The NASPP Blog

It’s not often that I have an opportunity to blog about Federal Trade Commission decisions because, well, the FTC doesn’t really have much to do with stock compensation. But they do oversee the Hart-Scott-Rodino Antitrust Improvement Act of 1976, which means they are responsible for updating the filing thresholds imposed under the act on an annual basis. And those filing thresholds could end up being very important in the context of your executive compensation program.

What the Heck?

The HSR Act, as it is known to its friends, was enacted to provide the FTC and the Department of Justice with advance notice of large mergers and acquisitions, by requiring the entities involved in the transaction to file reports with both agencies. A trap for the unwary, however, is that the HSR Act applies to individuals as well as corporations. Where an individual acquires voting stock that exceeds the filing thresholds specified under the Act, that individual is responsible for making the required filings.

While the HSR Act can apply to any individual, in the context of equity compensation, it is most likely to be a concern when executives amass significant amounts of company stock as a result of their transactions in the company’s stock plans. As administrator of your company’s stock plan, this is where you come in and why it’s a good idea for you to be familiar with the HSR Act.

Filing Thresholds

The filing requirements apply only to acquisitions that exceed a specified threshold, defined in terms of the value of the individual’s holdings in the company as a result of the acquisition. Acquisitions that don’t cause an individual’s holdings to exceed this threshold aren’t subject to the HSR Act filing requirements.

Even acquisitions that do exceed this threshold may not trigger the filing requirement. For the filings to be required, one of the following conditions must be met:

• The individual’s holdings in the company as a result of the acquisition must exceed another higher maximum threshold, or
• The individual and the company must have assets or net annual sales exceeding specified amounts.

Where neither of the about conditions apply, the HSR Act filing requirements would not be triggered.

2018 Thresholds

The thresholds increase annually. As just announced by the FTC, effective February 28, the thresholds are as follows:

• Individuals with company stock holdings of less than $84.4 million are not required to make filings under the HSR Act (until February 28, this threshold is $80.8 million).
• Individuals with company stock holdings in excess of $337.60 million are required to make filings under the HSR Act (until February 28, this threshold is $323 million).
• If the individual’s holdings are between the above two thresholds, their acquisition is reportable under the HSR Act if one party to the transaction has assets in excess of $16.9 million and the other party had assets of exceeding $168.8 million (until February 28, these thresholds are $16.2 million and $161.5 million, respectively).

Could these rules possibly by any more confusing? It’s hard to say, but probably. I think the take-away is that if any of your executives own close to $84.4 million in company stock, or own more than this amount, it’s time to get your legal team involved in making sure the executives don’t need to make these filings.

A Costly Mistake

Penalties for failing to make these filings can be $40,000 per day!  Thats right—PER DAY! This isn’t something to take lightly or to just hope that someone else in your company is monitoring it. If you have executives nearing the ownership threshold at which filings can be required, raise the red flag.

– Barbara