On June 29 2016, the Federal Trade Commission (FTC) announced significant increases to the maximum civil penalties for violations of numerous laws and regulations that it enforces, including pre-merger notification requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The FTC increased the civil penalties for Hart-Scott-Rodino Act violations by 150%, from $16,000 per day to $40,000 per day. The new penalties are effective as of August 1 2016, although they will apply to any violations that occurred before that date.
The increases were required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015, 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 $11,000 per day to $16,000 per day. The FTC will increase its maximum civil penalties annually pursuant to the Penalties Inflation Adjustment Act Improvements Act – at approximately the same time that it announces the revised Hart-Scott-Rodino filing thresholds.
Under the Hart-Scott-Rodino 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 Hart-Scott-Rodino Act is to allow the US antitrust agencies to investigate and possibly challenge reportable acquisitions before they are closed. If a company or person fails to submit a required filing, or closes on a reportable acquisition before the applicable Hart-Scott-Rodino waiting period has expired or been terminated, such company or person can face substantial civil penalties. Each day of non-compliance – that is, each day for 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 $40,000 per day maximum, a violation that occurred for one year could potentially incur a maximum civil penalty of $14.6 million.
However, this is the maximum penalty only; the antitrust agencies will 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 first inadvertent Hart-Scott-Rodino Act violation, provided that 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 which have learned that they have inadvertently violated the Hart-Scott-Rodino Act. Although violations occur under many different circumstances, the FTC frequently sees two specific scenarios:
- 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 that they already hold. Therefore, they do not realise that they satisfy the Hart-Scott-Rodino size of transaction threshold test.
- Second, acquiring persons which have previously qualified for the investment-only exemption in connection with their holdings in a company may sometimes wrongly continue to rely on that exemption when they acquire additional company voting shares. They do not appreciate that the exemption no longer applies because either they have become active investors in the company or their holdings in the company have increased above 10%.
The Hart-Scott-Rodino threshold tests and exemptions are complex and have 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 that they have robust compliance programmes in place to avoid Hart-Scott-Rodino Act violations.
For further information on this topic please contact Michele S Harrington or Robert F Baldwin at Hogan Lovells US LLP's Washington DC office by telephone (+1 703 610 6173 or +1 202 637 5600) or email ([email protected] or [email protected]). The Hogan Lovells website can be accessed at www.hoganlovells.com.
(1) 15 USC 45(m)(1)(C). These factors apply to civil penalties for violations of the FTC's rules addressing unfair or deceptive practices issued under §18 of the FTC Act, as well as violations of other statutes that provide for civil penalties by reference to §18. In its announcement, the FTC said that it applies these same factors when considering whether to seek the maximum penalty for violations of the Hart-Scott-Rodino Act.
(2) See the FTC's Procedures For Submitting Post-Consummation Filings.