HSR Considerations for Secondary Sales of Private Company Stock

While investors generally are aware that mergers and acquisitions can require antitrust filings in the United States under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act), they are sometimes surprised to learn that secondary sales also can trigger HSR Act filing obligations. Such filings are more likely for secondary sales involving large, late-stage private companies whose stock has become valuable. (For a general overview of secondary sales, see this Cooley GO article.) Further, while the HSR Act is a US law, its requirements may apply to sales of shares in a non-US company if the company has US assets, operations or revenue, as well as to sales and purchases of shares by non-US parties if the transaction involves a company with a sufficient US nexus.

Complying with HSR Act filing requirements can cause significant delays in closing a transaction, so it is important for investors, sellers and companies to understand the basics of these requirements.

HSR basics

The HSR Act requires parties to a transaction to notify the Federal Trade Commission and the Antitrust Division of the Department of Justice if the transaction meets certain “size-of-person” and “size-of-transaction” thresholds, unless the transaction falls within an exemption to the HSR Act. Importantly, if a transaction requires an HSR filing, the parties cannot close the transaction until the filings have been accepted by the agencies and a statutory waiting period (typically 30 days) has expired.

Under the thresholds in effect as of August 2024, an acquisition meets the “size-of-transaction” threshold if the deal is valued at more than $119.5 million, and meets the “size-of-person” thresholds if:

• One party to the transaction – which, in the context of secondary sales, is either the issuer or the purchaser – has total assets, per its last regularly prepared balance sheet, of more than $23.9 million, or revenue in its last financial year in excess of $23.9 million.
• The other party to the transaction has total assets, per its last regularly prepared balance sheet, of more than $239 million, or revenue in its last financial year in excess of $239 million.

HSR in secondary sales

To determine the “size-of-transaction” in secondary sales – or in any sale in which an investor already owns shares in an issuer – the investor must take into account not only the value of the shares being acquired, but also the fair market value of the shares the investor already owns. As a result, even small, incremental investments by a party that already holds a company’s stock can trigger HSR Act filing requirements if the investment causes the aggregate value of an investor’s holdings to exceed the size-of-transaction threshold.

In assessing the aggregate value of an investor’s holdings, the value of shares being acquired is their purchase price, while the value of shares an investor already owns is their current “fair market value.” Frequently, investors consider the price of the shares being acquired, or the price of shares issued in a recent financing round, when determining the fair market value of the shares the investor already holds in an issuer – even if the investor bought its existing holdings at a much lower valuation. Because of this, a relatively small, early investment at a low valuation may be significant for purposes of the “size-of-transaction” test if the value of the company’s stock has appreciated. Care should be taken if existing holdings have stronger rights (e.g., higher per share liquidation preferences) to be sure the shares are fully valued for HSR threshold purposes.

Just as with mergers and acquisitions, exemptions may be available in secondary sales so that even if all HSR thresholds are met, no filing is required. For example, one frequently relied on exemption is available if the investor is acquiring the shares “solely for the purpose of investment.” This exemption applies if, as a result of the acquisition, the securities held do not exceed 10% of the outstanding voting shares of the issuer, and the “person holding or acquiring such voting securities has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” Note, however, that this exemption is complicated, and various factors may result in this this exemption being unavailable to an investor, such as having a seat on the company’s board or being a competitor of the company.

Another exemption frequently used in financings is the “pro rata” exemption. Pursuant to this exemption, an acquisition of voting securities is not subject to HSR filing requirements if it does not increase the acquiring person’s percentage of outstanding voting securities in an issuer. Thus, if existing stockholders invest on a pro rata basis in an additional funding round, those acquisitions may fall under this exemption. Secondary acquisitions, however, typically cannot take advantage of the pro rata exemption because they generally increase the voting percentage of the acquiring party. (There is an exception that may apply if the secondary acquisition occurs simultaneously with a financing round that introduces new shareholders onto the cap table, and thereby dilutes the voting percentages of existing investors generally, but this requires detailed analysis of the changes in voting percentages that result from the transaction.)

HSR Act filing analyses and determinations are highly technical, and agency guidance implementing and interpreting the rules is constantly evolving. Because of this, it is important to discuss with your lawyer any secondary sales where the HSR Act may apply.