Berkshire Hathaway Agrees to Pay $896,000 Maximum Civil Penalty for HSR Violation
On August 20, 2014, the Federal Trade Commission (“FTC”) announced that Berkshire Hathaway Inc. (“Berkshire”) agreed to pay a civil penalty of $896,000, the maximum civil penalty that could have been imposed, for its alleged violation of the premerger notification and filing requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”) in connection with its 2013 acquisition of voting securities of USG Corporation, which was allegedly its second HSR violation after a promise to impose an HSR compliance program.
First HSR Mistake
According to the FTC’s complaint, Berkshire failed to file an HSR notification before exercising warrants for shares of voting securities in Symetra Financial Corporation, a transaction that pushed it over the $283.6 million threshold. Berkshire realized its mistake and made a corrective filing in July 2013 concerning the acquisition of voting securities of Symetra Financial Corporation. The FTC took no action against Berkshire following this violation but sent Berkshire a letter on December 5, 2013, including its standard language cautioning that Berkshire “is accountable for instituting an effective program to ensure full compliance with the [HSR] Act’s requirements.”
Under Rules 802.31 and 801.32, no HSR filing was required when acquiring the convertible notes, but filing was required prior to their conversion. In the Symetra deal, Berkshire Hathaway failed to follow the aggregation rules. Under Rule 801.13, for the purposes of determining what voting securities will be held as a result of a transaction, the voting securities to be acquired must be aggregated with the voting securities of the same issuer already held by the acquirer. The Premerger Notification Office has identified this is a common HSR filing mistake. Typically, company executives exercise a very small number of options or warrants with a value well below the size-of-transaction threshold, but fail to aggregate the value of the converted shares with what they already hold.
Promise of Compliance Program
After the first mistake, Berkshire allegedly assured the FTC that it would institute an HSR compliance program. With that promise, the Commission did not seek penalties. The FTC may determine not to seek civil penalties when parties inadvertently and mistakenly fail to file if: (1) the violation was the result of understandable or simple negligence; (2) the parties make corrective filings promptly after discovering the mistake; (3) they did not benefit from the violation; (4) they submit an acceptable explanation for the failure to file and explain what they will do to prevent another violation; and (5) they have not previously violated the HSR Act.
Second HSR Mistake
Under Rule 802.21(a) of the HSR Act Rules, once an acquiring person submits an HSR Act filing and observes the waiting period, subsequent acquisitions of voting securities of the same issuer are exempt from the HSR Act’s reporting requirements for a period of five years from the expiration of the waiting period, provided the acquisitions do not cross a higher notification threshold. Once that five year period expires, however, the protection provided by the initial filing no longer exists.
The FTC’s Complaint alleges that in January 2006, Berkshire properly submitted an HSR Act filing concerning its acquisition of 19% of the voting securities of USG Corporation. Berkshire Hathaway, however, acquired voting securities of USG Corporation in December 2013 through a conversion of notes that gave it shares with a value over the $283.6 million threshold, but it failed to make the required HSR filing. On December 9, 2013, five days after it received the FTC letter concerning its corrective filing in Symetra – and more than five years after the waiting period applicable to its initial HSR Act filing relating to USG had expired – Berkshire, without first submitting an HSR Act filing, converted certain USG notes that it owned into USG voting securities. As a result of this acquisition, Berkshire held approximately 28% of USG’s voting securities, valued at more than $950 million. Berkshire submitted a corrective filing concerning this conversion/acquisition on January 3, 2014.
With the second HSR violation within six months of the first violation, the FTC sought civil penalties in order to ensure that the HSR rules are enforced in a way that is fair to all investors.
The maximum penalty sends a strong message to all corporate executives, hedge fund managers, securities traders, and institutional investors on notice that they are not exempt from the premerger notification requirements of the HSR Act and that the antitrust agencies are prepared to aggressively investigate and litigate technical and inadvertent violations of the HSR Act, even if they present no competitive harm in the marketplace. These inadvertent mistakes can lead to substantial penalties. Therefore, corporate executives, hedge funds, individual investors must take HSR reporting requirements seriously.
While the FTC may not seek penalties for every inadvertent error, the FTC will enforce the rules when the same party makes additional mistakes after promises of improved oversight. Companies and individual investors alike should ensure that they have an effective program in place to monitor compliance with HSR filing requirements. Indeed, this settlement agreement indicates that parties that have already submitted corrective filings for an HSR Act violation must successfully establish and monitor effective compliance programs to avoid future violations and significant civil penalties. In addition, it also serves as a reminder that the conversion of notes into voting securities is treated as an acquisition of voting securities that may be subject to the HSR Act and that the benefits of an HSR Act filing expire within five years. Once that period expires, even the proposed acquisition of a single additional share of voting securities can require the submission of a new HSR Act filing.