Penalty Highlights Need for Post-Filing Compliance Monitoring
The Federal Trade Commission on June 20, 2013 settled charges against an investment firm accused of violating the Hart-Scott-Rodino Act by acquiring voting securities of an issuer resulting in holdings whose value exceeded the relevant HSR notification threshold more than five years after the firm had properly obtained HSR clearance to cross the same threshold with respect to the same issuer. The accused firm, MacAndrews & Forbes Holdings Inc., agreed to pay a civil penalty of $720,000. An FTC news release with links to related court filings may be found here.
The HSR Act requires parties to certain large acquisitions to file formal notifications with the FTC and the Antitrust Division of the U.S. Department of Justice and then allow a waiting period (usually 30 days) to expire or be terminated before consummating their transactions. The government can impose significant civil penalties for noncompliance.
Under the HSR Rules issued by the FTC, an acquirer of voting securities of a given corporation may have to file more than one HSR notification with respect to its purchases of that stock. One underlying reason for this is that the HSR Rules have established five successive notification thresholds for acquisitions of a particular issuer’s voting securities, and obtaining HSR approval to cross one threshold does not confer authorization to cross a higher threshold. For example, if an HSR filer obtains approval to acquire shares resulting in holdings valued at more than $70.9 million (currently the lowest threshold, adjusted annually), but not valued at more than $141.8 million (currently the next threshold) and not constituting 50% or more of the issuer’s outstanding voting securities, then it typically cannot acquire additional shares putting it over $141.8 million in holdings and/or bringing it up to a 50% or greater (i.e., controlling) voting stake without making another HSR filing.
Moreover, an acquirer may have to make a second HSR filing with respect to its acquisition of the same issuer’s shares even if it does not cross a higher threshold than the one it initially obtained approval to exceed. This is because an exemption created by Section 802.21(a)(2) of the HSR Rules only allows an acquirer to continue acquiring shares (up to but not exceeding the next threshold) for five years after the waiting period for the initial HSR filing expired or was terminated. Once the five-year period has elapsed, the reportability of any further purchase of the same stock by the acquirer is evaluated on the same basis as if the acquirer had never made its initial HSR filing.
In the case of MacAndrews & Forbes, the firm filed an HSR notification to acquire stock of Scientific Games Corporation on February 1, 2007, and early termination of the HSR waiting period was granted on February 9, 2007. This enabled MacAndrews & Forbes to continue acquiring Scientific Games shares until February 9, 2012, so long as it did not cross a higher notification threshold than the one for which it had obtained approval. The share purchases that led to the FTC’s penalty action, however, did not occur until June 2012. Although these purchases gave MacAndrews & Forbes total holdings of Scientific Games stock valued at more than the lowest applicable threshold then in effect, according to the explanatory statement the firm submitted to the FTC, the firm inadvertently failed to recognize, until after it had completed the purchases, that an HSR filing obligation had arisen.
Though many acquirers that have inadvertently failed to make a required HSR filing have not been penalized, in this case the Complaint filed against MacAndrews & Forbes by the Department of Justice on behalf of the FTC alleges that the firm previously had committed what it also maintained was an inadvertent failure to make a required filing, in connection with an acquisition of a different issuer’s stock, in January 2011.
This recent penalty action by the FTC comes just 18 months after one against the CEO of Comcast Corporation that also involved an alleged failure to report an acquisition of voting securities under the HSR Act after the five-year window allowed by Section 802.21(a)(2) had closed. The FTC news release and court filings from this previous case, which resulted in a $500,000 civil penalty against the CEO, may be found here.
These penalty actions underscore the need for HSR compliance programs that, among other things, track the five-year time period during which the exemption under Section 802.21(a)(2) is available. Our HSR lawyers can advise clients on creating such compliance mechanisms.
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