On Dec. 15, 2008, the Federal Trade Commission (“FTC”) announced the filing of a complaint in federal district court charging two related investment funds, ESL Partners LP (“ESL Partners”) and ZAM Holdings LP (“Zam Holdings”), with violating the Hart-Scott-Rodino Antitrust Improvements Act (“HSR Act”) by failing to make timely filings with the government prior to acquiring blocks of AutoZone Inc. (“AutoZone”) shares in September and October of 2004. ESL Partners and ZAM Holdings agreed to pay civil penalties of $525,000 and $275,000, respectively, to settle the charges. The HSR Act provides for a penalty of up to $11,000 for each day that a person is out of compliance with its notification and waiting period requirements. The settlement with these two firms highlights the FTC’s position that “the HSR Act and its filing requirements should be well known to companies and individuals making acquisitions and the significant civil penalties imposed here should reinforce the need to fully comply with the Act.”  

HSR Act Clearance Expires on the Fifth Anniversary

Under the HSR Act, so long as a person’s holdings pass the HSR threshold for which it filed within one year following the termination or expiration of the waiting period, such person’s holdings may fall below such threshold and recross it (up to the next threshold) repeatedly for a period ending on the fifth anniversary of the waiting period. After the fifth anniversary, HSR Act clearance has in effect “expired,” and the filing person must once again file under the HSR Act for any acquisition of securities that will result in such person holding voting securities of the target valued in excess of the lowest applicable HSR threshold (usually the $50 million (as adjusted) threshold).  

According to the complaint, ESL Partners made a filing under the HSR Act with respect to its purchases of AutoZone voting shares, and had received early termination of the waiting period thereunder on Sept, 1, 1999. Thus, ESL Partners was free to acquire additional shares of AutoZone voting securities within the threshold range for which they had filed until the fifth anniversary of the waiting period, Sept. 1, 2004. Thereafter, ESL Partners needed to analyze their holdings of AutoZone voting securities under the HSR Act prior to completing any additional acquisitions that would result in ESL Partners holding AutoZone voting securities valued in excess of $50 million (as adjusted).  

On Sept. 28, 2004, ESL Partners acquired additional AutoZone voting securities, resulting in ESL Partners holding in excess of $50 million (as adjusted) of AutoZone voting securities. No exemptions applied to such purchase, and ESL was required to submit a Notification and observe the HSR Act’s waiting period before completing such acquisition. ESL Partners subsequently made three additional purchases of AutoZone voting securities without having filed any HSR Notification and observing the related waiting period. On Jan. 27, 2005, after an inquiry from the FTC regarding ESL Partners’ acquisitions after Sept. 1, 2004, ESL Partners submitted a Notification under the HSR Act, and the waiting period related to such filing expired on Feb. 28, 2005. ESL Partners agreed to settle the FTC’s charges that it failed to make timely filings under the HSR Act by paying civil penalties of $525,000.

Proposed Acquisitions Must Be Analyzed Under HSR Act, Even If Previous Acquisitions Were Exempt

Also according to the complaint, as of Sept. 1, 2004, ZAM Holdings had acquired a $270 million interest in AutoZone voting securities through a number of transactions, none of which was subject to the reporting requirements of the HSR Act. However, on Oct. 12, 2004, and Oct. 14, 2004, ZAM Holdings acquired additional AutoZone voting securities in transactions that triggered the notification requirements of the HSR Act, and the acquisitions did not qualify for any exemption from the HSR Act (such as the passive investment exemption). ZAM Holdings failed to submit a Notification under the HSR Act and observe the related waiting period with respect to such purchases until Jan. 31, 2005, after the FTC contacted ZAM Holdings regarding the absence of any HSR filing for the October 2004 purchases. The waiting period related to such filing expired on March 2, 2005. ZAM Holdings agreed to settle the FTC’s charges that it failed to make timely filings under the HSR Act by paying civil penalties of $275,000.  

The FTC’s decision to investigate these acquisitions serves as an important reminder that investment funds need to have compliance programs in place that will identify in a timely manner potential acquisitions of voting securities that may trigger a filing under the HSR Act. This is true even where the firm has already made significant acquisitions of a particular issuer’s voting securities for which they may or may not have submitted an HSR filing. In addition to identifying investments that may prompt an initial HSR filing, each fund should also track (i) the HSR Notifications they have submitted to the government, (ii) the highest threshold crossed during the first year after termination of the waiting period, and (iii) the date of the five year anniversary of the termination of the waiting period. Likewise, changes in investment intent or fund structure should prompt further HSR Act inquiry by the fund’s compliance officer. As there are additional concerns that may face specific funds, HSR counsel should be consulted to develop a tailored compliance program.