On October 15, 2007, the U.S. Department of Justice (DOJ) filed a complaint in U.S. District Court to obtain $550,000 in civil penalties against Iconix Brand Group Inc. ("Iconix") for violating premerger notification requirements of the Hart-Scott-Rodino (HSR) Notification Act, Section 7A of the Clayton Act, 15 U.S.C. § 18a, as amended. The DOJ's complaint is yet another strong reminder from the antitrust agencies to parties engaged in mergers and acquisitions that the agencies will continue to vigorously enforce premerger notification requirements and will fine companies that do not comply. The complaint is also significant in that it enforces HSR in the context of a non-controversial transaction, reminding parties that the DOJ and FTC will pursue HSR Act violators even though the agencies may conclude that the transaction poses no threat to competition or consumers.
Background
On March 6, 2007, Iconix and Rocawear Licensing LLC ("Rocawear") entered into an Asset Purchase Agreement under which Iconix, an owner of a portfolio of fashion brands, purchased certain assets and rights related to Rocawear brands, trademarks, and intellectual property for $204 million. Iconix obtained more than $200 million in financing from Lehman Brothers Inc. to complete the acquisition.
On March 14, 2007, Iconix and Rocawear each filed a Notification and Report Form with the FTC and DOJ, and each did not state in their respective premerger filings that there were documents responsive to Item 4(c), which generally calls for documents concerning the transaction and its effect on competition, and none were submitted by the parties. The HSR filing was accompanied by a sworn statement by Neil Cole, the President and CEO of Iconix, that the filing was complete.
About a week after the filings were made, an FTC staff member contacted counsel for Iconix and noted that the lack of any documents responsive to Item 4(c) was unusual, and he sought confirmation that an appropriate search for 4(c) documents had been done. Iconix's counsel confirmed that the company had duly searched for 4(c) documents and that no such documents existed.
In late March 2007, Iconix and Rocawear received early termination of the HSR waiting period, allowing them to close their transaction. On March 30, 2007, Iconix completed its acquisition of the Rocawear assets.
In April of 2007, the DOJ decided to investigate whether Iconix had undertaken the Rocawear transaction, a deal requiring more than $200 million in financing, without its officers or directors having prepared or reviewed documents that evaluated or analyzed the transaction from a competition standpoint. Accordingly, it issued a Civil Investigative Demand ("CID") to Iconix on May 1, 2007, seeking documents concerning the Rocawear asset deal.
Numerous documents were produced in response to the CID, including:
- An email addressed to Directors and several officers of Iconix that discussed expansion into new product and geographic market segments;
- A presentation to Iconix's Executive Vice Preisdent describing "Rocawear's presence in the urban lifestyle market," accompanied by a chart and discussion of Rocawear's market share along with other competitors; and,
- Materials that were prepared for a February 27, 2007 Board of Directors meeting that also included the same market share charts.
The DOJ determined that these documents should have been submitted in response to Item 4(c), and that Iconix did not comply with the reporting and waiting requirements of the HSR Act and Rules before closing its transaction on March 30, 2007. It therefore found that Iconix was in continuous violation of the Act from March 30, 2007 through June 22, 2007.
The HSR Act and its Rules
The HSR Act requires certain acquiring persons and certain persons whose voting securities or assets are acquired to file notifications with the Federal Trade Commission and the Department of Justice ("federal antitrust agencies"), and to observe a waiting period before consummating certain acquisitions of voting securities or assets. The notification and waiting period is intended to give the federal antitrust agencies prior notice of, and information about proposed transactions. It also provides the agencies an opportunity to investigate the transaction to determine whether the transaction might violate the antitrust laws. If an acquiring person meets the jurisdictional thresholds of the HSR Act, which are adjusted annually, the required notifications must be made.
Section 7(A)(g)(1) of the Clayton Act, 15 U.S.C. § 18(a)(g)(1), provides that any person, or any officer, director, or partner thereof, who fails to comply with any provision of the HSR Act is liable to the United States for a civil penalty for each day during which such person is in violation. The maximum amount of civil penalty is $11,000 per day.
The issue in the Iconix case arose from what is known in antitrust merger practice as "4(c) documents." Documents submitted with the notification in response to this form request are viewed by the agencies as an integral part of the premerger notification, and these documents were conspicuously absent from Iconix's HSR filing.
4(c) documents include:
- studies, surveys, analyses, or reports;
- prepared by or for an officer or director;
- for the purpose of analyzing or evaluating the transaction at issue;
- with respect to competition, competitors, competitive conditions, markets, market shares, or potential for sales growth or expansion into product or geographic markets.
Understandably, the agencies interpret this definition broadly. These documents can include: shopping documents prepared by an acquired person and/or its bankers, any analyses commissioned by the officers or directors of an acquiring person, presentation slides, email, recordings of presentations or meetings, handwritten notes, spreadsheets showing market shares, and any bullet points explaining competitive benefits of the acquisition. Obviously, this list is not exhaustive. What determines whether a document is responsive to Item 4(c) can and should be a factual inquiry that antitrust counsel should undertake with his or her client.
Moreover, depending on the nature of the entity making the notification, rules of the HSR Act require that a general partner (in the case of a partnership), officer or director (in the case of a corporation), or those who may exercise similar functions, must certify that the notification is true, correct, and complete in accordance with the HSR Act and all of its rules. Neil Cole, the President and CEO of Iconix had submitted a certification that the notification was complete, and Iconix's counsel subsequently confirmed that an appropriate search for 4(c) documents had been done and that no such documents existed. However, when documents that should have been submitted as 4(c) documents later turned up in response to DOJ's CID, Iconix's later recertification of a revised version of its original premerger notification with the newly discovered 4(c) documents, was "too little, too late."
Implications of the Ruling
The antitrust authorities take enforcement of the HSR Act seriously and, when discovered, failures to comply with premerger notification requirements represent "low hanging fruit" to the agencies from an enforcement perspective. Depending on the facts and circumstances, it largely can become an issue of severity of the fine. Indeed, although the DOJ found that Iconix was in violation for 84 days, its total fine could have been a maximum of $924,000, although the fine is more aligned with the 54-day period between its closing of the Rocawear deal and Iconix's recertification of its HSR filing.
HSR Act violations are easier to prove, and from an enforcement perspective, serve as a highly efficient and cost effective means to put parties on notice that they can and will be subject to civil penalties for violations. The determination is also made without regard to competitive effects of the transaction, and from the perspective of the client, the result can be both unfortunate and unnecessary.
In its press release, Tom Barnett, Assistant Attorney General of the Department of Justice's Antitrust Division, stated, "Compliance with Hart-Scott-Rodino Act filing obligations is fundamental to the agencies' ability quickly and accurately to evaluate a transaction's competitive impact. Filing parties must understand that the Division will vigorously enforce filing requirements even if we conclude that the transaction poses no threat to competition or consumers."
In a previous HSR Act violation case filed in May of this year, James Dondero, a hedge fund director of Highland Capital Management, failed to file premerger notification and was fined $250,000. Jeffrey Schmidt, Director of the FTC’s Bureau of Competition, stated, "Our goal is to make the process as open and transparent as possible to ensure that all appropriate filings are made in a timely manner. But we will not hesitate to bring enforcement actions when violations occur."
The bottom line is that if your deal requires premerger notification, don’t forget to file and don’t withhold documents. Companies are strongly advised to work with counsel to ensure that the notification is complete, engage in a diligent search for responsive materials, and ensure that the company is being responsive and compliant with the rules. Otherwise, your company could be the next piece of fruit to be plucked.
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