On December 6, 2018, the FTC announced that James Dolan, Executive Chairman and CEO of The Madison Square Garden Company (MSG), agreed to pay a $609,810 civil penalty to settle charges brought by the Federal Trade Commission (FTC) and U.S. Department of Justice (DOJ) that he violated the premerger notification requirements of the Hart-Scott-Rodino Act of 1976 (HSR Act) by failing to timely report his acquisition of shares of MSG. This is the latest of several enforcement actions in recent years against corporate executives for HSR Act violations stemming from the failure to file for acquisitions of voting securities. Under the HSR Act, parties must notify the FTC and DOJ of proposed acquisitions that meet annually adjusted statutory thresholds and observe a waiting period before closing. These requirements are intended to give the U.S. antitrust authorities notice of, and information about, proposed transactions and provide them with an opportunity to evaluate whether a proposed transaction may harm competition. The maximum civil penalty for violating the HSR Act is currently $41,484 per day, updated annually.
FTC Allegations and Settlement
As described in the complaint, Dolan receives restricted stock units (RSUs) as part of his compensation package as an executive of MSG. According to the DOJ’s complaint, in 2016, Dolan acquired MSG voting securities in the form of vesting RSUs, which pushed his holdings above the lowest HSR notification threshold of $50 million (as adjusted). Dolan submitted an HSR filing as required and completed the transaction following early termination of the waiting period. Under the HSR Act, Dolan was permitted to make additional acquisitions of MSG voting securities for the next five years without submitting an HSR filing, so long as the acquisitions did not result in holdings that exceeded the next-highest notification threshold of $100 million (as adjusted to $161.5 million in 2017). On September 11, 2017, Dolan acquired 591 additional shares of MSG through vesting RSUs. This acquisition brought his holdings above the $161.5 million threshold. However, Dolan completed the transaction without submitting an HSR filing and observing the waiting period. Dolan made a corrective filing, likely upon discovering the error, on November 27, 2017 and the waiting period for that filing expired on December 26, 2017.
The complaint stated that Dolan was in continuous violation of the HSR Act from the date of the acquisition through the expiration of the waiting period for his corrective filing. Dolan settled the charges in exchange for a civil penalty $609,810, which was adjusted downward from the maximum penalty of more than $4 million because the violation was inadvertent, voluntarily disclosed, corrected, and ultimately settled.
The agencies likely pursued civil penalties here because this was not the first time Dolan had violated the HSR Act by failing to submit an HSR filing. The FTC has a long-standing, informal policy of allowing “one free bite at the apple” and typically will not seek civil penalties for a person’s first failure to file, provided the error was inadvertent and the person self-reports and makes a corrective filing. According to the complaint, in 2010, Dolan failed to notify two successive acquisitions of Cablevision Systems Corporation (CVC) voting securities that each resulted in holdings that exceeded the HSR notification thresholds. Dolan (who was CEO of CVC at the time) made a corrective filing in 2012, explaining in a cover letter that his failure to file was inadvertent. The FTC notified Dolan that it would not recommend a civil penalty for the violations, but advised that he “must bear responsibility for compliance with the Act” and would be “accountable for instituting an effective program to ensure full compliance with the Act’s requirements.”
Other Recent Enforcement Actions
In the last several years, the FTC has frequently sought civil penalties against repeat offenders for violations of the HSR Act due to failure to file. In 2017, billionaire businessman Mitchell Rales agreed to pay $720,000 to settle charges that he failed to notify open market acquisitions of voting securities of Danaher and Colfax. In the same year, hedge fund manager Ahmet Okumus paid a $180,000 fine stemming from allegations that he violated the HSR Act by not filing for the acquisition of additional shares of Web.com. In 2016, Caledonia Investments agreed to pay a $480,000 civil penalty relating to its failure to report the acquisition of voting securities of Bristow Group triggered by the vesting of RSUs. Notably, like Dolan, Caledonia, Okumus and Rales all had prior violations.
HSR Compliance Guidelines
These enforcement actions underscore the importance of keen awareness of HSR requirements on the part of companies, executives, and employees alike. The HSR Act requires notification of acquisitions in which the value of voting securities held as a result of the transaction – including shares already held – exceeds certain annually adjusted thresholds. Filing requirements can be triggered by share acquisitions executed through various means, including the vesting of RSUs, the exercise of options or warrants, purchases made pursuant to an employee stock purchase plans, and/or “backside” transactions in which shareholders of the target receive voting securities of the buyer as consideration. Further complicating the analysis, there are several exemptions that can apply to such transactions under the HSR rules and informal guidance from the FTC. In light of these complexities and the serious consequences of HSR Act violations, companies and executives whose equity interests might trip relevant thresholds should regularly track holdings and compensation schedules in order to ensure compliance. In addition, parties should consult experienced antitrust counsel to analyze whether HSRs filing may be required and evaluate any potential exemptions.