Alert October 17, 2017

Reminder: Equity Compensation May Require Personal, Individual HSR Filings

Summary

Do you receive any form of equity-based compensation? Does your company grant any form of equity-based compensation? If so, it is critical to remember that common equity-based compensation, such as option exercises, restricted stock grants and settlement of restricted stock units (RSUs), may trigger filing obligations under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) for individuals who own significant amounts of their company’s stock. All individuals should be aware of how these filing requirements may apply to them, as filing fees are significant ($45,000 or more) and failing to make a required filing can bring about stiff consequences, including fines of up to $41,484 per day, a governmental inquiry and potential embarrassment. Employers who want to help employees avoid fines and other consequences should similarly be aware of these filing requirements.

This alert discusses how the HSR Act filing requirements apply, in general, to individuals in the context of common equity compensation-related transactions.

THE RULE

The HSR Act requires that the Federal Trade Commission (FTC) and Department of Justice (DOJ) be given advance notice of acquisitions of voting securities, non-corporate (LLC/LP) interests, or assets which meet certain monetary thresholds. As a result, parties to mergers and acquisitions may be required to file a notification under the HSR Act. 

However, it is important to note that the law is equally clear that acquisitions of voting stock by individuals – whether the stock is acquired through option exercises, grants of restricted stock, settlement of RSUs, open market purchases or any other means – can also trigger an HSR Act filing obligation. An individual may be required to make an HSR Act filing even if he or she will hold 5% or less of the company’s total outstanding voting stock after the acquisition. 

Any individual who will hold more than $84.4 million of stock after acquiring additional shares by any means will often have an HSR Act filing requirement.[1]

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 $168.8 million and $843.9 million.[2]

HOW TO CALCULATE THE TRANSACTION VALUE?

These filing thresholds are based on the total aggregate amount of stock that a person will hold after making an acquisition (even though 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 individual 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 individual also cannot rely on a public company 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 individual will hold for HSR Act 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 Act filing may be necessary if this combined fair market value is greater than the now-applicable size-of-transaction threshold of $84.4 million (note that the thresholds are adjusted annually).

HOW TO CALCULATE THE SIZE-OF-PERSON REQUIREMENT?

For transactions that are valued at less than $337.6 million (as calculated above), HSR Act filings are only required if one of the filing thresholds set forth above is met and the additional size-of-person requirement is met (importantly, note that HSR Act filings may be required if the total value of voting stock that an executive will hold is $337.6 million, even if the size-of-person requirement is not satisfied). The size-of-person requirement generally will be met if:

  • the company has more than $168.8 million in total assets or annual net sales; and
  • the individual holds at least $16.9 million in total investment assets, voting securities, options, warrants and income-producing property.

Given the $84.4 million size-of-transaction threshold, it is  unlikely that a transaction by an individual that exceeds the size-of-transaction threshold would not also exceed the size-of-person requirement.[3]

WHY DOES THIS MATTER?

An acquisition that is subject to notification may not be completed until the acquiring person pays the filing fee and the 30-day statutory waiting period either expires without action or is terminated early by the agencies.[4] The failure to make a required HSR Act filing can subject the individual to civil monetary penalties of up to $41,484 per day, and the FTC has imposed significant fines in the hundreds of thousands of dollars on individual investors in recent years. In 2016, the FTC obtained a $480,000 fine from Caledonia Investments for failing to report the acquisition of voting shares as a result of the vesting of restricted stock units in Bristow Group, Inc. Also in 2016, the FTC obtained a $720,000 fine from entrepreneur Mitchell P. Rales for shares that his wife purchased in Colfax Corporation. In 2011, the FTC imposed a penalty of $500,000 on Comcast CEO Brian Roberts when he failed to report acquiring additional stock in 2008 as the result of the vesting of RSUs. Roberts had previously filed notification in 2002 to report acquiring Comcast stock, but that filing was more than five years old and therefore expired at the time Roberts acquired additional stock in 2008. 

ARE THERE EXEMPTIONS THAT MAY APPLY TO INDIVIDUALS?

