Antitrust Filing Mistakes Can Cost Activists
Mistakes in activist campaigns can be embarrassing and distracting. Current events make clear that they can also be expensive.
Publicly traded Biglari Holdings Inc. (NYSE: BH) has agreed to pay an $850,000 fine for missing a mandated Hart-Scott-Rodino Act (HSR) premerger notification filing in 2011 as it built its position in Cracker Barrel Old Country Store, Inc. (NasdaqGS: CBRL), where it is now the largest shareholder. Chain restaurant
operator Biglari Holdings and its Chairman Sardar Biglari, a frequently identified devotee of Warren Buffet and Carl Icahn, are locked in an activist battle with Cracker Barrel over board seats. In the midst of that contest Biglari has agreed to settle with the government, and Cracker Barrel is already using this misstep to sow doubts about Biglari and its campaign.
HSR rules generally require shareholders acquiring voting securities worth in excess of $68.2 million (subject to annual adjustments) to make a confidential disclosure filing with both the Federal Trade Commission and the Department of Justice and then wait for early termination or the passage of 30 days’ time before acquiring additional target stock. Biglari made an HSR filing in August 2011 with respect to its Cracker Barrel position.
Biglari, however, had crossed the HSR threshold (which was $66.0 million in 2011) in June 2011 and
purchased additional shares after crossing the threshold. At the request of the Federal Trade Commission,
the Department of Justice filed a complaint seeking penalties for the alleged violation. The government asserted that Biglari’s purchases in excess of the threshold were in false reliance on the often misunderstood passive investment exemption available under the HSR rules. As narrowly interpreted by the FTC this exemption is available to holders of not more than 10% of an entity’s outstanding voting securities who acquired their position solely for investment purposes, regardless of the value of the position. Biglari is now publicly stating that it never relied on the passive investment exemption and that the late filing was merely a “corrective filing” addressing an inadvertent failure to file timely. Regardless of which of the dueling versions of the facts you accept, the penalty and the reputational stain remains.
Although corporations are broadly aware of HSR requirements in the contexts of mergers, hedge funds and other acquirers may be under-aware of the rather complicated and specialized rules governing HSR notifications with respect to other types of acquisitions, including open market purchases. To make an
HSR mistake in the context of an activist campaign could threaten the outcome of the contest itself, and shines a spotlight on the need for close client-attorney coordination from the earliest stages of building a stock position, particularly one that has any potential to result in activism.