Analyzing Whether an HSR Filing Is Necessary: Lessons for Transacting Parties From Enforcement Actions

Transacting parties that structure, time, or value a transaction in a way that regulators believe was designed to avoid or delay a required regulatory filing have always faced significant risk. Antitrust enforcers, however, recently have shown an increased willingness to pursue civil penalties against parties that sidestep the notification and waiting period requirements of the Hart-Scott-Rodino Act (HSR) Act.

The HSR Act, passed in 1976, requires firms to notify the Federal Trade Commission (FTC) and Department of Justice (DOJ) before consummating mergers or acquisitions that meet certain size thresholds, allowing the antitrust enforcement agencies to review, investigate, and decide whether to sue to block transactions. Reporting parties must submit an HSR form to the FTC and the DOJ and observe a statutory waiting period (generally 30 calendar days) before they can close. Several states separately require the submission of HSR materials to the state Attorney General, with similar statutory penalties for failure to file.

Prior to signing, parties concerned about crossing the reporting thresholds often engage with antitrust counsel to determine whether a filing is necessary. Parties are prohibited from structuring a transaction or using other devices or methods to avoid compliance with the statutory reporting requirements of the HSR Act. A recent FTC enforcement action involving related medical-device transactions illustrates the scope of this risk: a combined $12 million in penalties for alleged failures to comply with the HSR Act’s notification and waiting period requirements, the largest-ever penalty for failing to make an HSR filing. 

Of equal importance, parties that do file must ensure their submissions are complete and accurate. Recently, regulators have pursued an action and secured penalties for perceived withholding of required documents or information submitted as part of an HSR filing. This is the largest HSR penalty ever assessed and more than 20 times any prior penalty obtained by the DOJ.

Recent HSR Enforcement Example

According to a complaint involving related medical-device transactions brought by the DOJ on the FTC’s behalf, the parties allegedly separated consideration into multiple agreements. The agencies alleged that, viewed together, the payments exceeded the then-HSR reporting threshold, even though the parties treated each payment independently for filing purposes.

The parties allegedly closed the transaction without submitting an HSR notification or observing the required waiting period. They made no public announcement at that time, and shortly after closing, the purchasing party entered into a separate agreement to purchase the seller subsidiary’s only competitor. Because the agencies concluded that the related transactions had been purposefully structured to avoid an HSR filing, and that the transactions in substance were reportable, they brought a civil antitrust action to obtain monetary relief.

Under 16 C.F.R. § 801.90 of the HSR Rules, parties are prohibited from purposefully structuring their transactions for the purpose of avoiding the HSR Act. When the agencies suspect parties have structured a transaction “for the purpose of avoiding” the HSR Act’s requirements, their analysis of whether a filing was necessary hinges on the “substance of the transaction.”

Here, the agencies alleged that documents and testimony showed an effort to keep the reported price below the filing threshold. The agencies argued that the substance of the related transactions, not their separate form, triggered HSR filing requirements.

Under the Clayton Act, any person, or any officer or director, who fails to comply with any provision of the HSR Act is liable to the United States for a civil penalty of up to $53,088 for each day of being in violation. Accordingly, the agencies sought a decree against the parties for violating the HSR Act and requested that each party pay an appropriate civil penalty, as provided by the HSR Act.

The final judgment required the parties to pay combined penalties of $12 million, with the purchasing party bearing most of the penalty. In addition to monetary relief, the purchasing party agreed to provide prior written notice to the FTC before acquiring any ownership interest in the specific market at issue and to design, maintain, and operate an antitrust compliance program to ensure compliance with the final judgment and the antitrust laws.

Additional Enforcement Actions

The two recent enforcement actions come after a history of similar actions over the past 30 years.  In light of recent enforcement activity, older enforcement actions are worth revisiting.  

