Three Recent Fines Show Dangers of Mistakes in U.S. Hart-Scott-Rodino Premerger Matters

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Three Recent Fines Show Dangers of Mistakes in U.S. Hart-Scott-Rodino Premerger Matters

By: Steven J. Cernak and William M. Hannay




All business entities, including those located outside the U.S., need to understand the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR)1 before acquiring any assets or shares of entities that are responsible for sales into the U.S. Even if the transaction poses no substantive antitrust or competition law issue, a failure to make a required HSR filing or respect the HSR waiting periods will leave an acquiring person subject to large fines. Three recent actions by the two U.S. federal antitrust agencies illustrate some common HSR mistakes and the large costs they can cause. While the new Trump administration might appoint antitrust agency leaders who could ease HSR’s burden on merging parties, there is no indication that there will be drastic changes in HSR enforcement for failure to file or other technical breaches.


HSR Background


For certain large acquisitions of assets or interests in entities, HSR requires both the buyer and seller to submit a form and certain documents to the U.S. Federal Trade Commission (FTC) and the Department of Justice Antitrust Division (DOJ). The form requires information about the parties and the transaction, including which of several dollar amounts or percentage of ownership thresholds the buyer will be crossing through the current transaction. After receipt of a proper filing, the agencies have 30 days to decide whether to block the transaction in court, seek more information, or allow the transaction to proceed. Until the agencies terminate the waiting period or allow it to expire, the buyer cannot take beneficial ownership of the shares or assets.


To determine if the transaction triggers the need for an HSR filing, parties must first measure the size of the transaction. If the immediate acquisition, along with any current holdings, will cause the acquiring person to hold less than $80.8M worth of assets, voting securities of a corporation, or interests in a non-corporate entity, then no HSR filing is necessary.2 If the size of the transaction is greater than $323M, then an HSR filing is necessary unless one of the exemptions described below is met.


For transactions valued in between $80.8M and $323M, an HSR filing is necessary only if the size of the person test is also met. That test requires that one of the parties to the transaction has global annual net sales or total assets of $161.5M while the other’s sales or assets are at least $16.2M. For the size of the person test, the entity to be measured is the ultimate parent entity of the entity actually involved in the transaction.


If these tests are met, then an HSR filing is necessary unless the elements of one of the many regulatory exemptions are met.3 For instance, the acquisition of the voting securities of a non-U.S. issuer by a non-U.S. person will be exempt unless the transaction will confer control of the issuer and the issuer has U.S. assets or annual aggregate sales into the U.S. valued at $80.8M or more.4


Buyers that violate the HSR Act (e.g., by failing to file a reportable transaction or taking beneficial ownership of the assets or voting securities of the seller before the termination or expiration of the waiting period) are subject to civil penalties of $40,000 per day. In practice, the fines recommended by the agencies often are much lower than the theoretical maximum; in fact, the agencies often recommend no civil penalty if the buyer can show that the mistake was its first and inadvertent and the buyer puts in place a robust HSR compliance policy. Still, as the recent examples described below show, the cost of HSR mistakes can be large.


FTC Matter–Okumus


In January 2017, the DOJ, acting on behalf of the FTC, sued Ahmet Okumus for his second HSR violation.5 In 2014, Okumus had acquired 13.5 percent of a company for a sum that crossed the applicable HSR threshold. He did not make an HSR filing because he claimed to qualify for the “solely for investment purpose” exemption.6 While that provision exempts certain acquisitions if the buyer exhibits only an investment intent, it is limited to acquisitions of 10 percent or less of the voting securities of a company. Okumus then made a corrective filing and promised to institute an effective HSR compliance program. The FTC declined to pursue any civil penalty.


In that corrective filing, Okumus filed for acquisitions of voting securities of the seller crossing the lowest dollar amount threshold. After the expiration of the HSR waiting period, Okumus was free to make additional purchases up to the next threshold without any new HSR filings. Unfortunately, in 2016, Okumus’s additional purchases of the company caused his holdings to cross the next threshold, then set at $156.3M. Okumus again failed to make an HSR filing. This failure to file was an HSR violation even though three weeks later he sold enough shares to bring his holdings back below the $156.3M threshold. Okumus agreed to settle the lawsuit by paying $180,000.


FTC Matter–Rales


At the same time as filing the Okumus complaint, the DOJ also filed suit against Mitchell Rales on behalf of the FTC and alleging multiple HSR violations.7 Rales’ initial HSR violation was in 1988 when an entity he controlled made a reportable acquisition but never made an HSR filing. In early 1991, Rales agreed to pay a $850,000 fine.


In 2011, Rales’ wife acquired voting securities on the open market in a different company in which Rales already had a significant minority position. Under HSR rules, the holdings of one spouse are considered the holdings of the other.8 As a result, the acquisition by his wife was reportable but Rales did not make an HSR filing. Rales or his wife continued to acquire shares of the same company through mid-2015 but did not make a corrective HSR filing until early 2016.


Separately, Rales acquired $2.3B worth of shares of yet another company in 2008. The acquisition easily cleared the then-applicable HSR thresholds and qualified for no exemptions. As a result, the transaction was reportable. Rales did not make an HSR filing until making a corrective filing in early 2016. The DOJ and Rales agreed to settle the lawsuit alleging these two later HSR violations for $720,000.


DOJ Matter–Duke Energy


A day after filing the two lawsuits on behalf of the FTC, the DOJ filed its own HSR violation lawsuit, this one alleging that Duke Energy Corporation (Duke) failed to file and wait for the end of the HSR waiting period before taking beneficial ownership of the assets to be purchased.9


According to the lawsuit, Duke and Calpine Corporation signed a term sheet in August 2014 outlining the terms under which Duke would buy a plant from Calpine. An HSR filing was made in early 2015 and the waiting period ended in February 2015 and the transaction closed thereafter.


