California Law Requiring AG Notice for Retail Grocery and Pharmacy Transactions Now in Effect

ABOUT AB 853

AB 853 was signed on October 8, 2023, and added a Part 14 to Division 3 of Title 1 of the California Corporations Code. According to the California Legislature, this law was proposed and enacted to protect the public health of Californians in an age of increasing consolidation of chain retail grocery stores and chain retail pharmacies. The newly enacted law states that these transactions and mergers “not only potentially affect the supply and affordability of food and medicine, [but] they [also] potentially affect the supply of experienced grocery retail workers with knowledge of proper sanitation and health regulations, and licensed pharmacists, pharmacy technicians, and pharmacists-in-charge, who are entrusted with supplying safe and accurate medications and dosages to ailing Californians.”

Accordingly, as of the new year, no person can acquire, directly or indirectly, any voting securities or assets of a retail grocery firm or retail drug firm, including mail-order and institutional pharmacies, unless both parties give (or in the case of a tender offer, the acquiring party gives) written notice to the attorney general 180 days before the acquisition is made effective.

A “retail drug firm” and a “retail grocery firm” are each defined as a person, association, organization, partnership, business trust, LLC or corporation, including a proprietorship, joint venture, corporate officer or executive, that has one or more North American Industry Classification System (NAICS) businesses or establishments located within California and is identified in the NAICS as a retail business or establishment (for retail drug firms, within the retail trade category 45611, and for retail grocery firms, within the retail trade categories 44511 and 455211).

NAICS retail trade category 45611 comprises “establishments generally known as pharmacies and drug retailers engaged in retailing prescription or nonprescription drugs and medicines” and includes the following index items: apothecaries, drugstores, off-site institutional pharmacies exclusively on the internet, off-site mail-order institutional pharmacies, on-site institutional pharmacies, and pharmacies.

NAICS retail trade category 44511 comprises “establishments generally known as supermarkets and other grocery retailers (except convenience retailers) primarily engaged in retailing a general line of food, such as canned and frozen foods; fresh fruits and vegetables; and fresh and prepared meats, fish, and poultry[, including] . . . delicatessen-type establishments primarily engaged in retailing a general line of food,” while trade category 455211 comprises “establishments generally known as warehouse clubs, superstores, or supercenters, primarily engaged in retailing a general line of groceries, including a significant amount and variety of fresh fruits, vegetables, dairy products, meats, and other perishable groceries, in combination with a general line of new merchandise, such as apparel, furniture, and appliances.” Both NAICS trade categories include index items, including grocery stores, supermarkets and warehouse clubs.

An “acquiring party” is defined as “a person by whom or on whose behalf the merger or other acquisition of control is to be effected” and is either required to provide notice of the merger or acquisition pursuant to the federal Hart-Scott-Rodino Antitrust Improvements Act of 1976 (15 U.S.C. Sec. 18a) (HSR Act), or is acquiring more than 20 retail drug firms or retail grocery firms.

Parties to the transaction can satisfy this notice requirement by submitting a copy of their HSR filing to the attorney general. For parties not required to submit an HSR filing, AB 853 specifies a variety of information that must be included in the notice, all with the aim to assess the transaction’s economic and community impact. Such information includes:

• The name and address of each acquiring party and a report of the nature of its business operations during the past five years (or for a lesser period, if necessary).

• An informative description of the business intended to be done by the person and the person’s subsidiaries.

• A list of all individuals who are or have been selected to become directors or executive officers.

• The source, nature and amount of the consideration used or to be used in effecting the merger or other acquisition of control, a description of any transaction in which funds were or are to be obtained, and the identity of persons furnishing the consideration.

• Fully audited financial information as to the earnings and financial condition of each acquiring party for the preceding five fiscal years (or for a lesser period if necessary), and similar unaudited information as of a date not earlier than 90 days before the written notice.

• Any plans or proposals that an acquiring party may have to liquidate the retail grocery or retail drug firms, to sell its assets, to merge or consolidate it with any person, or to make any other material change in its business or corporate structure or management.

• The information required to assess the competitive effects of the proposed acquisition, giving particular attention to the effects of the proposed chain retail grocery store acquisition on consumers, including (but not limited to) consumer choice, food pricing, access to food, food deserts and factors affecting the supply of experienced grocery workers, including wages, benefits and unemployment. This information should also focus on the effects of the chain retail pharmacy acquisition on patients, including (but not limited to) patient choice, medicine pricing, access to medications, and factors affecting the supply of licensed pharmacists, pharmacy technicians and pharmacists-in-charge.

• The information required to assess the economic and community impact of any planned divestiture or store closures, including (but not limited to) the impact on food deserts, food supply, economic mobility, unemployment and small businesses.

The acquiring party will be subject to a filing fee not to exceed 0.00045% of the combined sales from the parties in the previous year. After the attorney general’s office receives notice under this law, it may determine that it cannot complete an evaluation of the competitive effects of the acquisition before the parties intend to consummate the transaction. In that scenario, the attorney general may seek an order from the Superior Court of the County of Sacramento temporarily staying or preliminarily enjoining the transaction until the attorney general can complete the analysis.

Further, the law provides for penalties of $20,000 per day in the event of noncompliance with the notice requirement, and states that the attorney general is entitled to injunctive relief and any other equitable remedy for violations.

Takeaways

Parties considering a transaction subject to AB 853 should keep in mind the following:

• As of now, this law does not set a threshold for the acquisition of “all or substantially all” of the assets before notice is required, but rather states that any acquisition of voting securities or assets in these entities necessitates notice.

• The attorney general is permitted to adopt regulations to effectuate the law as necessary or appropriate for the protection of workers, consumers and the public interest. Additionally, the regulations may specify exemptions from the notice requirement for acquisitions that, by virtue of the size, business volume or number of employees, are unlikely to materially affect competitive markets in California. As of the date of this article, such regulations have not been proposed and the attorney general’s office has not responded to inquiries as to the status or expected timeline for such regulations.

• The law provides the attorney general with somewhat broad powers, permitting it to bring an action to enjoin or seek divestiture of assets or ownership interest obtained in a completed acquisition or otherwise to restore competition.

• AB 853 is not the only transaction-related notice requirement that becomes effective this year in California. The California Office of Health Care Affordability (OHCA) notice requirement begins this year for certain healthcare transactions closing on or after April 1, 2024. For more information on the OHCA notice requirements, read our previous On the Subject, “California Publishes Draft Regulations on Filing Requirement for Healthcare Entity Transactions.”

We will continue to monitor this law, as well as the broader legal landscape of health transaction notice requirements. Reach out to the authors or your McDermott lawyer for more information.