If the size-of-person requirement and one of the filing thresholds are met, the transaction will nevertheless be exempt if the fair market value of the company’s non-exempt assets is $84.4 million or less. There are some commonly held types of assets that are non-exempt, such as trademarks, fund management operations, third-party property management businesses, value of management rights for assets that are not majority owned, and property that is used to conduct a business. If an individual acquires non-exempt assets in excess of the threshold at a time when he or she has already exceeded the filing threshold, then the individual’s acquisition of even a single share of stock will trigger a filing requirement.  As a result, individuals seeking to rely upon an exemption will need to monitor the value of the non-exempt assets on an ongoing basis.

TYPICAL SCENARIOS

The following address the HSR Act filing implications of a number of typical equity-based compensation-related transactions for individuals, most commonly executives, assuming that the size-of-person test described above is met and that the individual has at least $84.4 million of non-exempt assets:

What happens if:

  1. an individual receives a grant of restricted stock that would put him or her over the threshold?

    Unvested restricted stock, which entitles the individual to vote for the election of directors, is included in determining whether the individual holds more than $84.4 million of total voting stock. As a result, a grant of unvested restricted stock that puts the individual over the threshold typically will require the  individual to make an HSR filing.

  2. an individual vests in restricted stock that puts him or her over the threshold?

    The HSR Act requirements apply any time an individual acquires stock that confers the right to vote for the election of directors. For restricted stock, the event that can trigger an HSR filing requirement takes place when the restricted stock is granted (or sold?) to the individual. The individual is deemed to hold voting stock as a result of the grant, and therefore the subsequent vesting of the restricted stock does not trigger any HSR Act filing obligation.

  3. an individual receives an RSU that would put him or her over the threshold if the underlying shares were owned?

    RSUs, which do not entitle the individual to vote for the election of directors, do not count towards the $84.4 million size of transaction threshold. The RSU vesting terms (performance-based hurdles and/or continued employment) do not affect this determination. Therefore, the grant of RSUs does not trigger an HSR Act filing requirement. However, the subsequent settlement of RSUs after vesting may require an HSR Act filing since, upon settlement, the individual will acquire stock that entitles the holder to vote for the election of directors. Prior to the time any RSU settlement takes place, it is important to determine whether the individual will hold more than $84.4 million of voting stock upon the settlement of the RSUs. RSUs or shares of stock that are retained by the company to satisfy tax withholding or that the recipient intends to sell immediately upon settlement will not count toward the $84.4 million threshold.

  4. an individual receives shares of stock upon the settlement of an RSU that puts him or her over the threshold?

    The acquisition of voting stock upon settlement of an RSU that results in the individual holding more than $84.4 million of total voting securities typically will require an HSR Act filing unless the individual intends to sell the stock acquired upon settlement of the RSU immediately upon settlement.

  5. an individual receives an option for a number of shares that, if exercised, would put him or her over the HSR threshold?

    The grant of an option to acquire shares does not require an HSR Act filing. An HSR Act filing may be required upon the exercise of the option into voting securities, but the option grant itself does not trigger any filing requirement.

  6. an individual exercises an option that puts him or her over the threshold?

    The exercise of an option that results in the individual holding voting stock that has a total value of more than $84.4 million (including the fair market value of any voting securities the individual holds prior to the exercise) typically will require the individual to make an HSR Act filing unless the individual intends to sell the stock acquired immediately upon exercise (e.g., pursuant to a broker-assisted cashless exercise).

As discussed above, a number of common equity-based compensation-related transactions can trigger HSR Act filing obligations for individuals who currently own or may acquire voting securities of their company with a value in excess of $84.4 million. These individuals should be receiving expert advice to make sure that they do not inadvertently overlook these obligations and might want to consider negotiating contractual protections relating to these filing obligations.



[1] The FTC adjusts the HSR thresholds annually in the first quarter according to changes in GNP. The figures reflected here are current through January 2019.

[2] The FTC adjusts the HSR thresholds annually in the first quarter according to changes in GNP. The figures reflected here are current through January 2019.

[3] As with all dollar thresholds discussed in this alert, adjustments are made annually in the first quarter. Please be sure to confirm the thresholds have not been adjusted. The figures reflected here are current through January 2019.

[4] The filing fee is: $45,000 for transactions valued at more than $84.4 million but not more than $168.8 million; $125,000 for transactions valued at more than $168.8 million but not more than $843.9 million; and $280,000 for transactions valued at more than $843.9 million.