Alert December 22, 2011

CEO to Pay $500,000 Fine – Highlights Need to Consider HSR Requirements When Shareholders Increase Stakes

The Department of Justice (“DOJ”) Antitrust Division has fined Comcast’s CEO, Brian L. Roberts, $500,000 for failure to file notification under the Hart-Scott-Rodino (“H-S-R”) Act to report his acquisition of additional shares of Comcast voting securities. This case dramatically highlights the hard reality that the value of incremental acquisitions through option exercises, open market purchases and other follow-on investments must be aggregated with the current fair value – not the historic cost – of existing holdings to determine whether an H-S-R Act filing is required. In other words, current transactions by persons who are already shareholders can easily trigger the H-S-R filing, even if the current acquisition price is far below the H-S-R size-of-transaction thresholds.

Under the H-S-R Act, transactions that exceed certain reporting thresholds may require notification to the DOJ and Federal Trade Commission Bureau of Competition before the parties can close. The reporting thresholds for 2011 are:

  • $66 million
  • $131.9 million
  • $659.5 million
  • 25% of the post-closing outstanding voting securities if valued at greater than $1.319 million
  • 50% of the post-closing outstanding voting securities if valued at greater than $66 million

(Note that the dollar thresholds are adjusted annually based on the change in gross national product from the prior year.)  The value or percentage of incremental acquisitions must be aggregated with the value or percentage of existing holdings to determine whether a reporting threshold may be exceeded and a filing required. An H-S-R Act filing is good for only five years. A new filing may be required after the expiration of the five-year period if the acquiring person will exceed any of the reporting thresholds as the result of acquisitions of additional voting securities of target. 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.

In its complaint, the DOJ alleged that Roberts filed notification under the H-S-R Act in 2002 to acquire Comcast voting securities in connection with Comcast’s merger with AT&T. The 2002 filing gave Roberts until 2007 to acquire additional Comcast voting securities up to the next reporting threshold without filing a new H-S-R Act notification. Roberts acquired additional Comcast voting securities in 2008 and 2009 when restricted stock units that he had been awarded as part of his compensation package vested, and as a result of purchases through his 401(k) account. These acquisitions resulted in Roberts holding an amount of voting securities that exceeded the highest monetary reporting threshold ($139.1 million for 2011). Because more than five years had passed since the expiration of the waiting period in connection with his 2002 filing, Roberts was required to file notification under the H-S-R Act and observe the applicable waiting periods prior to acquiring the additional Comcast voting securities in 2008 and 2009. Roberts did not, and instead filed a corrective notification in August 2009 to report his failure to comply with the H-S-R Act requirements.

This was apparently Roberts’s first violation of the H-S-R Act as a result of his personal acquisitions. However, Roberts had previously 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.

The DOJ enforcement action against Roberts spotlights the necessity for all clients who intend to acquire additional shares of voting securities in a target company, whether through negotiated agreements, open-market purchases, or option or warrant exercises, to consider carefully whether the total value of their holdings may exceed a reporting threshold under the H-S-R Act.  Even if a client has previously filed to report the acquisition of voting securities of a target company, a new notification may still be necessary and failure to comply with the H-S-R Act reporting and waiting obligations may result in significant monetary penalties.