FTC Penalizes Individual Investor for Hart-Scott-Rodino Act Violation

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Fine serves as a reminder of the numerous HSR Act traps for the unwary investor.

On July 2, the Federal Trade Commission (FTC) announced that corporate investor Barry Diller will pay $480,000 in civil penalties to settle charges alleging that he violated the premerger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act).[1] The penalty resulted from Mr. Diller allegedly acquiring shares of The Coca Cola Company between 2010 and 2012 while sitting on Coca Cola's board of directors without submitting notification and obtaining HSR Act approval. The FTC typically does not impose penalties on persons for the first time when the failure to file under the HSR Act was inadvertent. In this case, however, the government alleged that Mr. Diller had previously failed to file in 1998, albeit inadvertently, and had crossed two separate notification thresholds without adhering to HSR Act requirements, prompting the FTC to take action.

The fine here was relatively modest considering that Mr. Diller's total exposure under the HSR Act was approximately $9.6 million, or $16,000 per day for each day of violation. HSR Act fines begin to accrue from the date of closing until the violator makes a corrective filing and obtains HSR Act approval.

Unlike most countries' merger control laws, which typically apply to acquisitions of control, the United States' HSR Act extends to individuals making minority acquisitions. Indeed, with respect to officers and directors of a corporation, a pre-closing HSR Act filing may be required prior to holding in excess of $70.9 million (as adjusted annually) of the voting securities of the issuer. Additionally, HSR Act approval may be required prior to the exercise of options or deposits into a 401(k) or other retirement account.

The action against Mr. Diller comes on the heels of a $720,000 failure-to-file fine that the FTC levied against MacAndrews & Forbes Holdings Inc. in June 2013. MacAndrews had submitted an HSR Act filing for its acquisition of Scientific Games Corporation (SG) shares in February 2007, which allowed MacAndrews to acquire additional SG shares up to the next threshold for a period of five years without refiling. (Five years after HSR Act approval, the same acquiring person must undertake a new HSR Act analysis prior to making the acquisition of even one additional share of the same issuer.) Without submitting a new HSR Act filing, MacAndrews acquired additional shares in June 2013. Similar to Mr. Diller's case, this was not MacAndrews's first failure to file, and the $720,000 fine was less than the nearly $1.7 million of total exposure that MacAndrews faced under the HSR Act.

Traps and Lessons Learned

  • HSR Act Approval Timing: An officer or director must obtain HSR Act approval before obtaining beneficial ownership of the shares.
  • Remember to Aggregate: Exercising even a very small number of options can trigger a filing because the value of those converted shares must be aggregated with the value of shares already held. For example, if CEO Jones already holds $69.9 million of Corporation XYZ's voting securities, she will have a filing obligation if she acquires (or exercises options) on merely another $1 million and one penny of shares.
  • More Than One Threshold to Consider: In general, a new HSR Act filing may be required prior to exceeding each of the applicable notification thresholds. There are several such thresholds, mainly based on the value of the holding. For example, if Officer Smith files under the HSR Act in connection with the acquisition of $70.9 million of Corporation XYZ's shares and obtains approval, he may not cross the next jurisdictional threshold of $141.8 million (as adjusted annually) a year later without filing under the HSR Act again.
  • Five-Year Window: An HSR Act filing is good for only five years. After five years, a new filing may be required for any acquisition of voting securities, regardless of size, if the value of the shares to be held exceeds the applicable threshold.
  • Officers and Directors Are Not Passive Investors: Although there is an exemption for share acquisitions of 10% or less of a corporation by certain "passive" investors, this exemption does not apply to investments made by the corporation's officers or directors.
  • Cash-Out Option: An officer or director can cash out shares on the same day that they are acquired through the exercise of options in order to avoid HSR Act filing obligations.
  • Correct Mistakes: The FTC usually will not impose penalties for an inadvertent first-time failure to file if the individual promptly notifies the FTC upon discovering the violation and convinces the FTC that the relevant parties have committed no further violations and that an HSR Act compliance program is in place.

[1]. View the FTC's announcement here.

Topics:  FTC, Hart-Scott-Rodino Act, Investors, Liability, Policy Violations, Securities Fraud

Published In: Antitrust & Trade Regulation Updates, Finance & Banking Updates, Mergers & Acquisitions Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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