On 20 August 2014, Berkshire Hathaway Inc. (Berkshire Hathaway or the Company) agreed to a settlement with the Federal Trade Commission (FTC) for allegedly violating the premerger reporting requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act).
Berkshire Hathaway agreed to pay the maximum civil penalty of US$896,000 for failing to report pre-closing the December 2013 change of convertible notes it owned in USG Corporation (USG) into 21.4 million shares of voting securities, which resulted in the Company holding USG voting shares valued at US$950 million. Such conversions are treated as acquisitions of voting shares under the HSR Act, so a conversion that resulted in satisfaction of the HSR size thresholds required a pre-closing notification to the agencies unless an exemption applied.
Under the rules of the HSR Act, when an entity acquires voting securities of an issuer after filing under the HSR Act and observing the waiting period, subsequent acquisitions of voting shares of that issuer are exempt from the reporting requirements for five years after the expiration or termination of the waiting period, so long as the entity’s subsequent acquisitions do not result in holdings that meet or exceed a higher notification threshold than that indicated in the HSR filing and actually crossed by the entity within one year of the expiration or termination of the HSR waiting period.
Berkshire Hathaway had made a filing when it acquired voting securities of USG in 2006; but since more than five years had passed since that filing, this new transaction was no longer exempt through the earlier filing. The Company later submitted a corrective filing on 3 January 2014, acknowledging that the transaction should have been reported under the HSR Act. The civil penalty covers the period from 9 December 2013, when the voting securities were acquired through the conversion, until 3 February 2014, which was the last day of the waiting period under the HSR Act for the corrective filing, and is calculated at the maximum of US$16,000 per day (for a total maximum penalty of US$896,000).
Only six months earlier, in July 2013, Berkshire Hathaway had made its first corrective filing related to a June 2013 acquisition of US$41 million of additional voting securities in Symetra Financial Corporation (Symetra), triggering the filing threshold under the HSR Act because Berkshire Hathaway held as a result Symetra voting shares valued at approximately US$310 million. Berkshire Hathaway assured the agencies that its failure to file was inadvertent. The agencies took no action in that case, but told the Company that it must institute “an effective program to ensure full compliance with the [HSR] Act’s requirements.”
This enforcement action follows similar actions against companies in the last several years for repeated failures to file. (See our 3 July 2013 and 25 June 2013 alerts for examples.) In each case, no enforcement action followed an initial corrective filing. But subsequent corrective filings received substantial penalties. As the FTC noted in its press release for this settlement, it does not necessarily seek penalties for inadvertent failures to file, but it will go after parties that make repeated mistakes after promising to monitor compliance with HSR filing requirements. Companies should consult with counsel to implement effective compliance programs, especially after initial corrective filings. And companies that make frequent acquisitions of minority interests, such as Berkshire Hathaway, should work with counsel to audit their investment portfolios and highlight when future filings may be required by additional investments.
More generally, the settlement highlights the need for vigilance in monitoring HSR compliance and for companies to consider the filing requirements for all types of transactions, including conversions or small, subsequent acquisitions of additional voting securities of an issuer. The government will pursue enforcement actions even in transactions that do not raise competitive concerns.Parties should consult with counsel to navigate the HSR Act’s complex valuation and aggregation regulations to determine when filings are required.