In 2019, the DOJ charged Canon and Toshiba with violating Rule 801.90 by allegedly devising and implementing a multi-step scheme to transfer beneficial ownership of Toshiba Medical Systems Corporation (TMSC) to Canon before making an HSR filing or observing the HSR waiting period. According to the allegations, Toshiba restructured TMSC’s securities, sold Canon a non-voting share and options for approximately $6.1 billion, and transferred the TMSC’s voting shares to a newly created special purpose entity for $900. The agencies alleged that this structure masked the substance of the transaction: Canon’s acquisition of beneficial ownership of TMSC’s voting securities before HSR clearance. The parties ultimately settled, with Canon and Toshiba each paying $2.5 million, for a combined $5 million civil penalty.

That DOJ action was the first in over 20 years and followed an action in which the DOJ charged Sara Lee with violating the HSR Act by failing to file, or alternatively by purposefully undervaluing its acquisition of U.S. assets from Reckitt & Colman plc so that the reported transaction value would not exceed the HSR filing threshold. Sara Lee acquired the shoe care products assets of the seller. The agencies alleged that Sara Lee did not perform the fair market valuation required by the HSR rules for an asset acquisition, and that internal cash-flow projections presented to its board reflected a value above the applicable threshold. The FTC later investigated the transaction on antitrust grounds, the parties ultimately filed HSR forms, and the DOJ brought an HSR enforcement action. Sara Lee settled and paid a $3.1 million civil penalty (nearly $6.6 million in today’s dollars).

A few years prior, the DOJ charged Beazer plc with violating the HSR Act by acquiring Koppers Company voting securities valued above the HSR threshold, while intentionally delaying its HSR filing. The alleged structure involved a series of acquisitions through several entities, including a partnership allegedly formed for the sole purpose of avoiding timely compliance with the HSR Act. Beazer later made an HSR filing in connection with a tender offer, and the waiting period expired before the DOJ filed its enforcement action. The matter settled the same day the DOJ filed its complaint, and Beazer paid a $760,000 civil penalty (nearly $1.8 million in today’s dollars) for an alleged 152-day violation period. The reported resolution focused on the civil penalty and settlement of the HSR claim; no separate ongoing compliance obligations are noted in the summary.

Practical Takeaways for Transacting Parties

The FTC continues to watch premerger filings closely. “Companies that try to sneak deals through without lawful FTC review should take notice,” says Chairman Andrew N. Ferguson. “The FTC will be vigilant in enforcing the requirements of the Hart-Scott-Rodino Act and we will not hesitate to seek penalties for its violation.”

When a particular deal structure or valuation method makes an HSR filing requirement unnecessary, or delays a filing, parties should consider whether the agencies may perceive that the benefit that motivates the structure or valuation change is to avoid or delay making the filing. If so, the structure or valuation method may be considered a device for avoidance in violation of the HSR Act, even if a legitimate business reason exists for that structure or valuation method. For example, the Premerger Notification Office has previously stated that it views any ownership arrangement designed to avoid compliance with the HSR Act as a violation of the rules. Regardless of the accuracy of that view in any particular circumstance, defending whether something is designed to avoid compliance may not be worth the business interruption or cost. In addition to imposing significant financial penalties, the agencies can require a violating party to:

• sell the assets or equity that caused the violation;
• make a corrective HSR filing and observe a waiting period before making any additional acquisitions; and
• initiate and maintain an HSR Act compliance program.

Given the still-active enforcement landscape, transacting parties should consider the following best practices when structuring and timing a transaction:

• Engage antitrust counsel early in deal negotiations, well before signing, to assess whether a transaction triggers HSR (or other regulatory) filing obligations.
• Avoid structuring price, timing, or deal terms that may be perceived to have the purpose or effect of falling below applicable filing thresholds or otherwise avoiding a required filing.
• Document the legitimate business rationale for any deal structure or valuation methodology, recognizing that a legitimate business reason will not cure a structure whose purpose is to avoid a required filing.
• Take the time to ensure that all HSR submissions are complete, accurate, and unaltered.
• Build sufficient lead time into deal timelines to account for statutory waiting periods and potential second requests.

Transacting parties considering whether the HSR Act applies to their transactions should reach out to Ballard Spahr’s Antitrust and Competition Group to for guidance on whether an HSR filing is required.

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