In late December 2021, the U.S. Federal Trade Commission (“FTC”) settled charges in two separate matters for failure-to-file violations of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a (“HSR Act”). In one, investment fund operator Biglari Holdings Inc. agreed to pay a penalty of $1.4 million. In the other, Clarence L. Werner, founder of Werner Enterprises, Inc. agreed to pay a penalty of $486,900 regarding multiple acquisitions between May 2007 and February 2020.1
These fines capped a year of aggressive enforcement activity by an emboldened FTC. They also serve as a reminder of the HSR Act filing obligations that individual investors can encounter, sometimes unwittingly.
Individual investors may be required to file for HSR Act clearance when they plan to make acquisitions of voting securities, assets, or control of a non-corporate entity if the acquisition will result in holdings that exceed a filing violation threshold under the HSR Act (the lowest threshold is currently $92.0 million2). Failure to file can result in substantial penalties. The rules are complex and technical, so investors should consult with their own counsel, but this note provides a brief overview.
Basics of the HSR Act for Individuals
Acquisitions above certain size thresholds are subject to premerger review and a waiting period under the HSR Act, which is overseen by the FTC and the Antitrust Division of the U.S. Department of Justice (“DOJ”). A transaction is described as “reportable” if it is expected to be large enough to be subject to this premerger review process, and is not otherwise exempt. If a transaction is reportable, then both the acquirer and the acquired entity (which, if the acquisition is of voting securities, is the issuing corporation) must make a filing, and a filing fee is required. The acquirer must then observe a waiting period of 30 days (15 days in the case of a tender offer or certain bankruptcy transactions) before consummating the transaction. If the waiting period expires or the agency earlier terminates the period, the acquisition may proceed. If the FTC or DOJ issues a request for additional information, the transaction is further stayed until the parties comply with the agency’s request. The FTC or DOJ also may sue to block the transaction or may demand other relief, although this is rare (fewer than 1 percent of reportable transactions).
Generally, there are four steps to determining reportability: the commerce test (whether the transaction affects commerce in or into the United States); the size of transaction test; the size of person test; and whether any exemptions apply. For purposes of this note, we will focus only on the two steps that usually require the most analysis for individuals’ investments: size of transaction and exemptions.
Key Exemptions for Individuals
If an individual already controls an entity, acquisitions of additional interests in that entity are not reportable.3 Acquisitions also may be exempt due to the acquirer’s intentions. For example, an acquisition of voting securities is exempt if made solely for the purpose of investment and if, as a result of the acquisition, the acquiring person would hold 10 percent or less of the outstanding voting securities of the issuer, regardless of the dollar value of voting securities so acquired or held (but most intentions to influence the direction of management, or to participate directly as a manager or director, will disqualify an investor from this exemption).
Acquisitions of non-voting shares in corporations and non-controlling shares in noncorporate entities are exempt,4 as are acquisitions of certain asset types (e.g., raw land of any value, or oil & gas productive assets having a value of $500 million or less), and likewise, the acquisition of voting shares or interests in an entity is exempt if the entity’s assets consist only of exempt assets. Acquisitions of the shares of foreign corporations are exempt, unless the foreign corporation has substantial U.S. sales or assets, as explained in the HSR Act regulations.5 Other such exemptions exist that may cover certain transactions.
Transaction Values, What is “Held,” and Filing Fees
Under the HSR Act and its rules, valuation of acquisitions often is complex. For publicly traded voting securities, the value of shares to be acquired is either market price or acquisition price, whichever is greater. For transactions subject to rule 801.306 (e.g., open market purchases, tender offers, conversions, or exercises of options or warrants), “market price” means the lowest closing quotation during the 45 calendar days prior to closing. For transactions not subject to rule 801.30 (generally, acquisitions pursuant to a contract or letter of intent), “market price” is the lowest closing quotation during that portion of the same 45-day period that begins one day before execution of the contract or letter of intent. If acquisition price is not determined, market price governs the value of the transaction. For guidance on valuation of other acquisitions, see the FTC’s “Valuation of Transactions” web page.7
The following table explains the valuation thresholds and their corresponding filing fees. If a transaction is properly valued below the first threshold, then it is not reportable.
