Two More HSR Cases Reflect Agencies' Steadfast Compliance Expectation & Leniency for Good Faith
Recent enforcement activity by the Federal Trade Commission (FTC) related to the failure by parties to provide notification under the Hart-Scott-Rodino (HSR) Act serves as an important reminder that the FTC actively monitors for and does not hesitate to pursue violators even where there are no competitive concerns with the underlying transaction. Under the HSR Act, certain acquisitions valued over US$76.3 million (threshold revised annually) must be reported to the Department of Justice and the FTC. Given the stern statutory penalties that accrue daily for violations of the Act and the agencies' willingness to show leniency for good-faith compliance efforts as demonstrated in these recent cases, companies and individual investors would be well served to understand the Act's requirements and exemptions, as well as to hire experienced counsel when questions arise.
A Wave of Recent Cases
In a span of less than 45 days, the FTC brought three significant HSR enforcement actions-two relating to exemptions for investors with passive intent. In the first case, filed in August 2015 (for full details, see Arnold & Porter Advisory "FTC Brings Action for Improper Reliance on HSR Investment-Only Exemption and Provides Guidance on Passive Investment Intent" (Sept. 17, 2015)), the FTC found that a family of investment funds had improperly relied on a passive investor exemption in deciding not to file. However, because it was the funds' first violation of the HSR Act, the FTC settled with only conduct commitments, as opposed to civil monetary penalties.
The two most recent cases involved repeat violators of the HSR Act's reporting requirements and resulted in the parties settling by agreeing to pay significant fines. First, Leucadia National Corp. (Leucadia) agreed to pay US$240,000 after incorrectly relying on the institutional investor exemption. Then an individual investor agreed to pay US$656,000 after failing to make an HSR filing for a reportable acquisition made by his controlled company.
Interestingly, Leucadia was in violation of the HSR Act for more than three times as long as the individual investor and received less than half the fine. The difference appears to be that Leucadia sought the advice of HSR counsel at the time of the acquisition. As such, even though the FTC did not agree with Leucadia's assessment of the applicability of an exemption, the amount of the settlement suggests that the FTC credited Leucadia's good-faith HSR compliance efforts.
On September 22, 2015, the FTC settled allegations that Leucadia violated the HSR Act when its subsidiary, Jefferies, LLC (Jefferies), acquired voting securities through a conversion and Leucadia failed to file.1 Jefferies previously held shares of Knight Capital Group, Inc. (Knight). On July 1, 2013, Knight and GETCO Holding Co., LLC combined to form KCG Holdings, Inc. (KCG); as part of that transaction, Jefferies's shares of Knight were converted to shares of KCG. After consulting with HSR counsel, Leucadia determined that it did not need to file for the acquisition of KCG shares based on an exemption for acquisitions by passive institutional investors.
Section 802.64 of the HSR Rules exempts acquisitions (i) made directly by certain institutional investors (ii) in the ordinary course of business, where (iii) the institutional investor will hold less than 15% of the target issuer as a result of the transaction, and (iv) the voting securities will be held solely for the purposes of investment-i.e., the investor must have passive intent. The Rule defines several categories of institutional investors for purposes of the exemption, including broker-dealers. 2
The FTC took the position that although the prima facie elements for the 802.64 exemption may have been satisfied, an exception to the exemption applied because both Jefferies and KCG were broker-dealers. Section 802.64(c)(1) provides that the institutional investor exemption is not available where the target is an institutional investor of the same type as "any entity included within the acquiring person." As explained in the Statement of Basis and Purpose for the Rule, the exception exists because acquisitions of the same type of institutional investor "may indicate increasing concentration in an area of commerce related to the business of the type of institutional investor acquired."3
At the time of the acquisition, Leucadia, with the assistance of HSR counsel, determined that KCG was not a broker-dealer for purposes of the HSR Act. While there were no competitive issues raised with respect to Leucadia's acquisition of KCG shares, Leucadia later acknowledged a filing was required, made a corrective filing on September 19, 2014-more than 14 months after the acquisition-and settled with the FTC for a fine of US$240,000.
On October 6, 2015, the FTC settled allegations that an individual investor violated the HSR Act when he failed to file for an acquisition of TangoMe voting securities through a privately held company in August 2014.4 The investor was found to have previously violated the HSR Rules in 2010 when he failed to report a prior acquisition of voting securities. The FTC did not seek a civil penalty related to the prior acquisition, but as is typical, did instruct this investor to institute a compliance program, and according to the Complaint, the investor, in a letter, told the FTC that he and his company would consult with HSR counsel prior to future acquisitions of voting securities.
On August 6, 2014, the investor, through his company, acquired approximately US$228 million worth of TangoMe's voting securities. No filing was made at the time and it was not until December 17, 2014, just over four months later, that the investor made a corrective filing. Again, there were no allegations that the underlying transaction created substantive competition issues, but, as a result of the delayed filing, the investor settled with the FTC for a fine of US$656,000.
While Leucadia had previously violated the HSR Act for an inadvertent failure to file in 2007, the FTC appears to have taken a more lenient approach with it as a repeat corporate offender than it did with the individual investor who did not adhere to his prior commitment to the FTC. Relative to the maximum statutory fines that could have been sought by the FTC, Leucadia paid around 3%, while the individual investor paid 25%.5 The antitrust agencies historically have been more harsh on repeat offenders, but the current cases suggest that the FTC credits those who have undertaken good-faith efforts to comply with the HSR Act and is more likely to seek reduced penalties in such cases.
United States v. Leucadia National Corp., 15-cv-01547 (D.D.C. Sept. 22, 2015).
The definition of a "broker" or "dealer" for purposes of 802.64 comes from a cross-reference to the federal securities laws. Specifically, a broker is defined as "any person engaged in the business of effecting transactions in securities for the account of others," and a dealer is "any person engaged in the business of buying and selling securities (not including security-based swaps, other than security-based swaps with or for persons that are not eligible contract participants) for such person's own account through a broker or otherwise." 16 CFR 802.64(a)(8); 15 U.S.C. § 78c(a)(4) & (5).
43 Fed. Reg. 33450, 33503-04 (July 31, 1978).
United States v. Blavatnik, 15-cv-01631 (D.D.C. Oct. 6, 2015).