Obligations of executives acquiring company stock
Enforcement action against Comcast CEO
Share acquisitions under equity compensation programmes
Compliance measures for executives


A public company chief executive officer (CEO) recently consented to a federal district court order requiring him to pay a $500,000 civil penalty for violating the Hart-Scott-Rodino Antitrust Improvements Act. The Antitrust Division of the Department of Justice (DOJ), at the request of the Federal Trade Commission (FTC), charged the executive for failing to satisfy the Hart-Scott-Rodino notification and waiting period requirements before acquiring common stock under his company's stock-based compensation programmes. The CEO exceeded a Hart-Scott-Rodino notification filing threshold through his acquisition of common stock upon the vesting of outstanding restricted stock unit awards and the reinvestment of dividends and short-term interest through his 401(k) account.

The DOJ's enforcement action illustrates the potentially costly consequences of a failure to consider Hart-Scott-Rodino compliance in the investment planning process for corporate executives who hold or will acquire company stock with a total value greater than the statute's transaction filing thresholds.

Obligations of executives acquiring company stock

The Hart-Scott-Rodino regime imposes obligations on parties to certain transactions involving acquisitions of assets, interests in unincorporated entities or voting securities of corporations. The parties must file notification reports with the FTC and the DOJ's Antitrust Division and observe a waiting period before closing their acquisition transactions if the transactions satisfy Hart-Scott-Rodino reporting threshold tests and are not otherwise exempt. The purpose of the Hart-Scott-Rodino Act is to permit an antitrust agency to review – and possibly challenge – reportable acquisitions before they are consummated if the agency determines that the transactions may have an anti-competitive impact.

Application to personal investments
Although Hart-Scott-Rodino Act compliance is frequently considered in the context of business mergers and acquisitions, the statute also can apply to personal investments by executives in their company's common stock and other voting securities. Executives may incur a Hart-Scott-Rodino reporting obligation when they:

  • buy voting securities in capital-raising transactions from the company or in the open market;
  • convert non-voting securities into voting securities;
  • receive equity awards under company-sponsored compensation programmes;
  • exercise stock options; or
  • acquire voting securities in other transactions.

The statute's requirements apply only if, among other things, the total value of voting securities to be acquired and held by the executive exceeds the Hart-Scott-Rodino size-of-transaction threshold, which is currently $66 million until the threshold is next adjusted.

The Hart-Scott-Rodino Act applies in the same manner to acquisitions of common stock by a company's directors and employees generally. However, acquisitions by senior members of a company's management may be more likely to meet the statute's transaction value threshold. Executives holding substantial equity positions in public companies which they obtained as founders or in merger transactions, or which they have accumulated from compensation payments, may be particularly at risk of crossing the size-of-transaction threshold when they acquire additional shares.

Acquisition of 'voting securities'
An executive's acquisition of employer securities will be reportable if the transaction:

  • involves the acquisition of 'voting securities' within the meaning of the Hart-Scott-Rodino Act;
  • satisfies the Hart-Scott-Rodino size-of-transaction and size-of-person threshold tests; and
  • does not qualify for an exemption.

The Hart-Scott-Rodino rules define 'voting securities' as securities that presently or on conversion entitle the owner or holder to vote for the election of company directors. Accordingly, an executive will not incur a Hart-Scott-Rodino obligation if the securities to be acquired confer no voting rights or if the securities confer the right to vote on corporate matters other than those involving director elections. Shares of a corporation's common stock having customary voting rights qualify as voting securities under this test.

The definition of 'voting securities' includes instruments that do not confer the present right to vote for the election of directors, but that are convertible into securities having such voting rights. The acquisition of such a convertible security, however, is exempt from Hart-Scott-Rodino requirements. As a result, no Hart-Scott-Rodino filing is required at the time that an executive acquires a stock warrant, a security convertible into common stock or a stock option or other awards under a company stock-based compensation plan if the instrument does not provide its holder with the present right to vote for the election of company directors. The Hart-Scott-Rodino Act, however, could apply to the executive's later acquisition of common stock (or another security having the present right to vote for the election of directors) upon the conversion, exercise or exchange of the stock warrant or convertible security, or upon the vesting of some types of compensatory equity awards, if the statute's threshold tests are satisfied and the transaction is not exempt.

