Federal Merger Enforcement Increases To Highest Level In Five Years

by Perkins Coie

Hart-Scott-Rodino Filings Decreased Slightly in 2012, but Percentage of Investigations Leading to Second Requests and Enforcement Actions Increased; FTC Continues to Enforce HSR Act in Connection with Corporate Officers' and Directors' Acquisitions of Company Stock

On April 30, 2013, the Federal Trade Commission and the Department of Justice published their Hart-Scott-Rodino Annual Report Fiscal Year 2012 for the period from October 1, 2011 to September 30, 2012.  The annual report summarizes the actions of the Federal Trade Commission and Department of Justice that were conducted under the Hart-Scott-Rodino Antitrust Improvements Act, or HSR Act, in fiscal year 2012.  The number of HSR filings in fiscal 2012 decreased slightly from 2011, but the percentage of investigated transactions leading to second requests and subsequent enforcement actions increased to the highest level in five years.  The agencies continue to enforce the HSR Act's notification requirements with respect to acquisitions of company stock by corporate officers and directors, often in inadvertent "failure to file" situations. Noteworthy findings include:

  • The number of HSR filings in fiscal 2012 decreased slightly from 2011, but the percentage of investigated transactions leading to second requests and subsequent enforcement action increased to its highest level in five years.
  • The agencies continue to enforce the HSR Act's notification requirements with respect to acquisitions of company stock by corporate officers and directors, often in an inadvertent "failure to file" situation.

This Update provides key highlights of the Annual Report and offers practical advice.

The Annual Report Shows a Slight Decrease in Percentage of Deals Investigated

In fiscal 2012, 1,429 transactions were reported under the HSR Act, a 1.4% decrease from the 1,450 transactions reported in fiscal 2011.  The Federal Trade Commission or the Department of Justice investigated about 15% of the 2012 transactions, the lowest percentage in five years.   But of the transactions investigated, 24% resulted in the issuance of second requests, the highest percentage in five years.  And where second requests were issued, 90% of the transactions, compared to 67% in 2011, resulted in one of the following:  an abandoned or restructured deal, a consent decree requiring the parties to divest assets, or litigation in federal district court.  These trends suggest that the agencies are conserving their resources and targeting transactions that present more obvious competitive concerns.

  2008 2009 2010 2011 2012
Transactions Reported 1,726 716 1,166 1,450 1,429
Investigated 18% 23% 20% 18%  15%
Investigated – 2nd Request Issued 14% 20% 19% 21% 24%
2nd Requests Resulting in Challenge 90% 100% 95% 67% 90%

Practical Tip

Address Antitrust Concerns Early.  A company considering an acquisition that is likely to raise agency concerns should confer with its antitrust counsel early in the negotiation process. Address potential anticompetitive concerns with counsel during the preparation and filing of reports under the HSR Act and engage with antitrust authorities as soon as possible during the waiting period to avoid a second request.

Corrective Filings.  The statistics cited above do not include agency actions taken in connection with post-consummation "corrective filings."  During fiscal year 2012, the agencies received 60 corrective filings for violations and brought two enforcement actions resulting in $1.35 million in civil penalties.  This is a substantial increase from 2011, when only 16 such filings were made and none resulted in a penalty.  The antitrust agencies examine the circumstances of each violation to determine whether penalties should be sought.

  • Prompt Corrective Filings May Help Companies Avoid Penalties.  When the parties inadvertently fail to file, the enforcement agencies generally do not seek penalties if the parties
    • promptly make corrective filings after discovering the failure to file;
    • submit an acceptable explanation for their failure to file; and
    • have not previously violated the HSR Act.
  • Failures to File Often Involve Executives Who Exercised Stock Options.  Although there are many different circumstances under which a failure to file may occur, one of the most common scenarios involves corporate executives exercising a very small number of options or warrants to purchase their company's stock.  The failure to file often results in such a situation for this reason although the purchase price of the stock acquired through the exercise of the option or warrant typically falls well below the size-of-transaction threshold (currently $70.9 million), the executives fail to aggregate the value of those shares with their existing holdings when determining whether a filing is necessary.

Practical Tip

When Executives Exercise Stock Options, Consider the Effect on HSR Thresholds.  Companies whose executives receive part of their compensation in the form of options or warrants to purchase company stock are advised to first determine first whether the aggregate value of the company stock to be held by the executive as a result of an option exercise meets or exceeds the HSR size-of-transaction threshold.  If it does, companies should undertake a complete HSR-threshold analysis to determine whether an HSR filing is required prior to issuing any shares. 

Cautionary Note: Even if an acquisition does not require an HSR filing, the government can and frequently does investigate the transaction to determine whether it is likely to have any anticompetitive effects.

Additional Information

This update is intended only as our summary of the Hart-Scott-Rodino Annual Report for Fiscal Year 2012.  Click here for the full text of the report.

You can find discussions of other recent cases, laws, regulations, and rule proposals of interest to public companies on our website.

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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