequently

plans to acquire an additional five percent of the B's voting

securities for $10 million. ``A'' would be required to determine

whether its subsequent acquisition of B's stock qualifies for the

exemption under Sec. 802.4(a). If B's holdings of oil and gas reserves

have increased and the value of its reserves exceeds $500 million,

``A's'' subsequent acquisition of B's stock would not be exempt under

Sec. 802.4(a). Under Sec. 801.15(b), ``A'' is considered to hold 20

percent of the voting stock of B, and ``A's'' subsequent acquisition is

not exempt under Sec. 802.4(a).

Another situation in which aggregation is required under

Sec. 801.15(b) involves an acquisition of a minority interest in the

voting securities of an issuer exempt under Sec. 802.4(a) followed by a

subsequent acquisition of either a minority or a controlling interest

in the voting securities of another issuer included within the same

acquired person. For example, assume that ``A'' acquired 30 percent of

the voting securities of C, an issuer controlled by ``B,'' for $40

million and that the acquisition was exempt under Sec. 802.4(a) because

C held oil and gas assets valued at $300 million and non-exempt assets

valued at $7 million. Six months later, ``A'' proposes to acquire from

``B'' all (or a minority) of the voting securities of D and E, issuers

controlled by ``B,'' for $20 million each. D has oil and gas reserves

valued at $150 million and non-exempt assets valued at $2 million, and

E has oil and gas reserves valued at $150 million and non-exempt assets

valued at $2 million. Under Sec. 801.15(b), ``A'' is required to

aggregate its current proposed acquisitions of D and E with its

previous exempt acquisition of C's voting securities to determine

whether the limitations set forth in Sec. 802.4(a) will be exceeded as

a result of the subsequent acquisition. In this situation, since the

value of the oil and gas reserves held by the C, D, and E exceed $500

million, the acquisition of the voting securities of D and E is not

exempt under Sec. 802.4(a).

Aggregation is not required in a subsequent acquisition of voting

stock of an issuer included within the same acquired person if the

acquiring person acquired control of that issuer in an earlier

transaction, i.e., holds 50 percent or more of the issuer's outstanding

voting securities. In such case, the issuer is now included within the

acquiring person, and the aggregation requirements of Sec. 801.13(a) do

not apply since control has passed to the acquiring person. (In a

situation in which the acquiring person acquires exactly 50 percent of

an issuer's voting stock and the acquired person has retained 50

percent, the Premerger Notification Office has long treated the issuer

as within the acquiring person alone in applying the aggregation

requirements of Secs. 801.13 and 801.14 for subsequent voting stock and

asset purchases from the same acquired person.) Therefore, if an

acquiring person has acquired 50 percent or more of the voting stock of

an issuer and proposes to acquire additional voting stock from the same

issuer or another issuer controlled by the same acquired person, the

acquiring person is not required to aggregate the assets of the issuer

in the first acquisition with assets of the issuer in the second

acquisition to determine if any limitations have been exceeded.

Section 802.4 contains three examples that illustrate the

application of the rule, including an example involving simultaneous

acquisitions. Examples illustrating the aggregation principles of

Sec. 802.4 in sequential transactions are included in the examples to

Sec. 801.15. Section 802.4 represents the Commission's first major

effort to accord the same treatment to asset acquisitions and

comparable voting securities acquisitions. The aggregation principles,

though necessary, complicate the application of the exemption. If the

complexity of the aggregation principles makes applying the Sec. 802.4

exemption overly burdensome for parties, the Commission will review the

provision to determine if any changes to the exemption are necessary.

Proposed Section 802.5: Acquisitions of Investment Rental Property

Assets

Section 802.5 exempts acquisitions of investment rental property

assets. It is intended to exempt certain acquisitions of real property

that are not exempt under new Sec. 802.2. The exemption applies only to

acquisitions of real property assets that will be held by the acquiring

person solely for rental or investment purposes and that will be rented

only to entities not included within the purchaser (except for the sole

purpose of maintaining, managing or supervising the operation of the

investment rental property assets). Thus, the intent of the purchaser

at the time of the acquisition must be considered to determine whether

the exemption is available. Although the application of new Sec. 802.5,

unlike proposed Sec. 802.5, is no longer limited to certain types of

acquiring persons such as institutional investors, the Commission

believes that this provision will exempt most real property

acquisitions typically made by institutional investors, real estate

investment trusts (``REITs''), or real estate development and

management companies that are not exempted by new Sec. 802.2.

