The U.S. Department of Justice (DOJ) announced earlier this month that Canon and Toshiba agreed to each pay $2.5 million to settle allegations that they schemed to avoid complying with Hart-Scott-Rodino Act (HSR) antitrust premerger notification and waiting period requirements. See 15 U.S.C. § 18a. In this case, Canon and Toshiba structured their $6 billion deal to avoid HSR requirements to close the transaction before the end of Toshiba’s fiscal year. This conduct exposed both companies to civil penalties in the United States and potentially in other jurisdictions as well.
This case serves as a useful reminder of the importance of engaging antitrust counsel early in the process when parties are negotiating letters of intent and transaction agreements to ensure that antitrust laws, such as the premerger notification and waiting period requirements, are fully considered and evaluated as soon as possible.
Premerger Notification and Waiting Period Requirements
Typically, parties engaged in a transaction that satisfies certain size-of-transaction and size-of-party thresholds set forth in the HSR Act must notify the DOJ and the Federal Trade Commission (FTC) of the pending transaction before completing the transaction by filing an HSR premerger notification form. Once the form is filed, the parties cannot close the transaction for a period of 30 calendar days to permit the agencies to decide whether to initiate a formal investigation—called a second request—which can take over one year to complete. If the parties try to close the transaction while the second request is pending, the DOJ or the FTC can seek a temporary restraining order in federal court.
As of February 14, 2019, the civil penalty for failing to comply with the HSR Act was $42,530 per day. Adjustments to Civil Penalty Amounts, 84 Fed. Reg. 3980 (Feb. 14, 2019). This penalty may be assessed against both buyer and seller.
Toshiba’s and Canon’s Scheme
The alleged HSR avoidance scheme in this case was designed for Toshiba’s financial benefit, not to enable Toshiba and Canon to evade HSR obligations to permit the parties to engage in anticompetitive conduct. According to the DOJ’s complaint, in 2015, to shore up its “precarious financial position,” Toshiba decided to sell Toshiba Medical Systems Corporation (TMSC). Toshiba wanted to close the deal before its fiscal year ended on March 31, 2016. In early March 2016, Toshiba and Canon still had not finalized the transaction, but by then it was impossible for Toshiba to close before the fiscal year ended while still complying with necessary premerger notification and waiting requirements in several countries, including the United States.
Toshiba and Canon then structured the deal in a way that would allow Toshiba to close the transaction and recognize the proceeds from the sale before its fiscal year ended, while, for HSR purposes, nominally delaying the transfer of “control” of TMSC to Canon to a later date, following compliance with the HSR Act.
The deal structure itself was complex, involving the creation of special purpose investment vehicles, multiple classes of voting securities, and a series of transactions. The DOJ asserted that the deal structure served no purpose other than to permit Toshiba to close the transaction before complying with the HSR Act.
Statutory Maximum Fine Calculation
This violation period consisted of 159 days, entailing a maximum statutory fine of $6.36 million per company. Ultimately, the parties agreed to each pay $2.5 million—less than half of the statutory maximum penalty—as part of their settlements with the DOJ. Both companies agreed to implement HSR compliance programs and to comply with other inspection and reporting requirements. Further, neither party had to admit responsibility or guilt.
The DOJ’s Competitive Impact Statement states only that the government “adjusted the penalty downward from the maximum permitted under the HSR Act because Defendants are willing to resolve the matter by consent decree and avoid prolonged litigation.” It is possible that Toshiba and Canon violated premerger notification and waiting period requirements in other jurisdictions that have not yet announced their respective penalties.
To assess premerger notification and waiting period requirements and the possibility of a transaction being unwound after closing, companies should consult experienced antitrust counsel early on in the merger and acquisition process.