On September 25, 2012, the Department of Justice (“DOJ”) Antitrust Division announced an $850,000 fine against publicly traded Biglari Holdings, Inc. (“Biglari”). The fine resolves allegations by the Federal Trade Commission (“FTC”) that Biglari acquired voting securities of Cracker Barrel Old Country Store, Inc. (“Cracker Barrel”) without filing notification under the Hart-Scott-Rodino (“H-S-R”) Act. The fine is the second significant civil penalty that DOJ has imposed within the last year for apparent first time violations of the H-S-R Act reporting requirements, and may serve as a warning to investors that FTC and DOJ are tightening their enforcement efforts.
Background Facts. In the most recent matter, Biglari acquired approximately 8.7% of the outstanding voting securities of Cracker Barrel in open market purchases in May and June 2011. As a result of these purchases, the total value of Cracker Barrel equity that Biglari held exceeded the H-S-R Act reporting threshold in effect at the time.[i] Biglari did not file a premerger notification under the H-S-R Act in connection with these acquisitions of Cracker Barrel stock. However, it did file a Form 13D with the Securities and Exchange Commission on June 13, 2011 in which it stated its plans “to communicate with the Issuer’s management and members of the Board regarding the business, governance and future plans of the Issuer.” In August 2011, Biglari filed an H-S-R Act notification to report the acquisition of additional Cracker Barrel voting securities. Biglari received early termination of the 30-day premerger waiting period, which usually occurs only after FTC and DOJ determine that they have no substantive competitive concerns with the reported transaction.
DOJ Complaint. The H-S-R Act and implementing rules include a “passive investment” exemption for acquisitions where the acquiring person will not hold more than 10% of the issuer’s outstanding voting securities. An acquisition is passive if the investor intends to hold the stock solely for purposes of investment. The rules state that an investor holds securities solely for purposes of investment only where it has “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” According to the DOJ complaint, Biglari intended at the time it made its open market purchases in May and June 2011 to participate actively in the business affairs of Cracker Barrel. DOJ cites as evidence of Biglari’s active investment intent its effort to obtain a board seat. It appears from the DOJ complaint that this intent to acquire a board seat was alone sufficient to show that Biglari was not a passive investor, and was therefore required to file notification and observe the applicable waiting period under the H-S-R Act before crossing the minimum filing threshold. This focus on an intent to acquire a board seat appears to be a departure from prior transactions where FTC staff has interpreted the exemption to apply even where an investor is in negotiations with the target to acquire a board seat once the investor’s holdings reach a specified per centum threshold.
Analysis. The determination whether a particular acquisition qualifies for the “passive investment” exemption is fact intensive, and clients should consult with antitrust counsel before concluding that an H-S-R Act notification is not required. While communicating with the company to monitor an investment (as Biglari indicated it would do in its Form 13D filed with the SEC) is not itself sufficient to render the “passive investment” exemption inapplicable, the FTC has been firm in stating that holding a board seat makes an acquisition ineligible for the exemption. Other conduct that indicates an active rather than passive investment intent include:
- nominating a candidate for the board of directors of the issuer;
- proposing corporate action requiring shareholder approval;
- soliciting proxies;
- being (or holding at least 50% of) a competitor of the issuer.
One striking fact that emerges from the enforcement action against Biglari is that there is no evidence Biglari had previously failed to file notification under the H-S-R Act. The failure to observe the reporting and waiting requirements under the H-S-R Act may result in the imposition of a civil penalty of up to $16,000 per day. Historically, FTC has been lenient in imposing a civil penalty for first-time violations of the H-S-R Act. In the case of Biglari, the maximum penalty that FTC could have imposed was a fine of approximately $1.3 million (calculated from the time the DOJ complaint alleges Biglari crossed the $66 million threshold on June 8, 2011 until it filed notification on August 26, 2011). The fact that DOJ obtained a fine that was more than two-thirds of the maximum penalty that could have been imposed for a first-time violation of the H-S-R Act is significant, in particular since the grant of early termination of the premerger waiting period indicates that the transaction did not pose any substantive competitive concerns.
DOJ and FTC may be sending a signal to investors. In December 2011, DOJ obtained a $500,000 fine for Comcast’s CEO, Brian L. Roberts, for his failure to file notification to report the acquisition of additional shares of Comcast voting securities. The Roberts case dramatically highlighted that the value of incremental acquisitions through option exercises, open market purchases, and other follow-on investments must be aggregated with the current fair market value – not the historic cost – of existing holdings to determine whether an H-S-R Act filing is required. As with Biglari, it appears that this was Roberts’s first violation of the H-S-R Act, although he was CEO of Comcast when the company filed corrective notifications on two separate occasions to report Comcast’s failure to comply with the H-S-R Act requirements in connection with its acquisition of shares in Internet Capital Group in 1999 and Susquehanna Cable Co. in 2000.
Taken together, the DOJ actions against Biglari and Roberts may indicate a new era of stricter enforcement by FTC and DOJ of the H-S-R Act reporting and waiting requirements.
[i] The minimum value that can trigger a filing under the H-S-R Act is adjusted by FTC each year based on the change in gross national product from the prior year. The current filing threshold is $68.2 million. In 2011 when Biglari acquired Cracker Barrel voting securities, the filing threshold was $66 million.