FTC Closes Loophole in Antitrust Law

Federal regulators said Wednesday they had agreed to close a loophole in the antitrust laws that has enabled partnerships to evade an advance-notice requirement for takeovers of big corporations.

Under the new Federal Trade Commission rules, which will take effect in about five weeks, partnerships will be required to obtain advance clearance from federal antitrust agencies before they can complete a major merger or acquisition deal.

The commission and the Department of Justice agreed to tighten the government’s pre-merger notification rules as they apply to partnerships.

Under the current rules, advance reports of planned acquisitions by partnerships were not required by antitrust regulators.

The partnership loophole has been widely used by hostile corporate raiders to skirt the advance notice requirements of the federal antitrust laws and thus evade government detection of their early strategic moves.

Until now, to evade the advance notice requirement, a raider simply set up a new partnership with little capitalization and made its takeover moves through that vehicle.

If, for example, a raider chose to gain an advantage on a takeover target by having the partnership it controls buy up the target’s stock in the open market, it would not have to disclose these actions until it triggered the federal securities laws by acquiring more than 5% of the target’s outstanding shares.

If the partnership were bound by the pre-merger notification rules, however, it typically would have to file a notice with the government as soon as it spent $15 million in the stock market, and then wait as long as 30 days or more before buying more stock.

For many publicly traded companies, $15 million of stock is far less than 5% of the total outstanding.

Under the new rules, antitrust agencies will look at who controls a partnership to determine whether advance notice is required.

Any entity or person owning 50% or more of a partnership will be required to report acquisitions made by the partnership.

The rules require individuals or companies contemplating transactions with potential anti-competitive implications to notify the government of their plans and wait a specified period before completing the deal.