New Sec. 802.5 is designed to supplement new Sec. 802.2 by

recognizing that there may be additional categories of real property

assets, such as industrial parks and multi-purpose sports and

entertainment facilities, that,

[[Page 13682]]

when acquired as investment rental property, are not likely to violate

the antitrust laws. Acquisitions of these types of real property are

often made solely for rental investment purposes. In such instances,

investors in such property play no active role in the business

conducted on these properties and seek only to profit from their

investment in the real estate. Moreover, 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. Given the size and unconcentrated nature of the real

estate market, such acquisitions are not likely to pose a competitive

concern. The limitations in new Sec. 802.5 on the intent of the

acquiring person and the use of the qualifying real property are

designed to insure that the exemption will not be available for any

acquisition intended to achieve business objectives that are not

related to the rental or investment objectives.

Although the investment rental property exemption may apply to real

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

rental retail space, that is also exempt under Sec. 802.2, there will

be no need to apply new Sec. 802.5 to the acquisition of these

categories of real property assets. The important distinction between

Sec. 802.2 and Sec. 802.5 is that Sec. 802.2 exempts acquisitions of

specific classes of real property assets and does not incorporate the

intent-based test of Sec. 802.5, while Sec. 802.5 exempts any type of

real property assets that meet the rule's requirements for investment

rental property. 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 while Sec. 802.5 permits the acquiring

person to use the acquired investment rental property assets only to

manage or operate the real property assets being acquired.

Proposed Sec. 802.5 limited the availability of the exemption for

acquisitions of investment rental property to institutional investors

as defined by Sec. 802.64 and persons whose sole business is the

acquisition or management of investment rental property assets. Comment

2 recommended that the limitation on qualified purchasers be eliminated

because the definition of investment rental property assets in proposed

Sec. 802.5(b) would be sufficient to prevent purchasers from conducting

business on the property being acquired. Comment 31 suggested that the

exemption should be available to persons other than investors whose

sole business consists of acquiring or managing investment rental

property assets. REITs, the commenter pointed out, are permitted to own

certain assets such as temporary stock and bond investments that are

not investment rental property and thus, under the proposed rules, may

not qualify as entities whose sole business is acquiring and managing

investment rental property assets.

The Commission has determined that the dual restrictions in

proposed Sec. 802.5 which made the exemption available only to (1)

certain types of investors for (2) acquisitions of investment rental

property were too limiting. The Commission believes that eliminating

the first restriction will not compromise the efficacy of the

exemption. Thus, new Sec. 802.5 is available to all types of purchasers

so long as the acquisition qualifies as investment rental property

assets.

New Sec. 802.5 includes a provision, found in other sections of

Part 802 and omitted from proposed Sec. 802.5, stating that in an

acquisition that includes investment rental property, the transfer of

any other property shall be separately subject to the requirements of

the act. Thus an investor can purchase property, the acquisition of

which is exempt under Sec. 802.5, and non-exempt assets valued at $15

million or less and still qualify for the exemption.

In addition, the provision included in proposed Sec. 802.5

exempting acquisitions of voting securities of an entity holding assets

that consist solely of investment rental property assets has been

modified and moved to new Sec. 802.4. Thus, the exemption for

acquisitions of voting securities of issuers holding Sec. 802.5 assets

will be governed by Sec. 802.4. This change results in greater

comparability between the direct acquisition of Sec. 802.5 assets and

the acquisition of voting securities of issuers holding these assets.

Proposed Sec. 802.5 included within the definition of investment

rental property assets any space occupied by the acquiring person for

the sole purpose of maintaining, managing or supervising the operation

of real property and real property rented only to entities not included

within the acquired person. The proposal incorrectly implied that an

investor could not lease a portion of the acquired rental property to a

subsidiary or other affiliated entity which would, in turn, manage the

property on behalf of the investor. The language in new Sec. 802.5 has

been changed and explicitly permits the investor to establish this

arrangement with a subsidiary solely to maintain, manage or supervise

the purchased property.

