United States: US Antitrust Agencies Reject Parties' Corporate Deal Structure To Determine Alleged HSR Act Violations

Last Updated: June 28 2019
Article by Meytal McCoy

On June 10, 2019, Toshiba Corporation ("Toshiba") and Canon Inc. ("Canon") agreed to settle a complaint filed by the Antitrust Division of the US Department of Justice ("DOJ") at the request of the Federal Trade Commission ("FTC").  The complaint alleges that the companies intentionally engaged in a scheme to evade US pre-merger notification laws in violation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a (the "HSR Act"). Pursuant to the terms of the settlement, Toshiba and Canon each must pay $2.5 million in civil penalties for a total of $5 million.  Additionally, for a period of three years after the fine is paid, each corporation is required to implement an HSR compliance program, which includes hiring a compliance officer and ensuring that relevant employees receive at least two hours of annual HSR training by a specialist in US antitrust law. 

The complaint alleges that Toshiba and Canon devised a plan to enable Canon to acquire Toshiba's subsidiary, Toshiba Medical Systems Corporation ("TMSC"), which would allow the financially struggling Toshiba to recognize the proceeds from the sale by the close of its fiscal year.  Although Toshiba and Canon actively were negotiating a deal for TMSC in February 2016, the complaint asserts that the parties realized that they did not have enough time to complete their negotiations and abide by the 30-day waiting period under the HSR Act if they were to meet Toshiba's March 31, 2016 fiscal year end deadline. 

Thus, the complaint alleges that the parties engaged in a series of legal somersaults to sign a deal that allowed Toshiba to realize income before March 31, transfer control of TMSC to Canon, and avoid or delay an HSR Act filing until after March 31.  Specifically, (1) the parties engaged a law firm to create a special purpose vehicle called MS Holding Corporation ("MS Holding"); (2) Toshiba re-arranged the ownership of TMSC to create new voting shares, a single non-voting share and options convertible to ordinary shares; (3) Toshiba sold TMSC's voting shares to MS Holding for approximately $900; (4) Toshiba sold TMSC's non-voting shares and convertible options to Canon for $6.1 billion; and (5) Canon exercised its options later, only after an HSR Act filing was made and a waiting period was observed. 

As devised, in the absence of being an avoidance device (discussed below), the TMSC sale to MS Holding was not reportable under the HSR Act.  The transfer of the TMSC voting shares to MS Holding was not reportable because, at only $900, the transaction value was below the HSR reporting threshold.  The sale of the non-voting shares and options to Canon also was not reportable because (i) only acquisitions of voting shares are reportable under the HSR Act, and (ii) acquisitions of options are exempt from reporting (although the exercise of the option may be reportable). (See 16 C.F.R. §§ 801.1(f)(1)(i), 802.31.)  

The lynchpin of the allegations is that MS Holding allegedly never had beneficial ownership over the TMSC shares under the HSR rules.  The complaint sets forth that MS Holding had no risk of gain or loss over the TMSC shares because Canon agreed to pay MS Holding a pre-determined amount when the options were exercised, regardless of TMSC's financial performance.  The complaint asserts that Canon was intimately involved in the creation of MS Holding, which existed merely to hold the TMSC shares until Canon had time to make an HSR Act filing.  The complaint proceeds that MS Holding was never an independent entity and that it never made any effort to be involved with the day-to-day business of TMSC.  

Because MS Holding never "held" the TMSC shares under the HSR Act and, in fact, the shares were "held" by Canon, the complaint charged that the transaction was an avoidance device prohibited under 16 C.F.R. § 801.90, which allows the antitrust authorities to disregard the parties' transaction structure and enforce HSR Act rules if it is determined that such transaction was entered into to avoid an HSR Act obligation.  Thus, the complaint alleges that while Canon and MS Holding submitted an HSR Act filing with respect to the exercise of the TMSC options, an HSR Act violation occurred because Canon and Toshiba did not make the required filing relating to Canon's acquisition of the TMSC voting shares.

Key Takeaways:

This action is highly relevant to entities determining how to structure transactions and provides several important lessons regarding how to avoid HSR Act violations:

  • The heart of the alleged violation was that the transaction was a vehicle to avoid an HSR Act filing.  While typically HSR Act violations are borne by the buyer, here both parties are subject to the consent decree.  Parties should be mindful that in these cases where there is a possibility that a jointly negotiated transaction structure could be questioned under the avoidance device prohibition, both the buyer and seller may be on the hook if the agencies determine there is a violation. 
  • The fine for HSR Act violations currently stands at more than $42,000 per day for every day in violation.  While the court could have assessed each party a penalty of more than $6.3 million, the parties settled with the DOJ for $2.5 million.  The parties also agreed to implement an HSR Act compliance program that would be monitored by the DOJ.  If faced with a potential violation, a party should consider whether settlement is a more palatable option than litigation, particularly if there is a possibility to obtain a substantial reduction of the potential civil penalty. 
  • The FTC (which referred the case to the DOJ) took a close look at which party actually held the economic benefits of the shares of TMSC, not just at how the voting/non-voting shares were transferred.  Looking behind the curtain of the share transfer at the underlying economic rights is telling and reflects that the agencies may not take companies' descriptions of their transactions at face value, particularly where the agencies have a reason to believe that the parties have engaged in conduct to avoid a reporting obligation.
  • Both Canon and Toshiba are sophisticated global companies, well-versed in multi-jurisdictional merger control regulations.  The settlement requires that the parties' compliance program include annual training for certain employees to be conducted by a lawyer with expertise in US antitrust law.  This settlement is a reminder that companies of all sizes should conduct HSR Act training for their executives to avoid or mitigate the risk of a violation.

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