Davis Polk & Wardwell Newsflash

FTC Fines Two Investment Funds for Failure to File Under HSR Act; $800,000 Penalty

December 17, 2008

The Federal Trade Commission ("FTC") on Monday fined two investment funds, ESL Partners, L.P. ("ESL") and ZAM Holdings, L.P. ("ZAM"), $525,000 and $275,000, respectively, for their failure to make timely filings with the antitrust authorities, under the HSR Act, prior to acquiring blocks of shares of AutoZone, Inc. in September and October of 2004.

Three points significant to note about this newest enforcement action for an alleged failure to make a timely HSR notification are:

(i) it does not appear that either fund committed any prior violation of the HSR Act;

(ii) the filings were not made until after the FTC contacted the acquirers to inquire as to why no filings were made for these subsequent stock acquisitions; and

(iii) the corrective filings were made almost three years ago (in February and March of 2005, respectively).

The HSR Act requires parties to mergers and acquisitions that exceed certain jurisdictional thresholds to make filings with the Federal Trade Commission ("FTC") and the Department of Justice (“DOJ”) and to observe a waiting period before closing.  In this case, the acquirers previously held shares of AutoZone, but it was the additional purchases, when aggregated with current holdings, that gave rise to the filing requirements.

According to the FTC's complaint, ESL first filed HSR notification to acquire certain stock of AutoZone in August of 1999.  Under the HSR rules, subsequent purchases of AutoZone stock (that did not cross an HSR threshold) were exempt from filings for a five-year period, which expired on September 1, 2004.  ESL made additional purchases of AutoZone stock after that date, without first filing and observing the waiting period under the Act.  These additional purchases were not exempt as an acquisition "solely for the purpose of investment," because ESL held in excess of 10% of the outstanding voting stock of AutoZone as a result of those additional purchases.

ZAM held a certain amount of AutoZone stock, valued in excess of an HSR filing threshold, through majority control of another partnership, which directly held those shares.  ZAM was not required to file under the HSR Act prior to obtaining control of that partnership, and thus indirect acquisition of the AutoZone stock, under the HSR rules then in effect.  It also was not required to file for a subsequent transfer of those shares to it following dissolution of that partnership.  However, ZAM was required to file for additional purchases of AutoZone stock completed in October of 2004.  ZAM was also not able to avail itself of the exemption from notification for a passive investment due to its representation on the AutoZone board of directors.

In many cases, parties “self report” HSR violations by alerting missed filings to the FTC and DOJ.  In these cases, the FTC contacted the parties and inquired about the acquisitions.  (The FTC may have become aware of the acquisitions through public filings.)

The Commission's press release, which includes a link to the complaint, can be found at:  http://www.ftc.gov/opa/2008/12/esl.shtm.  From the press release:

“The Commission takes the premerger notification requirements of the HSR Act very seriously and will not hesitate to take action when companies or individuals shirk their filing responsibilities,” said Acting FTC Bureau of Competition Director David P. Wales. “Thirty years after becoming law, the HSR Act and its filing requirements should be well known to companies and individuals making acquisitions and the significant civil penalties imposed here should reinforce the need to fully comply with the Act.”

The fines were, in ESL's case, just under one-third of the maximum amount for its violation of the HSR Act and, in ZAM's case, less than one-fifth of the maximum amount. 

Specifically, ESL was deemed to be in violation of the HSR Act from September 28, 2004, the day on which the first additional acquisition of AutoZone shares closed, to February 28, 2005, the day on which the waiting period applicable to its corrective filing expired.  Its maximum fine would have been approximately $1.7 million ($11,000 per day).

ZAM was deemed to be in violation of the HSR Act from October 12, 2004, the day on which the first additional acquisition of AutoZone shares closed, to March 2, 2005, the day on which the waiting period applicable to its corrective filing expired.  Its maximum fine would have been approximately $1.6 million.

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If you have any questions about the matters covered in this newsflash, please contact any of the lawyers listed below or your regular Davis Polk contact:

Paul W. Bartel, II, Partner
212-450-4760 | paul.bartel@dpw.com

Arthur J. Burke, Partner
212-450-4352 | arthur.burke@dpw.com

Joel M. Cohen, Partner
212-450-4592 | joel.cohen@dpw.com

Ronan P. Harty, Partner
212-450-4870 | ronan.harty@dpw.com

Stephen M. Pepper, Associate
212-450-4108 | stephen.pepper@dpw.com

Davis Polk & Wardwell