The Department of Justice's (DOJ) recent settlement for US$480,000 with Caledonia Investments PLC (Caledonia) regarding Caledonia's failure to comply with the Hart-Scott-Rodino Act (HSR Act) serves as an important reminder that investors and investment firms need to have appropriate procedures in place to ensure they are identifying and making required HSR Act notifications before closing on acquisitions. In particular, the case reflects the highly technical nature of the regulations, the antitrust authorities' focus on improper reliance on the narrow exceptions to the HSR Act, and the extra scrutiny received by past violators of the Act.
On August 10, 2016, DOJ settled claims against Caledonia that it failed to file notification under the HSR Act, which requires parties to an acquisition to file a notification and observe a waiting period for transactions that meet certain thresholds. DOJ alleged that Caledonia, a United Kingdom-based investment firm, improperly relied on a prior filing and clearance that had expired, when acquiring voting securities as a result of the vesting of restricted stock units (RSUs).
In 2008, Caledonia obtained HSR clearance to acquire voting securities of helicopter operator Bristow Group (Bristow). That clearance, however, expired after 5 years on June 13, 2013. On February 3, 2014— nearly 8 months after expiration of the prior clearance—Caledonia acquired additional voting securities of Bristow as a result of vesting RSUs, but failed to make a new HSR filing.
Caledonia self-reported its violation "shortly after learning of its obligation to file." It ultimately received HSR clearance on March 15, 2015. Caledonia, however, had similarly failed to file in 1996 when it improperly relied on the passive, investment-only exemption. The passive, investment-only exemption was unavailable because Caledonia received two seats on the board of directors of the target, but regardless of Caledonia's error, the antitrust authorities did not bring suit at that time because of the inadvertent nature of the failure to file.
While Caledonia's failure to file for the vesting RSUs was again inadvertent, DOJ brought an action because it was Caledonia's second violation—a situation where the agencies consistently have sought monetary penalties. Under the recently increased maximum penalties (now US$40,000 per day), the violation could have resulted in a penalty of approximately US$15.8 million, but Caledonia had to pay only US$480,000 (a little over three percent of the potential maximum penalty) because it self-reported and settled with DOJ.
The HSR regulations are highly technical and, as a result, investors and investment companies need to ensure proper compliance procedures are in place to determine when filings are necessary and to seek legal advice when questions arise. Even if inadvertent, failing to make an HSR filing when required can see be costly, especially if there has been a prior violation. As a result, the case against Caledonia is an important reminder of the following:
- The U.S. antitrust agencies continue to observe a "one-strike" rule and routinely will seek civil monetary penalties for failure to comply with the HSR filing obligations against repeat violators, regardless of intent.
- The stakes are high. Effective August 1, 2016, the maximum civil penalties for failure to file HSR increased from US$16,000 per day to US$40,000 per day. Caledonia was facing a potential maximum penalty of approximately US$15.8M.
- The agencies appear to credit good faith compliance efforts and self-reporting of violations. Caledonia received a discount of approximately 97% off the statutory maximum penalty.
- It is important to track prior filings and clearances closely—not only whether a prior clearance is still valid (e.g., obtained within 5 years), but also whether new purchases exceed the next filing threshold, to make sure no new filings are required in connection with new trading activity.
- Investment companies and individual investors need to monitor not only new acquisitions, but also automatic conversions of options or RSUs that were previously acquired. The conversion of options or vesting of RSUs is considered an "acquisition" under the HSR rules and may trigger a filing, as was the case for Caledonia.