No 'passive investor exemption'
An executive's acquisition of company voting securities may qualify for an exemption from the Hart-Scott-Rodino requirements. Under current FTC staff positions, however, an executive may not rely on the so-called 'passive investor exemption'. Under this exemption, a person generally is permitted to acquire up to 10% of the issuer's voting securities so long as that person acquires and holds the securities "solely for the purpose of investment". The Hart-Scott-Rodino rules define 'investment purpose' to mean that "the person holding or acquiring such voting securities has no intention of participating in the formulation, determination or direction of the basic business decisions of the issuer". FTC staff has indicated that the passive investor exemption generally is not available to officers or directors of a company (or of any entity under common control with the company) who acquire the company's shares. In the staff's view, officers and directors, by reason of their positions, intend to participate in the company's basic business decisions and to exercise control or influence over the company's actions and, accordingly, cannot satisfy the exemption's investment purpose condition.

Reporting obligation
If the Hart-Scott-Rodino Act applies to an acquisition of voting securities, both the acquiring executive and the company must satisfy the statute's notification and waiting period requirements before the acquisition is consummated. A failure to comply will expose the executive and the company to potential civil penalties of up to $16,000 a day for each day of non-compliance.

Enforcement action against Comcast CEO

Allegations in DOJ complaint
The DOJ's Antitrust Division brought a civil antitrust action in federal district court against Brian L Roberts, CEO of Comcast Corporation. The DOJ charged that Roberts had violated Hart-Scott-Rodino notification and waiting period requirements in connection with his acquisition of Comcast common stock during a period of almost two years beginning in October 2007.

According to the complaint, Roberts had filed under the Hart-Scott-Rodino Act in 2002 to acquire Comcast voting securities in connection with a merger agreement between Comcast and AT&T Corp. Under Hart-Scott-Rodino rules, Roberts was permitted to acquire additional shares of Comcast common stock up to the next notification threshold for five years after the expiration of the waiting period for his 2002 filing, without having to file again under the Hart-Scott-Rodino Act. Roberts acquired approximately 3,700 shares of Comcast Class A common stock through his 401(k) account from October 2007 to April 2009 and a total of approximately 334,560 shares of Class A common stock upon the vesting of restricted stock units from March 2008 to April 2009. The DOJ alleged that because the five-year period for acquisitions under his 2002 Hart-Scott-Rodino Act filing had expired in September 2007, Roberts had violated the statute by failing to file under the Hart-Scott-Rodino Act and observe the waiting period before any of such subsequent acquisitions. As a result of the subsequent acquisitions, Roberts held Comcast voting securities with a value greater than the applicable Hart-Scott-Rodino size-of-transaction threshold.

Corrective filing process
The antitrust agencies became aware of the reporting violations when Roberts made a corrective filing under the Hart-Scott-Rodino Act in August 2009 for the Comcast shares he had acquired over the preceding two years. In making this filing, Roberts took appropriate action to correct his reporting delinquency. A failure to file a Hart-Scott-Rodino notification report when required for a transaction may be corrected only by a filing, albeit delinquent, for the transaction. If an executive has acquired company shares in violation of the Hart-Scott-Rodino Act, the executive and the company should notify the FTC Pre-merger Notification Office of the missed filing as soon as they discover the violation and file the appropriate Hart-Scott-Rodino notification reports with the antitrust agencies as soon thereafter as practicable. The FTC and the DOJ will process the late filing in accordance with their normal procedures. If the agencies determine that the executive's acquisition of shares will not have an anti-competitive effect - which is almost always the case - the post-notification waiting period will expire or terminate in the usual course.

