On August 20 2014 Berkshire Hathaway Inc agreed to a settlement with the Federal Trade Commission (FTC) for allegedly violating the pre-merger reporting requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Berkshire Hathaway agreed to pay the maximum civil penalty of $896,000 for failing to report pre-closing the December 2013 change of convertible notes it owned in USG Corporation into 21.4 million shares of voting securities, which resulted in Berkshire Hathaway holding USG voting shares valued at $950 million. Such conversions are treated as acquisitions of voting shares under the act so a conversion that results in satisfaction of the act's size thresholds requires a pre-closing notification to the agencies unless an exemption applies.
Under the Hart-Scott-Rodino Act, when an entity acquires an issuer's voting securities after filing under the act and observing the waiting period, subsequent acquisitions of that issuer's voting shares 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 Hart-Scott-Rodino filing and actually crossed by the entity within one year of the expiration or termination of the waiting period.
Berkshire Hathaway had filed 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. It later submitted a corrective filing on January 3 2014, acknowledging that the transaction should have been reported under the act. The civil penalty covers the period from December 9 2013, when the voting securities were acquired through the conversion, to February 3 2014, the last day of the waiting period for the corrective filing under the act. It was calculated at the maximum of $16,000 per day, with a maximum penalty of $896,000.
Six months earlier, in July 2013, Berkshire Hathaway had made its first corrective filing related to a June 2013 acquisition of $41 million of additional voting securities in Symetra Financial Corporation, which triggered the filing threshold under the act because, as a result, Berkshire Hathaway held Symetra voting shares valued at approximately $310 million. Berkshire Hathaway assured the agencies that its failure to file was inadvertent. The agencies took no action in that case, but told Berkshire Hathaway that it must institute "an effective program to ensure full compliance with the Act's requirements."
This enforcement action follows similar actions against companies in recent years for repeated failures to file (for further details see "FTC hands down another fine for violation of pre-merger filing requirements"). 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 will pursue parties that make repeated mistakes after promising to monitor compliance with the Hart-Scott-Rodino Act filing requirements. Companies should consult with counsel to implement effective compliance programmes, especially after initial corrective filings. Companies that frequently acquire minority interests 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 compliance under the act and for companies to consider the filing requirements for all types of transaction, including conversions or small, subsequent acquisitions of additional voting securities of an issuer. The government will pursue enforcement action even in transactions that raise no competitive concerns. Parties should consult with counsel to navigate the Hart-Scott-Rodino Act's complex valuation and aggregation regulations to determine when filings are required.
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@example.com). Alternatively, contact Joseph G Krauss or Robert F Baldwin at Hogan Lovells US LLP's Washington DC office by telephone (1 202 637 5600), fax (1 202 637 5910) or email (firstname.lastname@example.org or email@example.com). The Hogan Lovells website can be accessed atwww.hoganlovells.com.