For some acquisitions, in order to determine prior to the

acquisition whether the buyer will use the investment rental property

in accordance with the requirements of Sec. 802.5, 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) prior to the acquisition, the property is being leased to or used

by entities included within the acquiring person; (4) a portion of the

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

competitor of the acquiring person; and (5) the purchase price reflects

the value of a business operated on the property rather than the

investment rental value of the property.

Because Sec. 802.5 covers a broad range of non-specific assets and

places no limits on who may acquire the assets, the Commission has

declined to adopt the suggestion in Comment 7 to eliminate the

requirement that the property to be acquired will be rented only to

entities not included within the acquiring person. The Commission also

declined to adopt the suggestions in Comments 7 and 9 to eliminate the

restrictions on the acquiring person's use of any space on the property

for the sole purpose of maintaining, managing and supervising the

operation of the property. Limits on the use of the property provide

additional safeguards to insure that the property is being acquired for

investment or rental purposes, since other safeguards such as limits on

the type of investment rental property that can be acquired and the

type of investor that qualifies for exemption are absent from new

Sec. 802.5.

Currently, HSR notifications are not required for acquisitions of

realty made by REITs under the ordinary course of business exemption.

REITs acquire real estate in the ordinary course of their business, and

the fiduciary nature of their investment activities and the

restrictions imposed upon them by the Internal Revenue Code safeguard

against improper use of property they acquire.

[[Page 13683]]

New Sec. 802.5 is not intended to narrow the exemption from the

reporting requirements that is currently available to REITs.

Comment 9 noted that the language of proposed Sec. 802.5 excluded

the acquisition of a REIT by a non-REIT, because of the restriction on

the type of investor that qualified for the exemption. Acquisitions of

REITs by non-REITs are currently subject to the notification

requirements, because the fiduciary restraints that govern acquisitions

by REITs do not generally apply to non-REITs. However, under new

Sec. 802.5, the acquisition by a non-REIT of all of the assets of a

REIT may be exempt from the reporting requirements if the transaction

meets the requirements of the exemption. The acquisition of all of the

assets of a REIT by another REIT is currently an exempt transaction,

even though the acquired REIT may hold certain non-real estate assets,

and new Sec. 802.5 does not supersede this exemption.

VI. Aggregation Rules

Section 801.15 states that, notwithstanding Sec. 801.13, certain

assets and voting securities acquired in exempt transactions are not

considered to be ``held as a result of an acquisition.'' These rules

and concepts govern whether certain acquisitions must be aggregated to

determine if a proposed acquisition requires notification. As the

Statement of Basis and Purpose makes clear (43 FR 33479), Sec. 801.15

is applicable to simultaneous acquisitions in which both exempt and

non-exempt assets or voting securities are being acquired from the same

acquired person and to acquisitions of non-exempt assets or voting

securities after the person has previously acquired exempt assets or

voting securities from the same acquired person.

Section 801.15(a) provides that assets and voting securities exempt

at the time of acquisition under certain provisions of the act and

rules are not held as a result of the acquisition. Acquisitions

exempted by section 7A(c)(1) of the act are among the classes listed.

As a result, in determining whether an assets acquisition meets the

more than $15 million size-of-transaction criterion of section

7A(a)(3), the value of assets acquired in the ordinary course of

business is not counted. Because Sec. 802.1 declares that certain

acquisitions are and that others are not considered to be transfers in

the ordinary course of business under section 7A(c)(1), it is not

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

eliminate possible confusion, Sec. 802.1 is listed in Sec. 801.15(a),

along with section 7A(c)(1), to make clear that assets exempted

pursuant to Sec. 802.1(b), (c) and (d) are not deemed to be held as the

result of an acquisition for aggregation purposes. Therefore, an

acquisition of current supplies valued at $8 million is not aggregated

with subsequent acquisitions from the same person to determine if a

proposed acquisition will 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(c).

