A senior executive of a public company has agreed to pay $609,810 in civil penalties for acquiring additional voting securities in the company without first making a Hart-Scott-Rodino Act filing and observing the statutory waiting period.^[1]

The penalties highlight a filing requirement under the HSR Act that has led to fines from time to time against executives of public companies for inadvertent behavior.

Under the HSR Act, generally companies and individuals that are of sufficient size must file notifications with the Federal Trade Commission and the Antitrust Division of the Department of Justice reporting acquisitions that cause the value of their voting securities in a company to increase above certain dollar value thresholds and then must observe a post-filing statutory waiting period before completing any such transaction.

When executives or directors receive a portion of their compensation in the form of voting securities in the company to which they provide services, these stock awards may be reportable events. For example, before receiving restricted share awards (RSAs) that entitle the holder to vote the shares, the recipient may have to make an HSR filing and observe the statutory waiting period.  Generally, acquisitions of restricted stock units (RSUs) do not require this, because RSUs commonly do not carry the right to vote the underlying shares; however, the recipient may have to file and observe the waiting period before the receipt of voting shares in settlement of RSUs.

The executive already held voting shares in the company for which he had made an HSR filing but, according to the FTC, his acquisition of additional shares in the company was not reported when some of his RSUs settled into shares and brought his holdings over a higher filing threshold. Although a corrective filing was later made, the FTC noted that the executive was in continuous violation of the HSR Act from September 11 through December 26, 2017—the period between his acquisition of the additional shares and the expiry of the waiting period on the corrective filing. The FTC referred the complaint to the DOJ, which in turn filed it in a federal district court in D.C., together with the proposed settlement, on December 6, 2018. 

While the agencies generally do not fine “first offenders,” the DOJ’s complaint alleges that this was not the first time that the notification and waiting period requirements of the HSR Act were not observed by the executive; he previously made a corrective filing in February 2012 for a March 2010 acquisition of voting shares in a related company. 

Although the potential penalty for an HSR violation is up to $41,484 per day, the government adjusted the penalty downward from the maximum because it concluded the violation was inadvertent, and the executive promptly self-reported and was willing to enter into a consent decree.

Takeaways

This action is a reminder that:

• The HSR Act can apply to executives and directors receiving shares in the company to which they provide services. The so-called “passive investment” exemption does not apply to such stock acquisitions, because board members and officers cannot be considered “passive” under the HSR rules; to be passive one must not have the intent to influence the basic business decisions or participate in the management of the company.
• It is important to consider whether an HSR notification may be required before voting stock compensation is acquired. Once an HSR notification is submitted, there is a 30-day waiting period that the acquirer must observe before taking beneficial ownership of the stock. While the waiting period may be terminated early by the FTC and DOJ, there is no guarantee of early termination. HSR should be considered early enough to allow time for both the preparation of the notification filing and the expiry of the waiting period.
• Even if a notification has previously been filed, it is necessary to consider whether a higher HSR threshold may be crossed before continuing to acquire or receive additional shares. Currently, the initial threshold is $84.4 million, but there are additional thresholds at $168.8 million and at $843.9 million. (These thresholds are adjusted annually.) Under the HSR rules, acquisitions are cumulative. Once a filing has been made and the waiting period has expired or been terminated, additional acquisitions may be made up to the next threshold for five years (assuming the initial threshold is crossed within a year). But if an acquisition of additional shares crosses a higher threshold, it will trigger an additional filing.