Filing Obligations and Sanctions
Any business as well as any of its officers, directors or partners is subject to a maximum fine of $11,000 per day for failure to comply with the premerger notification requirements of the HSR Act. The FTC is charged with administering the premerger notification program, and recommends actions and penalty amounts to DOJ. The FTC generally will not seek an enforcement action for a violation that appears to be truly inadvertent, or where the filing requirement is promptly met after discovery of the oversight.
The FTC Has Initiated a Vigorous HSR Enforcement Program
Since 1995 the FTC has pursued a vigorous enforcement policy against firms or individuals that have failed to comply with the HSR Act, where they either knew or ought to have known of the Act's requirements. There have been six recent cases imposing substantial penalties for failure to comply either with the waiting period or with premerger filing requirements of the HSR Act. The FTC's recent enforcement actions highlight: (a) maximum fines for intentional failures to comply; (b) liability for both acquirors and acquirees; and (c)individual, as well as corporate, liability.
a) Record Fine and Hold Separate Agreement: Under the terms of a 1997 FTC settlement, Mahle GmbH, a German piston manufacturer, and Metal Leve S.A., a Brazilian competitor, agreed to pay a record $5.6 million penalty for failing to give federal enforcers advance notice of Mahle's acquisition of a controlling interest in Metal Leve. The FTC alleged that the parties had intentionally avoided HSR filings as a trade-off between the costs of compliance and the potential risks of civil penalties. The settlement of these charges provided for the maximum civil penalties allowed under law from both Mahle and Metal Leve from the date of acquisition until the companies filed an HSR notification acceptable to the FTC. This was the first time the FTC announced a hold separate agreement after consummation of the acquisition pending a proper HSR filing and expiration of the waiting period.
b) Liability of Corporation as Acquiree and Corporate Officer as Acquiror: Under the terms of another 1997 FTC settlement, each of Figgie International Inc. and its Chairman and CEO agreed to pay a $150,000 civil penalty. In this case, the President and CEO, as an "acquiring person," failed to notify his reportable acquisition of Figgie International's voting stock until over two months after his cumulative holdings exceeded the 15% HSR threshold.
c) Illegitimate Determination of Fair Market Value: On February 6, 1996, Sara Lee agreed to pay a civil penalty of $3.1 million, including a punitive penalty assessed because Sara Lee acted intentionally in avoiding HSR filing requirements. This is the second highest penalty yet obtained under the HSR Act. Wishing to avoid agency review, Sara Lee made it a condition of its offer to its target that the transaction not be reportable under the HSR Act. The parties then structured the transaction in a manner that allowed Sara Lee to allocate less for the assets of the target business than the $15 million HSR notification threshold. The HSR rules state that reporting obligations are determined by the greater of the fair market value of assets or the acquisition price. Upon review, the FTC found that Sara Lee had failed to make a legitimate determination of the assets' fair market value, which was in fact more than $15 million. The FTC emphasized that even if the transaction itself did not raise substantive antitrust concerns, compliance with HSR Act requirements was compulsory.
d) Inadequate Search for 4(c) Documents: In 1996, Automatic Data Processing, Inc. ("ADP") agreed to pay $2.97 million in civil penalties for completing an HSR-reportable transaction in which it failed to provide all of the Item 4(c) documents. The assessed fine was equal to the maximum penalty for the period from the time of the acquisition until ADP re-certified its filing and submitted the required documents. The maximum penalty was assessed because ADP had conducted a wholly inadequate search for 4(c) documents. The FTC became aware of ADP's failure as a result of competitor complaints after the transaction had received HSR clearance and closed.
During the FTC's HSR compliance investigation, ADP argued that even if some 4(c) documents had been overlooked, the Commission was not entitled to pursue civil penalties. The FTC rejected this position. Failure to submit all 4(c) documents is a punishable offense under the HSR Act, again warranting civil penalties.
The lesson of ADP is clear: Parties should fully and diligently comply with the HSR Act requirements, which includes a thorough search for any Item]4(c) documents. Indeed, Item 10 of the HSR notification expressly requires that the filing be certified by a person having knowledge about the requirements of filling out the form and the steps that were undertaken to comply. This person must certify that all responses are "true, accurate and complete." Accordingly, the certifying person should never rely on general assurances from others without inquiring specifically as to what was done in order to comply with the Actms reporting requirements.
e) "Jumping the Gun" on HSR Waiting Periods: In May 1996, the FTC announced that Titan Wheel International, Inc. ("Titan"), an Illinois-based wheel manufacturer, had agreed to pay $130,000 in civil penalties because it took charge of the seller's plant before the statutory HSR waiting period had expired. Significantly, the FTC granted Titan early termination . indicating that the government had no intention of challenging the merger on substantive antitrust grounds.
f) Failure to File: In August of 1996, Foodmaker, Inc. agreed to pay $1.45 million for failing to inform regulators about the acquisition of Consul, an operator of 26 franchised Chi-Chi's restaurants, by Chi-Chi's, Inc., a subsidiary of Foodmaker at the time of the acquisition.
Conclusion
The FTC will vigorously enforce HSR filing requirements, regardless of whether the persons involved are U.S. or foreign, whether they are corporations or individuals, or whether they are acquirors or acquirees. Enforcement may occur before or after the merger closes. The risks of non-compliance, whether intentional or merely negligent, are even greater in competitive markets where unhappy competitors may bring instances of noncompliance to the attention of the enforcement agencies.