New Sec. 802.2, which provides an exemption for the acquisition of

certain types of real property assets (new facilities, used facilities,

unproductive real property, office and residential property, hotels and

motels, recreational land, agricultural property, rental retail space

and warehouses) is also listed in Sec. 801.15(a) since the exemption

sets no dollar limit on the amount of exempt assets that may be

acquired without prior notification. Since new Sec. 802.2 is listed in

Sec. 801.15(a), assets exempt under this provision are never held as a

result of an acquisition. Section 802.5, which exempts acquisitions of

investment rental property also appears in Sec. 801.15(a). However, it

is important to note that new Secs. 802.2 and 802.5 provide that the

acquisition of any other assets not exempted by new Secs. 802.2 and

802.5 are subject to the requirements of the act and the rules as if

they were being acquired in a separate acquisition. Consequently, in an

acquisition that includes these exempt assets, the acquisition of other

non- exempt assets are subject to the aggregation requirements of

Sec. 801.13(b).

Sections 802.3 (exempting certain acquisitions of carbon-based

mineral reserves) and 802.4(exempting acquisitions of voting securities

of issuers holding exempt assets under section 7A (c)(2) of the act,

Secs. 802.2, 802.3 and 802.5, plus non-exempt assets valued at $15

million or less), 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 $500 million limitation for

oil and gas reserves and the $200 million limitation for coal reserves

in Sec. 802.3, that were not reached in an earlier acquisition, may be

exceeded by a subsequent acquisition of reserves.

Example 4 to 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, 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.

In response to a suggestion in Comment 9, language has been added

to Example 5 regarding valuation of assets in sequential acquisitions

to determine if the limitation in Sec. 802.3 has been exceeded. In such

acquisitions, the buyer is not required to determine the current fair

market value of the assets of the first acquisition, but he may use the

value of those assets at the time of their prior acquisition pursuant

to Sec. 801.10(b). However, in applying Sec. 802.4, if in the first

acquisition the buyer had purchased a minority share of the voting

securities of an issuer that held the exempt oil reserves assets and

proposed to buy additional voting securities from the same issuer, the

buyer is required to revalue the total holdings of the issuer at the

time of the second acquisition to determine if the issuer's holdings of

oil and gas rights and reserves exceed the limitation in Sec. 802.3.

In proposed Sec. 801.15, only Sec. 802.4(b) appeared in

Sec. 801.15(b) because only that provision of Sec. 802.4 exempted

acquisitions of voting securities of issuers holding assets that, if

acquired directly, were exempt subject to certain dollar limitations.

Paragraphs (a) and (b) of proposed Sec. 802.4 have now been

consolidated into new Sec. 802.4(a) since the exemption has been

expanded to exempt issuers holding exempt assets and non-exempt valued

at $15 million or less. New Sec. 802.4 now appears in amended

Sec. 801.15(b) to reflect the provision contained in Sec. 802.4(a)

limiting the value of the non-exempt assets that the issuer whose

voting securities are being acquired can hold. Also, three new examples

have been added to Sec. 801.15 to illustrate the aggregation principles

of Sec. 802.4 (see discussion of new Sec. 802.4, above).

List of Subjects in 16 CFR Parts 801 and 802

Antitrust.

Amended Rules

The Commission amends Title 16, Chapter 1, Subpart H, of the Code

of Federal Regulations as follows:

[[Page 13684]]

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, 802.5, 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, 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 Examples 5, 6, 7 and 8

are 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 into 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, ``B'' would hold assets of X exceeding $15 million in

value, would not qualify for the exemption in Sec. 802.50(a)(2), and

must observe the requirements of the act and file notification for

the acquisition of all three plants before acquiring the third

plant.

5. ``A'' acquires producing oil reserves valued at $400 million

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(b)(2) require aggregating the previously

exempt acquisition of oil reserves with the second acquisition. If

the two acquisitions, when aggregated, exceed the $500 million

limitation on the exemption for oil and gas reserves in

Sec. 802.3(a), ``A'' and ``B'' will 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 $500 million,

both acquisitions are exempt from the notification requirements. In

determining whether the value of the assets in the two acquisitions

exceed $500 million, ``A'' need not determine the current fair

market value of the oil reserves acquired in the first transaction,

since these assets are now within the person of ``A.'' Instead ``A''

may use the value of the oil reserves at the time of their prior

acquisition in accordance with Sec. 801.10(b).

