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E-MailBernard A. Nigro, Jr. is a partner and Nathaniel L. Asker is special antitrust counsel at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Nigro, Mr. Asker, and Aleksandr B. Livshits.
In an effort to facilitate a smooth transition for the new administration, the Federal Trade Commission and the Antitrust Division of the Department of Justice this week announced three separate actions charging parties with violations of the Hart-Scott-Rodino Act. The actions are a reminder that HSR compliance is important and not always straightforward. The following precautions will help ensure compliance:
- In certain situations, even small acquisitions can trigger a reporting requirement. Because the HSR Act contains a number of reporting thresholds based on the aggregate value or percentage of a company’s voting securities held by an investor, a buyer should confirm whether a contemplated acquisition would exceed an HSR threshold prior to increasing its holdings in an issuer.
- For acquisitions subject to the HSR Act, buyers should not proceed with any conduct that may be viewed as influencing the day-to-day operations of the target, including through an arms-length agreement, without advice of counsel.
Background
In general, the HSR Act requires transacting parties to file notification with the FTC and the DOJ and observe a waiting period if, as a result of the contemplated transaction, the buyer would hold shares in the target valued in excess of $78.2 million (adjusted annually). Prior to expiration or termination of the waiting period, the buyer may not exercise beneficial ownership of the target company.
On January 17, 2017, the FTC fined an individual $720,000 for failing to report purchases of shares in two companies that he co-founded. On the same day, the FTC separately fined a hedge fund investor $180,000 for failing to report purchases of shares of an Internet company. On January 18, 2017, the DOJ fined an electric power company $600,000 for exercising beneficial ownership of an energy plant prior to expiration of the HSR waiting period, conduct known as “gun-jumping.”
No HSR Exemptions for Acquisitions of a Company’s Stock by its Officers and Directors (or Family Members)
The antitrust agencies have not hesitated to fine officers and directors in connection with acquisitions of shares in their own companies, notwithstanding the lack of competitive harm posed by such transactions. [1]
In one of this week’s actions, the FTC fined an individual for failing to report stock acquisitions of two companies that he founded and continued to serve as a director. One of the violations arose as a result of an acquisition of stock by the founder’s wife after an IPO, which had reduced the founder’s holdings in the company from over 50 percent to approximately 21 percent. Under the HSR rules, holders of 50 percent or more of a company’s voting securities are not obligated to make HSR filings to acquire additional shares, regardless of value. However, after the IPO, the founder no longer controlled the company but still held voting securities valued in excess of the HSR notification threshold. As a result, he was required to make a filing prior to any additional acquisition (even a single share). Because the HSR rules require that holdings of spouses (and minor children) be aggregated, the incremental acquisition by the founder’s wife resulted in a violation of the HSR Act.
The other violation arose when the individual acquired 6,000 shares worth approximately $165,000 of a second company that he founded. While that acquisition itself was well below the HSR threshold, the founder remained as one of the company’s largest shareholders and already held shares valued at almost $2.3 billion and apparently had not filed to cross the applicable HSR threshold within the past five years. [2] Thus, the incremental purchase triggered a reporting obligation under the HSR rules.
Beware of Higher HSR Thresholds for Incremental Acquisitions
In 2014, a hedge fund investor acquired 13.5 percent of the voting securities of an Internet company. The investor initially did not submit an HSR filing, relying on an exemption for passive investors. However, this exemption applies only for passive investors holding 10 percent or less of the voting securities of an issuer. [3] Shortly after the acquisition, the investor discovered the error, reported it to the FTC, and submitted a corrective filing to cross the lowest HSR threshold. The FTC did not seek a fine, and the corrective filing enabled the investor to acquire additional shares of the company valued up to the next reporting threshold, currently $156.3 million. However, in June 2016, the investor acquired additional voting securities of the company such that the aggregate value of his holdings exceeded $156.3 million, resulting in a violation of the HSR Act.
Influencing Target’s Business Operations Prior to HSR Clearance
Unlike the previous actions, the electric power company’s violation of the HSR Act did not arise from a failure to file the appropriate notification. Instead, the company submitted the required filing but was alleged to have prematurely exercised control of the target company. Under the HSR rules, a buyer cannot assume beneficial ownership of the target prior to expiration or termination of the applicable waiting period. On August 25, 2014, the electric power company reached an agreement to acquire a power plant in Florida for $166 million. On September 30, 2014, the parties executed a tolling agreement, which took effect the next day and gave the buyer responsibility for determining the amount of power that would be generated at the plant, fuel purchasing and delivery decisions, and shifted profits or losses resulting from the plant’s operations to the buyer. Although such tolling agreements are common in the industry, the DOJ alleged that the tolling agreement in combination with the agreement to purchase the plant effectively transferred beneficial ownership of the plant to the buyer well before the buyer filed its HSR notification and received clearance. [4] As a result, the buyer was deemed in violation of the HSR Act for the 150-day period after the tolling agreement took effect until early termination of the HSR waiting period was granted.
Key Takeaways
These actions serve as a reminder that the antitrust agencies remain highly focused on compliance with all aspects of HSR rules, regardless of whether the underlying transactions at issue pose harm to competition. Violations of the HSR Act are subject to fines of up to $40,000 per day, and the antirust agencies have broad discretion in how the HSR rules are enforced. For example, the FTC typically does not pursue fines for first-time inadvertent failures to file that are self-reported and corrected. However, the FTC has consistently pursued fines for subsequent violations, even those that are inadvertent, self-reported, corrected, and involve acquisitions that pose no potential harm to competition. In contrast, gun-jumping violations usually do not get a similar “mulligan.”
The HSR rules are highly technical in nature, and absent appropriate safeguards, inadvertent violations can easily arise. This week’s actions serve as a reminder that HSR compliance should be part of any risk management program for firms and individuals who engage in acquisitions.
Endnotes
1See, e.g., United States v. Diller, No. 1:13-cv-01002 (D.D.C. 2013) (Director of The Coca-Cola Company was fined $480,000 for failing to report acquisitions of shares in the company); United States v. Brian L. Roberts, 2011 U.S. Dist. LEXIS 152118 (D.D.C. 2011) (CEO of Comcast Corporation was fined $500,000 for failing to report acquisitions of shares of Comcast as a result of reinvestment as Comcast shares of dividends and short-term interest earned through his 401(K), and vesting of Comcast restricted stock); United States v. Figgie Int’l, 1997 WL 269480 (D.D.C. 1997) (Founder of Figgie International was fined $75,000 for failing to report acquisition of shares in the company in excess of the notification threshold; Figgie International was also fined $75,000). The FTC takes the position that officers and directors of an issuer are ineligible for the HSR Act exemption for acquisitions made solely for the purpose of investment.(go back)
2The DOJ’s complaint does not disclose whether the company’s founder had previously filed HSR in connection with his approximately $2.3 billion holdings. If a filing was made, it may have expired by the time he acquired the 6,000 additional shares (HSR filings become “stale” after five years, at which point any additional acquisitions may require a new filing).(go back)
3Certain institutional investors may acquire up to 15 percent of the voting securities of an issuer without making an HSR filing.(go back)
4According to the DOJ’s complaint, the purpose of the tolling agreement was to facilitate approval of the transaction by the Federal Energy Regulatory Commission by enabling the buyer to argue that it already effectively controlled the plant and that no competitive harm could result from the outright acquisition of the plant.(go back)
