- But it Wasn’t a Merger! HSR Act Premerger Reporting Requirements Outside of the Merger Context
- March 8, 2012 | Author: Mary K. Marks
- Law Firm: Greenberg Traurig, LLP - New York Office
The Department of Justice (DOJ) recently fined a company’s Chief Executive Officer $500,000 for personally violating the Hart-Scott-Rodino (HSR) Act’s premerger notification requirements. According to the DOJ, the fine was assessed because the executive failed to comply with the HSR Act’s reporting requirements before he acquired voting securities of his employer as part of his compensation as Chairman and Chief Executive Officer, resulting in his holding voting securities valued in excess of the HSR Act’s reporting threshold. Significantly, the Complaint also identified two previous failures by the executive to comply with HSR Act reporting requirements that may have been difficult to identify as potential antitrust premerger compliance issues because the acquisitions were not made in the context of a traditional merger or acquisition.
The HSR Act imposes reporting and waiting period requirements with respect to certain acquisitions of voting stock, non-corporate interests or assets valued in excess of $68.2 million by parties of sufficient size, regardless of any potential antitrust issues related to the acquisition. Transaction parties generally are familiar with HSR Act reporting in connection with mergers and acquisitions, but the Act is not limited to the acquisition of control of one entity by another. HSR Act reporting requirements also may come into play in the context of executive compensation, “internal” reorganizations, and acquisitions of control that lead to indirect secondary acquisitions of minority positions in another entity’s voting securities.
This article discusses the application of HSR Act reporting requirements to acquisitions made outside of the merger context, what to do if a person misses an HSR filing, and strategies to ensure reporting obligations are timely identified.
HSR Act Coverage Rules
The HSR Act applies to all acquisitions of voting securities in excess of the thresholds unless an exemption applies. For HSR Act purposes, voting securities are those that at present or upon conversion entitle the holder to vote for the election of directors of the issuer, but only the acquisition of voting securities with the current right to vote for directors are subject to the reporting requirements of the HSR Act. The subsequent conversion of a security with a future right to vote for directors (e.g., an option) into a security with the current right to vote for directors (e.g., common stock) is considered an acquisition of the underlying security, and may trigger the HSR Act’s reporting requirements. While some voting stock investments are exempt when made “solely for the purpose of investment,” the FTC staff has taken the position that the exemption is not available to a person who intends to influence the basic business decisions of the issuer or participate in its management. Thus, executives of the issuer cannot rely on this exemption.
Non-merger HSR Act Reporting Scenarios
1. Executive Compensation Involving Voting Securities
Executives acquire company stock in a variety of contexts. They may receive or acquire voting stock based on their own investment decisions or in connection with larger transactions involving their employer. Whether these acquisitions are voluntary (e.g., open market purchases or company-level transactions with third parties) or passive (e.g., dividend reinvestment by a 401(k) plan), the type of transaction is not dispositive for HSR Act analysis. All voting securities of the issuer held by the executive after a given acquisition are relevant for the reportability analysis. Thus, it is important to aggregate the value of the new voting securities to be acquired with all of the other voting securities of the issuer then held by the executive. Holdings of an executive’s spouse or minor children are aggregated with those held directly by the executive for HSR Act purposes.
Securities received as compensation may trigger reporting requirements under the HSR Act upon the receipt, exercise or vesting of the security. The key issue is: when does the executive acquire voting securities with the current right to vote for the election of directors of the issuer. Stock grants immediately confer securities but may be subject to forfeiture, while stock options and stock-settled stock appreciation rights require an affirmative exercise decision (after vesting or payment of an exercise payment), and other awards may be subject to vesting requirements, requiring HSR analysis of each situation based on the particular facts.
Company awards of restricted and unrestricted stock are analyzed as of the grant date of the award, as the voting securities underlying the awards are issued on the grant date. Because the executive receives and has the right to vote for directors of the issuer as of such date, the executive must comply with the HSR Act’s reporting (and waiting period) requirements before the grant date. The fact that the executive may forfeit such shares at a later date because of failure to satisfy the award’s vesting conditions is not relevant for HSR Act reportability analysis on the date of grant.
Awards of stock options or stock-settled stock appreciation rights are analyzed on the date of exercise because the options and rights themselves do not confer the current right to vote for directors of the issuer on their holders. The voting securities underlying these options or rights are not issued until the date of exercise, usually after vesting or payment of the exercise price, not on the award grant date. Thus, the HSR Act’s reporting (and waiting period) requirements must be satisfied before the executive exercises such options or rights.
Some equity awards vest on their own and are not subject to an exercise event driven by the executive. Awards of this type — including restricted stock units, certain stock options, and stock-settled stock appreciation rights that provide for automatic exercise and/or delivery upon the occurrence of certain vesting events or at certain specified times — require the issuer to deliver securities with the current right to vote for directors on or after specified dates pursuant to the terms of an award agreement entered into when the award is made. Such voting securities do not confer a right to vote for directors of the issuer until the award has vested and the underlying voting securities have been delivered (issued) to the executive, so it is the delivery date that is determinative for the HSR Act’s reporting (and waiting period) analysis. Delivery in this situation is deemed the acquisition event for the underlying voting securities, and for HSR Act purposes the company and the executive must consider, prior to delivery, the total value of the issuer’s voting securities that will be held by the executive after such delivery.
