United States: HSR Civil Penalty Skyrockets

Two recent events make it clear that the cost of violating HSR is going up...a lot.

HSR refers to the Hart-Scott-Rodino Antitrust Improvements Act of 1976.

Under HSR, parties to mergers and other acquisitions (equity or assets) meeting certain jurisdictional tests and not otherwise exempted must file notification with the Federal Trade Commission (FTC) and the Department of Justice (DOJ), and then wait a specified period of time (normally 30 calendar days), before closing on that transaction. Those Federal antitrust agencies use that waiting period to determine whether to challenge the pending transaction on substantive antitrust grounds.

Although the agencies often forgo monetary civil penalties in the case of a first-time, inadvertent HSR violation, the agencies very well may seek a stiff penalty in the case of a subsequent violation.

ValueAct Civil Penalty Smashes Previous Record

The agencies' determination is evident by DOJ's announcement this week that certain investment funds sponsored by ValueAct Capital (an investment firm headquartered in San Francisco and described by DOJ as being "well known for actively involving itself in the management of the companies in which it invests") have agreed to pay an aggregate $11 million civil penalty for violating HSR in connection with their acquisition of stock of Halliburton Co. and Baker Hughes Incorporated after the November 2014 announcement by those two companies of their intention to merge. That merger, between what DOJ described as head-to-head competitors, raised potentially significant substantive antitrust concerns (and ultimately was abandoned soon after being challenged by DOJ).

Through those acquisitions, according to DOJ, ValueAct became one of the largest stockholders of both companies. In doing so, ValueAct had told its own investors that its holding of a significant stake in the two companies would put ValueAct in a position to be a strong advocate for the deal to close and thus increase the probability of that happening, and also would enable ValueAct to help develop new terms should the deal encounter regulatory concerns, according to DOJ. DOJ further alleged that ValueAct also recommended to each company alternative transaction strategies in case the full-firm merger could not be achieved.

Despite that involvement by ValueAct, ValueAct elected not to comply with HSR (HSR's jurisdictional tests were satisfied), taking the position it was entitled to rely on the HSR exemption for making passive investments. That exemption (which DOJ describes as a narrow one) is available for acquisitions of stock (up to certain percentage limits) as long as the investor "has no intention of participating in the formulation, determination or direction of the basic business decisions of the issuer." In light of ValueAct's announced intentions and actual conduct, DOJ concluded that ValueAct did not qualify for HSR's passive investment exemption.

Nor was this ValueAct's first trip to the HSR penalty box. ValueAct was assessed a $1.1 million HSR civil penalty in 2007 (for violations in 2005); after the Government opted not to seek civil penalties for even earlier inadvertent violations by ValueAct (in 2001 and 2002). Earlier this year (April 2016), DOJ announced that, "[g]iven the seriousness of [this new] violation and ValueAct's prior HSR violations, [the Government] will be seeking significant civil penalties...."

Virtually all HSR civil penalties are assessed via consent decrees – after the Government and the offending party have negotiated a settlement amount. Here, though, it appeared that was not going to be the case; and DOJ's April complaint sought up to the maximum possible civil penalty (more than $19 million).

This week, DOJ announced that the parties in fact had settled, on the $11 million civil penalty. That amount is nearly double the previous record for an HSR civil penalty. According to published reports, ValueAct changed course and opted to settle with the Government in light of the second recent development regarding the HSR civil penalty – discussed below – which could have increased ValueAct's potential maximum exposure from $19 million to nearly $50 million.

Maximum HSR Civil Penalty Increases 150%

When first introduced in 1976, HSR allowed for a civil penalty to be assessed, in an amount not exceeding $10,000 per day, for each day the offending party was in violation of HSR. That maximum civil penalty was not indexed for inflation. A minor adjustment (to $11,000 per day) was made in 1996; and there was a further adjustment (to $16,000 per day) in 2009. Two weeks ago, the FTC (explaining it was acting in accordance with a Federal civil penalty inflation adjustment law enacted last year) increased a variety of Federal civil penalties substantially. In the case of HSR, the maximum civil penalty jumps from $16,000 per day to $40,000 per day; and the adjusted amount henceforth will be subject to inflation adjustments annually.

Of particular significance (particularly to ValueAct -- see above) was the FTC's clarification that, in accordance with the law enacted last year, this increased maximum civil penalty, once in effect (August 1, 2016), would apply for all HSR civil penalties assessed after that date, including civil penalties assessed after that date for HSR violations that had preceded that date. In other words, the increase in the maximum civil penalty per day would apply retroactively. ValueAct determined its best course would be to accept its HSR civil penalty now, in order to assure it was assessed before that inflation adjustment took effect.

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.

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