Flurry of Antitrust Merger Enforcement Actions as Obama Presidency Comes to a Close
The Federal Trade Commission (FTC) and Antitrust Division of the Department of Justice (DOJ) announced several antitrust enforcement actions in advance of the inauguration of President Trump, including settlements for failures to file under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act), a challenge to an unreportable deal and a settlement of a “gun-jumping” claim under the HSR Act. These cases illustrate the importance of compliance with the often complex reporting, waiting period and substantive aspects of antitrust laws in connection with acquisitions of various types, whether or not those acquisitions require premerger reporting. Failure to comply can result in significant financial penalties.
Two HSR “Failure to File” Settlements. On January 17, 2017, the FTC announced two settlements for failures to submit HSR filings and observe the statutory waiting period under the HSR Act prior to consummating acquisitions that met the relevant thresholds. The HSR Act requires notification of certain acquisitions of voting securities, assets and non-corporate interests if the value held as result of the transaction is in excess of certain notification thresholds and size of person thresholds (if applicable), and the transaction is not otherwise exempt. Parties to reportable transactions must observe the statutory waiting period prior to closing. If they fail to file, or otherwise do not observe the waiting period under the HSR Act, the parties may be liable for civil penalties of up to $40,654 per day (which was recently increased from $40,000, effective February 24, 2017).
In the first settlement, Ahmet Okumus agreed to pay $180,000 in connection with failing to notify for his purchases of voting securities of Web.com Group, Inc. (Web.com). According to the complaint, in September 2014, Okumus acquired voting securities of Web.com and as a result, held approximately 13.5 percent of the voting securities of Web.com. Okumus continued to acquire voting securities of Web.com through November 2014. Okumus did not file an HSR notification prior to making these acquisitions, relying on the “investment only” exemption, which exempts acquisitions resulting in holdings of 10 percent or less of the issued and outstanding voting securities if the shares are held solely for the purpose of investment (see 15 U.S.C. § 18a(c)(9) and 16 C.F.R. § 802.9). However, because Okumus held in excess of 10 percent, this exemption was not applicable. In late November of 2014, Okumus made a corrective filing that allowed him to acquire additional Web.com voting securities for approximately five years, provided that the value of the voting securities he held as a result of any acquisition did not exceed the $100 million (as adjusted) notification threshold. In a letter that accompanied his corrective filing, he indicated that the failure to file was inadvertent. The FTC did not seek civil penalties in that instance.
In June of 2016, Okumus began acquiring additional voting securities of Web.com. Later that month he acquired 236,589 voting securities of Web.com, and as a result of that acquisition, Okumus held voting securities valued (per the HSR rules) in excess of the $100 million (as adjusted) threshold, which at the time was $156.3 million. He made this acquisition without first filing and observing the HSR waiting period. In July of 2016, Okumus sold 33,200 shares, which resulted in him holding less than $156.3 million in Web.com voting securities, so technically, Okumus was only in violation of the HSR Act between June 27, 2016 (when he made the acquisition that put him over the $100 million (as adjusted) threshold) and July 14, 2016 (when his holdings in Web.com fell below the $100 million (as adjusted) threshold). In connection with this second corrective filing, Okumus agreed to pay a civil penalty of $180,000. In its press release, the FTC noted that it determined to seek penalties because “this is Okumus’s second HSR violation in two years regarding Web.com.” While technically the maximum civil penalty could have approached $700,000, the FTC noted that the penalty was adjusted downward from the maximum because the violation was inadvertent and promptly corrected, and Okumus was willing to resolve the matter quickly through a consent decree.
In the second settlement, Mitchell P. Rales agreed to pay $720,000 in connection with his wife’s acquisition of voting securities of Colfax Corporation (Colfax) and his acquisition of voting securities of Danaher Corporation (Danaher). Prior to his wife’s acquisition of Colfax shares, Rales held 57.9 percent of the voting securities of Colfax, and because he held over 50 percent of the voting securities of Colfax, any additional acquisitions would have been exempt under the HSR rules. However, after an initial public offering of Colfax voting securities, Rales’ holdings decreased to approximately 20.8 percent, and thus additional acquisitions were not exempt under the HSR rules. In October 2011, Rales’ wife acquired 25,000 voting securities of Colfax on the open market. Under the HSR rules, holdings of spouses and minor children are aggregated, so the shares acquired by Rales’ wife were attributed to him. As a result of this acquisition, Rales held voting securities of Colfax valued in excess of the then applicable $100 million (as adjusted) threshold. Rales did not file or observe the waiting period prior to his wife making this acquisition.
Separately, in January of 2008, Rales acquired 6,000 shares of Danaher on the open market, and as a result of this acquisition, held voting securities of Danaher valued at approximately $2.3 billion, which is well in excess of the $500 million (as adjusted) notification threshold at the time. Rales did not file or observe the waiting period under the HSR Act. Rales made corrective filings in February 2016 for both this acquisition and his wife’s acquisition of Colfax voting securities.
Prior to these corrective filings, Rales had paid a civil penalty of $850,000 in 1991, in connection with an acquisition for which Rales failed to file, that the FTC alleged was not inadvertent, but instead was structured in such a way as to avoid filing. In its press release, the FTC stated that it determined to seek penalties because “Rales had paid civil penalties to settle an earlier HSR enforcement action brought by the Department of Justice in 1991.”
These two settlements include some important reminders for acquiring parties, especially natural persons.
First, the “size of transaction” for HSR purposes is not simply the value of what is being acquired, but also includes the current value (as defined by the HSR rules) of what is already held of the acquired person.
