On 29 June 2016, the Federal Trade Commission (FTC) announcedsignificant increases to the maximum civil penalties for violations of numerous laws and regulations it enforces, including premerger notification requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act). The FTC increased the civil penalties for HSR Act violations 150% -- from US$16,000 per day to US$40,000 per day. These new penalties are effective as of 1 August 2016, although they will apply to any violations that occurred before that date.
These increases were required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (IAAI Act), which requires federal agencies to adjust civil penalties for inflation using a “catch-up” formula. The FTC last increased the maximum fine in 2009, from US$11,000 per day to US$16,000 per day. Going forward, the FTC will increase its maximum civil penalties annually pursuant to the IAAI Act—approximately at the same time it announces the revised HSR filing thresholds.
Under the HSR Act, certain acquisitions of assets, voting securities, or interests in non-corporate entities are subject to pre-closing notification filing and waiting period requirements if applicable jurisdictional thresholds are satisfied and no exemption applies. The purpose of the HSR Act is to allow the U.S. antitrust agencies to investigate and possibly challenge reportable acquisitions before they are closed. If a company or person fails to submit a required filing, and/or closes on a reportable acquisition before the applicable HSR waiting period has expired or been terminated, such company or person can face substantial civil penalties since each day of non-compliance (i.e., each day in which the acquiring person held the voting shares, assets or non-corporate interests without having filed and observed the waiting period) is a separate violation. Thus, under the new US$40,000 per day maximum, a violation that occurred for one year could incur a maximum civil penalty of US$14.6 million.
However, this is only the maximum penalty and the antitrust agencies do take into account mitigating factors when assessing the appropriate penalty, such as “degree of culpability, any history of prior such conduct, ability to pay, effect on ability to continue to do business, and such other matters as justice may require.”1 In addition, the FTC has long adopted a “one-bite-at-the-apple” policy, whereby it typically does not impose a civil penalty for a company’s or person’s first inadvertent HSR Act violation so long as the company or person reports the violation to the FTC upon discovery, submits a corrective filing and a detailed letter explaining the circumstances surrounding the violation and how the mistake was discovered, and implements measures to avoid future violations.2
The FTC has reported that it is contacted “several times a year” by parties who have learned that they have inadvertently violated the HSR Act in the past. Although violations occur under many different circumstances, it sees “two specific scenarios very frequently”:
- First, company executives acquire company voting shares through exercising options or warrants and fail to aggregate the value of such shares with the value of the company shares they already hold and therefore do not realize that they have satisfied the HSR size of transaction threshold test.
- Second, sometimes acquiring persons who have qualified for the investment-only exemption in the past in connection with their holdings in a company may wrongly continue to rely on that exemption when they acquire additional company voting shares not appreciating that the exemption no long applies because either they have become active investors in the company or their holdings in the company have increased above 10%.
The HSR threshold tests and exemptions are complex, with specific and detailed aggregation and valuation rules. The significant increase in the maximum civil penalty recently announced by the FTC is a timely reminder that companies and natural persons (including company executives who receive stock-based compensation) should ensure they have robust compliance programs in place to avoid violations of the HSR Act.