Continued strong antitrust enforcement under the Hart-Scott-Rodino Act (HSR) reminds us that HSR compliance issues can arise in unexpected places. When Berkshire Hathaway Inc. acquired voting securities of Symetra Financial Corporation by exercising warrants without first submitting the required HSR filing to the antitrust agencies, the Federal Trade Commission's (FTC) Premerger Notification Office did not recommend a civil penalty. Not so when shortly thereafter Berkshire converted USG Corporation notes into voting securities valued in the aggregate with prior holdings at more than $950 million.
The HSR requires advance notification to the FTC and the U.S. Department of Justice before certain stock or asset acquisitions can take place. Though typically thought of as a merger requirement, the Act's broad reach captures many other types of transactions. These can include, for instance, joint ventures, minority investments, nonstrategic transactions, stock grants or conversions, option exercises, incremental purchases, formations, IP licenses and asset acquisitions.
In most cases of a first-time inadvertent failure to file, the agency will not recommend a penalty, but will insist the offender put a policy in place to ensure future filing obligations are not missed. That was the case when Berkshire Hathaway notified the agency in July 2013 that it failed to meet its filing obligation when it acquired Symetra Financial Corporation stock several days earlier at the end of June 2013. This is notable for several reasons: (1) Berkshire acquired the Symetra voting stock by exercising warrants, which can trigger the HSR filing and waiting period requirements in some instances; (2) the corrective filing was made shortly after the violation was discovered, an important mitigating factor; and (3) it was the first violation of the HSR Act by Berkshire, another important mitigating factor.
Later, in December 2013, Berkshire acquired USG voting stock through the conversion of a convertible note in another HSR reportable transaction, and filed the following month in January 2014. The agency imposed the maximum civil penalty of $16,000 per day for the period Berkshire was in violation of the Act, totaling $896,000. The lesson here is that HSR filing obligations are not always obvious or easy to spot – there are very few cases of intentional violations of the Act. The convertible notes that Berkshire converted were acquired in 2008, five years prior to conversion in a nonreportable transaction, and not all conversions are reportable.
There are numerous examples of inadvertent failures to file for warrant exercises and stock conversions, for instance with respect to executive compensation plans. Yes, there are cases where a company officer has to file HSR before acquiring voting stock in his or her own company. This and the aggregation rules that come into play when calculating valuation are often overlooked nuances in the Act, and though the agency can be somewhat forgiving, that's not always the case. One or two enforcement actions typically are seen per year. The fines can be substantial and, in some cases, have exceeded a million dollars.
No compliance program is perfect, but more safeguards reduce not only the likelihood of a violation, but the likelihood that the agency will seek a steep penalty.