On 19 June 19 2013, the Department of Justice (DOJ), at the request of the Federal Trade Commission (FTC), filed a complaint against MacAndrews & Forbes Holdings Inc. (M&F) charging M&F with acquiring voting shares of Scientific Games Corporation (SG) in violation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 as amended (the “HSR Act”). Under the HSR Act, parties must first file HSR notifications with the FTC and DOJ and observe a waiting period before acquiring voting securities, assets, or controlling interests in partnerships or limited liability companies if HSR threshold tests would be satisfied and no exemption would apply. Failure to comply with the HSR Act subjects parties to civil penalties of up to US$16,000 a day. DOJ also filed a proposed settlement agreement under which M&F agreed to pay civil penalties of US$720,000 to settle the charges.
According to the complaint, M&F filed an HSR notification to report its acquisition of voting shares of SG on 1 February 2007. After the waiting period on that filing was terminated on 9 February 2007, M&F lawfully acquired shares of SG voting shares for a five year period and as a result did not cross the next HSR filing threshold. Thus, the acquisitions qualified for an HSR exemption. The exemption expired, however, five years after the termination of M&F’s initial HSR waiting period on 7 February 2012. Once the five year period had expired, M&F was obligated to file a new HSR form and observe a new waiting period before acquiring any additional voting shares of SG if as a result M&F would hold in excess of the lowest applicable HSR threshold -- US$50 million (as adjusted) – so long as no exemption applied. On 4 and 5 June 2012, M&F acquired 800,000 additional shares of SG voting shares at a cost of US$6.5 million. When these shares were aggregated with the SG shares already held by M&F, M&F held in excess of US$50 million (as adjusted) of SG voting shares. M&F did not file an HSR notification before acquiring the additional SG shares. M&F discovered its failure to observe the HSR requirements after HSR counsel reviewed its investment portfolio. M&F then reported its failure to the FTC and made a corrective filing on 16 August 2012. The waiting period on the corrective filing expired on 17 September 2012. The complaint charges that M&F was therefore in violation of the HSR Act between 4 June 2012, and 17 September 2012.
Typically, the agencies do not penalize parties who inadvertently fail to file the required HSR form and observe the required HSR waiting period so long as they immediately report their failure upon discovery to the FTC and file promptly a corrective HSR filing. However, the agencies are likely to seek civil penalties if a party fails to make a required HSR filing (even if inadvertently) after it has corrected an inadvertent failure to file in the past. Apparently this is what happened to M&F since it discovered in 2011 that it failed to file a required HSR form before acquiring additional shares of another issuer – SIGA Technologies, Inc. (SIGA) – which caused M&F to cross a higher HSR notification threshold than it had indicated in its 22 June 2010, HSR filing to report its acquisition of SIGA voting shares. According to the complaint, M&F notified the FTC of this failure upon discovery and made a corrective filing on 13 May 2011. Presumably, in 2011 M&F committed to implement procedures so that it would not miss future HSR filing obligations. Nonetheless, it missed another filing obligation before its 4 June 2012 acquisition of additional SG voting shares.
There are a number of HSR lessons to be gleaned from the M&F complaint. First, HSR counsel should be consulted before any acquisition of voting shares, assets, or non-corporate interests in partnerships or limited liability companies no matter the value and no matter the means. M&F missed one HSR filing obligation when it acquired additional SIGA voting shares as a result of a cashless exchange of warrants into voting shares and missed another filing obligation when it acquired additional SG voting shares for less than US$7 million. The HSR regulations include complicated valuation and aggregation rules and timely analysis of application of these rules to both acquisitions could have prevented the missed filings.
Second, in the case of both missed filing obligations, M&F had previously filed HSR forms for acquisitions of shares of both issuers. New filing obligations arose, however, due to additional acquisitions of shares in these same issuers. Parties who acquire minority interests in corporations must therefore keep HSR concerns on their radar even after making initial HSR filings.
Third, according to the complaint, M&F discovered both missed filing obligations as a result of a review of its investment portfolio by HSR counsel. Had M&F not undertaken such a review, and discovered the missed filings months or years later, it could have had to pay significantly higher civil penalties. It is therefore prudent for entities who routinely make acquisitions (particularly of minority interests in corporations) to consult with HSR counsel before each such acquisition and to ask HSR counsel to audit their investment portfolios for HSR compliance periodically, whether quarterly, semi-annually, or annually. HSR counsel can provide at the audit road maps to highlight when future acquisitions of voting securities of a corporation could trip an HSR, or another HSR, filing obligation.