In June and July of 2013, 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.
Currently, 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 $70.9 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 $16,000 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 MacAndrews & Forbes Holdings Inc. (“M&F”), an investment firm owned by billionaire Ronald Perelman and the second alleged violation involved Barry Diller as an individual. Both violations were inadvertent.
On June 20, 2013, M&F agreed to pay $720,000 to settle allegations it violated HSR disclosure requirements by failing to report its purchase of a large number of shares in a lottery ticket company. The antitrust agencies alleged M&F waited too long to disclose its 2012 purchase of 800,000 shares of Scientific Games Corp. (“SGC”) in violation of the HSR Act.
According to the complaint, M&F had a history of investments in SGC. Following an acquisition of voting securities in February 2007, M&F was exempt from making a new HSR filing for five years and continued to purchase SGC shares during that time. However, M&F inadvertently failed to make an HSR filing prior to its purchase of 800,000 shares of SGC on June 4 and 5, 2012; just four months after the HSR granted five-year grace period expired. As soon as it realized its filing error, M&F made a corrective filing two months later on August 16, 2012. At that time, M&F acknowledged that the SGC acquisitions of stock should have been reported, but it also indicated that its failure to file was not deliberate. Significantly, M&F quickly acknowledged and promptly corrected its mistake for not filing its HSR form of an acquisition of voting securities that had no impact on competition was severely punished.
Similarly, on July 2, 2103, the Commission settled another technical HSR violation against Barry Diller, an investor with many holdings in public companies. Mr. Diller agreed to a civil penalty of $480,000 for violating the HSR pre-merger filing requirements.
Mr. Diller acquired 120,000 shares of Coca Cola on November 1, 2010, and, as a result of that acquisition, he held more than $63.4 million, the pre-merger reporting threshold under HSR at that time. Between November 1, 2010 and April 26, 2012, Mr. Diller acquired an additional 605,000 shares of Coca Cola voting securities but failed to submit the requisite HSR filings. In addition, on April 27, 2012, Mr. Diller acquired 264,000 more shares and again failed to meet his HSR filing requirements. Mr. Diller subsequently made corrective filings.
Mr. Diller gained no advantage of any kind and there was no harm to Coca Cola, nor to anyone else as a result of his HSR mis-filings. In fact, the civil penalty finally agreed to by the FTC was a fraction of the total potential penalty he could have been required to pay if the Commission sought and obtained maximum damages. The FTC chose, for whatever reason, to impose a reduced penalty on Mr. Diller. Most importantly, and like the MacAndrews & Forbes case just discussed, there were no competition issues for the antitrust agencies to consider and there was no effect on competition in any relevant market. The Diller case was purely a technical failure to file which was corrected by Mr. Diller as soon as it was discovered.
Both settlement agreements send 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.
The HSR Act contains numerous exemptions but the antitrust agencies have construed the exemptions narrowly and the agencies have made it abundantly clear that they will prosecute those that rely on aggressively broad interpretations of HSR exemptions. These cases are excellent examples of why anyone who is a party to an acquisition that approaches the HSR Act's minimum reporting threshold (now $70.9 million) should seek the advice of experienced HSR counsel. These oversights cost M&F $720,000 and Barry Diller $480,000 in civil penalties.