Hart-Scott-Rodino Act obligations relating to minority investments
'Passive investor' exemption
Reporting obligation


Biglari Holdings, Inc has agreed to pay a $850,000 civil penalty to settle charges that it violated the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in connection with its 2011 acquisition of voting shares of Cracker Barrel Old Country Store, Inc.

The Department of Justice (DOJ) charged Biglari with accumulating approximately 9% of the voting securities of Cracker Barrel without satisfying the notification and waiting period requirements of the Hart-Scott-Rodino Act. Although the act exempts acquisitions of less than 10% of an issuer's voting securities (the 'solely for the purpose of investment' exemption), this exemption is available only when the investor has no intention of participating in or influencing the management of the issuer.

The DOJ complaint alleges that Biglari accumulated in excess of $66 million of Cracker Barrel voting securities from June 8 2011 to June 13 2011, but did not satisfy the 'solely for the purpose of investment' exemption because its chief executive officer contacted that of Cracker Barrel on June 14 2011 to set up a meeting to discuss improving shareholder value and to request representation on the Cracker Barrel board of directors.(1)

Hart-Scott-Rodino Act obligations relating to minority investments

The Hart-Scott-Rodino Act imposes obligations on parties to certain transactions involving:

  • acquisitions of assets;
  • interests in unincorporated entities; or
  • voting securities of corporations.

The parties must file notification reports with the Federal Trade Commission and the DOJ and observe a waiting period before closing their acquisition if the acquisition satisfies Hart-Scott-Rodino Act reporting threshold tests and is not otherwise exempt. The purpose of the act is to permit an antitrust agency to review – and possibly challenge – reportable acquisitions before they are consummated if the agency determines that the transactions may have an anti-competitive impact.

Although Hart-Scott-Rodino Act compliance is frequently considered in the context of mergers and acquisitions, the statute also can apply to minority investments in publicly traded or privately held corporations if the total value of voting securities to be acquired and held by an investor exceeds the act's applicable thresholds and is not otherwise exempt. The current size-of-transaction threshold is $68.2 million. This threshold, which is adjusted annually for inflation, was US$66 million at the time of Biglari's alleged violation.

'Passive investor' exemption

An acquisition of a minority voting securities interest may qualify for the so-called 'passive investor' exemption from the Hart-Scott-Rodino Act requirements. Under this exemption, a party generally is permitted to acquire up to 10% of the issuer's voting securities, so long as the party acquires and holds the securities "solely for the purpose of investment".(2) The Hart-Scott-Rodino rules define 'investment purpose' to mean that "the person holding or acquiring such voting securities has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer".(3)

Merely exercising the ordinary voting rights conferred by the stock ownership is inconsistent with asserting a purely investment intent. However, the antitrust agencies consider certain types of conduct to be inconsistent with the passive investor exemption, including:

"(1) nominating a candidate for the board of directors of the issuer; (2) proposing corporate action requiring shareholder approval; (3) soliciting proxies; (4) having a controlling shareholder, officer, director, or employee simultaneously serving as an officer or director of the issuer; (5) being a competitor of the issuer, or (6) doing any of the foregoing with respect to any entity directly or indirectly controlling the issuer."(4)

Reporting obligation

If the Hart-Scott-Rodino Act reporting requirements apply to an acquisition, both the acquiring party and the acquired party must satisfy the statute's notification and waiting period requirements before the acquisition is consummated. Failure to comply can expose both parties to potential civil penalties of up to $16,000 per day for each day of non-compliance.

The enforcement action against Biglari underscores the importance of considering Hart-Scott-Rodino filing issues in advance of acquiring shares of a company's voting securities, even if the acquiring party would hold a small percentage of a company's voting securities as a result of the acquisition. Hart-Scott-Rodino threshold tests and exemptions are complex and technical. Hart-Scott-Rodino filings may be required, and the antitrust agencies may impose penalties for technical Hart-Scott-Rodino Act violations, even when an acquisition is unlikely to have any substantive antirust issues. However, the agencies will not always impose fines when parties inadvertently fail to meet a filing obligation, provided that they self-report and remedy their mistake on discovery.

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 ( Alternatively, contact Janet Ridge at Hogan Lovells US LLP's Washington DC office by telephone (+1 202 637 5600), fax (+1 202 637 5910) or email (


(1) The complaint filed by the DOJ in this action can be found at

(2) 16 CFR §802.9.

(3) 16 CFR §801.1(i)(1).

(4) 43 Fed Reg 33465.

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