Mon, 11/06/2007 - 07:55
A US hedge fund manager has agreed to pay a USD250,000 civil penalty to settle charges that he violated reporting requirements of the Hart-Scott-Rodino Act by failing to report the exercise of stock options on time and not observing a required waiting period.
As the ultimate parent of hedge fund Highland Capital Management, James A. Dondero had exercised options to acquire shares in Motient Corporation without first filing required pre-merger notification forms with the US Federal Trade Commission and the Department of Justice and observing a 30-day waiting period.
According to the investment funds group of law firm Kaye Scholer, the case is an important reminder that, under appropriate circumstances, officers and directors may be required to make filings under the Hart-Scott-Rodino Act, even when exercising options to acquire stock in their own companies.
Dondero acquired a total of 3.5m shares of Motient between 2002 and 2004 and became a director of the company. His initial holdings in the company, both directly and through Highland, were below the then-applicable USD50m threshold for HSR Act filing.
However, Motient's share price subsequently rose significantly, so that when Dondero exercised the stock options in February 2005, his cumulative holdings exceeded the USD50m HSR filing threshold then in effect, requiring him to have filed HSR notification forms and waiting 30 days before exercising options that would increase his holdings.
Instead, Dondero made a filing in April, approximately two months after he had exercised his options. According to the Department of Justice complaint, the 30-day waiting period for the filing expired on May 28, 2005, so Dondero was therefore in violation of the HSR Act for three months. Fines for HSR Act violations are USD11,000 per day.
According to Kaye Scholer, the case raises two important points. First, the firm says, it demonstrates that the US government will vigorously enforce HSR filing requirements, even where the transaction raises no competition issues.
The government did not allege that Dondero's stock acquisitions would adversely affect competition in any market, simply that the filing was not made as required at least 30 days before the acquisition of stock.
In addition, although acquiring stock options does not raise HSR reporting obligations, exercising the options may do so. Stockholders who exercise options may be required to file HSR reports and observe a waiting period if, upon exercising their options, they hold voting securities with a total value greater than the HSR reporting threshold, which is adjusted annually and is currently USD59.8m.
Although some large shareholders may take advantage of an exception to HSR reporting requirements if they are acquiring shares 'solely for purposes of investment', Kaye Scholer says this exception is quite limited, and officers, directors and stockholders with board representation generally do not qualify.
Regardless of when stock already held was acquired and regardless of whether the new stock is acquired by direct purchase, as a result of an option exercise, or through vesting of restricted stock, an HSR filing and observance of a 30-day waiting period may be required.
There is a limited exception to the filing requirement for an officer who sells all the shares acquired through the option exercise, or sells at least as many other shares as those acquired through the option exercise, on the same day as exercising the option.
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