Failure to Comply with HSR Premerger Notification Requirements Result in a $5.6 Penalty Against Two Foreign Corporations
April 1, 1998 Advisory
On June 24, 1997, the U.S. District Court for the District of Columbia entered a final judgment on a proposed consent decree in the matter of U.S. v. Mahle GmbH, Civ. Act. No. 97-1404, 1997-2 Trade Cases ¶ 71,868. The consent decree required that Mahle GmbH and Metal Leve S.A. pay a total of $5.6 million in civil penalties for their failure to comply with Section 5 of the Federal Trade Commission Act, as amended, and the premerger notification and waiting period requirements of Section 7A of the Clayton Act, as amended by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act").
The penalty was the largest ever assessed by the Federal Trade Commission ("FTC") and the Department of Justice ("DOJ").
The HSR Act essentially requires that entities involved in mergers and acquisitions, one with at least $100 million in assets or annual total net sales and the other with at least $10 million, file a premerger notice with the FTC if the transaction will result in the acquirer obtaining either at least $15 million worth of the target's voting securities or assets or control of a target with assets or net sales of at least $25 million. The notice allows the FTC to analyze the competitive effect of the merger and either approve or oppose the merger on the basis of such analysis. Failure to comply with such notice provisions can subject both entities to penalties of $11,000 per day of noncompliance, beginning as of the effective date of the merger.
On June 26, 1996, Mahle GmbH, a German manufacturer of diesel engine parts, primarily pistons, with a U.S. manufacturing subsidiary, consummated the acquisition of 50.1% of the voting securities of Metal Leve S.A., a Brazilian manufacturer of diesel engine parts, also primarily pistons, also with a U.S. manufacturing subsidiary. As a result of failing to comply with U.S. antitrust laws, especially the HRS Act (Mahle filed information required by the HSR Act approximately 20 days after the merger was consummated thereby not allowing for a 30 day waiting period), the FTC filed its first ever Hold Separate Agreement, barring both firms from exchanging confidential information, requiring Mahle to place the purchased Metal Leve shares in trust, prohibiting Mahle from voting the shares and prohibiting Mahle from participating in Metal Leve's business. The FTC's analysis of the competitive effects of the merger determined that the combined firms would have control of approximately 95% of the articulated piston market in the U.S. On March 20, 1997, both firms agreed with the FTC to an order requiring the divestiture of substantially all of the Metal Leve assets with the FTC and DOJ on June 24, 1997 to pay fines totaling $5.6 million.
With aggressive federal enforcement of U.S. antitrust laws and a steep $11,000 per day penalty for noncompliance with the HSR Act, entities attempting to engage in mergers and acquisitions, including foreign entities who are seeking to buy or sell U.S.-based assets or voting stock that will confer control of U.S. subsidiaries, should seek counsel as to whether HSR Act compliance is required.