Executive compensation professionals do not often come across the filing requirements of Section 7A of the Clayton Act (15 U.S.C. § 18a, commonly known as the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”). However, certain compensatory stock awards to a corporate director or executive can trigger HSR and the failure to file can lead to an enforcement action by the Federal Trade Commission (“FTC”) and the Department of Justice. On September 2, 2021, the FTC announced that the CEO of Capital One Financial Corp. (who it characterized ominously as a “Wall Street Banker”), will pay a $637,950 civil penalty to settle charges that his acquisition of Capital One stock violated the HSR Act. According to the press release, the CEO’s compensation package included over 100,000 Capital One shares in 2018, which increased his holdings to $168 million.
Neither the company nor the CEO reported this stock acquisition to federal antitrust authorities and “illegally finalized the acquisition before the agencies could investigate.” According to the press release, the CEO “is a repeat filing offender with wrongdoing spanning two decades,” although this is the first time he has been penalized. The complaint states that the CEO twice failed to comply with the HSR Act in making filings relating to his “multi-million dollar” compensation package. In 1999 and 2004, he had failed to file under the HSR Act prior to acquiring Capital One stock. The CEO had made a corrective filing in 2008, alleging that his filing failure was inadvertent. And he pledged to implement a system to ensure that, going forward, the required HSR notifications would be filed. The FTC gave him a free pass for the 1999 and 2004 acquisitions. But not this time.
The Hart-Scott-Rodino Act is part of antitrust law (thus, the FTC involvement). The HSR Act generally applies to mergers, acquisitions, and joint ventures that exceed a minimum value threshold( the size-of-transaction test) and, in some cases, an additional threshold based on the size of each party (the size-of-person test). But the HSR reporting requirements, by their terms, apply to any acquisitions of equity, including the granting or vesting of compensatory equity awards.
The reason we do not encounter the HSR reporting rules often is because the filing thresholds are quite high. Individuals with company stock holdings of less than $92 million are not required to make filings under the HSR Act. However, some directors and executives, generally a company founder or significant individual investor, will attain those thresholds. Additionally, to complicate matters, every year since 2010, the FTC has adjusted the HSR filing thresholds, based on changes in gross national product. In 2020, the FTC increased the filing thresholds. However, effective March 4, 2021, the FTC adjusted the filing thresholds downward. The FTC adjusted the size-of-transaction threshold for reporting proposed mergers and acquisitions from $94 million to $92 million.
I do not recall seeing an HSR enforcement action like this since December 2011, when the DOJ and FTC collected a $500,000 civil penalty for an executive’s failure to make a timely HSR filing before receiving stock as compensation. Consider this a reminder that we all need to be on the lookout for the application of the HSR in the equity compensation context.
-Mike Melbinger, CompensationStandards.com September 13, 2021
