It’s once again time for my annual blog about the Hart-Scott-Rodino Antitrust Improvement Act of 1976. The annual increasing of the HSR Act filing thresholds is a good opportunity for me to remind my loyal blog readers about the act’s requirements. Failure to comply with the HSR Act could be very costly—see below—so it’s something you want to keep an eye on.
The HSR Act was enacted to provide the Federal Trade Commission and the Department of Justice with advance notice of large mergers and acquisitions, by requiring the entities involved in the transaction to file reports with both agencies. A trap for the unwary, however, is that the HSR Act applies to individuals as well as corporations. Where an individual acquires voting stock that exceeds the specified filing thresholds, that individual is responsible for making the required filings.
While the HSR Act can apply to any individual, in the context of equity compensation it is most likely to executives, who are the employees who are most likely to amass amounts of company stock that exceed the act’s filing thresholds as a result of their transactions in the company's stock plans. As administrator of your company's stock plan, this is where you come in and why it's a good idea for you to be familiar with the HSR Act (because if an executive exceeds the thresholds and fails to make the required filing, you can bet that executive isn’t going to blame him/herself for the failure).
The filing requirements apply only to acquisitions that exceed a specified threshold, defined in terms of the value of the individual's holdings in the company as a result of the acquisition. Acquisitions that don't cause an individual's holdings to exceed this threshold aren't subject to the HSR Act filing requirements.
Even acquisitions that do exceed this threshold may not trigger the filing requirement. For the filings to be required, one of the following conditions must be met:
The thresholds increase annually. As just announced by the FTC on February 18 and to be effective at a later date, the thresholds are as follows:
If the individual's holdings are between the above two thresholds, their acquisition is reportable under the HSR Act if one party to the transaction has assets in excess of $18 million and the other party had assets of exceeding $180 million (until the new thresholds are effective, these thresholds are $16.9 million and $168.8 million, respectively).
Could these rules possibly by any more confusing? It's hard to say, but probably. I think the take-away is that if any of your executives own close to $90 million in company stock, or own more than this amount, it's time to get your legal team involved in making sure the executives don't need to make these filings.
Oh, and just to keep things as confusing as possible, the new thresholds are effective 30 days after they are published in the Federal Register, because we all have nothing better to do than check the Federal Register every day to see if the rules have been published.
Penalties for failing to make these filings can be $40,000 per day! That’s right—PER DAY! This isn't something to take lightly or to just hope that someone else in your company is monitoring it. If you have executives nearing the ownership threshold at which filings can be required, raise the red flag.
This memo by Morrison & Foerster provides more information on the new thresholds. And this NASPP Essentials article provides more information on the HSR Act in general.
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