On December 6, 2018, the Federal Trade Commission (FTC) announced that James L. Dolan, the Executive Chairman of Madison Square Garden Company (MSG), which owns the New York Knicks and New York Rangers, had agreed to pay a civil fine in excess of $600,000 to resolve charges by the FTC that he violated the reporting requirements of the Hart-Scott-Rodino (HSR) Act. This latest FTC enforcement action is a reminder that the HSR Act contains some nuance that can create traps for the unwary.
The HSR Act requires that parties to a transaction for the acquisition of voting securities or assets that exceed certain thresholds notify the FTC and the U.S. Department of Justice of those transactions and observe a 30-day waiting period prior to closing. The HSR Act requires that any transaction that will result in the acquirer holding in excess of $200 million (as adjusted) of voting securities or assets of another person be reported; in 2018, that adjusted amount was $337.6 million. Depending on the size of the parties, transactions that will result in the acquirer holding in excess of $50 million (as adjusted) of voting securities or assets of another person may need to be reported; in 2018, that adjusted amount was $84.4 million.
It is important to remember that these thresholds apply not to the value of the voting securities or assets being acquired in the transaction in question, but rather to the aggregate value of voting securities or assets that the acquirer will hold as a result of the transaction. Once an acquirer has crossed these HSR thresholds, any additional acquisition of voting securities or assets of another party could trigger the HSR notice requirement and waiting period, but the FTC has used its rulemaking authority under the HSR Act to define "notification thresholds" within which a person can continue to acquire additional voting securities or assets of another person without being required to file notification and observe the waiting period.
After the $50 million (as adjusted) threshold, the FTC's rules identify four additional thresholds at which a transaction must be reported and the waiting period observed: voting securities valued at $100 million (as adjusted) or greater but less than $500 million (as adjusted); voting securities valued at $500 million (as adjusted) or greater; 25 percent of the voting securities of an issuer, if the 25 percent (or any amount above 25% but less than 50%) is valued at greater than $1 billion (as adjusted); and 50 percent of the voting securities of an issuer if valued at greater than $50 million (as adjusted). These "notification thresholds" are designed to relieve parties of the burden of making another filing every time additional voting securities or assets of the same person are acquired, but parties must take care to ensure that they file the required notification and observe the waiting period when these thresholds are crossed.
As the Executive Chairman of MSG, Mr. Dolan receives restricted stock units (RSUs) in the company as part of his compensation package. In August 2016, when a portion of those RSUs vested, Mr. Dolan filed an HSR notification prior to his acquisition of MSG voting securities in excess of the $50 million threshold (as adjusted, then $78.2 million). One year later, on September 11, 2017, Mr. Dolan acquired an additional 591 shares of MSG due to vesting RSUs, resulting in him holding MSG voting securities in excess of $100 million (as adjusted, then $161.5 million). Mr. Dolan did not file an HSR notification or observe the waiting period before completing the transaction, but made a corrective filing with the FTC on November 24, 2017. The 30 day waiting period expired on December 26, 2017.
As part of a negotiated resolution with the FTC, Mr. Dolan agreed to pay a civil fine of $609,810. This represents a significant portion of the maximum penalty available; the HSR Act imposes a fine of up to $10,000 for each day a violation continues. The FTC explained that the size of the penalty was due in part to a similar violation of the HSR Act by Mr. Dolan in 2010, when he failed to report an acquisition of additional voting securities in a company that took him across a notification threshold.
This most recent enforcement action by the FTC serves as a reminder to businesses and high net worth individuals that where HSR thresholds are concerned, it is not the size of the transaction that triggers coverage, but rather the size of the buyer's holdings that will result. And even after complying with the HSR requirements prior to closing a particular transaction for the acquisition of voting securities or assets of another person, businesses and high net worth individuals should make a note of where the next notification threshold lies, so that they do not inadvertently cross that line in the next transaction for the voting securities or assets of that same person without again complying with the HSR requirements.
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