Second, because acquirers need to consider the value of what they currently hold, valuation can creep up over time and a subsequent acquisition—no matter how small—may trip an HSR notification threshold. In other words, valuation must be considered with every acquisition from the same acquired person.
Third, natural persons must aggregate holdings of spouses and minor children when considering possible HSR filing requirements.
Disgorgement of Profits for Non-Reportable Transaction. On January 18, 2017, the FTC announced Mallinckrodt ARD Inc. (formerly known as Questcor Pharmaceuticals, Inc.) (Questcor) and its parent company agreed to pay $100 million to settle claims it monopolized a market for therapeutic adrenocorticotropic hormone (ACTH) drugs in the United States. The FTC alleged that Questcor held a monopoly in ACTH drugs when it acquired the rights to develop a competing drug, Synacthen Depot, from Novartis AG in June of 2013. The acquisition of these intellectual property rights was not subject to the reporting requirements of the HSR Act at the time. However, changes to the HSR rules applicable to pharmaceutical licenses in November 2013 likely would have resulted in a reportable transaction.
The FTC claimed that Questcor disrupted the bidding process for Synacthen and outbid other bidders so that it could keep Synacthen from becoming a competitor to Questcor’s product. Because of Questcor’s actions, the FTC alleged that a competitor was thwarted from challenging Questcor’s market position with a lower priced product. Meanwhile, Questcor has taken significant price increases on eight occasions since 2011. The FTC alleged these actions were in violation of Section 5 of the Federal Trade Commission Act as an unfair method of competition and Section 2 of the Sherman Act as monopolization. The Attorneys General of Alaska, Maryland, New York, Texas and Washington joined the FTC’s complaint.
Under the settlement, Questcor will pay $100 million in disgorgement and grant a license to develop Synacthen Depot to a licensee approved by the FTC. The states that joined the FTC’s complaint will receive $10 million of the $100 million payment and an additional $2 million as payment for attorney’s fees and costs. This settlement serves as an important reminder that non-reportable transactions remain subject to antitrust review and potential challenge at both the federal and state levels.
“Gun-Jumping” under the HSR Act. Also on January 18, 2017, the DOJ announced a settlement with Duke Energy Corporation (Duke) for violating the HSR Act by taking operational control of a target prior to observing the HSR waiting period. In August 2014, Duke agreed to purchase an electrical generating plant located in Florida. As part of the purchase agreement, Duke also entered into a “tolling agreement” where Duke would immediately—and prior to closing—began exercising control over the plant’s output and retaining the day-to-day profits and losses from its business. The DOJ’s complaint stated that Duke assumed control of purchasing all the fuel for the plant, arranging for delivery of that fuel and arranging for transmission of the energy generated by the plant. The DOJ claimed that Duke bore the benefit (or risk) of the profit (or loss) generated by the plant as well as the risk of changes in the market price for fuel and the market price for energy.
As stated in the 1978 Statement of Basis and Purpose issued with the final rules implementing the HSR Act, “the existence of beneficial ownership is to be determined in the context of particular cases with reference to the person or persons that enjoy the indicia of beneficial ownership, which include the right to obtain the benefit of any increase in value or dividends, the risk of loss of value, the right to vote the stock or to determine who may vote the stock, the investment discretion (including the power to dispose of the stock.” (43 Fed. Reg. 33450, 33458.) Application of these indicia of beneficial ownership depends on the totality of the circumstances; no one factor or set of factors is necessarily dispositive. In any event, in transactions that meet the HSR Act thresholds and are not otherwise exempt, the HSR Act prohibits an acquiring person from taking beneficial ownership of the target prior to the expiration or termination of the statutory waiting period. The DOJ alleged that Duke’s retention of the profit and loss of the electrical generating plant’s business as well as the benefit (or risk) of changes in market prices for fuel and energy were indicative of its beneficial ownership of Duke.
The parties did not submit their respective HSR notification and report forms for Duke’s acquisition of the plant until months after entering into the tolling agreement, which the DOJ alleges gave Duke beneficial ownership of the plant. Accordingly, the DOJ alleged that Duke was in violation from October 1, 2014, when the tolling agreement became effective, until February 27, 2015, when the HSR waiting period expired. To settle the DOJ’s complaint, Duke agreed to pay a civil penalty of $600,000 for violation of the HSR Act. In a statement, Duke noted that it “admits no wrongdoing or liability as part of the settlement,” but agreed to the civil penalty “to settle the case and avoid the costs and uncertainties of continued litigation.”
Summary. These various settlements illustrate several important reminders for acquiring or merging parties. First, the notification requirements of HSR Act can apply in unexpected circumstances. Acquiring parties—whether individual investors, executives that receive stock as compensation, spouses or companies—should give careful consideration as to whether the HSR Act may apply to even the most seemingly mundane or ordinary acquisitions. Second, even if a transaction is not subject to the reporting requirements of the HSR Act, it may still be investigated and ultimately challenged—possibly resulting in an effective unwinding of the transaction and disgorgement of profits. Careful analysis and advance planning can help parties anticipate and manage the potential risk of a post-closing challenge. Third, obligations under the antitrust laws do not end with the execution of a transaction agreement. Parties must continue to observe obligations under the antitrust laws prior to closing even after they have executed a transaction agreement. This applies to the pre-closing activity of merging competitors, as well as complying with the HSR Act by not taking beneficial ownership prior to the expiration or termination of the HSR waiting period (regardless of the competitive overlap between the parties). These enforcement actions illustrate the potential (and possibly unanticipated) applicability of antitrust laws to a variety of acquisitions and at different stages of a transaction’s life cycle.