November 9, 2016

Missed HSR Filings by a Director Spanning a Decade Result in US$720,000 Settlement


On October 28, 2016, Fayez Sarofim agreed to pay US$720,000 in civil penalties to resolve allegations by the Federal Trade Commission (FTC) that he violated the Hart-Scott-Rodino Act (HSR Act) for failing to file notification for acquiring stock of companies where he served on the board of directors.1 Although it was the first time the FTC took action against Mr. Sarofim, his violations spanned over a decade and were the result of improper reliance on the "investment only exemption" on four different occasions.

With no statute of limitations and fines assessed on a daily basis (currently at US$40,000 per day), corporate compliance officers, as well as high-net worth individuals, investment managers, board members, and executives should consider re-evaluating and expanding their procedures for ensuring HSR Act compliance to include typical stock purchases, as well as stock benefit acquisitions, such as the exercise of options, the vesting of restricted stock, or the conversion of warrants.


Under the HSR Act, companies and individuals must provide notification of transactions meeting certain jurisdictional thresholds and observe a statutory waiting period to allow the antitrust authorities to review the transaction prior to closing. However, certain transactions are exempt from notification under the HSR Act. One exemption known as the "investment only exemption" exempts acquisitions of up to ten percent of voting securities of an issuer if the acquirer is passive and the acquirer is not involved, or does not plan to be involved, in influencing the basic business decisions or management of the target (i.e., made solely for investment purposes).2 Board representation has long been viewed as inconsistent with the exemption's passive intent requirement.3

Fayez Sarofim was an early investor in Kinder Morgan, Inc. His initial acquisitions of Kinder Morgan shares fell under the investment only exemption, and thus no HSR Act filing was required. However, in October 1999, Mr. Sarofim became a Kinder Morgan board member. As a result, according to the FTC's Complaint, the investment only exemption would not apply to any subsequent acquisition of Kinder Morgan stock by Mr. Sarofim. Mr. Sarofim made open market acquisitions of Kinder Morgan stock in January 2001, received stock as compensation for serving on Kinder Morgan's board in July 2006, and again made open market purchases of Kinder Morgan in October 2012. The FTC alleged that each of these three acquisitions created separate filing obligations as each purchase, when aggregated with other Kinder Morgan holdings, exceeded a relevant threshold. According to the Complaint, the violations for the failures to file notification of the January 2001 and July 2006 acquisitions continued until May 2007 when Mr. Sarofim no longer held Kinder Morgan securities. His October 2012 failure to file violation continued until December 2014 when the waiting period from his corrective filing expired.

In addition, in May 2007, Mr. Sarofim failed to file notification for his acquisition of shares of Unitrin Inc., a predecessor company to Kemper Corporation, while he served on Unitrin's board (and later Kemper's board). The FTC found his violation continued until December 2014 when the waiting period from a corrective filing expired. 

The FTC stated that in deciding on the amount of the US$720,000 civil penalty, it wanted to "deter the Defendant and others" from future HSR Act violations and adjusted the penalty downward from the maximum "because the violations were inadvertent, the Defendant promptly self-reported, and the Defendant is willing to resolve the matter by consent decree and avoid prolonged investigation and litigation."4


HSR Act filing obligations extend beyond open market purchases of a company's stock. Acquisitions of stock in other circumstances, such as the exercise of options, the vesting of restricted stock, the conversion of warrants, and the receipt of stock as compensation may trigger a filing. And, while companies often have HSR Act compliance programs in place to evaluate open market purchases, firms should ensure that appropriate compliance procedures are in place to capture these other potential triggering events—and well in advance of any triggering event.

Moreover, companies should consider extending compliance procedures to their board of directors and executives given that individuals face exposure for their personal acquisitions under the HSR Act and failure to file could lead to negative publicity for the company.

In developing such compliance procedures, it is important to remember a few key points:

  • Holdings Are Aggregated in Evaluating Whether HSR Thresholds Are Met. Even if each individual acquisition is below the current minimum reporting threshold (US$78.2 for 2016, adjusted annually), one must aggregate the present acquisition with any current holdings to determine if a threshold is met.
  • Filings Are Required for Each Higher Threshold Crossed. Filing requirements occur at each threshold, not just the minimum threshold, and currently there are both dollar and percentage thresholds ranging from US$78.2 million to 50% (again, with dollar thresholds adjusted annually).
  • No Exception for Automatic Grants or Other Stock Benefit Acquisitions. Filings must be made and waiting periods observed before any actual acquisition—including in the case of automatic stock grants, conversion of warrants, etc. As a result, it is important for a compliance program to recognize the likely timing for such events so that filings can be planned accordingly.
  1. Competitive Impact Statement, United States v. Sarofim, 16-cv-02156 (D.D.C. Oct. 27, 2016).

  2. See 16 C.F.R. § 802.9.

  3. Statement of Basis and Purpose, 43 Fed. Reg. 33450 at 33465 (July 31, 1978).

  4. Competitive Impact Statement, supra note1, at 5.


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