Actions by the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) in 2012 and 2013 remind us of some often overlooked aspects of the Hart-Scott-Rodino Act (HSR Act). The HSR Act requires some companies or individuals to file premerger notifications with the FTC and DOJ and to observe a waiting period before consummating certain acquisitions. The notification and waiting period are intended to give the federal antitrust agencies prior notice of proposed transactions and to allow them to determine whether a transaction may violate antitrust laws.
Companies (and their officers and directors) and other purchasers are well advised to consult with counsel to set up ongoing HSR Act compliance programs to avoid some of these common pitfalls.
Limited scope of passive investor exemption: The HSR Act includes an exemption for purchases of voting securities made solely for the purpose of investment where the purchaser would hold 10 percent or less of the outstanding voting securities of an issuer.1 The limited scope of the exemption often traps unwary purchasers. For instance:
- The issuer’s officers and directors cannot rely on the investment-only exemption.
- A filing may be required when a passive investor who has relied on the investment-only exemption becomes an active investor or increases its holdings above 10 percent.
- The exemption does not apply if the purchaser intends to participate in the issuer’s business decisions or in any way be involved in the issuer’s management. The agencies may consider a party to have an intention of actively participating in an issuer’s management even if the purchaser does not take any such actions until after the acquisition is complete.
- Aggregation: Purchasers should consider the aggregation rules even when acquiring small amounts of voting securities. For example, company executives exercising very small numbers of options or warrants with values well below the size of transaction threshold often fail a filing obligation because they forget to aggregate. In general, all voting securities of the issuer that will be held by the purchaser at the time of the acquisition must be considered when determining whether the size of transaction threshold has been crossed. Aggregation rules apply to acquisitions of assets and non-corporate interests as well.
- Thresholds/five-year window: Thresholds and time periods must be considered when additional voting securities of the same issuer are acquired. When an HSR notification is filed, the purchaser may continue to purchase shares up to the next threshold for five years. The purchaser must file again before it crosses the next-higher threshold.
First-time failures: Parties must make a postconsummation filing, or corrective filing, as soon as they realize they consummated a reportable acquisition without filing the required notification and observing the appropriate waiting period under the HSR Act. The agencies often refrain from imposing civil penalties on parties making a corrective filing for the first time. In determining whether or not to take action on first time failures, the agencies may consider the following:
- Whether the violation was the result of understandable or simple negligence.
- Whether the corrective filing was made promptly after discovery of the violation.
- Whether the parties realized any benefit that would not otherwise have been realized.
- Whether the parties have implemented adequate measures to prevent future violations. Some recent enforcement actions include:
MacAndrews & Forbes (2013)
MacAndrews & Forbes Holdings Inc. (M&F) paid a $720,000 civil penalty to settle charges that the company violated premerger reporting and waiting period requirements under the HSR Act when it acquired voting securities of Scientific Games Corporation.
M&F first made a corrective filing under the HSR Act in 2011. It had filed to report the acquisition of voting securities of SIGA Technologies, Inc. in 2010, but then continued to acquire additional voting securities of SIGA and failed to take into consideration the increased value of its total holding in SIGA shares. In May 2011, M&F filed a corrective filing to report the acquisition of additional voting securities valued at more than the next notification threshold. No civil penalty was imposed on M&F at that time.
Having learned its first lesson too late, M&F made a second corrective filing just one year later. In February 2007, M&F filed to report the acquisition of voting securities of Scientific Games Corporation. It was able to acquire additional voting securities for the next five years without being required to make an additional filing, but continued to acquire voting securities after the five-year period. M&F acquired an additional 800,000 shares of voting securities of Scientific Games Corporation valued at approximately $6.5 million. These shares, aggregated with the shares of voting securities of Scientific Games Corporation it already held, were valued at more than the size of transaction threshold in effect at the time. In August 2012, M&F again made a corrective filing under the HSR Act to report the acquisition of voting securities acquired after the end of the five-year period.
For a party in violation of the HSR Act, the maximum civil penalty is $16,000 a day. M&F was deemed to be in violation of the HSR Act from June 4, 2012 through September 17, 2012 and subject to a fine of well over $1 million; it eventually settled for a civil penalty of $720,000.
Barry Diller (2013)
Barry Diller paid a $480,000 civil penalty to settle charges that he violated premerger reporting and waiting requirements under the HSR Act when he acquired voting securities of The Coca Cola Company.
In 1998, Diller made a corrective filing for acquisitions of voting securities of CitySearch, Inc. made without filing and observing the waiting period under the HSR Act. The FTC refrained from imposing a civil penalty at that time, but warned Diller that he was accountable for having an effective program to ensure full compliance with the requirements of the HSR Act.
Diller made a second corrective filing on May 23, 2013, which reported the acquisition of voting securities of Coke between November 1, 2010 and April 27, 2012. The HSR Act’s “solely for the purpose of investment” exemption did not apply, as Diller intended to participate in the formulation, determination or direction of the basic business decisions of Coke through his membership on the board of directors. In this case, the FTC sought civil penalties against Diller, having previously warned him to put in place a program to prevent inadvertent failures to file.
Diller was deemed to be in violation of the HSR Act from November 1, 2010 through April 27, 2012 and could have been required to pay a fine of almost $9 million. He agreed to pay a civil penalty of $480,000 to settle these allegations.
Biglari Holdings, Inc. (2012)
Biglari Holdings, Inc. (Biglari) paid a $850,000 civil penalty to settle charges that it violated premerger reporting and waiting requirements under the HSR Act when it acquired voting securities of Cracker Barrel Old Country Store, Inc. In May 2011, Biglari began acquiring voting securities of Cracker Barrel. It continued to purchase shares through June 13, 2011. By June 8, 2011, Biglari held voting securities of Cracker Barrel valued at more than the size of transaction threshold.
Biglari made an HSR filing on August 26, 2011. The FTC claimed that Biglari violated the HSR Act, as its intent was beyond what is permissible under the passive investment exemption. Biglari’s CEO had talked with Cracker Barrel management and told them he had ideas to improve traffic at Cracker Barrel. He also had requested positions on Cracker Barrel’s board of directors for two Biglari officers. Biglari was deemed to be in violation of the HSR Act from June 8, 2011 through September 22, 2011 and could have been required to pay a fine of more than $1.5 million. It agreed to pay a penalty of $850,000 to settle these allegations.