Even an oracle can get stung by the nuances of whether the Hart-Scott-Rodino (“HSR”) Act requires a particular transaction be notified. On August 20, the Federal Trade Commission (“FTC”) announced the maximum civil penalty of $896,000 for Berkshire Hathaway’s second corrective HSR filing in six months, continuing a trend in aggressive enforcement of penalties for repeated HSR Act violations.
In November 2008, Berkshire Hathaway purchased Contingent Convertible Senior Notes of USG Corporation for $300 million, which are due in 2018. The Convertible Notes could be converted into voting securities of USG at Berkshire Hathaway’s option at the conversion price of $11.40 per share, subject to adjustment at any time prior to the end of November 30, 2018.
On December 9, 2014, Berkshire Hathaway converted its notes into USG voting securities, giving Berkshire Hathaway 28% of USG, a stake worth over $950 million. The HSR Act treats a conversion as an acquisition, meaning that a conversion meeting the HSR Act size thresholds (including the size of transaction test, which is currently $75.9 million) must be notified to the FTC and the Department of Justice. Then, the parties are required to observe the statutory waiting period before closing.
Although Berkshire Hathaway’s acquisition by conversion exceeded the size of transaction threshold, the company failed to comply with the HSR Act’s reporting requirements prior to closing. On January 3, 2014, Berkshire Hathaway made a corrective filing for the USG voting securities acquired the month prior. This meant that Berkshire Hathaway was in violation of the HSR Act from December 9, 2013 until February 3, 2014, when the 30-day waiting period initiated by the corrective filing expired.
Violations of the HSR Act are punishable by fines of up to $16,000 per day. The FTC sought and Berkshire Hathaway agreed to pay the maximum daily penalty for its failure to file. In its press release announcing the enforcement action, the FTC noted that six months earlier, Berkshire Hathaway had also failed to file an HSR notification related to an acquisition of $41 million of voting securities of Symetra Financial Corporation. As was the case with the instant transaction, Berkshire Hathaway eventually recognized its obligation to notify the transaction, and it made a corrective filing. According to the FTC’s press release, it took no action against Berkshire Hathaway following its first HSR Act violation in reliance upon the company’s assurances that it would implement appropriate HSR monitoring procedures going forward.
This enforcement action serves as an important reminder that companies need to consider HSR reportability issues with respect to various types of transactions. As was the case here, the conversion of notes or the exercise of options or warrants may trigger HSR Act filing obligations. Companies should consult counsel when such events occur.
The Berkshire Hathaway enforcement action reflects a broader increase in compliance-related activity at the antitrust agencies. For example, in 2013 a member of the Coca Cola board of directors paid $480,000 to settle charges that he had failed to make an HSR filing in connection with his receipt of voting securities from Coca Cola. The same year, an investment firm failed to file an HSR notification relating to its acquisition of voting securities that exceeded HSR thresholds and agreed to pay $720,000 to settle the charges. As in Berkshire Hathaway, both of these cases involved a second failure to file, reflecting an unwritten policy of lenience for a first inadvertent violation but full sanctions for subsequent noncompliance. As the FTC stated in its press release, “[a]lthough we may not seek penalties for every inadvertent error, we will enforce the rules when the same party makes additional mistakes after promises of improved oversight.” The policy is of course different for deliberate non-compliance with the HSR Act.
The message from the FTC and DOJ appears to be having an impact. In FY 2013, there were 39 corrective filings made for past violations. Although this is less than the 60 corrective HSR filings in FY 2012, both are substantially higher than in 2011 (16 corrective filings), 2010 (24 corrective filings), and 2009 (24 corrective filings). This sharp increase is likely the result of high-profile compliance penalties leveled in the last few years. In this context, Berkshire Hathaway represents another strong warning to companies to ensure that they are in compliance with HSR Act obligations, even in transactions that do not raise competition concerns.