by Joseph Winterscheid

In December 2011, the United States Department of Justice (DOJ) announced that a public company chief executive officer (CEO) will pay a $500,000 civil penalty to settle charges that he violated Hart-Scott-Rodino Act (H-S-R Act) premerger reporting and waiting period requirements.  The DOJ, acting at the request of the Federal Trade Commission, charged the executive for failing to satisfy the H-S-R Act’s requirements before acquiring common stock under the company’s stock-based compensation program.  The CEO allegedly exceeded the H-S-R Act filing threshold ($59.8 million when the alleged violation occurred) upon the vesting of outstanding restricted stock units awards and the reinvestment of dividends and short term interest through his 401(k) account.

Violations of the H-S-R Act’s reporting and waiting period requirements are subject to fines of up to $16,000 per day.  The DOJ’s recent enforcement action illustrates the potentially costly consequences of a failure to consider H-S-R Act compliance in connection with investment planning for corporate executives (and other individuals) who will hold or acquire stock valued in excess of the H-S-R Act’s notification threshold (currently $66 million and moving to $68.2 million effective February 27, 2012), and that violations may occur under somewhat obscure circumstances.  In this connection, it is also important to remember that the relevant valuation is determined by reference to the total value of the voting securities that will held following any given acquisition of shares.  Thus, for example, if an executive already holds shares valued at $65,999,999, a reporting obligation could be triggered by acquiring just one additional share.  Likewise, if the executive’s existing holding has already crossed the $66 million valuation threshold through appreciation, any further acquisitions could trigger a reporting obligation.               

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