Government Remains Vigilant Against Reporting Violations
On January 24, 2012, the Federal Trade Commission (FTC) announced its annual adjustment of the jurisdictional thresholds for pre-merger notification filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) and for interlocking directorates under Section 8 of the Clayton Act. The revisions account for changes in the level of the U.S. gross national product and constitute an increase of over three percent. In addition, the FTC has continued to bring cases against companies and individuals accused of not complying with the HSR Act, including one at the end of 2011 in which the CEO of Comcast Corporation (“Comcast”) agreed to pay a $500,000 fine.
- HSR Act Pre-Merger Notification Thresholds
The HSR Act requires companies contemplating mergers or acquisitions of voting securities or assets that meet or exceed certain monetary thresholds to file notification forms with the FTC and Department of Justice and to wait a designated period of time before consummating the contemplated transaction. The new thresholds will go into effect for transactions closing on or after February 27, 2012. Thus, for transactions closing after this date, companies generally will need to comply with the HSR Act pre-merger notification and waiting period requirements if the following is true:
- The size of the transaction (as defined by the HSR Act and applicable regulations) is in excess of $272.8 million;
- The size of the transaction is in excess of $68.2 million, the total assets or annual net sales of one party to the transaction (as defined by the HSR Act and applicable regulations) equals $136.4 million or more, and the total assets or annual net sales of the other party to the transaction equals $13.6 million or more.
Although the HSR Act filing fee amounts will not increase, these adjustments do affect the filing fee schedule as follows:
Size of the Transaction Filing Fee
In excess of $68.2 million, but less than $136.4 million $45,000
$136.4 million or more, but less than $682.1 million $125,000 $682.
1 million or more $280,000
These adjustments constitute the primary changes to the HSR Act regulations adopted by the FTC on January 24. Additional regulations governing the methodology for calculating the size of party and size of transaction tests, as well as exemptions from the HSR Act, remain unchanged.
- Interlocking Directorates Thresholds
Section 8 of the Clayton Act prohibits, with certain exceptions, one person from serving as a director or officer of two competing corporations. Under the FTC’s revised Section 8 thresholds, which became effective upon publication in the Federal Register on January 26, a person may not serve as a director or officer of two competing corporations if each corporation has capital, surplus and undivided profits aggregating more than $27,784,000, unless one or more of the corporations has competitive sales under $2,778,400.
- Recent Enforcement Action for Failure to Comply with the HSR Act
The FTC and Justice Department also provided a strong reminder late last year that failure to submit an HSR filing, when required by the HSR Act, can result in significant fines for individuals and companies. On December 16, 2011, the CEO of Comcast, Brian L. Roberts, agreed to pay $500,000 to settle charges that he failed to file pre-merger notification forms and observe the HSR waiting period when he acquired additional Comcast stock.
According to the government’s complaint, Roberts filed an HSR notification for his personal acquisition of Comcast stock in 2002, but failed to file subsequent notifications for later purchases. Under HSR regulations, the original HSR submission permitted Roberts to purchase additional Comcast stock for a period of five years, so long as his holdings did not cross another HSR threshold level. However, after five years, Roberts acquired additional stock as compensation without making another HSR filing. Roberts acknowledged the error and made a corrective filing in 2009. Although the FTC noted a number of mitigating factors, including that the error was inadvertent and technical, Roberts had made two corrective filings in the past that did not lead to any fines. Based in part on that fact, the FTC referred the matter to the Antitrust Division of the Department of Justice, which filed a lawsuit and stipulated final judgment in federal court in Washington settling the charges and requiring Roberts to pay a $500,000 fine. Although the fine represents a significant reduction from the statutory penalty of $16,000 per day for which he could have been liable, the case adds to the list of significant fines for HSR violations in recent years, which include John Malone of Discovery Holding Company ($1.4 million in 2009), ESL Partners and ZAM Holdings ($525,000 and $275,000, respectively, in 2008), ValueAct Capital Partners ($1.1 million in 2007), Bill Gates ($800,000 in 2004) and the Hearst Trust ($4 million in 2001).
This recent enforcement action underscores the importance of maintaining strict compliance with the HSR Act and demonstrates the substantial penalties that await both individuals and companies that fail to comply. Individuals who receive significant voting securities as compensation or invest heavily in specific companies via the open market must be vigilant to ensure they comply with the Act.