On May 21, 2007, the U.S. Department of Justice (DOJ) filed a complaint in U.S. District court to obtain civil penalties against James Dondero, a hedge fund director of Highland Capital Management (Highland), for violating premerger notification requirements of the Hart-Scott- Rodino (HSR) Notification Act, Section 7A of the Clayton Act, 15 U.S.C. § 18a, as amended.
Background
In August 2003, Highland acquired shares in Neighborcare, Inc., then known as Genesis Health Ventures, putting Highland’s holdings above the $50 million HSR premerger filing threshold. Highland did not file premerger documents with the FTC, and continued to acquire Neighborcare shares, eventually holding more than $100 million in Neighborcare stock by the end of March 2004. Only then did Highland discover it had to file under the HSR Act, and made a corrective filing in April 2004. In conjunction with that filing, Highland outlined steps it would take to ensure it would not violate the HSR premerger notification rules in the future.
On April 23, 2005, however, Highland reported another HSR-related violation. On February 28, 2005, Dondero exercised an option to acquire 10,000 shares of stock in Motient Corporation (Motient). Highland already had stock in Motient that had appreciated significantly, and Dondero now held over $90 million in Motient voting securities after exercising the option. However, Dondero did not report his exercise of the option to acquire the 10,000 shares, and he did not make the required HSR filing with the Commission until the corrective filing was made on April 23, 2005. The HSR Act waiting period for the February transaction expired on May 28, 2005. Thus, Dondero was in continuous violation of the HSR Act from February 28, 2005 through May 28, 2005.
The HSR Act and its Rules
The HSR Act requires certain acquiring persons and certain persons whose voting securities or assets are acquired to file notifications with the Federal Trade Commission and the Department of Justice (federal antitrust agencies), and to observe a waiting period before consummating certain acquisitions of voting securities or assets. This notification and waiting period is intended to give the federal antitrust agencies prior notice of, and information about, proposed transactions. It also provides the agencies an opportunity to investigate the transaction to determine whether the transaction might violate the antitrust laws. If an acquiring person meets the jurisdictional thresholds of the HSR Act, which are adjusted annually, the required notifications must be made.
Section 7(A)(g)(1) of he Clayton Act, 15 U.S.C. § 18(a)(g)(1), provides that any person, or any officer, director, or partner thereof, who fails to comply with any provision of the HSR Act is liable to the United States for a civil penalty for each day during which such person is in violation. The maximum amount of civil penalty is $11,000 per day.
Implications of the Ruling
When private individuals and businesses are engaged in mergers and acquisition activity, they are strongly advised to determine with counsel whether a potential transaction may require premerger notification. The federal antitrust agencies take these filing obligations seriously and are willing to fine those who violate premerger notification obligations. According to Jeffrey Schmidt, Director of the FTC’s Bureau of Competition, "Our goal is to make the process as open and transparent as possible to ensure that all appropriate filings are made in a timely manner. But we will not hesitate to bring enforcement actions when violations occur."
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