Note that the valuation refers to shares or interests “held,” not merely what is acquired. This is an important term of art and a trap for the unwary. The valuation must be applied to the entirety of the position to be held by an individual at the close of the transaction, which requires aggregating, for example, previously acquired voting shares with the shares newly acquired in the transaction. If an investor already owns $91 million of voting shares in a corporation, and seeks to acquire $2 million more, the transaction value is $93 million (not merely $2 million), and the valuation has crossed the first threshold below.
|HSR Act valuation thresholds and fees
(on or after March 4, 2021)
|Deal value or total voting shares “held”
|> $92 million but < $184 million
|= $184 million but < $919.9 million
|= $919.9 million or more
|25% of voting securities, if valued at greater than $1,839.8 million
|50% of voting securities, if valued at greater than $92 million
||based on values above
Family- and Controlled-Entity Aggregation Rules
Individuals must aggregate the holdings of a spouse and any minor children. This creates a potential compliance headache: individual investors should consider monitoring acquisitions made by relevant family members.
Individuals and their relevant family members also must aggregate holdings that they possess indirectly via controlled entities, which not only include controlled corporations and Limited Partnerships (LPs) or Limited Liability Companies (LLCs), but also include certain trusts.
Subsequent Acquisitions, after an HSR Act Filing
Fortunately, once an investor makes an HSR Act filing, gets clearance, and crosses a threshold, the investor is not required to file again for every subsequent purchase of voting shares. Such an investor will benefit from what is known as the “one year to meet, five years to buy” rule, which is as follows.
An HSR Act filing expires one year following the expiration or early termination of the HSR Act waiting period. During the first year, an investor can make the purchase that crosses the notification threshold, as well as any number of additional purchases, without filing another HSR Act notification, as long as the investor does not cross a higher notification threshold (see table above). As long as the investor makes the acquisition and crosses the threshold as predicted in the HSR Act filing (this is “one year to meet”), the investor then may acquire additional voting securities in the target issuer for the following four years, for a total of “five years to buy” after expiration or early termination of the waiting period, as long as the additional stock does not result in meeting or exceeding a higher notification threshold.
Compliance Considerations – Have a Plan
If an investor completes a reportable acquisition without first making an HSR Act filing and receiving clearance or expiration of the waiting period, the investor can be hit with a fine, soon to rise to a maximum of $46,517 per day that the acquisition remains un-filed.8 In practice, the fine is not usually the maximum amount, but large fines are common. A first-time violator (if shown to be inadvertent) often receives only a warning and a directive to make a corrective filing; repeat violators, however, can face fines in the hundreds of thousands of dollars, and sometimes over one million dollars.
Investors are well advised to create a protocol under which their acquisitions (and those of relevant family members) of voting securities and non-corporate interests are evaluated for HSR Act reportability well before those acquisitions are consummated.
1 Although Mr. Werner was the founder, he no longer controlled the company at the time of these acquisitions; therefore, his acquisitions were found to be reportable.
2 This amount is adjusted annually by the FTC, usually in February or March.
3 Control for HSR ACT purposes is a term of art. For a non-corporate entity, control is an economic test (not a management test) that generally means 50 percent of rights to current distributions or 50 percent of rights to assets upon dissolution. For a corporation, control means ownership of 50 percent or more of the voting shares. If shares have different values of voting rights (e.g., founders shares with twice the voting power of common shares), this may require additional calculations.
4 Non-voting shares must be genuinely non-voting. If shares do not have normal voting rights, but do confer the right to seat corporate directors, they may be non-exempt. If non-voting shares are convertible to voting shares, then their proposed conversion to voting shares may be reportable.
5 16 C.F.R. § 802.51.
6 16 C.F.R. § 801.30.
7 Valuation of Transactions Reportable under The Hart-Scott-Rodino Act, Fed. Trade Comm’n, https://www.ftc.gov/enforcement/premerger-notification-program/hsr-resources/valuation-transactions-reportable-under.
8 Adjusted annually by the FTC.