United States: US Antitrust Agencies Reject Parties' Corporate Deal Structure To Determine Alleged HSR Act Violations

Last Updated: June 28 2019
Article by Meytal McCoy

On June 10, 2019, Toshiba Corporation ("Toshiba") and Canon Inc. ("Canon") agreed to settle a complaint filed by the Antitrust Division of the US Department of Justice ("DOJ") at the request of the Federal Trade Commission ("FTC").  The complaint alleges that the companies intentionally engaged in a scheme to evade US pre-merger notification laws in violation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a (the "HSR Act"). Pursuant to the terms of the settlement, Toshiba and Canon each must pay $2.5 million in civil penalties for a total of $5 million.  Additionally, for a period of three years after the fine is paid, each corporation is required to implement an HSR compliance program, which includes hiring a compliance officer and ensuring that relevant employees receive at least two hours of annual HSR training by a specialist in US antitrust law. 

The complaint alleges that Toshiba and Canon devised a plan to enable Canon to acquire Toshiba's subsidiary, Toshiba Medical Systems Corporation ("TMSC"), which would allow the financially struggling Toshiba to recognize the proceeds from the sale by the close of its fiscal year.  Although Toshiba and Canon actively were negotiating a deal for TMSC in February 2016, the complaint asserts that the parties realized that they did not have enough time to complete their negotiations and abide by the 30-day waiting period under the HSR Act if they were to meet Toshiba's March 31, 2016 fiscal year end deadline. 

Thus, the complaint alleges that the parties engaged in a series of legal somersaults to sign a deal that allowed Toshiba to realize income before March 31, transfer control of TMSC to Canon, and avoid or delay an HSR Act filing until after March 31.  Specifically, (1) the parties engaged a law firm to create a special purpose vehicle called MS Holding Corporation ("MS Holding"); (2) Toshiba re-arranged the ownership of TMSC to create new voting shares, a single non-voting share and options convertible to ordinary shares; (3) Toshiba sold TMSC's voting shares to MS Holding for approximately $900; (4) Toshiba sold TMSC's non-voting shares and convertible options to Canon for $6.1 billion; and (5) Canon exercised its options later, only after an HSR Act filing was made and a waiting period was observed. 

As devised, in the absence of being an avoidance device (discussed below), the TMSC sale to MS Holding was not reportable under the HSR Act.  The transfer of the TMSC voting shares to MS Holding was not reportable because, at only $900, the transaction value was below the HSR reporting threshold.  The sale of the non-voting shares and options to Canon also was not reportable because (i) only acquisitions of voting shares are reportable under the HSR Act, and (ii) acquisitions of options are exempt from reporting (although the exercise of the option may be reportable). (See 16 C.F.R. §§ 801.1(f)(1)(i), 802.31.)  

The lynchpin of the allegations is that MS Holding allegedly never had beneficial ownership over the TMSC shares under the HSR rules.  The complaint sets forth that MS Holding had no risk of gain or loss over the TMSC shares because Canon agreed to pay MS Holding a pre-determined amount when the options were exercised, regardless of TMSC's financial performance.  The complaint asserts that Canon was intimately involved in the creation of MS Holding, which existed merely to hold the TMSC shares until Canon had time to make an HSR Act filing.  The complaint proceeds that MS Holding was never an independent entity and that it never made any effort to be involved with the day-to-day business of TMSC.  

Because MS Holding never "held" the TMSC shares under the HSR Act and, in fact, the shares were "held" by Canon, the complaint charged that the transaction was an avoidance device prohibited under 16 C.F.R. § 801.90, which allows the antitrust authorities to disregard the parties' transaction structure and enforce HSR Act rules if it is determined that such transaction was entered into to avoid an HSR Act obligation.  Thus, the complaint alleges that while Canon and MS Holding submitted an HSR Act filing with respect to the exercise of the TMSC options, an HSR Act violation occurred because Canon and Toshiba did not make the required filing relating to Canon's acquisition of the TMSC voting shares.

Key Takeaways:

This action is highly relevant to entities determining how to structure transactions and provides several important lessons regarding how to avoid HSR Act violations:

  • The heart of the alleged violation was that the transaction was a vehicle to avoid an HSR Act filing.  While typically HSR Act violations are borne by the buyer, here both parties are subject to the consent decree.  Parties should be mindful that in these cases where there is a possibility that a jointly negotiated transaction structure could be questioned under the avoidance device prohibition, both the buyer and seller may be on the hook if the agencies determine there is a violation. 
  • The fine for HSR Act violations currently stands at more than $42,000 per day for every day in violation.  While the court could have assessed each party a penalty of more than $6.3 million, the parties settled with the DOJ for $2.5 million.  The parties also agreed to implement an HSR Act compliance program that would be monitored by the DOJ.  If faced with a potential violation, a party should consider whether settlement is a more palatable option than litigation, particularly if there is a possibility to obtain a substantial reduction of the potential civil penalty. 
  • The FTC (which referred the case to the DOJ) took a close look at which party actually held the economic benefits of the shares of TMSC, not just at how the voting/non-voting shares were transferred.  Looking behind the curtain of the share transfer at the underlying economic rights is telling and reflects that the agencies may not take companies' descriptions of their transactions at face value, particularly where the agencies have a reason to believe that the parties have engaged in conduct to avoid a reporting obligation.
  • Both Canon and Toshiba are sophisticated global companies, well-versed in multi-jurisdictional merger control regulations.  The settlement requires that the parties' compliance program include annual training for certain employees to be conducted by a lawyer with expertise in US antitrust law.  This settlement is a reminder that companies of all sizes should conduct HSR Act training for their executives to avoid or mitigate the risk of a violation.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2019. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions