Failure to Comply with the HSR Act Just Got More Expensive


Failure to Comply with the HSR Act Just Got More Expensive

Alert |
William M. Hannay

Last November, the president signed into law an amendment to the Federal Civil Penalties Inflation Adjustment Act (Sec. 701 of Public Law 114-74). The amendment requires federal agencies to adjust the maximum civil penalties for violations of the laws they enforce no later than July 1, 2016.

On June 29, 2016, the Federal Trade Commission revised its Rule 1.98 to reflect the new higher levels for maximum civil penalties. The new maximums will apply to civil penalties assessed by the FTC after August 1, 2016. They include civil penalties for violations that occurred prior to the effective date. (Going forward, the maximums will be adjusted for inflation each January.)

Of particular significance to corporations that acquire, sell, or merge with other businesses, the penalties for violating the premerger reporting and waiting requirements under the Hart-Scott-Rodino Act have been increased from $16,000 per day to $40,000 per day, an increase of 150%.

As most businesspersons know, under the HSR Act, the parties to mergers and acquisitions that meet the dollar thresholds of the Act and are not otherwise exempt must file a premerger notification form, pay the appropriate fees, and wait 30 days (or possibly more) prior to closing the transaction. Failure to file the required notification or to observe the mandatory waiting period will subject the parties to civil penalties, which are now significantly higher.

Note that for continuing violations of the HSR Act, each day is a separate violation. As a result, the maximum civil penalty may be multiplied by the number of days for each violation of the applicable statute or order. (For example, a company or individual that is required to report but fails to do so for one year would be facing a fine of up to $14.6 million under the new levels.)

But statutory maximums are not automatically imposed. Before levying a civil fine, the Commission considers various factors in determining whether the maximum should be mitigated. Those factors include:

  1. Harm to the public
  2. Benefit to the violator
  3. Good or bad faith of the violator
  4. The violator's ability to pay
  5. Deterrence of future violations by this violator and others
  6. Vindication of the FTC's authority

Why does it happen that a company or individual fails to make the required HSR filing? The FTC reports that it frequently sees two specific scenarios:

  1. Company executives who acquire company voting shares through exercising options or warrants may fail to aggregate the value of such shares with the value of the company shares they already hold and therefore do not realize that they have satisfied the HSR size of transaction threshold test.
  2. Sometimes companies or individuals who have qualified for the “investment-only” exemption in the past may erroneously continue to rely on that exemption even though they have become active investors in the company or their holdings in the company have increased above 10%.

Other recurring scenarios can also trip up acquirers. For example, companies may not realize that patent and other IP licenses are in certain circumstances treated as the acquisition of an asset for HSR Act purposes.