Voluntary corrective action usually will limit the maximum amount of penalties that may be assessed by the antitrust agencies and (at least in the case of the first inadvertent violation) may persuade the agencies to impose no penalties. The agencies may have decided to seek civil penalties against Roberts in the current action because, as the DOJ highlighted in its complaint, Roberts in previous years had submitted two corrective filings for other acquisitions which he had acknowledged as being reportable under the Hart-Scott-Rodino Act. In each of the prior filings, Roberts had asserted that his failure to file and observe the waiting period was inadvertent. In the absence of the earlier reporting delinquencies, the antitrust agencies might have been willing to forbear from imposing penalties. The agencies typically do not seek penalties where:

  • the failure to file resulted from an executive's unfamiliarity with the Hart-Scott-Rodino Act's application to acquisitions of employer voting securities;
  • the company and the executive self-report the non-compliance and make corrective filings as soon as they discover their mistake; and
  • the executive and the company have undertaken measures to prevent a recurrence.

Share acquisitions under equity compensation programmes

As the DOJ's enforcement action against Roberts illustrates, the Hart-Scott-Rodino Act reporting analysis must be applied to acquisitions of company shares resulting from the receipt, exercise or vesting of equity awards granted to the executive under stock incentive plans and other employer-sponsored compensation programmes, such as 401(k) plans. In some circumstances, such as where an executive exercises a stock option after the award has vested, the acquisition of shares requires action by the executive. In other circumstances, the executive may acquire shares through a grant by the company's compensation committee, which is outside the executive's control. Under the Hart-Scott-Rodino Act rules as currently administered, the lack of voluntary action by the executive in the latter case will not exempt the acquisition from Hart-Scott-Rodino Act filing requirements that otherwise would apply. As a result, because the rules accord no special status to equity awards, Hart-Scott-Rodino Act compliance for compensation arrangements must focus on the date on which an executive may be considered to make a reportable acquisition of voting securities.

Restricted and unrestricted stock
Compensatory awards of restricted stock and unrestricted stock must be evaluated for Hart-Scott-Rodino filing purposes by reference to the award grant date. Because the shares represented by these awards are issued on the grant date, the awards result in the executive's acquisition on that date of shares having the present right to vote for the election of company directors. Restricted stock awards are not excludible from Hart-Scott-Rodino reporting simply because the executive may forfeit the shares at a later date on failure to satisfy the award's vesting conditions. If the acquisition of a restricted or unrestricted stock award is reportable, the executive and the company must satisfy the Hart-Scott-Rodino notification and waiting period requirements before the executive receives delivery of the shares.

Stock options and SARs
The award of a stock option or a stock-settled stock appreciation right (SAR) will not result in the executive's acquisition on the grant date of the shares subject to the award. The acquisition will occur on a later date when the executive exercises the option or SAR and receives the underlying shares. If the applicable Hart-Scott-Rodino threshold tests will be met in connection with (and at the time of) an exercise, and no exemption applies, the Hart-Scott-Rodino requirements must be satisfied before the option or SAR is exercised.

Restricted stock units
Potential Hart-Scott-Rodino reporting may similarly be deferred in the case of equity awards, such as restricted stock units, that provide for the delivery of the underlying shares on or after specified future vesting dates. The executive's acquisition of the shares subject to such awards will occur when the company issues the shares. The company and the executive must evaluate the executive's acquisition of shares at each delivery date in light of the applicable Hart-Scott-Rodino threshold tests and, if any scheduled share issuance is reportable, satisfy the statute's requirements before the executive receives delivery of the shares.

Compliance measures for executives

Public companies and their executives should exercise the same vigilance in complying with the Hart-Scott-Rodino Act as they display in complying with other federal laws that apply to executive acquisitions of company shares. An effective Hart-Scott-Rodino compliance programme should involve the executive and the executive's advisers, since much of the information needed to evaluate the statute's applicability to a particular transaction will be in the executive's possession.

