On, August 1, 2016, the maximum daily penalty for premerger notification violations under the Hart-Scott-Rodino Act (HSR Act) increases from $16,000 to $40,000. This 250 percent increase, which the Federal Trade Commission (FTC) announced at the end of June, is mandated by a statute requiring federal agencies to adjust civil penalties for inflation.
- Maximum fine for HSR violations increased from $16,000 to $40,000 per day.
- Increased penalties and enforcement could result in millions of dollars in fines.
- Harsher penalties generally reserved for parties with prior noncompliance or bad faith
Under the HSR Act’s premerger notification program, parties to a large merger or acquisition – generally, those valued at $78.2 million or more – must notify the FTC and Department of Justice (DOJ) of the merger or acquisition and submit a form and information about the transaction and the parties’ businesses. Once the form is submitted, the deal cannot close until the 30-day waiting period expires. Failure to file under the premerger notification program violates the HSR Act and could result in the imposition of the $40,000-per-day penalty.
Generally, the FTC does not seek maximum penalties for HSR Act violations. In the Federal Register announcement of the increase, the FTC noted that when it seeks civil penalties “it is mindful of the statutory criteria courts must apply when determining the amount of” such penalties, including the degree of culpability, history of such conduct, good or bad faith, and harm to the public. Based on these criteria, repeat offenders are likely to receive harsher punishments than first-time offenders whose violations are inadvertent or made in good faith. As the Director of the FTC’s Bureau of Competition said in an August 2014 press release announcing a substantial penalty, “Although we may not seek penalties for every inadvertent error, we will enforce the rules when the same party makes additional mistakes after promises of improved oversight. Companies and individual investors alike should ensure that they have an effective program in place to monitor compliance with HSR filing requirements.”
Nonetheless, penalties may be significant, as each day of noncompliance is treated as a separate violation. Just a few weeks ago, the Department of Justice reached a settlement with an activist investment firm that allegedly failed to comply with the HSR Act’s notification requirements. The firm agreed to pay a record $11 million fine—nearly double the highest fine previously paid.
Other settlements in the past year have resulted in hundreds of thousands of dollars in civil penalties. In October 2015, an investor agreed to pay $656,000 in penalties to resolve FTC allegations that he failed to report voting shares he acquired in a technology startup. And in September 2015, a company agreed to pay $240,000 in penalties to resolve FTC allegations that it failed to report a conversion of its ownership interest in a financial services company. In both instances, the FTC noted, the parties had previously violated the HSR Act.
Given active enforcement and a harsher penalties scheme, now more than ever, parties considering mergers or acquisitions should be aware of the potential pitfalls of failing to comply with the HSR Act.
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Compliments of Thompson Hine – a member of the EACCNY