Sixteen thousand dollars ($16,000) per day. That is the current maximum penalty for failing to observe applicable requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”). That is also the amount one major company recently agreed to pay for each of the 56 days that the Federal Trade Commission (“FTC”) claimed it was in violation of the HSR Act.
In a complaint announced last week (filed by the U.S. Department of Justice (“DOJ”) on the FTC’s behalf), the FTC alleged that Berkshire Hathaway Inc. (“Berkshire”) acquired voting securities of USG Corporation (“USG”) in a transaction that should have been reported under the HSR Act. That is, the value of the acquisition was sufficient to obligate Berkshire to file a Notification and Report Form with the FTC and the DOJ, and observe the applicable waiting period prior to closing. In the transaction at issue, Berkshire exercised its rights with respect to certain convertible notes of USG in December 2013, resulting in its acquisition of additional USG voting securities. According to the complaint, as a result of that acquisition, Berkshire held USG voting securities valued at over $950 million, comprising approximately 28% of USG stock. This value far exceeded the $283.6 million HSR filing threshold applicable at the time of the acquisition, and therefore triggered a filing obligation. Berkshire subsequently made a corrective filing in January 2014, and the relevant waiting period under the HSR Act expired in early February 2014.
This was apparently not the first time Berkshire had missed a filing. In June 2013, Berkshire acquired certain voting securities of another company. The complaint indicates that Berkshire made a corrective filing soon after that acquisition, acknowledging that the transaction was reportable but noting that its failure to file was inadvertent. In response to Berkshire’s corrective filing for that acquisition, the FTC did not initiate an enforcement action, relying on assurances that Berkshire would implement an effective program for ensuring future compliance with the HSR Act.
That even a sophisticated company like Berkshire could inadvertently fail to timely recognize a reporting obligation under the HSR Act demonstrates the ease with which violations (and penalties) may result if sufficient attention is not paid to the detailed rules governing the Act. This instance alone highlights a number of HSR rules that may be easily overlooked:
- The exercise of stock options and other convertible securities can raise a reporting obligation. While a mere acquisition of stock options or other convertible securities that do not presently entitle the holder to vote for directors of an entity is not reportable under the HSR Act, the exercise of those options and their conversion into voting securities can raise a reporting obligation.
- The value of what is already held is just as important as the value of what will be acquired. An acquisition of voting securities (including the conversion of stock options held) must be valued along with all other voting securities of that issuer already held by the investor. For publicly traded voting securities, value is tied to market price (as defined by the HSR rules) and therefore, it is important for investors to understand the HSR value of their existing holdings prior to making new acquisitions.
- Filing to exceed one HSR threshold doesn’t necessarily preclude future filings. There are a number of notification thresholds applicable to HSR. The relevant rules provide that once a person files notification and observes the waiting period to acquire voting securities that exceed one threshold (and the person does actually exceed that threshold within a year), that person can continue to acquire additional voting securities of the issuer for the next five years without making additional filings as long as the next highest threshold is not exceeded. Thus, even where a person has previously filed, a new filing obligation may arise where a subsequent acquisition might result in aggregate holdings that surpass the next threshold or where the waiting period for the prior filing expired more than five years ago.
- Repeat offenses make enforcement likely. That this was a repeat offense was likely an important part of the FTC’s decision to bring an enforcement action. While the antitrust agencies often opt not to bring an enforcement action upon one’s first inadvertent violation, the agencies are particularly vigilant about bringing actions where companies have previously failed to file and made assurances of improving their HSR oversight efforts. This is true even where the subsequent failure to file was also inadvertent.
Sixteen thousand dollars a day adds up quickly. In this case, the relatively short period of time between the date of Berkshire’s acquisition (December 2013) and the date the waiting period expired after its corrective filing (February 2014) – less than two months – translated to a penalty of $896,000, the maximum amount allowed under the statute.
The ultimate lesson here is perhaps best conveyed through a statement made by Deborah Feinstein, Director of the FTC’s Bureau of Competition, in connection with this action. As Ms. Feinstein put it: “Companies and individual investors alike should ensure that they have an effective program in place to monitor compliance with HSR filing requirements.”