United States: Antitrust Agencies Penalize Activist Investor For HSR Violations

Last Updated: October 1 2012
Article by Barry A. Nigro, Jr.

Biglari Holdings Inc. has agreed to pay $850,000 in civil penalties to settle charges that it violated the premerger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the -HSR Act – or -Act –) when it acquired voting stock of Cracker Barrel Old Country Store, Inc. in 2011. Absent an applicable exemption, the HSR Act generally applies to acquisitions of voting stock positions or assets valued in excess of $68.2 million (the current size-of-transaction threshold), and requires parties to submit notification and report forms to the antitrust authorities and observe a pre-closing waiting period. Violations of the HSR Act are subject to a civil penalty of $16,000 per day of violation.

This case presents a rare challenge the first in eight years by the Department of Justice (-DOJ –) over an investor's improper reliance on a commonly used exemption to the HSR Act, the -investment only – exemption. The Biglari case confirms the agencies' commitment to aggressively challenge violations of the Act, even for transactions that do not raise competitive concerns. It also highlights the role that the HSR Act can play in hostile transactions.

According to the complaint, activist investor Biglari began acquiring Cracker Barrel voting stock in June 2011, and continued to build its position up to an 8.7% stake through September 2011. Shortly after it began acquiring shares, Sardar Biglari, the Chairman and CEO of Biglari Holdings, initiated a series of communications by phone and in person with Cracker Barrel's CEO and CFO. Specifically, Biglari sought to propose ideas to improve the business and, most significantly, requested that he be immediately appointed to the board of directors, along with another Biglari executive.

Biglari did not submit an HSR filing prior to the stock purchases in June, July and most of August 2011, but did eventually file notification under the HSR Act on August 26, 2011. From the complaint, it can be inferred that Biglari had exceeded the HSR size-of-transaction threshold prior to its August filing, but had relied upon the investment-only exemption. This exemption applies to acquisitions of voting stock that are made -solely for the purpose of investment,– and where the acquiring person would hold 10% or less (or 15% or less for certain institutional investors) of the outstanding voting securities of the target. However, as reflected in this case and others, the Federal Trade Commission (-FTC –), which has jurisdiction to administer the HSR Act, construes this exemption very narrowly. Thus, voting securities are held -solely for the purpose of investment – if the acquiring person has no present or future intention of participating in the

formulation, determination, or direction of the issuer's basic business decisions, including participating in or influencing management." The Statement of Basis and Purpose (-SBP –) accompanying the Act states that conduct (or the intention to engage in future conduct) beyond -merely voting – the shares may be inconsistent with investment intent, including, but not limited to: (1) nominating a candidate for the board of directors of the issuer; (2) proposing corporate action requiring shareholder approval; (3) soliciting proxies; (4) having a controlling shareholder, director, officer or employee simultaneously serving as an officer or director of the issuer; (5) being a competitor of the issuer; or (6) doing any of the foregoing with respect to any entity directly or indirectly controlling the issuer.

The principal challenge in applying the exemption is that it turns on subjective intent. Indeed, a party may acquire voting stock in excess of the HSR reporting threshold and rely upon the investment-only exemption, but thereafter change its intent (e.g., decides to take an activist role) without triggering a filing obligation. However, any subsequent acquisition of voting stock after the change in intent would require an HSR filing. Because subjective intent is often difficult to prove and enforce, past enforcement actions involving this exemption have tended to be based on evidence that clearly contradicts passive investment intent.

Because there is relatively limited guidance and precedent, the passive exemption can be difficult to apply as there are gray areas, particularly with respect to communications between investors and management. Depending on the circumstances, communications - particularly with management of the company - suggesting or advocating a course of action or decision-making with respect to the business could be viewed as inconsistent with investment only intent. For example, the FTC previously has taken the position that an intention to make -strong suggestions – to management or the board is inconsistent with passive intent. However, having board observer rights in a private company and/or the right to receive certain financial and other non-public information from the company, likely would be viewed as passive. It can be difficult to distinguish between communications actually seeking to influence business decisions and investors making more passive-oriented statements about a company. It is possible that there would be some circumstances where it is appropriate for an investor to have limited communications with management where it is not seeking to control or influence management. Here, for example, the complaint alleges that Biglari approached Cracker Barrel management with ideas on how to improve customer traffic, but it also alleged that Biglari actively sought two board seats, which is plainly within the type of conduct that would render the exemption inapplicable.

The Biglari action is a compelling reminder that investors should exercise caution before crossing the HSR Act reporting threshold, or acquiring additional shares after the threshold has been crossed. In a statement issued along with the Biglari complaint and settlement, FTC Chairman Jon Leibowitz stated that, -[t]he passive investment exemption is a narrow one, and we will not hesitate to seek civil penalties against companies that try to abuse it. Accordingly, investors should consult counsel before relying upon the passive investment exemption or engaging in communications with a company's management. A potential investigation or enforcement action is more likely in hostile transactions such as this where the adverse target could report potential violations to the FTC as a means to delay or thwart the hostile investor. Indeed, Biglari now holds a 17.7% stake in Cracker Barrel, and according to public reports, continues to battle for two board seats and push the company to implement changes that would maximize shareholder value. It recently received HSR approval to acquire up to 49.99% of the company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.