Quick: Does your company have any insiders who either now or in the future may own $90 million or more in company stock? The CEO? The founder? A member of the board? If so, then now is the time for a crash course in the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act).
The HSR Act requires certain mergers and acquisitions to be reported to the Federal Trade Commission (FTC) and the Department of Justice for a “waiting period” (usually 30 days) before the transaction is allowed to close. The idea is to give these agencies the opportunity to review the merger or acquisition for potential antitrust concerns. But the HSR Act captures a wide array of transactions, including many transactions that pose no antitrust concerns whatsoever. For example, the HSR Act can apply to mergers between companies in totally different industries, and it can apply to acquisitions of non-controlling (e.g., 25%) interests, including open market purchases by outside investors and investments by private equity firms. Perhaps most surprisingly of all—and as the FTC recently underscored—the HSR Act can also apply when company insiders receive compensation in the form of equity, or otherwise acquire new shares, if that compensation or acquisition results in the insider holding more than $90 million in stock.
The rule that Human Resources personnel should remember is this:
Whenever a company insider acquires stock that—when added to that person’s existing holdings—results in that person holding $90 million or more in voting securities, then the HSR Act may be triggered.
An “insider” for these purposes includes, for instance, executives, employees, consultants, members of the board, and outside investors who control board seats. A few examples will illustrate the breadth of this rule:
- The CEO owns $89 million in company stock.The CEO wants to exercise $1.1 million in stock options.An HSR filing is required before those options can be exercised.
- The CFO holds $89 million in company stock.Last year, she was awarded $1.1 million in restricted stock units (RSUs) that do not carry the right to vote.However, these RSUs are about to vest into voting securities.An HSR filing is required before the RSUs can vest.
- A board member bought $20 million in stock three years ago.Since then, the company’s stock price has quintupled, causing these holdings now to be worth $100 million.The director wants to buy a single additional share of stock (e.g., on the open market, from an exiting investor, or even from passively reinvesting dividends).An HSR filing is required before the director can buy that share.
In all of these situations, HSR filings are required both from the acquiring individual and from the company. Among other things, these HSR filings will entail completing a form, submitting certain documents about the acquisition, paying at least a $45,000 filing fee (which is paid by the acquirer unless the parties otherwise agree), and observing a waiting period before the acquisition can close.
It bears noting that the HSR Act is extremely complicated, with a host of byzantine technicalities and exceptions. Relevant here, there is an exception in the HSR regulations for grants of stock options, so long as the stock options do not entitle the option holder to cast votes for directors. (There is, however, an exception to this exception, where the grant of options is coupled with the grant of an irrevocable proxy to vote for directors.) Additionally, there is an HSR exception for exercises of stock options, so long as the shares are immediately sold after the option is exercised (even in a “T+3” situation, for publicly traded companies).
Suffice to say that the HSR rules are complicated enough that, whenever an executive, director, or other insider comes anywhere close to holding $90 million in company stock, HSR counsel should be consulted. Finally, if an insider in your company may have inadvertently made an HSR-reportable acquisition without making an HSR filing, then consult with HSR counsel. There is a procedure to correct inadvertent failures to make HSR filings, but you will need to act promptly and diligently to lessen the chances of serious civil penalties.