6. ``X'' acquired 55 percent of the voting securities of M, an

entity controlled by ``Z,'' six months ago and now proposes to

acquire 50 percent of the voting stock of N, another entity

controlled by ``Z.'' M's assets consist of $150 million worth of

producing coal reserves plus $7 million worth of non-exempt assets

and N's assets consist of a producing coal mine worth $100 million

together with non-exempt assets with a fair market value of $6

million. ``X's'' acquisition of the voting securities of M was

exempt under Sec. 802.4(a) because M held exempt assets pursuant to

Sec. 802.3(b) and less than $15 million of non-exempt assets.

Because ``X'' acquired control of M in the earlier transaction, M is

now within the person of ``X,'' and the assets of M need not be

aggregated with those of N to determine if the subsequent

acquisition of N will exceed the limitation for coal reserves or for

non-exempt assets. Since the assets of N alone do not exceed these

limitations, ``X's'' acquisition of N also is not reportable.

7. In Example 6, above, assume that ``X'' acquired 30 percent of

the voting securities of M and proposes to acquire 40 percent of the

voting securities of N, another entity controlled by ``Z.'' Assume

also that M's assets at the time of ``X's'' acquisition of M's

voting securities consisted of $90 million worth of producing coal

reserves and non-exempt assets with a fair market value of $9

million, and that N's assets currently consist of $60 million worth

of producing coal reserves and non-exempt assets with a fair market

value of $8 million. Since ``X'' acquired a minority interest in M

and intends to acquire a minority interest in N, and since M and N

are controlled by ``Z,'' the assets of M and N must be aggregated,

pursuant to Sec. 801.15(b) and Sec. 801.13, to determine whether the

acquisition of N's voting securities is exempt. ``X'' is required to

determine the current fair market value of M's assets. If the fair

market value of M's coal reserves is unchanged, the aggregated

exempt assets do not exceed the limitation for coal reserves.

However, if the present fair market value of N's non-exempt assets

also is unchanged, the present fair market value of the non-exempt

assets of M and N when aggregated is greater than $15 million. Thus

the acquisition of the voting securities of N is not exempt. If

``X'' proposed to acquire 50 percent or more of the voting

securities of both M and N in the same acquisition, the assets of M

and N must be aggregated to determine if the acquisition of the

voting securities of both issuers is exempt. Since the fair market

value of the aggregated non- exempt assets exceeds $15 million, the

acquisition would not be exempt.

8. ``A'' acquired 49 percent of the voting securities of M and

45 percent of the voting securities of N. Both M and N are

controlled by ``B.'' At the time of the acquisition M held rights to

producing coal reserves worth $90 million and N held a producing

coal mine worth $90 million. This acquisition was exempt since the

aggregated holdings fell below the $200 million limitation for coal

in Sec. 802.3(b). A year later, ``A'' proposes to acquire an

additional 10 percent of the voting securities of both M and N. In

the intervening year, M has acquired coal reserves so that its

holdings are now valued at $140 million, and the value of N's assets

remained unchanged. ``A's'' second acquisition would not be exempt.

``A'' is required to determine the value of the exempt assets and

any non-exempt assets held by any issuer whose voting securities it

intends to acquire before each proposed acquisition (unless ``A''

already owns 50 percent or more of the voting securities of the

issuer) to determine if the value of those holdings of the issuer

falls below the limitation of the applicable exemption. Here, an

assessment shows that the holdings of M and N now exceed the $200

million limitation for coal reserves in Sec. 802.3.

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 and realty in the ordinary course of

business.

Pursuant to section 7A(c)(1), acquisitions of goods and realty

transferred in the ordinary course of business are 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 and realty 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. ``Operating unit'' means assets that are operated

by the acquired person as a

[[Page 13685]]

business undertaking in a particular location 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 is in the ordinary

course of business, except when the goods are 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 new or used

assets:

(1) Goods acquired and held solely for the purpose of resale or

leasing to an entity not within the acquiring person (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).

(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 solely for the purpose of

resale or leasing to an entity not within the acquiring person; or

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

has held the goods solely for resale or leasing to an entity not within

the acquired person; or

(3) The acquired person has replaced, by acquisition or lease, all

or substantially all of the productive capacity of the goods being sold

within six months of that sale, or the acquired person has in good

faith executed a contract to replace within six months after the sale,

by acquisition or lease, all or substantially all of the productive

capacity of the goods being sold; or

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

provide management and administrative support services for its business

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

contract to obtain substantially similar services as were provided by

the goods being sold. Management and administrative support services

include services such as accounting, legal, purchasing, payroll,

billing and repair and maintenance of the acquired person's own

equipment. Manufacturing, research and development, testing and

distribution (i.e., warehousing and transportation) are not considered

management and administrative support services.

