Securities Law Blog

As companies consider potential equity grants to their officers and directors, it is important that they be aware that the acquisition of voting securities as compensation, including through the exercise of stock options, vesting of restricted stock or through the receipt of equity securities, including through the reinvestment of dividends and short-term interest earned by a 401 (k) plan, may trigger pre-merger notification reporting requirements pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, commonly referred to as the Hart-Scott-Rodino Act or the HSR Act.  HSR Forms are filed with the Federal Trade Commission and the Department of Justice

While most people think of the HSR Act in terms of its commonly understood application to proposed mergers and acquisitions, officers and directors need to be cognizant of the applicability of the HSR Act to any acquisition of voting stock.  Voting securities are defined as securities having a present right to vote for the board of directors of a company.  Accordingly, the acquisition of an option or warrant would not trigger a reporting obligation; however, the exercise of such option or warrant may require an HSR Act filing.  

Acquisitions of company securities by officers and directors are not exempt from the reporting requirements under the HSR Act.  The HSR Act requires that parties to mergers or acquisitions of voting securities or assets notify the Federal Trade Commission and the Department of Justice if (1) the size of the parties involved and (2) the value of the transaction exceed certain monetary thresholds, absent an applicable exemption before consummating the proposed acquisition.  Premerger notification involves each party completing a separate HSR Form, also called a “Notification and Report Form for Certain Mergers and Acquisitions,” which requires information about each filing person (e.g., officer or director and the issuer). There is a filing fee for the HSR Form of $45,000 to $280,000, depending on the size of the transaction.  The parties may not close their transaction (e.g., officer or director acquiring voting securities) until the waiting period outlined in the HSR Act has expired, or the government has granted early termination of the waiting period.  

The FTC revises the thresholds set forth in the HSR Act annually, based on the change in the gross national product.  The size of the person test is currently met if the issuer has $156.3 million or more in annual sales or total assets and the officer or director has $15.6 million or more in total assets, increased from $152.5 million and $15.3 million, respectively, from 2015. As a result of the most recent revisions, the size-of-transaction threshold for reporting proposed mergers and acquisitions subject to antitrust enforcement was increased from $76.3 million for 2015 to $78.2 million for 2016.  If an individual has submitted an HSR Form and observed the waiting period for an applicable HSR threshold, and has crossed that threshold within one year of the expiration of the HSR waiting period, additional voting shares may be acquired for a period of up to five years up to the next HSR Act reporting threshold (as adjusted annually).  

In determining thresholds under the HSR Act, the value of a person’s current holdings must generally be aggregated with the value of any shares to be acquired.  In addition, the holdings of spouses, minor children and certain trusts must be taken into account in determining a person’s holdings.  Current holdings are valued at their “present value” based on the lowest closing price in the 45 calendar days prior to the HSR Act filing.  Appreciation of previously acquired stock will not, by itself, require reporting under the HSR Act. However, if previously acquired shares have appreciated in value, the acquisition of even a small number of shares may require filing an HSR Form.

Violations for failing to file an HSR Form can result in civil penalties of up to $16,000 per day. While first time offenders are generally not penalized for unintentional errors to make the required notice filing as long as the requisite corrective filings are made in a timely fashion, repeat offenders have been subjected to significant monetary fines.  Corrective filings should be submitted upon discovery of any inadvertent failure to file in order to mitigate any potential penalties.

In order to avoid any accidental HSR violations, companies should track any pending acquisitions of voting stock and have any potentially reportable acquisitions reviewed by HSR counsel prior to the issuance or acquisition of such securities. This is particularly important for officers and directors who already have significant holdings of shares of their company.