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

by Morgan Lewis

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.

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.

© Morgan Lewis | Attorney Advertising

Written by:

Morgan Lewis

Morgan Lewis on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.