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The $16K Per Day Mistake

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February 19, 2013 | Barbara Baksa

The $16K Per Day Mistake

We recently posted an alert about the filing thresholds under the Hart-Scott-Rodino Act increasing.  The alert reminded me that this is a topic I've been meaning to blog about for a while now.

The HSR Act

The Hart-Scott-Rodino Antitrust Improvement 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 the FTC and the DOJ. 

What does this have to do with stock compensation? I'm glad you asked! It turns out that the HSR Act applies to individuals as well as corporations.  If an individual's holdings in a company's stock exceed the filing thresholds, that individual is responsible for making the required filings with the FTC and the DOJ. 

The Filing Thresholds

Any acquisition that does not cause an individual's holdings to exceed more than $70.9 million is exempt from the filing requirement. 

Any acquisition that causes an individual's holdings to exceed $283.6 million triggers the filing requirements.

Stuck in the Middle With You

Transactions that cause an individual's holdings to fall somewhere in between these two thresholds trigger the filing requirements only if the smaller party in the transaction has annual net sales/assets exceeding $14.2 million AND the larger party has annual net sales/assets exceeding $141.8 million.

If you aren't confused about this, you are probably a lawyer that specializes in antitrust laws.  The rest of you are likely wondering how these "size of party" thresholds apply when individuals are acquiring company stock. I'll provide some more information on this next week. For now, however, I think the key takeaway is that if an executive at your company is in danger of acquiring more than $70.9 million in company stock, it's time to get the lawyers involved so they can figure all this out. 

Thresholds Increase Annually

The size of transaction and the size of party thresholds increase every year (they just increased as of February 11 of this year). 

Filing Requirements and Penalties

The filings must be completed before the acquisition is closed.  In the context of a merger, there is typically an extended period between when the parties agree to the deal and when it closes, providing time to complete these filings. Where an individual becomes subject to the filing requirements as a result of an acquisition of stock through, say, the company's stock compensation program, there may not be as much time to make the filing. Thus, monitoring executive's stock ownership levels with respect to the minimum filing threshold should, at a minimum, be part of your annual procedures.  Where executives are close to the threshold, this should be verified before every transaction.

There are some steep fees that go along with the filings--the minimum filing fee is $45,000. But the penalty for not making the filings can be up to $16,000 per day--three days late and the penalty could already exceed the filing fees.  We are aware of an executive that was fined $500,000 for failure to comply with the HSR Act. Luckily, according to an O'Melveny & Myers memo, first-time offenders are rarely fined, provided that the error was inadvertent and the filings are completed as soon as the error is identified. 

Stay Tuned

Next week I'll discuss more specifically how the HSR act applies to stock compensation. If you just can't wait 'til then, see the NASPP's new HSR Act Portal for more information.

- Barbara

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