United States: Flurry Of Antitrust Merger Enforcement Actions As Obama Presidency Comes To A Close

The Federal Trade Commission (FTC) and Antitrust Division of the Department of Justice (DOJ) announced several antitrust enforcement actions in advance of the inauguration of President Trump, including settlements for failures to file under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act), a challenge to an unreportable deal and a settlement of a "gun-jumping" claim under the HSR Act. These cases illustrate the importance of compliance with the often complex reporting, waiting period and substantive aspects of antitrust laws in connection with acquisitions of various types, whether or not those acquisitions require premerger reporting. Failure to comply can result in significant financial penalties.

Two HSR "Failure to File" Settlements. On January 17, 2017, the FTC announced two settlements for failures to submit HSR filings and observe the statutory waiting period under the HSR Act prior to consummating acquisitions that met the relevant thresholds. The HSR Act requires notification of certain acquisitions of voting securities, assets and non-corporate interests if the value held as result of the transaction is in excess of certain notification thresholds and size of person thresholds (if applicable), and the transaction is not otherwise exempt. Parties to reportable transactions must observe the statutory waiting period prior to closing. If they fail to file, or otherwise do not observe the waiting period under the HSR Act, the parties may be liable for civil penalties of up to $40,654 per day (which was recently increased from $40,000, effective February 24, 2017).

In the first settlement, Ahmet Okumus agreed to pay $180,000 in connection with failing to notify for his purchases of voting securities of Web.com Group, Inc. (Web.com). According to the complaint, in September 2014, Okumus acquired voting securities of Web.com and as a result, held approximately 13.5 percent of the voting securities of Web.com. Okumus continued to acquire voting securities of Web.com through November 2014. Okumus did not file an HSR notification prior to making these acquisitions, relying on the "investment only" exemption, which exempts acquisitions resulting in holdings of 10 percent or less of the issued and outstanding voting securities if the shares are held solely for the purpose of investment (see 15 U.S.C. § 18a(c)(9) and 16 C.F.R. § 802.9). However, because Okumus held in excess of 10 percent, this exemption was not applicable. In late November of 2014, Okumus made a corrective filing that allowed him to acquire additional Web.com voting securities for approximately five years, provided that the value of the voting securities he held as a result of any acquisition did not exceed the $100 million (as adjusted) notification threshold. In a letter that accompanied his corrective filing, he indicated that the failure to file was inadvertent. The FTC did not seek civil penalties in that instance.

In June of 2016, Okumus began acquiring additional voting securities of Web.com. Later that month he acquired 236,589 voting securities of Web.com, and as a result of that acquisition, Okumus held voting securities valued (per the HSR rules) in excess of the $100 million (as adjusted) threshold, which at the time was $156.3 million. He made this acquisition without first filing and observing the HSR waiting period. In July of 2016, Okumus sold 33,200 shares, which resulted in him holding less than $156.3 million in Web.com voting securities, so technically, Okumus was only in violation of the HSR Act between June 27, 2016 (when he made the acquisition that put him over the $100 million (as adjusted) threshold) and July 14, 2016 (when his holdings in Web.com fell below the $100 million (as adjusted) threshold). In connection with this second corrective filing, Okumus agreed to pay a civil penalty of $180,000. In its press release, the FTC noted that it determined to seek penalties because "this is Okumus's second HSR violation in two years regarding Web.com." While technically the maximum civil penalty could have approached $700,000, the FTC noted that the penalty was adjusted downward from the maximum because the violation was inadvertent and promptly corrected, and Okumus was willing to resolve the matter quickly through a consent decree.

In the second settlement, Mitchell P. Rales agreed to pay $720,000 in connection with his wife's acquisition of voting securities of Colfax Corporation (Colfax) and his acquisition of voting securities of Danaher Corporation (Danaher). Prior to his wife's acquisition of Colfax shares, Rales held 57.9 percent of the voting securities of Colfax, and because he held over 50 percent of the voting securities of Colfax, any additional acquisitions would have been exempt under the HSR rules. However, after an initial public offering of Colfax voting securities, Rales' holdings decreased to approximately 20.8 percent, and thus additional acquisitions were not exempt under the HSR rules. In October 2011, Rales' wife acquired 25,000 voting securities of Colfax on the open market. Under the HSR rules, holdings of spouses and minor children are aggregated, so the shares acquired by Rales' wife were attributed to him. As a result of this acquisition, Rales held voting securities of Colfax valued in excess of the then applicable $100 million (as adjusted) threshold. Rales did not file or observe the waiting period prior to his wife making this acquisition.

Separately, in January of 2008, Rales acquired 6,000 shares of Danaher on the open market, and as a result of this acquisition, held voting securities of Danaher valued at approximately $2.3 billion, which is well in excess of the $500 million (as adjusted) notification threshold at the time. Rales did not file or observe the waiting period under the HSR Act. Rales made corrective filings in February 2016 for both this acquisition and his wife's acquisition of Colfax voting securities.

Prior to these corrective filings, Rales had paid a civil penalty of $850,000 in 1991, in connection with an acquisition for which Rales failed to file, that the FTC alleged was not inadvertent, but instead was structured in such a way as to avoid filing. In its press release, the FTC stated that it determined to seek penalties because "Rales had paid civil penalties to settle an earlier HSR enforcement action brought by the Department of Justice in 1991."

These two settlements include some important reminders for acquiring parties, especially natural persons.

  • First, the "size of transaction" for HSR purposes is not simply the value of what is being acquired, but also includes the current value (as defined by the HSR rules) of what is already held of the acquired person.
  • Second, because acquirers need to consider the value of what they currently hold, valuation can creep up over time and a subsequent acquisition—no matter how small—may trip an HSR notification threshold. In other words, valuation must be considered with every acquisition from the same acquired person.
  • Third, natural persons must aggregate holdings of spouses and minor children when considering possible HSR filing requirements.

