A recent Federal Trade Commission (FTC) blog post highlights the importance of implementing HSR compliance systems that monitor all reportable acquisitions, not only those that involve monetary payment. The HSR Antitrust Improvements Act of 1976, as amended (15 U.S.C. § 18a) (the HSR Act) requires companies to file notification with the FTC prior to effectuating certain acquisitions or mergers. Many companies use HSR compliance systems to ensure that the FTC is properly notified of reportable transactions. According to the FTC, however, many of these compliance systems fail to identify certain common acquisition, reorganization and consolidation transactions, which nonetheless require reporting. This may lead to civil liability and financial penalties at a current rate of up to $41,484 per day for each day of noncompliance.
The FTC cautions against HSR compliance systems that track only transactions involving a payment by check, as various common transactions require reporting under the HSR Act despite their lack of monetary payment. Some examples of such transactions include:
Exchange of types of interest within a company
The FTC notes a 2013 transaction involving an exchange of convertible notes for voting securities within the same corporation. This transaction required reporting, but it was not flagged by the company’s HSR compliance system. This system failure led to a civil penalty for failure to comply with the HSR Act.
Backside acquisitions
When an acquiring company “pays” the shareholders of a target company in shares of the acquiring company, this is known as a backside transaction. Such a transaction may require reporting to the FTC and proper observation of the required waiting period prior to acquisition of the new shares.
Consolidations
When two corporations consolidate into a single new corporation, the original shareholders may receive voting securities in the new company in exchange for their shares in the original corporations. Such a transaction may require filing under the HSR even though there was no actual monetary payment, and even if the shareholder took no direct action to acquire or exchange the shares.
Reorganizations
When a business undergoes reorganization (i.e., an LLC or partnership reorganizes into a corporation), an HSR-reportable transfer may occur if voting securities or shares are distributed in exchange for member or partner interests, even if the partner or member took no action to effectuate the reorganization.
Compensation
Executives or other employees may be compensated in the form of voting securities. Such stock acquisitions may be HSR-reportable events. If the shares entitle the employee to vote and receive dividends, the employee may need to file and observe the required waiting period before receiving the shares. Even if the shares do not carry voting rights, employees may need to file and observe the waiting period before the shares vest.
For companies using HSR compliance systems, it is essential that such systems are designed to track all reportable transactions by properly analyzing any changes or modifications to company interests over time. Systems that only track transactions where money changes hands may ultimately lead to civil penalties and fines for noncompliance. Companies using HSR compliance systems should consult with antitrust counsel to ensure that their system is tracking all reportable transactions to avoid unnecessary liability. Similarly, companies interested in implementing HSR compliance systems should consult with antitrust counsel for assistance in creating effective tracking systems.
Client Alert 2018-123