Examples: 1. Greengrocer Inc. intends to sell to ``A'' all of

the assets of one of the 12 grocery stores that it owns and operates

throughout the metropolitan area of City X. Each of Greengrocer's

stores constitutes an operating unit, i.e., a business undertaking

in a particular location. Thus ``A's'' acquisition is not exempt as

an acquisition in the ordinary course of business. However, the

acquisition will not be subject to the notification requirements if

the acquisition price or fair market value of the store's assets

does not exceed $15 million.

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

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

engine components to be used in the manufacture of 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(b) as an acquisition of reserves of

coal 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(g) as an acquisition of agricultural property.

5. ``A,'' a railcar leasing company, will purchase $20 million

of new railcars from a railcar manufacturer in order to expand its

existing fleet of cars available for lease. The transaction is

exempt under Sec. 802.1(b) as an acquisition of new goods and

Sec. 802.1(c), as an acquisition of current supplies. If ``A''

subsequently sells the railcars to ``C'', a commercial railroad

company, that acquisition would be exempt under Sec. 802.1(d)(2),

provided that ``A'' acquired and held the railcars solely for resale

or leasing to an entity not within itself.

6. ``A,'' a major oil company, proposes to sell two of its used

oil tankers for $15.5 million to ``B,'' a dealer who purchases oil

tankers from the major U.S. oil companies. ``B's'' acquisition of

the used oil tankers is exempt under Sec. 802.1(d)(1) provided that

``B'' is actually acquiring beneficial ownership of the used tankers

and is not acting as an agent of the seller or purchaser.

7. ``A,'' a cruise ship operator, plans to sell for $18 million

one of its cruise ships to ``B,'' another cruise ship operator.

``A'' has, in good faith, executed a contract to acquire a new

cruise ship with substantially the same capacity from a ship

builder. The contract specifies that ``A'' will receive the new

cruise ship within one month after the scheduled date of the sale of

its used cruise ship to ``B.'' Since ``B''is acquiring a used

durable good that ``A'' has contracted to replace within six months

of the sale, the acquisition is exempt under Sec. 802.1(d)(3).

8. ``A,'' a luxury cruise ship operator, proposes to sell to

``B,'' a credit company engaged in the ordinary course of its

business in lease financing transactions, its fleet of six passenger

ships under a 10-year sale/leaseback arrangement. That acquisition

is exempt pursuant to Sec. 802.1(d)(1), used durable goods acquired

for leasing purposes. The acquisition is also exempt under

Sec. 802.63(a) as a bona fide credit transaction entered into in the

ordinary course of ``B's'' business. ``B'' now proposes to sell the

ships, subject to the current lease financing arrangement, to ``C,''

another lease financing company. This transaction is exempt under

Sec. 802.1(d)(1) and Sec. 802.1(d)(2).

9. Three months ago ``A,'' a manufacturing company, acquired

several new machines that will replace equipment on one of its

production lines. ``A's'' capacity to produce the same products

increased modestly when the integration of the new equipment was

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'' replaced. Delivery

of the equipment by ``A'' to ``B'' is scheduled to occur within

thirty days. Since ``A'' purchased new machinery to replace the

productive capacity of the used equipment, which it sold within six

months of the purchase of the new equipment, the acquisition by

``B'' is exempt under Sec. 802.1(d)(3).

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

equipment ``A'' uses exclusively to perform its billing

requirements. ``B'' will use the equipment to provide ``A's''

billing needs pursuant to a contract which ``A'' and ``B'' executed

30 days ago in conjunction with the equipment purchase agreement.

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

the assets of one of ``A's'' management and administrative support

services divisions, the acquisition qualifies for the exemption

under Sec. 802.1(d)(4) because a company's internal management and

administrative support services, however organized, are not an

operating unit as defined by Sec. 802.1(a). Management and

administrative support services are not a ``business undertaking''

as that term is used

[[Page 13686]]

in Sec. 802.1(a). Rather, they provide support and benefit to the

company's operating units and support the company's business

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

from providing billing services for third parties, then the transfer

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

the equipment is not being used solely to provide management and

administrative support services to ``A''.

