Biglari Holdings, Inc. (Biglari Holdings) agreed to pay a US$850,000 civil penalty to settle charges that it violated the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) in connection with its 2011 acquisition of voting shares of Cracker Barrel Old Country Store, Inc. (Cracker Barrel). The Department of Justice (DOJ) charged Biglari Holdings with accumulating approximately nine percent of the voting securities of Cracker Barrel without satisfying the notification and waiting period requirements of the HSR Act. Although the HSR Act exempts acquisitions of less than ten percent of an issuer’s voting securities (the "solely for the purpose of investment" exemption), this exemption is only available when the investor has no intention of participating in or influencing the management of the issuer. The DOJ complaint alleges that Biglari Holdings accumulated in excess of US$66 million worth of Cracker Barrel voting securities from 8 June 2011 through 13 June 2011, but did not satisfy the "solely for the purpose of investment" exemption, because its CEO contacted the CEO of Cracker Barrel on 14 June 2011 to set up a meeting to discuss improving shareholder value and to request representation on the Cracker Barrel board of directors. The complaint filed by the DOJ in this action can be found at http://www.ftc.gov/os/caselist/1110224/120925biglaricmpt.pdf.
HSR Act obligations relating to minority investments
The HSR 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 (FTC) and the DOJ and observe a waiting period before closing their acquisition if the acquisition satisfies HSR Act reporting threshold tests and is not otherwise exempt. The purpose of the HSR 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 anticompetitive impact.
Although HSR Act compliance is frequently considered in the context of mergers and acquisitions, the statute also can apply to, among other things, minority investments in publicly-traded or privately-held corporations, among other things, if the total value of voting securities to be acquired and held by an investor exceeds the HSR Act's applicable thresholds and is not otherwise exempt. The current size-of-transaction threshold is US$68.2 million. This threshold, which is adjusted annually for inflation, was US$66 million at the time of Biglari Holdings’ alleged violation.
The "passive investor exemption." An acquisition of a minority voting securities interest may qualify for the so-called "passive investor exemption" from the HSR Act requirements. Under this exemption, a person generally is permitted to acquire up to ten percent of the issuer's voting securities, so long as the person acquires and holds the securities "solely for the purpose of investment." 16 C.F.R. §802.9. The HSR 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." 16 C.F.R. §801.1(i)(1).
Merely exercising the ordinary voting rights conferred by the stock ownership is not 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." 43 Fed. Reg. 33465
Reporting obligation. If the HSR Act reporting requirements apply to an acquisition, both the acquiring person and the acquired person must satisfy the statute's notification and waiting period requirements before the acquisition is consummated. A failure to comply can expose both parties to potential civil penalties of up to US$16,000 a day for each day of noncompliance.
The enforcement action against Biglari Holdings underscores the importance of considering HSR filing issues in advance of acquiring shares of a company’s voting securities, even if the acquiring person would hold a small percentage of a company’s voting securities as a result of the acquisition. HSR threshold tests and exemptions are complex and technical. HSR filings may be required, and the U.S. antitrust agencies may impose penalties for technical HSR Act violations, even when an acquisition is not likely to have any substantive antirust issues. Note, however, that the agencies will not always impose fines when parties inadvertently fail to meet a filing obligation so long as they self-report and remedy their mistake upon discovery.