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The $16K Per Day Mistake, Part 2

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February 26, 2013 | Barbara Baksa

The $16K Per Day Mistake, Part 2

Last week I provided an overview of how the Hart-Scott-Rodino Act applies to stock compensation ("The $16K Per Day Mistake," February 19, 2013). This week I answer some of your burning follow-up questions about the HSR Act.

How Do the "Size of Party" Thresholds Apply to Executives?

You will recall that when an individual engages in an acquisition that causes his/her company stock holdings to be somewhere between $70.9 million and $283.6 million, the acquisition is only reportable if one party to the transaction has annual net sales or assets exceeding $14.2 million and the other has annual net sales or assets exceeding $141.8 million.

But how do these thresholds apply to a human being? That is a good question.  The executive is usually going to the be smaller party and the company is usually going to be the larger party, so the $14.2 million threshold is probably the operable number to worry about for the individual.

My understanding--which I would describe as "sketchy, at best"--is that unless the individual happens to have financial statements (unlikely), he/she creates a pro forma balance sheet to determine his/her assets. The net annual sales test typically wouldn't apply, but it can sometimes and includes certain types of investment income or revenues of entities that the individual owns. And, some assets don't count for purposes of the assets test. As I explained last week, I think the key take-away here is that if an individual's stock holdings exceed $70.9 million, it's time to get the lawyers involved and let them figure this out.

Can Stock Price Appreciation Cause an Executive to Be Subject to the HSR Act?

No, an executive will not become subject to the HSR Act merely because the value of his/her stock holdings increase above the threshold; only an acquisition of stock triggers the filing requirements.

For example, say that an executive owns company stock worth $60 million.  Now let's say the stock price subsequently increases so that the executive's holdings ultimately have a value in excess of $70.9 million. The increase in value would not trigger the HSR Act filing requirements.  But, now the executive's holdings are above that minimum $70.9 million threshold, so any acquisitions the executive makes from here on out have the potential to trigger the filing requirements (unless, of course, the value of the executive's stock declines below $70.9 million or the size of party thresholds aren't met).

Which Stock Plan Transactions Could Trigger HSR Act Filings?

Any stock plan transaction in which executives are acquiring common stock or other voting securities, regardless of whether or not the executive voluntarily engages in the transactions. Typically this would include the following transactions:

  • Exercise, but not grant, of employee stock options
  • Grant of restricted stock
  • Settlement, but not grant, of RSUs
  • Exercise of SARs that are settled in stock
  • Purchase of stock under an ESPP
  • Acquisition of stock under a dividend reinvestment program (but not acquisition of dividend equivalent rights--those would not result in an acquisition of voting stock until settled)

Can the Company Pay the Filing Fees?

As I noted last week, the HSR Act filing fees are substantial, starting at $45,000.  This is an individual obligation, so the fees apply to the executive.  If the company reimburses the executive for the fees, that should be disclosed in the Summary Compensation Table.

- Barbara

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