United States: Recent Civil Penalty For Failing To Comply With Hart-Scott-Rodino Act Illustrates Need For Strict Adherence To Reporting Obligations

On June 23, 2009, the Federal Trade Commission (FTC) and Antitrust Division of the Department of Justice (DOJ) announced that John Malone will pay a $1.4 million civil penalty to settle charges that he violated the Hart-Scott-Rodino Antitrust Improvements Act of 1976 as amended (HSR Act). The DOJ, at the FTC's request, filed a civil antitrust lawsuit in federal court against Mr. Malone for failing to comply with the HSR Act's premerger reporting and waiting period requirements in connection with purchases of voting securities of Discovery Holding Company (Discovery). See http://www.ftc.gov/opa/2009/06/malone.shtm and http://www.usdoj.gov/atr/public/press_releases/2009/247342.htm.

Factual Background for Enforcement Action

Mr. Malone is Chairman of the Board of Liberty Media Corporation (Liberty Media) and Chief Executive Officer and Chairman of the Board of Discovery.

In May 2005, Mr. Malone, who already held voting securities of Liberty Media, made a premerger filing under the HSR Act to acquire additional voting securities of Liberty Media. At that time, Liberty Media was the parent of Discovery. On July 21, 2005, Discovery was spun off from Liberty Media and became its own ultimate parent. On August 9, 2005, without making a filing under the HSR Act, Mr. Malone acquired Discovery voting securities that resulted in him holding an amount of Discovery voting securities valued in excess of the HSR Act's reportability level then in effect. Mr. Malone continued to make additional acquisitions of Discovery voting securities through April 2008.

On June 12, 2008, Mr. Malone made a corrective filing with regard to his prior acquisitions of voting securities of Discovery in violation of the HSR Act. In a letter accompanying the 2008 corrective filing, Mr. Malone stated that, in determining not to file in August 2005, he had relied on a 2001 FTC Premerger Notification Office informal interpretation. That informal interpretation indicated that a filing for the acquisition of a non-controlling amount of voting securities of a parent corporation could cover acquisitions of voting securities of a subsidiary of that parent corporation. Mr. Malone stated that neither he nor his counsel had been aware of a February 2005 informal interpretation that disavowed the 2001 interpretation. Mr. Malone also stated with regard to his acquisitions from August 9, 2005 through April 2008 that neither he nor his counsel on his behalf checked the database of informal interpretations maintained by the FTC Premerger Notification Office, or contacted the FTC Premerger Notification Office to ask whether the 2001 interpretation was still the FTC Premerger Notification Office's policy or to otherwise ask if a filing for a parent corporation covered acquisitions of a subsequently divested subsidiary.

The DOJ complaint alleged that on June 14, 2008, two days after making the corrective HSR Act filing and before the HSR Act waiting period had expired, Mr. Malone again violated the HSR Act. At that time, he exercised two options that were about to expire to acquire additional voting securities of Discovery. Mr. Malone exercised these options using an escrow arrangement but, according to the DOJ's complaint, the HSR Act still was violated as the escrow arrangement did not prevent the passing of beneficial ownership to Mr. Malone while the HSR Act waiting period was pending.

Mr. Malone had a prior violation of the HSR Act for an acquisition made in 1985 for which he made a corrective filing in 1991. The FTC did not seek civil penalties with regard to that 1985 acquisition.

Important Points to Remember Regarding HSR Act Compliance

This enforcement action is an important reminder of the need for strict adherence to obligations under the HSR Act. Other important reminders regarding HSR Act compliance from this matter include:

• The penalties under the HSR Act can be significant. Any entity or individual in violation of the HSR Act after February 9, 2009, may be subject to a civil penalty of up to $16,000 a day for each day in violation of the HSR Act. Any entity or individual in violation of the HSR Act on or before February 9, 2009, may be subject to a civil penalty of up to $11,000 a day for each day in violation of the HSR Act. Over time, this can result in a large penalty (e.g., millions of dollars) especially if a violation is not discovered for several years.
• You should consult with counsel immediately if you believe that you may have violated the HSR Act. The FTC has procedures for making a post-consummation filing. Parties that discover that they have closed a reportable transaction without filing should immediately notify the FTC and make a corrective filing as soon as possible. While the HSR Act thresholds are now indexed on an annual basis based on changes in gross national product, the thresholds that apply to a given transaction are the ones in place when that transaction closed.
• The application of the HSR Act is not limited to acquiring control of a business. For example, an exercise of an option for a minority ownership of voting securities can trigger the need for an HSR Act filing. (The HSR Act also can be triggered in many other contexts such as asset acquisitions, including exclusive licenses of intellectual property, where the applicable threshold tests are met and no relevant exemption applies.)
• For any transaction, parties must be careful to determine if a reporting threshold is met, given that the process can be very complex and the HSR Act rules are highly technical. Parties also need to be very careful to understand what is or is not covered under an HSR Act filing. The FTC Premerger Notification Office is available to provide informal interpretations regarding the application of the HSR Act and its rules to particular factual situations. While informal interpretations of the HSR Act on the FTC's Web site are often a useful resource, it can be dangerous to rely on a given interpretation without confirming that it reflects the agency's current view.
• The value of an acquisition for HSR Act purposes may require aggregating the value of the current transaction with the value of a prior acquisition. For example, if a person previously acquired a non-reportable and non-controlling amount of voting securities in a company, the value of those previously acquired shares will need to be aggregated with the value of any additional voting securities of that company being acquired to determine if the HSR Act is triggered. Further, when aggregation is required, the acquiring person cannot rely on an original acquisition price in valuing the interests it already holds but must use the current market value.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.