At the August 2014 term sheet signing, however, the two parties also agreed to a tolling agreement that, according to the complaint, allowed Duke to make “all competitively significant decisions for the Osprey plant.” For instance, Duke each day sent hour-by-hour instructions to the plant that determined how much power it produced. The complaint went on to allege that Duke also arranged to procure and deliver the necessary inputs to the plant and was entitled to receive all the electricity generated by the plant. In separate but contemporaneous filings with the Federal Energy Regulatory Commission prior to the end of the HSR waiting period, Duke claimed that the tolling agreement meant that it “already controls [Osprey] pursuant to the Tolling Agreement.”


In the complaint, DOJ noted that tolling agreements are not unusual in the energy and other industries and do not automatically cause their signatories to run afoul of HSR’s rules. DOJ, however, found this particular tolling agreement unusual in that it allowed Duke to assume all risk and reward from the plant while Calpine was merely reimbursed for the ministerial steps it took under Duke’s direction to keep the plant operating. As a result, DOJ alleged that Duke obtained beneficial ownership of the plant at the time the tolling agreement was effective. Because that transfer of beneficial ownership took place prior to the end of the HSR waiting period, Duke’s actions violated HSR. DOJ and Duke agreed to settle the lawsuit for a civil penalty of $600,000.


Potential Changes from New U.S. Antitrust Leaders?

On January 25, President Trump designated FTC Commissioner Maureen Ohlhausen as Acting Chairman of the FTC. In accepting this designation, Ohlhausen pledged to “ensure the Commission minimizes the burden on legitimate business” as the FTC protected competition and consumers.
10 Ohlhausen’s dissent from a 2015 agency action regarding an HSR violation provides some indication that the FTC under her leadership might indeed take steps to reduce HSR’s burden.


In August 2015, investment management company Third Point LLC (Third Point) settled FTC allegations that it illegally failed to make an HSR filing for its 2011 minority investment in Yahoo Inc. Third Point claimed that its purchase of voting securities in the company complied with the “solely for investment purpose” HSR exemption11, but the FTC disagreed, alleging that Third Point went beyond mere investment intent when it took such actions as communicating with third parties to determine their interest in becoming CEO or a board member at the company. Third Point and the FTC agreed that Third Point would pay no civil penalty but would make HSR filings if it took similar actions regarding its investments in the future.


Ohlhausen and her then fellow Republican Commissioner, Joshua Wright, dissented from the FTC’s decision. That dissent decried the FTC’s narrow interpretation of “investment intent” as likely to chill valuable shareholder advocacy while “subjecting transactions that are highly unlikely to raise substantive antitrust concerns to the notice and waiting requirements of the HSR Act.” More broadly, the dissent suggested that the two agencies should “explore potential modifications to the HSR rules or a legislative amendment to the HSR Act designed to eliminate filing requirements for” such small minority acquisitions because they have proven to raise few competition concerns.12 It is uncertain whether Ohlhausen as Chairman will follow up on her dissent and expand this or any other HSR exemptions.




HSR was instituted to provide information and advance notice of large transactions to the federal antitrust agencies so that they could review all of them and prevent any anticompetitive ones from closing. To be reportable under HSR, transactions need only cross the requisite thresholds. They do not need to raise competition concerns. In fact, DOJ and FTC determine that the vast majority of the transactions that require HSR filings raise no such concerns. Even if the transaction raises no antitrust issues, however, it must be notified to the agencies if it meets the HSR requirements and qualifies for no exemptions. While new leadership at the two U.S. federal antitrust agencies might modify some HSR rules in an effort to ease the filing burden, HSR’s overall filing requirements seem likely to survive.


Those HSR requirements and exemptions can be complicated and are not intuitive. Entities making significant investments in companies with significant U.S. sales or assets need to check the HSR rules and determine if a filing is necessary. Failure to make an HSR filing or properly observe its waiting periods can lead to significant civil penalties and other compliance costs for the buyer.


Steven J. Cernak is of counsel in the Antitrust & Trade Regulation Group in the Ann Arbor office of Schiff Hardin, LLP. Mr. Cernak can be contacted at William M. Hannay is a partner in the Antitrust & Trade Regulation Group in the Chicago office of Schiff Hardin, LLP and is the firm’s TerraLex representative. Mr. Hannay can be contacted at 



15 U.S.C. § 18a.

2 This and the other thresholds described in this paper are updated by the FTC annually to account for growth in the U.S. economy. The threshold amounts used here are those that were announced in January 2017 and that are expected to be fully implemented by March 2017.

3 The HSR regulations are available at 16 C.F.R. §§ 801-803 with the exemptions listed in § 802.

See 16 C.F.R. § 802.51(b) for the details of this and other exemptions related to the acquisition of foreign voting securities. See 16 C.F.R. § 802.50 for similar exemptions for the acquisitions of assets located outside the U.S.

Additional information on the suit and copies of the pertinent court documents can be found at the FTC’s website here: 

16 C.F.R. § 802.9.

Additional information on the suit and copies of the pertinent court documents can be found at the FTC’s website here: 

8 16 C.F.R. § 801.1(c)(2).

9 Additional information on the suit and copies of the pertinent court documents can be found at the DOJ’s website here: 

11 16 C.F.R. § 802.9.

12 Further details on the Third Point matter, including the FTC’s complaint and Ohlhausen’s dissent, can be found on the FTC’s website here: 

Chicago, IL 
Friday, March 3, 2017
Mergers and Acquisitions / Divestitures, Antitrust & Competition Law/Unfair Competition