2. Internal Reorganizations
Although many internal reorganizations are exempt from the HSR Act’s reporting requirements as an “intraperson transaction,” certain reorganizations involving affiliated corporations, limited partnerships or limited liability companies that do not have a common 50% investor may require HSR notification. A common investment manager, general partner or managing member will not cause separate legal entities to be under common HSR control in the absence of a 50% equity position in each of the entities. If the buyer and seller do not share a 50% investor, then a reorganization viewed by the parties as “internal,” (e.g., when a subsidiary of the seller partnership is “transferred” to the buyer partnership), may be a reportable event under the HSR Act if the thresholds are met and an exemption does not apply.
Likewise, certain reorganizations from one type of entity to another type (or reincorporation in another state) may trigger an HSR reporting requirement. Although both entities may have the same capital structure, if they do not share a 50% investor the conversion could trigger reporting requirements if any new assets are contributed to the new entity, or if an investor’s relative per cent holding in either entity increases.
3. Secondary Acquisitions
HSR reporting for acquisitions of control cover ownership of all entities that are 50% owned by the target (“primary transaction”). However, minority positions held by the target are not under common HSR control with the target, and their acquisition is subject to separate HSR Act analysis by the acquiring person. It may be the case that an HSR filing is required for the primary transaction and a separate HSR filing is required for the secondary transaction. The HSR Act’s reporting and waiting period requirements must be observed for both filings before the primary transaction may be consummated.
In addition, although a secondary acquisition may be exempt from the reporting requirements of the HSR Act, it is not exempt from the HSR Act merely because the primary acquisition is exempt. Thus, when the primary transaction is valued in excess of the size of transaction threshold, but still may not be reportable under the HSR Act due to an exemption or valuation below the “size of parties” test, an acquiring party should still inquire as to any minority positions held by the primary target that could independently trigger an HSR Act reporting requirement.
Action To Take In the Event Of A Missed HSR Filing
If an acquiring party finds itself in the position of possibly having missed an HSR reporting requirement related to a merger or in any of the non-merger situations discussed above, prompt voluntary filings are key to avoiding or minimizing potential penalties, especially with respect to a first, inadvertent violation. The FTC will consider whether the violation was the result of understandable or simple negligence, or whether the parties realized any benefit that they would not have realized had the filing been made and the waiting period observed. Depending on the circumstances, the FTC may decide to pursue civil penalties of up to $16,000 for every day that the parties have been in violation, generally beginning with the day the transaction was consummated and ending on the day the waiting period with respect to the post-consummation HSR filing expired.
If a missed filing is identified, the party(ies) in violation must send an explanatory letter to the antitrust agencies that explains the facts and includes a detailed description of the steps that have been taken to ensure future compliance. The FTC advises that these steps should include some or all of the following: (i) implementation of training programs by antitrust counsel; (ii) monitoring of company dealings for HSR purposes by the Chief Financial Officer and the General Counsel; (iii) establishment of an HSR review committee; and (iv) inclusion of HSR provisions on acquisition checklists.
HSR Act Compliance Tips for Non-merger Acquisitions
To increase the likelihood that non-merger acquisitions subject to the HSR Act are identified in a timely manner, the steps outlined above should be implemented by individuals and entities involved in acquisitions of voting securities that, individually or aggregated over time, will be valued at or near the HSR Act’s reportability thresholds. The FTC expects parties to be aware of their HSR reporting obligations, even when they are not acquiring control of a competitor. As outlined in the recent Complain against a CEO, the HSR Act may impose reporting requirements outside of the merger context, including executive compensation grants, internal reorganizations and secondary acquisitions. When an HSR Act filing is indicated, care must be taken to allow sufficient lead time for compliance with not just the reporting requirements of the HSR Act, but all related waiting periods as well.
 U.S. v. Brian L. Roberts (Case No. 1:11-cv-02240).
 The HSR Act’s waiting period is usually 30 calendar days (15 calendar days in limited situations). The HSR Act allows for early termination of the waiting period in the discretion of the antitrust agencies.
 Effective as of February 27, 2012, and adjusted annually.
 The size of parties test generally requires one party with assets or sales of $13.6 million and another with assets or sales of $136.4 million (effective as of February 27, 2012, and adjusted annually).
 The “investment intent” exemption covers certain “passive” investments up to 10% of the outstanding voting securities of an issuer, regardless of value. Investors may “lose” this exemption (and be subject to the HSR Act’s reporting requirements) if they acquire over 10% of the outstanding voting securities of the issuer or if they change their original intent and thereafter acquire additional shares.
 To be under separate control for HSR purposes, corporations must have different persons with a right to designate 50% or more of their respective directors, and different 50% investors.