The FTC is reminding companies that in-house HSR compliance programs may be failing to catch non-cash or nontraditional acquisitions of voting interests, including employee stock packages, reorganizations, conversions, and debt-for-equity swaps. Companies should review their tracking and compliance programs to ensure that all potentially notifiable transactions are being reviewed. This update contains our recommendations for corporate compliance updates that may help to avoid such issues.

FTC Guidance: HSR Notification Does Not Require Money Changing Hands

On May 15, the FTC’s Premerger Notification Office (PNO) posted a blog entry noting that HSR filing requirements can attach even to transactions that do not involve a traditional stock swap or monetary payment. The post, entitled “You don’t have to write a check to acquire an HSR-reportable interest,” highlights several common types of transactions that may require HSR notifications, despite not requiring a cash payment. Examples given include (among others) acquisitions of stock as part of employee compensation packages, corporate/partnership reorganizations and conversions, and debt-for-equity swaps.

The PNO notes that “many HSR compliance programs kick in when someone has to write a check” but “a compliance program that won’t catch [non-cash transactions] isn’t doing its job.” Failure to file can be a significant problem for the companies and individuals involved, who face a combination of corrective filings, enforcement actions, and financial penalties. The maximum civil penalty for failure to file a required HSR notification is now $41,484 per day (which adjusts upward annually) per person per violation, so exposure for a missed filing obligation can be large. For example, in 2011 a Comcast executive paid a $500,000 failure-to-file penalty, and in 2013 an investment firm paid $720,000 to settle a similar allegation. With the newly increased penalties and with the FTC putting companies on notice, future settlements could be even larger.

Companies that discover and self-report violations may avoid a civil penalty or receive reductions from the maximum. In light of the PNO’s new emphasis on this issue, companies and individuals (including corporate executives) may wish to review their recent transactions to ensure that they are in full compliance with HSR.

What Types of Transactions May Cause Issues?

The PNO’s most recent blog post highlights five types of transactions that might be missed by corporate compliance programs:

  • Exchange of one type of company interest for another (e.g., debt to equity);
  • “Backside” acquisitions (shareholders of seller or target companies receiving shares in the acquirer);
  • Consolidations to a NewCo entity (shareholders of merging parties compensated with NewCo shares);
  • Reorganization/change in corporate form (e.g., partnership converting to a corporation); and
  • Employee compensation (e.g., the exercise of a large number of stock options).

The FTC also previously emphasized two other scenarios, both involving so-called tipping point transactions where a small new acquisition causes the owner to cross a threshold due to the owner’s existing shares (often to the surprise of the owner):

  • Company executive exercises a small number of options or warrants with a value well below the size of transaction threshold, but does not recognize the need to aggregate the value of the converted shares with what the executive already holds, to determine whether a filing is necessary under 16 CFR 801.13(a); and
  • A passive investor, which has relied on the “investment only” exemption in 16 CFR 802.9 because it holds 10% or less of the voting shares of the target, slightly increases its holdings in the target above 10% without filing — or changes its investment strategy and becomes an active investor.

How Can Companies Mitigate Their Risk?

To mitigate the risk of unintentionally failing to notify a reportable transaction, companies may consider all of the following steps, in addition to whatever monitoring is already in place:

  • Track the HSR thresholds (the lowest of which is currently $84.4 million). They adjust annually, usually in late January or early February. The current thresholds are reported here.
  • Make sure the compliance program is tracking or requiring the reporting of shares already held, as well as those newly acquired. In particular, track the transactions identified by the FTC (see above), as well as exercises of options and warrants, vesting of shares, changes in restrictions in stock, and exchanges for voting securities.
  • Compliance programs should ensure that they distinguish voting securities from other interests. A voting security is any security that carries on its face a right to vote for a director. Debt, warrants, and options are not treated as voting securities for HSR purposes.
  • Prior to exercising an option or allowing shares to vest, individuals and corporations should value the shares held and those acquired to ensure they are not exceeding the applicable thresholds.
  • There are very different rules for acquisitions of limited partner and limited liability company interests, but exchanging those for voting securities needs to be included in a compliance program.
  • Any of the transactions above that result in a person or corporation holding limited partnership or limited liability company interests may also be subject to the HSR Act.

Note that having executives and the appropriate offices of the corporation understand that all acquisitions of shares in any form may be subject to the HSR notification requirements is a first step in a good compliance program.