It’s once again time for my annual blog about the Hart-Scott-Rodino Antitrust Improvement Act of 1976. The annual raising of the HSR Act filing thresholds provides an excellent opportunity for a reminder about the HSR Act requirements. This little understood area of trade law is sure to make you a hit at cocktail parties. But even more significant, 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's holdings in company stock 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, the greatest risk is for executives, who are the employees who are most likely to amass stock holdings 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 when the value of an individual's holdings in company stock exceed specified thresholds. That sounds simple enough but like most things regulatory, the government has management to make it a little more complicated. Here are the basic rules:
The thresholds increase annually. As announced by the FTC on January 28, effective February 27 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 $18.8 million and the other party had assets of exceeding $188 million (up from $18 million and $180 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 $94 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.
A Costly Mistake
Penalties for failing to make these filings can be in excess of $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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