11. ``A,'' a manufacturer of pharmaceutical products, and ``B''

have entered into a contract under which ``B'' will provide all of

``A's'' research and development needs. Pursuant to the contract,

``B'' will also purchase all of the equipment that ``A'' formerly

used to perform its own research and development activities. The

sale of the equipment is not an exempt transaction under

Sec. 802.1(d)(3) because ``A'' is not replacing the productive

capacity of the equipment being sold. The sale is also not exempt

under Sec. 802.1(d)(4), because functions such as research and

development and testing are not management and administrative

support services of a company but are integral to the design,

development or production of the company's products.

12. ``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)(3), since ``A'' is not replacing the

productive capacity of the equipment being sold. The acquisition is

also not exempt under Sec. 802.1(d)(4). ``A's'' sale of production

lines is not the transfer of goods that provide management and

administrative services to support the business operations of''A'';

this manufacturing equipment is an integral part of ``A's''

production operations.

3. Part 802 is amended by adding Sections 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 shall be

exempt from the requirements of the act. A new facility is a structure

that has not produced income and was 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

incidental to the ownership 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) Used facilities. An acquisition of a used facility shall be

exempt from the requirements of the act if the facility is acquired

from a lessor that has held title to the facility for financing

purposes in the ordinary course of the lessor's business by a lessee

that has had sole and continuous possession and use of the facility

since it was first built as a new facility. The used facility may

include realty, equipment or other assets associated with the operation

of the facility. In an acquisition that includes a used facility that

meets the requirements of this paragraph, the transfer of any other

assets shall be subject to the requirements of the act and these rules

as if they were acquired in a separate transaction.

(c) 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) Subject to the limitations of (c)(2), unproductive real

property is any real property, including raw land, structures or other

improvements (but excluding equipment), associated production and

exploration assets as defined in Sec. 802.3(c), natural resources and

assets incidental to the ownership of the real property, 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 the following:

(i) Manufacturing or non-manufacturing facilities that have not yet

begun operation;

(ii) Manufacturing or non-manufacturing facilities that were in

operation at any time during the twelve (12) months preceding the

acquisition; and

(iii) Real property that is either adjacent to or used in

conjunction with real property that is not unproductive real property

and is included in the acquisition.

(d) 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 that is used

primarily for office or residential purposes. In determining whether

real property is used primarily for office or residential purposes, all

real property, the acquisition of which is exempt under another

provision of the act and these rules, shall be excluded from the

determination. Office and residential property 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.

(e) Hotels and motels.

(1) An acquisition of a hotel or motel, its improvements such as

golf, swimming, tennis, restaurant, health club or parking facilities

(but excluding ski facilities), and assets incidental to the ownership

and operation of the hotel or motel (e.g., prepaid taxes or insurance,

management contracts and licenses to use trademarks associated with the

hotel or motel being acquired) 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, its improvements such as

golf, swimming, tennis, restaurant, health club or parking facilities

(but excluding ski facilities) and assets incidental to the ownership

of the 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) Notwithstanding paragraph (1) of the section, an acquisition of

a hotel or motel that includes a gambling casino shall be subject to

the requirements of the act and these rules.

(f) Recreational land. An acquisition of recreational land shall be

exempt from the requirements of the act. Recreational land is real

property used primarily as a golf course or a swimming or tennis club

facility, and assets incidental to the ownership of such property. In

an acquisition that includes recreational land, the transfer of any

property or assets that are not recreational land shall be subject to

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

acquired in a separate acquisition.

(g) Agricultural property. An acquisition of agricultural property,

assets incidental to the ownership of such property and associated

agricultural assets shall be exempt from

[[Page 13687]]

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 (activities

within SIC Major Groups 01 and 02).

(1) Associated agricultural assets are assets integral to the

agricultural business activities conducted on the property. Associated

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

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

that house livestock raised on the real property; and fertilizer and

animal feed. Associated agricultural assets do not include processing

facilities such as poultry and livestock slaughtering, processing and

pa

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