Our recent civil penalty action involving Berkshire Hathaway’s failure to file the required Hart-Scott-Rodino notification is a reminder to investors to be alert to common filing mistakes. It is also a reminder that every investor—companies and individuals alike—needs to have a program in place to ensure compliance with HSR filing obligations.
In a nutshell, Berkshire Hathaway acquired voting securities of USG Corporation in December 2013 through a conversion of notes that gave it shares with a value over the $283.6 million threshold, but it failed to make the required HSR filing. Under Rules 802.31 and 801.32, no HSR filing was required when acquiring the convertible notes, but filing was required prior to their conversion.
Berkshire Hathaway realized its mistake and made a corrective filing in January. However, it was the company’s second corrective filing in six months. Last year, it failed to file an HSR notification before exercising warrants for shares of voting securities in another company, Symetra Financial Corporation, a transaction that similarly pushed it over the $283.6 million threshold. In the Symetra deal, Berkshire Hathaway failed to follow the aggregation rules. Under Rule 801.13, for the purposes of determining what voting securities will be held as a result of a transaction, the voting securities to be acquired must be aggregated with the voting securities of the same issuer already held by the acquirer. The Premerger Notification Office has identified this as a common filing mistake: typically, company executives exercise a very small number of options or warrants with a value well below the size-of-transaction threshold, but fail to aggregate the value of the converted shares with what they already hold. This is exactly the scenario that led to Berkshire Hathaway’s first corrective filing.
After the first failure to file, Berkshire Hathaway assured the FTC that it would institute an HSR compliance program. With that promise, the Commission did not seek penalties. The Agencies may determine not to seek civil penalties when parties inadvertently and mistakenly fail to file if: (1) the violation was the result of understandable or simple negligence; (2) the parties make corrective filings promptly after discovering the mistake; (3) they did not benefit from the violation; (4) they submit an acceptable explanation for the failure to file and explain what they will do to prevent another violation; and (5) they have not previously violated the HSR Act. With the second oversight so quickly on the heels of the first, however, the Commission determined to seek civil penalties on the second violation in order to ensure that the HSR rules are enforced in a way that is fair to all investors.
This is not the first time the Commission has obtained civil penalties for a second mistake. Last year, the Commission obtained civil penalties from MacAndrews & Forbes for a second corrective filing just over a year after the first. The Commission previously obtained civil penalties from ValueAct Capital Partners, James Dondero and William Gates for second violations that occurred within eighteen months of the first filing error. And in some circumstances, the FTC has obtained civil penalties for a first mistake, see, e.g., The Loewen Group Inc., or ESL Partners. Additionally, we will continue to bring actions in other cases of a first violation that do not involve mere mistakes, such as where the company does not acknowledge that they should have made a filing or has failed to put in place any reasonable HSR compliance program.
Not all acquisitions of voting securities require an HSR filing, and buyers sometimes make mistakes in applying the HSR rules to particular combinations of buyer, seller, asset or voting security, value, location, timing, etc. For that reason, when companies make corrective filings, explain their mistake, and then make changes in their internal review process to ensure compliance in the future, the FTC may decide not to seek civil penalties. But especially when the same investor makes another mistake shortly after the first, something more is needed to ensure the company takes seriously its obligations to comply with the HSR Act.