Disgorgement of Profits for Non-Reportable Transaction. On January 18, 2017, the FTC announced Mallinckrodt ARD Inc. (formerly known as Questcor Pharmaceuticals, Inc.) (Questcor) and its parent company agreed to pay $100 million to settle claims it monopolized a market for therapeutic adrenocorticotropic hormone (ACTH) drugs in the United States. The FTC alleged that Questcor held a monopoly in ACTH drugs when it acquired the rights to develop a competing drug, Synacthen Depot, from Novartis AG in June of 2013. The acquisition of these intellectual property rights was not subject to the reporting requirements of the HSR Act at the time. However, changes to the HSR rules applicable to pharmaceutical licenses in November 2013 likely would have resulted in a reportable transaction.

The FTC claimed that Questcor disrupted the bidding process for Synacthen and outbid other bidders so that it could keep Synacthen from becoming a competitor to Questcor's product. Because of Questcor's actions, the FTC alleged that a competitor was thwarted from challenging Questcor's market position with a lower priced product. Meanwhile, Questcor has taken significant price increases on eight occasions since 2011. The FTC alleged these actions were in violation of Section 5 of the Federal Trade Commission Act as an unfair method of competition and Section 2 of the Sherman Act as monopolization. The Attorneys General of Alaska, Maryland, New York, Texas and Washington joined the FTC's complaint.

Under the settlement, Questcor will pay $100 million in disgorgement and grant a license to develop Synacthen Depot to a licensee approved by the FTC. The states that joined the FTC's complaint will receive $10 million of the $100 million payment and an additional $2 million as payment for attorney's fees and costs. This settlement serves as an important reminder that non-reportable transactions remain subject to antitrust review and potential challenge at both the federal and state levels.

"Gun-Jumping" under the HSR Act. Also on January 18, 2017, the DOJ announced a settlement with Duke Energy Corporation (Duke) for violating the HSR Act by taking operational control of a target prior to observing the HSR waiting period. In August 2014, Duke agreed to purchase an electrical generating plant located in Florida. As part of the purchase agreement, Duke also entered into a "tolling agreement" where Duke would immediately—and prior to closing—began exercising control over the plant's output and retaining the day-to-day profits and losses from its business. The DOJ's complaint stated that Duke assumed control of purchasing all the fuel for the plant, arranging for delivery of that fuel and arranging for transmission of the energy generated by the plant. The DOJ claimed that Duke bore the benefit (or risk) of the profit (or loss) generated by the plant as well as the risk of changes in the market price for fuel and the market price for energy.

As stated in the 1978 Statement of Basis and Purpose issued with the final rules implementing the HSR Act, "the existence of beneficial ownership is to be determined in the context of particular cases with reference to the person or persons that enjoy the indicia of beneficial ownership, which include the right to obtain the benefit of any increase in value or dividends, the risk of loss of value, the right to vote the stock or to determine who may vote the stock, the investment discretion (including the power to dispose of the stock." (43 Fed. Reg. 33450, 33458.) Application of these indicia of beneficial ownership depends on the totality of the circumstances; no one factor or set of factors is necessarily dispositive. In any event, in transactions that meet the HSR Act thresholds and are not otherwise exempt, the HSR Act prohibits an acquiring person from taking beneficial ownership of the target prior to the expiration or termination of the statutory waiting period. The DOJ alleged that Duke's retention of the profit and loss of the electrical generating plant's business as well as the benefit (or risk) of changes in market prices for fuel and energy were indicative of its beneficial ownership of Duke.

The parties did not submit their respective HSR notification and report forms for Duke's acquisition of the plant until months after entering into the tolling agreement, which the DOJ alleges gave Duke beneficial ownership of the plant. Accordingly, the DOJ alleged that Duke was in violation from October 1, 2014, when the tolling agreement became effective, until February 27, 2015, when the HSR waiting period expired. To settle the DOJ's complaint, Duke agreed to pay a civil penalty of $600,000 for violation of the HSR Act. In a statement, Duke noted that it "admits no wrongdoing or liability as part of the settlement," but agreed to the civil penalty "to settle the case and avoid the costs and uncertainties of continued litigation."

Summary. These various settlements illustrate several important reminders for acquiring or merging parties. First, the notification requirements of HSR Act can apply in unexpected circumstances. Acquiring parties—whether individual investors, executives that receive stock as compensation, spouses or companies—should give careful consideration as to whether the HSR Act may apply to even the most seemingly mundane or ordinary acquisitions. Second, even if a transaction is not subject to the reporting requirements of the HSR Act, it may still be investigated and ultimately challenged—possibly resulting in an effective unwinding of the transaction and disgorgement of profits. Careful analysis and advance planning can help parties anticipate and manage the potential risk of a post-closing challenge. Third, obligations under the antitrust laws do not end with the execution of a transaction agreement. Parties must continue to observe obligations under the antitrust laws prior to closing even after they have executed a transaction agreement. This applies to the pre-closing activity of merging competitors, as well as complying with the HSR Act by not taking beneficial ownership prior to the expiration or termination of the HSR waiting period (regardless of the competitive overlap between the parties). These enforcement actions illustrate the potential (and possibly unanticipated) applicability of antitrust laws to a variety of acquisitions and at different stages of a transaction's life cycle.

Flurry Of Antitrust Merger Enforcement Actions As Obama Presidency Comes To A Close

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.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
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.

Disclaimer

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.

Registration

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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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.