Key takeaways

• Small incremental acquisitions may require HSR filings and the HSR waiting period to be observed.
• Subsequent acquisitions of a small amount of the same issuer’s voting securities after the HSR requirements have been satisfied may still require additional HSR filings.
• Even the mere vesting of stock awards may be an HSR-reportable acquisition.
• The U.S. antitrust agencies are likely to impose significant fines on individuals or companies that they consider to be repeat or willful offenders.

On December 22, 2021, the Federal Trade Commission (FTC) and Antitrust Division of the Department of Justice (DOJ) announced that they had entered into settlements with Clarence L. Werner and Biglari Holdings Inc. (Biglari) for alleged violations of the Hart-Scott Rodino (HSR) Act.

The HSR Act requires that parties to transactions meeting certain annually-adjusted thresholds file a notification with the FTC and DOJ and observe a statutory waiting period – typically 30 days – prior to consummating such transactions unless an exemption applies. The objective is to permit the agencies an opportunity to review transactions, and to determine whether such transactions may be anticompetitive, in advance of closing. Companies or individuals that fail to comply with the reporting requirements of the HSR Act are subject to potentially steep civil penalties – currently up to US$43,792 per day until a corrective filing is made with the agencies – irrespective of whether the underlying transaction raises any antitrust concerns.

United States v. Werner

Clarence L. Werner is the founder and longtime executive of Werner Enterprises Inc. (WEI), a publicly-traded truckload carrier company. The complaint¹ alleges that Mr. Werner first violated the reporting requirements of the HSR Act in May 2007, when he exercised options to acquire WEI stock that resulted in his combined holdings exceeding the US$100 million (as adjusted) notification threshold. Following that acquisition, Mr. Werner continued to acquire additional WEI stock, including through open market purchases and option exercises, for years before the violations were detected by Mr. Werner’s counsel, who in turn contacted the FTC in January 2020.

Solely in order to assess the proper number of corrective filings, the FTC’s policy is to treat subsequent acquisitions that do not cross a higher notification threshold during the five years following the initial violation as exempt (i.e., as if an HSR filing had been timely made).² While Mr. Werner made numerous acquisitions over the years, he never exceeded the US$500 million (as adjusted) or 50% notification thresholds, and therefore only had to make corrective filings for acquisitions he made in May 2007, November 2012, and February 2019. HSR counsel submitted corrective filings in March 2020.

Although it was clear to the agencies that Mr. Werner had become aware of his HSR obligations at least as far back as January 2020, when counsel first contacted the FTC, Mr. Werner proceeded to acquire additional company stock through the vesting of restricted stock awards in February 2020. The agencies ultimately accepted that the violations, while “not excusable negligence,” may have been inadvertent. Therefore, the US$486,900 civil penalty being sought is significantly less than the maximum US$43,792 per day penalty that could have been imposed going back to May 2007.

United States v. Biglari Holdings Inc.

Biglari is a publicly-traded holding company that invests in various operating businesses. In 2012, the FTC fined Biglari US$850,000 for violations of the HSR Act. The company improperly relied on an exemption for passive investors because it intended to appoint directors to the board of Cracker Barrel Old Country Store (Cracker Barrel), the subject of the investment.³ Biglari eventually made an HSR filing in August 2011 that it later sought to recharacterize as a corrective filing for its prior violations. In its letter explaining the violations to the agencies, Biglari committed to seeking the advice of HSR counsel prior to making acquisitions exceeding the US$50 million (as adjusted) threshold.

In March 2020, approximately seven and a half years after the waiting period expired for the original HSR filing that Biglari made, two entities controlled by Biglari acquired additional shares of Cracker Barrel stock. While such incremental acquisitions were valued well below US$94 million (the inflation-adjusted US$50 million notification threshold in effect at the time), Biglari’s combined holdings of Cracker Barrel stock exceeded that threshold and no exemption applied.

Notably, the complaint mentions that Biglari did not make a corrective HSR filing on the March 2020 purchases until the Premerger Notification Office of the FTC contacted Biglari’s counsel in June 2020 to inquire as to why no HSR filing had been made for the March 2020 acquisitions.⁴ Biglari submitted a corrected filing 10 days later with an explanatory letter admitting that Biglari did not seek HSR advice from counsel prior to the March 2020 acquisitions. Biglari agreed to pay a civil penalty of US$1,374,190 (well below the maximum of approximately US$4.2 million that the agencies could have sought) to resolve the investigation.

* * *

These recent enforcement actions by the agencies are the latest sign of their commitment to policing compliance under the HSR Act, even for transactions that do not pose any substantive competitive concerns. In September 2021, the agencies fined the CEO of Capital One Financial Corporation (Capital One), Richard D. Fairbank, US$637,950 for failing to file for an acquisition through vesting of performance stock units. The Capital One CEO, who had previously made corrective filings for past violations of the HSR Act, made a timely HSR filing in February 2013. Subsequent acquisitions were exempt until March 6, 2018, five years after the end of the waiting period. Two days after the exemption period ended, the Capital One CEO acquired additional shares through vesting of performance stock units on March 8, 2018, in violation of the requirements of the HSR Act.

Similar to the case against the Capital One CEO, the failure to file by Mr. Werner for acquisitions of stock in the company he founded underscores the importance of HSR compliance, even for executives that receive securities as part of their compensation package. The vesting of shares, without any affirmative action by the individual, could be a potentially reportable acquisition. The Biglari case also parallels the violation by the Capital One CEO in that, after an HSR filing has been made, acquirors will not be able to rely on that filing for an exemption in subsequent acquisitions that take place more than five years after the expiration of the HSR waiting period.

The HSR rules are complex, and the application of the HSR Act can be highly technical and fact-specific. The advice of experienced legal counsel should be sought for specific situations.

Footnotes

1) United States v. Werner, Complaint, Civil Action No. 1:21-cv-03332 (D.D.C. Dec. 22, 2021), https://www.justice.gov/opa/press-release/file/1458201/download.

2) The HSR rules provide an exemption, after an HSR filing has been made and the waiting period observed, for subsequent acquisitions of voting securities of the same issuer within the five-year period after the end of the waiting period, unless a higher notification threshold is crossed. 16 C.F.R. § 802.21 (2021). The current notification thresholds are: (i) US$92 million, (ii) US$184 million, (iii) US$919.9 million, (iv) 25% if valued greater than US$1,839.8 million, and (v) 50% if valued greater than US$92 million. See Press Release, Fed. Trade Comm’n, HSR Threshold Adjustments and Reportability for 2021 (Feb. 17, 2021), https://www.ftc.gov/news-events/blogs/competition-matters/2021/02/hsr-threshold-adjustments-reportability-2021.

3) See Press Release, Fed. Trade Comm’n, Biglari Holdings, Inc., to Pay $850,000 Penalty to Resolve FTC Allegations That it Violated U.S. Premerger Notification Requirements (Sept. 25, 2012), https://www.ftc.gov/news-events/press-releases/2012/09/biglari-holdings-inc-pay-850000-penalty-resolve-ftc-allegations.

4) United States v. Biglari Holdings Inc., Civil Action No. 1:21-cv-03331 (D.D.C. Dec. 22, 2021), https://www.justice.gov/opa/press-release/file/1458211/download.