Client Alert

Another HSR Pre-Merger Violation: Investment Firm Will Pay a Civil Penalty of $1.1 Million for Numerous HSR Violations

December 19, 2007

On December 19, 2007, the U.S. Department of Justice (DOJ) filed a complaint in U.S. District Court to obtain $1.1 million in civil penalties against ValueAct Capital Partners ("ValueAct") for violating pre-merger notification requirements of the Hart-Scott-Rodino Act, Section 7A of the Clayton Act, 15 U.S.C. § 18a, as amended ("HSR Act") . The DOJ's complaint is yet another strong reminder from the antitrust agencies to parties engaged in mergers and acquisitions that the agencies will continue to vigorously enforce pre-merger notification requirements and will fine companies that do not comply. The complaint is also significant in that it demonstrates that the HSR Act is agnostic to whether or not a transaction contravenes the antitrust laws, reminding parties that the DOJ and FTC will pursue HSR Act violators even though the agencies may conclude that the transaction poses no threat to competition or consumers.

Background

On October 3, 2003, ValueAct, a San Francisco based investment firm, made a set of three corrective filings with the FTC regarding its previous acquisitions of Gartner, Martha Stewart Living Omnimedia and Mentor Corp. At that time, the FTC did not initiate any action against ValueAct given that this was its first violation and it was unaware of its obligations under the HSR Act. However, it did promise to take steps to prevent any further violations in the future. Nevertheless, ValueAct violated the HSR rules in a similar manner on three separate occasions.

On October 3, 2003, ValueAct filed a notification to acquire more than $50 million, but less than $100 million, of the voting shares of Gartner. In October 2004, ValueAct and other entities formed a Master Fund, which combined their holdings in a non-reportable transaction, but resulted in that entity having more than $100 million worth of Gartner shares. Then on February 7, 2005, Master Fund, whose ultimate parent entity was ValueAct, purchased additional Gartner shares in a reportable transaction that brought its total holdings to a value of approximately $248 million. According to the FTC, ValueAct violated the HSR Act by failing to notify the FTC and DOJ and to observe the waiting period before acquiring more than $100 million of Gartner shares.

The second and third violations relate to Master Fund acquisitions of a greater than 10 percent interest in voting shares of Catalina and Acxiom. On April 28, 2005, Master Fund purchased more than 10 percent of the outstanding voting shares of both Catalina and Acxiom. ValueAct, as the ultimate parent entity of the Master Fund, and Master Fund did not file the notification as required by the HSR Rules for either of these transactions until June 13, 2005 - thereby violating pre-merger notification requirements.

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. The 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 the 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.
The issue in the ValueAct case deals with procedural aspects of HSR pre-merger notification requirements. Under the HSR Act, a purchaser, who has filed the required notification and observed the pre-merger waiting period before acquiring more than $50 million of another entity's voting shares, must file an additional notification and observe additional waiting period before acquiring more than $100 million of the voting shares of that entity. Also, the Act requires purchasers to file and observe pre-merger waiting period if the shares acquired exceed 10% of outstanding shares of the acquired entity even if such acquisition is made solely for the purpose of investment.

Implications of the Ruling

The antitrust authorities take enforcement of the HSR Act seriously and, when discovered, failures to comply with pre-merger notification requirements represent "low hanging fruit" to the agencies from an enforcement perspective. Depending on the facts and circumstances, it largely can become an issue of severity of the fine.

HSR Act violations are easier to prove and serve as a highly efficient and cost effective means to put parties on notice that they can and will be subject to civil penalties for violations. The determination is also made without regard to competitive effects of the transaction, and from the perspective of the client, the result can be both unfortunate and unnecessary.

In a press release, Jeffrey Schmidt, Director of the FTC's Bureau of Competition, stated, "While we are flexible and may forgive an inadvertent error, we are less so in cases where multiple errors have been made despite earlier promises of diligent oversight." Indeed, ValueAct had ample opportunities to take corrective measures to prevent HSR violations when it violated the Act the first time. What is clear from this statement is that antitrust authorities will not tolerate repetitive violations of antitrust laws because repetitive violations despite a graceful warning cannot be inadvertent any more.

The bottom line is that if your deal requires pre-merger notification, consult with antitrust counsel to determine whether you need to file a notification. HSR and analysis of antitrust issues should be an essential step in planning the timeline of your transaction.