Alert January 19, 2017

Antitrust Enforcers At It Again: More HSR Actions Against Individuals Announced

Summary

In a trend that is sure to continue no matter the policy leanings of the incoming Trump administration, the Federal Trade Commission (FTC) announced this week that it has obtained nearly $1 million in civil penalties for two violations of the Hart-Scott-Rodino Antitrust Improvements (HSR) Act. These actions are notable because they make clear that noncompliance will not be tolerated. One involved shares that an investor’s spouse purchased in her own name in a public company in which the investor also held stock, while the other involved a fine against a hedge fund investor who was in violation of the HSR Act for just 17 days after making an HSR Act filing 1½ years earlier to acquire stock in the very same company. These actions make clear that failing to comply with the letter and spirit of the HSR Act is an invitation to penalties; care must be taken to assure compliance at every point, in every transaction.

Background

Acquisitions that meet certain monetary thresholds in terms of deal value and the parties’ sales or assets may be required to file notification under the HSR Act before closing the transaction. An HSR Act filing may be required if the acquiring person will hold more than $78.2 million of stock.[1] There are also additional, higher dollar thresholds that can trigger a filing – even if an acquiring person has previously filed to report acquiring a minority stake that crossed a lower threshold.  These higher thresholds are currently $156.3 million and $781.5 million.[2]  The failure to make a required HSR Act filing can result in civil penalties of up to $40,000 per day from the date the violation first occurred until the date the acquiring person files a remedial notification.

Holdings of a Spouse and Minor Children Matter

In the first enforcement action this week, the FTC obtained a $720,000 fine from entrepreneur Mitchell P. Rales. Rales was a minority shareholder of Colfax Corporation (Colfax), a public company listed on the New York Stock Exchange. On October 31, 2011, Rales’s wife bought 25,000 shares of Colfax through open market purchases.

Under the HSR Act and rules, the holdings of a spouse and minor children must be aggregated with a person’s direct holdings to determine whether any of the HSR Act thresholds are satisfied. The FTC found that as a result of his wife’s purchase of Colfax shares on the open market, Rales’s total holdings of Colfax shares exceeded the as adjusted $156.3 million threshold.  Because Rales had not previously reported the acquisition of Colfax stock, he was required to file an HSR Act notification before his wife made the open market purchases that pushed their combined holdings above $156.3 million.

Rales filed a remedial notification on February 25, 2016, to report his wife’s acquisition of Colfax shares in October 2011. At the same time, Rales made a second remedial notification to report his failure to report open market purchases of Danaher Corporation (Danaher) voting stock in January 2008.

Rales claimed that his failure to file to report his wife’s acquisition of Colfax stock and his acquisition of Danaher stock – both through open market purchases –  was inadvertent and he should therefore not be required to pay a civil penalty. However, the FTC noted that Rales had previously paid civil penalties to settle another HSR Act enforcement action in 1991, some 26 years ago. The FTC has a general policy that it will not impose penalties for a party’s first inadvertent failure to file. The fact that 26 years, practically a generation, had elapsed since Rales’s first HSR Act violation in 1991 did not dissuade the FTC from deciding to punish Rales the second time around. 

Tracking the Thresholds Is Critical

In the second enforcement action this week, the FTC obtained a civil penalty of $180,000 from hedge fund founder Ahmet H. Okumus. In September 2014, Okumus acquired shares of Web.com Group, Inc. (Web.com) that represented 13.5% of the total issued and outstanding Web.com voting stock. Okumus did not make an HSR Act filing because he relied on the “passive investment” exemption. Under the HSR Act, an acquisition of voting stock is exempt from the reporting and waiting requirements if the investor intends to hold the stock solely for purposes of investment and will not hold greater than 10% of the issued and outstanding voting securities of the target. 

Because Okumus acquired more than 10% of the outstanding voting stock of Web.com, he was required to make an HSR Act filing before his acquisition in September 2014. In November 2014, Okumus made a remedial filing to report his acquisition. He claimed his reliance on the passive investment exemption was made in good faith and his failure to file notification was inadvertent. In keeping with its unwritten and informal “one bite at the apple” rule, the FTC did not impose a civil penalty in connection with Okumus’s failure to make a required notification filing in September 2014.

In his November 2014 remedial filing, Okumus reported at the as adjusted $78.2 million threshold. Because Okumus filed notification at the lowest monetary reporting threshold, he was able to acquire additional stock of Web.com without making any further HSR Act notification only so long as the total aggregate value of his holdings did not exceed the next highest, as adjusted threshold of $156.3 million. 

In June 2016, however, Okumus acquired additional voting securities of Web.com that pushed the total value of his holdings over the $156.3 million threshold. Okumus was required, but failed to make, an HSR Act filing in advance of crossing the $156.3 million threshold. Just one month later, in July 2016, Okumus sold a sufficient number of Web.com shares to reduce his total holdings below $156.3 million. But the brief window of noncompliance did not matter.  Because of Okumus’s previous violation in 2014, the FTC imposed a civil fine. 

Conclusion

These enforcement actions serve as an important reminder that the HSR Act rules are nuanced and often not self-evident. Always consult with your Goodwin antitrust team if there is any chance that an acquisition will cause an acquiring person to hold more than $78.2 million of the voting stock or other interests of a target.

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[1] The FTC adjusts the HSR Act monetary thresholds in mid-January of each year. We expect that the FTC will announce the revised 2017 thresholds by the end of January; they will go into effect approximately 30 days after the announcement. 

[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.