On May 3,2004, the Department of Justice’s (“DOJ”) Antitrust Division, at the request of the Federal Trade Commission (“FTC”), filed two civil suits against alleged violators of pre-merger notification filing requirements under the Hart-Scott-Rodino (“HSR”) Act of 1976.
The HSR Act imposes notification and waiting period requirements on individuals and companies over a certain size before they can consummate acquisitions of stock or assets valued at more than $50 million. The purpose of the HSR Act is to provide federal antitrust enforcement agencies an opportunity to investigate proposed transactions and determine whether the transactions would violate the antitrust laws. If the reviewing agency determines that a transaction violates the antitrust laws, it may seek to block that transaction before the waiting period expires. Therefore, the antitrust agencies take HSR violations very seriously, even ones where no competition overlaps exist. Indeed, a party is subject to a maximum civil penalty of $11,000 a day for each day it is in violation of the HSR Act.
While the HSR Act requires pre-merger notifications to be filed with both the DOJ and the FTC, a number of exemptions exist. For example, the HSR Act exempts notifications of acquisitions of 10 percent or less of a company’s stock made “solely for the purpose of investment.” To qualify, the investment must constitute less than 10 percent of a company’s shares, and the investor cannot play any role in the acquired company’s decision making.
The DOJ filed complaints along with proposed consent agreements that will settle the charges. The first alleged violation involves Bill Gates as an individual and the second alleged violation involves Manulife Financial Corporation, a Canadian-based insurance and financial services company. Both improperly relied on the investment exemption. Mr. Gates agreed to pay $800,000 to settle charges that he violated the HSR Act in 2002 when he acquired more than $50 million of ICOS Corporation (“ICOS”) stock without first notifying antitrust regulators of the deal. The DOJ’s complaint alleged that Mr. Gates was in violation of the Act from May 9, 2002 through August 26, 2002. Apparently, Mr. Gates contended that no HSR filing was required for his purchase of ICOS stock because purchases for investment purposes are exempt from the filing requirements. According to the complaint, however, Mr. Gates did not qualify for the “solely for the purpose of investment” exemption to the pre-merger notification requirements because he intended to participate in the basic business decisions of ICOS through his longstanding membership on the board of directors of ICOS, a pharmaceutical company headquartered in Bothell, Washington. While the antitrust agencies normally will not penalize a company or individual for an inadvertent mistake, Mr. Gates had been previously made aware of the rules and the agencies considered the violation a second mistake that required a substantial penalty. On the same day, Manulife agreed to pay a $1 million civil penalty to settle charges that the company violated pre-merger notification requirements when it acquired approximately $150 million of John Hancock common stock in the spring of 2003. Following the alleged pre-merger notification, Manulife and John Hancock announced their intentions to merge on September 28, 2003, and they consummated that transaction on April 28, 2004. While the DOJ’s suit does not challenge the combination, the complaint alleges that at the time of these stock acquisitions in the spring of 2003, Manulife was considering a Manulife-John Hancock combination. Thus, Manulife’s purchases of John Hancock stock were not made solely for the purpose of investment and were not exempt from the Act’s notification and waiting period requirements. Moreover, the complaint alleged that Manulife was in violation of the Act from on or before March 24, 2003 through October 27, 2003, however, the penalties were reduced because Manulife brought the violation to the DOJ’s attention and cooperated with the investigation.
Both settlement agreements send a strong message to corporate executives and lawyers to take HSR reporting requirements seriously. The HSR Act’s investment exemption is limited to acquisitions that are “solely” for the purpose of a passive investment and does not apply if a corporation or individual intends on participating in the business of the company being acquired. The antitrust agencies have construed the exemption narrowly and the agencies have made it abundantly clear that they will prosecute those that rely on aggressively broad interpretations of HSR exemptions.