On 28 October 2016, the Department of Justice's Antitrust Division (DOJ), following a recommendation by the Federal Trade Commission (FTC), announced a proposed settlement with investment firm founder Fayez Sarofim for alleged violations of the Hart-Scott-Rodino (HSR) Act after he failed to notify the antitrust agencies of stock purchases in multiple issuers between 2001 and 2012. The FTC alleged that because Mr. Sarofim served as a board member at each company whose shares he acquired, he could not rely on the "investment-only" exemption to HSR's premerger filing requirements. Under the proposed settlement, Mr. Sarofim agreed to pay a US$720,000 fine.

This consent decree, the third one the government has obtained this year alone for acquisitions of voting shares in alleged violation of the HSR Act, highlights the continued need for vigilance in determining when HSR filings are required in connection with acquisitions.1

HSR Act Filing Requirements

Unless an exemption applies, the HSR Act imposes pre-closing notification requirements for certain acquisitions of assets, voting securities, and controlling interests in non-corporate entities meeting certain annually adjusted thresholds. After the parties notify the DOJ and FTC of a transaction, a waiting period commences in which the antitrust agencies conduct a pre-closing antitrust review. During this period, the parties may not close the transaction. If a company or person fails to submit a required filing 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 for each day in which assets, voting securities, or non-corporate interests are held in non-compliance. On 1 August 2016, fines for an HSR violation were increased from US$16,000 per day to US$40,000 per day.

Background and FTC Allegations

Mr. Sarofim, an early stockholder of Kinder Morgan Inc. (Kinder Morgan), became a board member of Kinder Morgan in 1999. Beginning in 2001, Mr. Sarofim acquired additional Kinder Morgan shares on several occasions, through open-market purchases and once as compensation for sitting on the Kinder Morgan board, crossing various applicable HSR filing thresholds. Mr. Sarofim was also a stockholder in and director of Unitrin Inc. On 10 May 2007, Mr. Sarofim acquired through an open-market purchase additional shares of Unitrin and as a result held Unitrin voting shares valued in excess of US$50 million (as adjusted). On 21 November 2014, Mr. Sarofim submitted corrective HSR filings for the acquisitions in each issuer that crossed the applicable HSR thresholds.

In its complaint, the government contended that Mr. Sarofim's past acquisitions of Kinder Morgan and Unitrin voting shares were not exempt from HSR filing requirements under the solely for the purpose of investment exemption 16 C.F.R. Section 802.9. The Complaint alleged that because Mr. Sarofim was a board member for both Kinder Morgan and Unitrin at the time he purchased voting shares in each company, his position "necessarily caused him to participate" in the "basic business decisions" of the company, disqualifying him from utilizing the solely for the purpose of investment exemption. Complaint at 16.

Key Takeaways

There are a number of significant takeaways from the latest HSR consent agreement.

  1. Mr. Sarofim filed corrective HSR filings on one day (21 November 2014) for multiple missed HSR filing obligations involving two different issuers. Presumably he examined all of his investments when he discovered his HSR error and made the necessary corrective HSR filings on the same day. The FTC has a "one bite at the apple" policy, and typically does not impose fines on parties who inadvertently miss an HSR filing obligation if, among other things, such parties self-report the violation upon discovery and make a corrective HSR filing soon thereafter. In this case, however, the FTC chose to seek a penalty when an acquiring person self-reported and filed corrective HSR filings for multiple violations all on one day.
  2. Although Mr. Sarofim agreed to pay a fine, it was significantly less than it could have been had the agencies sought the maximum penalty of US$16,000 a day for each day of the violation (the settlement was agreed to before the maximum penalty increased to US$40,000 per day). The maximum penalty could have been in the millions of dollars. It is prudent when a party realizes it inadvertently missed an HSR filing obligation to examine all of its past acquisitions and self-report and correct all of its missed filings to minimize possible very costly penalties.
  3. The "solely for the purpose of investment" exemption did not apply to Mr. Sarofim's prior acquisitions of voting shares in two companies because he was a director of both issuers at the time he acquired the additional shares. Officers and directors who acquire voting shares of their companies should be mindful of HSR filing requirements since by definition none may qualify for the passive investor exemption.
  4. Acquiring persons should also be mindful that the HSR Act can apply to the acquisition of voting shares of a corporation regardless of the means. Mr. Sarofim's past violations involved open-market purchases and even one case in which he received voting shares as compensation for his board service.

Given that the U.S. antitrust agencies have demonstrated an aggressive approach to enforcing the limits of the investment-only exemption, it is advisable for acquiring persons to exercise caution and consult with experienced HSR Act counsel before relying on any HSR exemption, including the investment-only exemption. This remains true even if acquiring persons would acquire and hold a very small percentage of a company's voting shares.