Commission staff have recently received several requests for interpretation of the exemption provided by ' 7A(c)(8) of the Clayton Act ("Act"), 15 U.S.C. ' 18a(c)(8), and ' 802.8 of the premerger notification rules ("rules"), 16 CFR ' 802.8, which exempt from the general notification and waiting requirements of the Act certain acquisitions approved by the Federal Reserve System. These requests inquire whether the exemption applies to acquisitions by bank holding companies that have filed with the Federal Reserve Board ("Board") irrevocable declarations that the companies, through divestiture of their banks, will cease to be bank holding companies by January l, 1981. The staff has determined that the regulatory oversight exercised by the Federal Reserve System over acquisitions by such companies does not constitute "approval" within the meaning of ' 7A(c)(8) and ' 802.8. Therefore, the exemption is not available, and such companies, if planning to engage in acquisitions covered by the Act and rules, must comply fully with the general notification and waiting requirements. A more complete discussion follows.
Section 7A(c)(8) of the Clayton Act exempts from general premerger notification requirements, inter alia, transactions which require agency approval under section 4 of the Bank Holding Company act of 1956 (12 U.S.C. 1843) . . . .
In general, ' 4(a) of the Bank Holding Company Act ("Bank Act") restricts the ability of bank holding companies to acquire or maintain interests in firms not engaged in banking. Section 4(c) contains several exemptions to this regulatory scheme. In particular, ' 4(c)(12) of the Bank Act provides that the proscriptions of ' 4(a) shall not apply to shares retained or acquired, or activities engaged in, by any company which becomes, as a result of the enactment of the Bank Holding Company Act Amendments of 1970, a bank holding company on the date of such enactment, or by any subsidiary thereof, if such company --
(A) within the applicable time limits prescribed in subsection (a)(2) of this section (i) ceases to be a bank holding company . . ., and
(B) complies with such other conditions as the Board may by regulation or order prescribe . . . .
The provisions of ' 4(c)(12) are codified in Board rule ' 225.4(d), 12 CFR ' 225.4(d). 1/ This rule provides a separate regulatory scheme for bank holding companies that have filed an irrevocable declaration with the Board that the company, by divestiture of its bank, will cease to be a bank holding company by January 1, 1981. 2/ Such bank holding companies, until the time of divestiture, may acquire other going concerns, provided that the company has given the local Federal Reserve Bank ("Reserve Bank") 45 days notice of the company's intention to make the acquisition. Absent opposition by the Reserve Bank, the company may consummate the acquisition after expiration of the 45 day period. Where opposition is expressed, the matter may be forwarded to the Board for further consideration. In exigent circumstances, the Reserve Bank may accelerate the time in which consummation may be made.
The issue presented is whether this procedure provides authority for "approval" within the meaning of ' 7A(c)(8) of the Clayton Act. In determining whether authority exists, it is necessary to examine the competitive issues addressed in the course of Reserve Bank review and the Congressional intentions underlying both ' 4 of the Bank Act and ' 7A of the Clayton Act.
Neither the provisions of ' 4(c)(8) and ' 225.4(d), nor the regulations of the Board delegating authority to the Reserve Banks to receive notice from bank holding companies (12 C.F.R. ' 265.2(f)(19)) 3/ provide meaningful guidance. Therefore, a review of secondary sources is appropriate, i.e., the legislative history of ' 4(c)(12) 4/ and a Federal Reserve Board instruction to Reserve Banks dated May 24, 1971. From review of the legislative history, it is clear that Congress intended to permit bank holding companies that filed irrevocable declarations freely to acquire other enterprises, provided that such acquisitions did not afford the company an "undue advantage." Discussing the conference committee version of ' 4(c)(12), Senator Sparkman stated that:
- The conference adopted the provision from the Senate bill which will allow any company covered by this legislation to retain or acquire whatever shares, or engage in whatever activities, it wishes so long as, within the applicable divestiture period, it . . . ceases to be a bank holding company . . .
- . . . It is contemplated that the Board will insure that the authority to make . . . acquisitions and engage in the activities provided by this particular provision will not be utilized by a bank holding company covered by this legislation to go into activities and make acquisitions which are totally unrelated to its present activities in order to obtain an undue advantage during the applicable divestiture period, or for any other purpose inconsistent with the intent and purpose of the Act. (116 Cong. Rec. 42425 (December 18, 1970)).
It is unclear whether the "undue advantage" alluded to in the Congressional Record was intended to be limited to advantages in the financial markets of the bank holding company, or whether it would include advantages in the financial and (possibly) nonfinancial markets of acquired firms.
This issue is addressed more clearly in the Board letter of May 24, 1971. Regarding the criteria for review of proposed acquisitions, the following guideline is provided:
- In deciding whether a proposed acquisition is appropriate, the Reserve Bank should consider the period of time for which the company will likely continue to own its bank, and base its decision on its judgment as to whether common ownership for that period of time of the bank and the company to be acquired may present undue dangers to the bank or to competitors of the bank or the company to be acquired. Undue danger to the bank would be indicated where, for example, the bank has been criticized in the past for loans to its nonbanking affiliates, the holding company, or related interests. In order to satisfy itself on this question, the Reserve Bank should review the bank's examination report or seek the advice of the bank's supervisor.
Acquisitions by a holding company which has filed the appropriate irrevocable declaration need not be closely related to banking. Therefore, the absence of such a relationship is not, in itself, a cause for concern.
