Alert April 01, 2016

The HSR Act and You: Failing to Report Executives' Stock Purchases and Option Exercises is No Joke


An HSR filing may be required even when an executive is acquiring only a small number of additional shares and will still hold only a minority stake after closing. Failing to file can bring about stiff consequences, including fines of up to $16,000 per day and a governmental inquiry. Any individual, including company executives, who will hold more than $78.2 million of stock after acquiring additional shares by any means must consider whether an HSR Act filing is required. Moreover, organizations should consider creating compliance protocols, as detailed below, to monitor for potential HSR Act filings so as not to run afoul of the statute inadvertently.

The Rule to Remember…

Whenever an individual exercises stock options, receives restricted stock awards, or even makes an open market purchase, there may be an attendant requirement to file an individual Hart-Scott-Rodino Notification and Report Form. 

We all know that under the Hart-Scott-Rodino Antitrust Improvements Act (HSR), parties to mergers and acquisitions meeting certain monetary thresholds in terms of deal value and the parties’ sales or assets may be required to file an HSR Notification and Report Form with the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) before closing the transaction. The HSR Act is usually thought of in terms of one company acquiring or merging with another company. But the law is also clear that the HSR Act may also apply to an individual’s acquisition of stock through stock option exercises, restricted stock awards, or even open market purchases.

Any individual, including company executives, who will hold more than $78.2 million of stock after acquiring additional shares by any means must consider whether an HSR Act filing is required.[1] In the event a transaction happened some years ago, the then-applicable filing thresholds will determine if a filing was required and they may be lower (or potentially higher) than the current thresholds. There are also additional, higher dollar thresholds that can trigger a filing – even if an individual has previously filed to report acquiring a minority stake that crossed a lower threshold. These higher thresholds are $156.3 million and $781.5 million.[2] In addition to making the HSR Act notification, the acquiring person must also pay a premerger filing fee based on the transaction value.[3]

The Calculations

The filing thresholds are based on the total aggregate amount of stock that an individual will hold after making an acquisition, though recall that a filing must be made before the acquisition. The total value of stock that will be held as a result of an acquisition is based on the current fair market value of the person’s present holdings plus the price that will be paid to acquire the new shares. However, if the company is publicly traded, then the acquisition price for the new shares is the higher of the current fair market value (based on the stock’s recent trading price) or the price that will be paid to acquire the new shares. In other words, an executive cannot rely on the price he or she previously paid to acquire current holdings of company stock. Instead, he or she must mark-to-market the value of the current holdings. An executive of a public company also cannot rely on the strike price for the options he or she intends to exercise. Again, he or she must determine the current fair market value. If the fair market value is higher than the strike price, then the value of what the executive will hold for HSR purposes is the combined fair market value of the current holdings plus the fair market value of what he or she will acquire. An HSR filing may be necessary if this combined fair market value is greater than the 2016 size-of-transaction threshold of $78.2 million (note that thresholds are adjusted annually).

How Long is My Filing Good For?

Another tricky detail is that an HSR Act filing is good for just five years. That means any filing that was made more than five years prior to an acquisition of additional shares has no effect at all. It’s as if the previous filing was never made. An individual who has not made an HSR Act filing in five years to report acquiring company stock may therefore have to file again to acquire even a single additional share of stock – even if the executive previously filed more than five years ago to report at the same monetary threshold.

Hypos for Your Consideration

This is a highly technical and nuanced area of the law. Here are two hypotheticals to help orient you as to when an HSR filing would be required. When in doubt, however, your best course is to consult your HSR counsel.

Example 1: In 2013, XYZ Company’s CEO exercised a very small number of options or warrants with a value well below the then-applicable HSR filing threshold, yet failed to aggregate the value of the converted shares with what she already held. The combination of these two numbers brought her current holdings to over $95 million, well-above the 2013 HSR filing threshold. In this situation, the CEO was required to make an HSR filing before exercising the new options or warrants. Now that this violation is known, the CEO will be required to make a “remedial HSR filing,” as described below. She will be required to pay a filing fee of $45,000, but will not need to report the additional purchase or conversion of any XYZ shares until 2018 so long as she remains below the next highest applicable threshold, presently $156.3 million.

Example 2: Ten years ago, when the company was still private, ABC Incorporated issued stock options to its CEO. The stock options have an exercise price of $10 per share and vest in chunks over a period of 20 years. Since then, ABC has gone public and performed exceedingly well. Its shares are currently trading at $180 per share and the CEO owns zero shares of any kind of ABC. The CEO now intends to exercise 500,000 options before the end of the expiration period for the first chunk of options in December 2016. He will pay only $5 million to acquire the shares (well below the present $78.2 million HSR filing threshold).  However, he must make an HSR filing because the current fair market value of the voting stock that he will acquire and hold as a result of the option exercise is $90 million (500,000 shares valued at $180 per share). The CEO files a notification in April 2016 at the $78.2 million filing threshold and pays a $45,000 premerger filing fee though he cannot officially exercise the options before clearance is received. Clearance for a transaction such as this typically takes no more than 15 calendar days.

Why Does this Matter?

Today may be April Fool’s Day but failing to make a required HSR Act filing is no joke. A person who fails to make a required HSR Act filing before closing can be fined up to $16,000 per day from the date the person acquired the stock until the date the person makes a corrective filing. In fact, in 2015, the FTC imposed fines totaling nearly $1 million on two minority investors who acquired additional voting securities without observing the HSR requirements.[4]

Where a failure to file has been identified, it will be necessary to make a remedial HSR notification. That process is not easy. The remedial notification requires submission of every element of a “typical” HSR form, as well as a detailed explanation – from the individual him or herself – detailing the circumstances around which the failure to file came to pass, whether the individual obtained any benefit as a result of not making the required HSR filing, and specific steps the individual will undertake to make sure that he or she does not violate the HSR Act in the future.

Tips for Compliance and Prevention

Organizations should put in place protocols so as to make examining for potential HSR filings a routine part of their internal procedures. For example, whenever a stock award is granted, language regarding the need to determine whether a filing is necessary, including allocation of the responsibility to make the examination and to pay the filing fee if need be, should be included in the accompanying paperwork. Or whenever a filing is made with the Securities and Exchange Commission alerting the public to an executive’s open-market purchase, a component of the process should include checking whether an HSR Act filing is also required. Most importantly, organizations must educate their executives and their compliance teams to be vigilant about the potential need for HSR filings in these often non-intuitive situations. When in doubt, it is critical to consult expert HSR counsel as every situation will have its own nuances, twists, and turns.

[1] The FTC adjusts the HSR Act monetary thresholds in mid-January of each year. For 2016, the minimum value of voting securities or other interests that must be exceeded before an HSR Act filing may be required is $78.2 million.

[2] Another filing can be required if an investor acquires 25% or more of the outstanding voting securities of a company if valued at $1.563 billion or more. There is a fifth threshold that applies when a party is acquiring 50% or more of the outstanding voting securities of a target. These monetary filing thresholds are also adjusted annually in mid-January.

[3] The filing fee varies based on the size of the transaction. It is $45,000 for transactions valued at more than $78.2 million but less than $156.3 million; $125,000 for transactions valued at $156.3 million or more but less than $781.5 million; and $280,000 for transactions valued at $781.5 million or more. 

[4] See, Leucadia National Corporation to Pay $240,000 to Settle FTC Charges It Violated U.S. Premerger Notification Requirements and Investor Len Blavatnik to Pay $656,000 to Settle FTC Charges That He Violated U.S. Premerger Notification Requirements.