Companies may wish to consider a number of compliance measures to reduce the possibility of mis-steps by their executives who may become subject to Hart-Scott-Rodino reporting obligations, as follows:

  • Communicate HSR Act requirements – as a first step, companies should communicate internally that some of their executives could incur a Hart-Scott-Rodino reporting obligation if they acquire additional company shares. Hart-Scott-Rodino requirements should be communicated to the executives who might engage in reportable transactions, as well as to employees who have responsibility for approving, documenting or processing executive stock transactions. Recipients of the briefing typically should include members of the company's legal, compliance and human resources departments.
  • Identify potentially affected executives – companies should identify executives whose existing holdings of company shares either exceed the Hart-Scott-Rodino size-of-transaction threshold or, together with reasonably expected future share acquisitions, might exceed the threshold. The company should then refine the list of potential candidates for Hart-Scott-Rodino filings by asking the executives in this group to evaluate their potential status under the size-of-person test (if applicable). Depending on the nature and scope of an executive's assets and shareholdings (including assets of entities controlled by the executive under Hart-Scott-Rodino control tests), such an evaluation might take some time to develop and require the assistance of the executive's personal advisers, particularly if the executive (or an entity under the executive's Hart-Scott-Rodino control) does not have a regularly prepared balance sheet or annual income statement. The assessment under the two threshold tests for each likely candidate will have to be updated from time to time in anticipation of future share acquisitions (whether scheduled or unscheduled) to reflect changes in the market price of company shares and in the executive's personal financial situation.
  • Consider an advance Hart-Scott-Rodino filing – the affected executive should consider whether to complete the Hart-Scott-Rodino notification process in advance of any particular acquisition of company shares. An executive who can certify to the antitrust agencies that the executive expects to cross a Hart-Scott-Rodino transaction reporting threshold within one year may file a Hart-Scott-Rodino notification report months before the first such acquisition. Agency clearance related to the filing will be effective for one year following expiration or termination of the executive's Hart-Scott-Rodino waiting period and will apply only if the executive crosses a Hart-Scott-Rodino reporting threshold within that period. If the specified reporting threshold or any lower threshold is crossed within the one-year period, the executive will be able to acquire additional company shares for a five-year period without another filing, unless the executive crosses a higher reporting threshold than he crossed within the year (as discussed above, this is the exemption on which Roberts initially relied following his Hart-Scott-Rodino filing in 2002). Although an advance filing would afford an executive flexibility to complete future share acquisitions without Hart-Scott-Rodino compliance concerns, this advantage might not outweigh any reluctance by the executive to pay the significant Hart-Scott-Rodino filing fee until a filing is required. This reluctance might be reinforced by the possibility that volatility in the company's stock price could drive the market price of company shares below an applicable Hart-Scott-Rodino threshold amount by the time of any new share acquisition.
  • Integrate compliance measures into stock compensation programmes – the administration of stock compensation programmes should include provision for monitoring potentially reportable transactions in connection with compensation committee grants, stock option and SAR exercises and the vesting of outstanding equity awards. To minimise the possibility of a missed Hart-Scott-Rodino filing, the company officials supporting the activities of the compensation committee should consult with each affected executive about a potential filing obligation well in advance of any scheduled grant, exercise or vesting date.
  • Consult with Hart-Scott-Rodino counsel – company officials should consult with Hart-Scott-Rodino counsel to confirm current Hart-Scott-Rodino filing thresholds and to evaluate the potential availability of an exemption from Hart-Scott-Rodino reporting.

The same measures should be effective in bolstering compliance with the Hart-Scott-Rodino Act by directors who acquire shares of the companies on whose boards they serve.


Application of the Hart-Scott-Rodino threshold tests and exemptions is complex and requires careful attention to changes in the executive's personal circumstances and annual changes in the Hart-Scott-Rodino filing thresholds. Failure to design and implement effective compliance measures could prove costly both to executives who acquire shares in violation of the Hart-Scott-Rodino Act and to their employers.

For further information on this topic please contact Michele S Harrington at Hogan Lovells US LLP's McLean office by telephone (+1 703 610 6100), fax (+1 703 610 6200) or email ([email protected]). Alternatively, contact Richard J Parrino at Hogan Lovells US LLP's Washington DC office by telephone (+1 202 637 5530), fax (+1 202 637 5910) or email ([email protected]).