It is anticipated that, with respect to most acquisitions under ' 4(c)(12), competitive considerations will not present serious questions. If the company to be acquired is not located within the subsidiary bank's market, no further investigation of competitive effects of the proposal would ordinarily be necessary; such would also appear true, even if the company to be acquired is located within that market, if the bank and affiliated deposit-type institutions have only a small share of the deposits and loans in the area. If, however, the subsidiary bank and other deposit-type institutions within the holding company organization have a large share of the market, the acquisition of a large company within that market would warrant closer inquiry. . . .
Regarding the Board's instructions to Reserve Banks, it is clear that the Reserve Bank's inquiry encompasses both competition in the bank's financial markets and competition in financial and nonfinancial markets in which the acquired firm may be engaged. However, as regards competition ln the markets of the acquired firm, this inquiry appears to be limited to the issue of whether the acquired firms access to the capital resources of its affiliated bank will afford the acquired firm an undue advantage, and adversely affect [Formal Interpretation 33] competition, in the firm's product markets. Moreover, Reserve Banks are under no statutory or regulatory obligation to consider the cumulative effect on competition of a series of acquisitions of firms in the same or related product markets. Thus, many issues of primary concern to the antitrust laws are not considered in the course of review by the Reserve Banks. 5/
In light of the limited scope of Reserve Bank review, the Commission staff has concluded that the Congressional intentions underlying ' 7A of the Clayton Act are best served by requiring bank holding companies that, pursuant to ' 4(c)(12) of the Bank Act, have filed irrevocable declarations to divest themselves of their banks by January 1, 1981, to comply fully with the general premerger notification and waiting requirements of the Act. This conclusion is supported by the comments of the Federal Reserve Board (attached) submitted during the two comment periods preceding promulgation of the premerger notification rules. Nevertheless, nothing contained herein shall affect any acquisition consummated prior to this date.
The Assistant Attorney General in charge of the Antitrust Division has indicated his concurrence with this formal interpretation.
Malcolm R. Pfunder
Assistant Director for Evaluation
MAY 08 1979
(a) Comment of the Board of Governors Federal Reserve System (February 18, 1977) in response to Federal Trade Commission Notice of Proposed Rulemaking Under Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 41 Fed. Reg. 55488 December 20, 1976.
A. Section 4(c)(12) Acquisitions
It is unclear whether section 7A(c)(8) would exempt those acquisitions made pursuant to section 4(c)(12) of the Bank Holding Company Act and section 225.4(d) of the Board's Regulation Y. Under those provisions a company that became a bank holding company as a result of the 1970 Amendments to the Act and has filed with the Board an irrevocable declaration that it will cease to be a bank holding company by January 1, 1981, may make an acquisition of a going nonbanking concern 45 days after the company has informed its Reserve Bank of the proposed acquisition unless the company is notified of the contrary within the time or unless it is permitted to make the acquisition at an earlier date, based on exigent circumstances of a particular case. The status of such acquisitions is uncertain under the FTC's proposed regulations because it is unclear whether an acquisition made pursuant to section 4(c)(12) and section 225.4(d) of Regulation Y is a transaction requiring agency approval under section 4 of the Bank Holding Company Act. From a policy standpoint, there does not appear to be any compelling reason to exempt from the requirements of the Act transactions pursuant to section 4(c)(12). Recommendation: The FTC should consider whether it should assert jurisdiction over acquisitions made pursuant to section 4(c)(12) of the Bank Holding Company Act and section 225.4(d) of Regulation Y and clarify their status under the FTC's proposed regulations.
1/ ' 225.4(d). Certain acquisitions by companies that became holding companies on December 31, 1970, as a result of the 1970 amendments: Except as provided in this paragraph, no bank holding company may acquire, directly or indirectly, any shares or commence to engage in any activities on the basis of section 4(c)(12) of the Act. A company may file with the Board an irrevocable declaration, in the form approved by the Board, that it will cease to be a bank holding company by January 1, 1981, unless it is granted an exemption under section 4(d) of the Act. A company that has filed such a declaration may (1) commence new activities de novo, either directly or through a subsidiary, without further action under this paragraph, until such time as the Board notifies the company to the contrary, and (2) make an acquisition of a going concern 45 days after the company has informed its Reserve Bank of the proposed acquisition, unless the company is notified to the contrary within that time or unless it is permitted to make the acquisition at an earlier date based on exigent circumstances of a particular case. . . .
2/ Section 4(c)(12) also governs acquisitions by a bank holding company, that, because it has chosen not to file an irrevocable declaration to divest its bank, must divest its nonbanking interests by 1981. The application of ' 7A(c)(8) and ' 802.8 to bank holding companies in the latter situation is not addressed in this interpretation.
3/ (19) Under ' 225.4(d) of this chapter (Regulation Y), [Reserve Banks have the authority] (i) To notify a bank holding company that has informed it of a proposed acquisition of a going concern that because the circumstances surrounding the application indicate that additional information is required or that the acquisition should be considered by the Board, the acquisition should not be consummated until specifically authorized by the Reserve Bank or by the Board; (ii) To permit a bank holding company that has informed it of a proposed acquisition of a going concern to make the acquisition before the expiration of the 45 day period referred to in that paragraph, because exigent circumstances justify consummation of the acquisition at an earlier time.
4/ S.Rep. No. 91-1084, 91st Cong., 2d Sess. 7 (1970), 116 Cong. Rec. 42425 and 42437 (1970).
5/ See Heller, Handbook of Federal Bank Holding Company Law (1976), at 187 n. 87, concerning ' 4(c)(12 )acquisitions:
- Inaction by the Federal Reserve following notice to it of a proposed acquisition does not mean, for example, that the acquisition will have no significantly adverse effect on competition. Acquisitions by a company that has filed an irrevocable declaration are subject to the antitrust laws and to the jurisdiction of the Justice Department and the Federal Trade Commission in the administration of those laws.