Failing to comply with premerger document disclosure rules can lead to civil and criminal penalties for companies and their executives.

On May 3, 2012, Kyoungwon Pyo, a senior executive at Hyosung Corporation, agreed to plead guilty and serve five months in prison for obstruction of justice for altering documents submitted to antitrust regulators in connection with a Hart-Scott-Rodino (HSR) Act premerger notification filing.  Pyo altered, and directed subordinates to alter, numerous pre-existing corporate documents and documents prepared to analyze the acquisition—known as Item 4 documents—before they were submitted to the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC).  In this case, following the completion of the normal drafting process, Pyo allegedly altered existing documents by changing data such as the market share attributed to different industry competitors.  According to DOJ, the alterations misrepresented and minimized the competitive impact of the proposed acquisition.  In October 2011, Nautilus Hyosung Holdings Inc., the corporate affiliate of Hyosung Corporation, also pleaded guilty to obstruction of justice and paid a $200,000 criminal fine for its actions.

Although criminal wrongdoing is uncommon—in fact unprecedented—in premerger notifications, this case serves as a useful reminder that there are severe penalties, both criminal and civil, that can accompany a failure to comply with premerger notification rules.

Item 4 Documents Are Critical to the Antitrust Review Process
Item 4 of the HSR rules require the submission of any document prepared by or for an officer or director that discusses, evaluates or analyzes the sale of the target from the standpoint of markets, market shares, competitors, competition, or potential for sales growth or product expansion or geographic market expansion, or with respect to synergies and/or efficiencies of the proposed transaction.  The HSR filing includes a certification that the submission is complete, including that all Item 4 documents have been provided. 

Item 4 documents are critical to the government’s premerger reviews.  These documents can give the agencies insight into competitive dynamics of an industry and the filing parties.  Often, the Item 4 documents play a pivotal role in the agencies’ determinations of whether additional investigation into the transaction is needed.

The Government Can Discover Non-produced Item 4 Documents in Many Ways. The government can discover non-produced documents in many different ways.  If the government opens an investigation into the competitive implications of the proposed transaction, it will require additional documents to be produced by issuing a “Second Request.”  This broad document request can lead to the production of previously non-produced Item 4 documents.

In other instances, the government may open an investigation into the Item 4 document production sua sponte.  In one $200 million transaction, the parties did not submit any Item 4 documents with their respective HSR filing.  The FTC called the buyer’s counsel noting that the lack of documents was unusual, but the buyer’s counsel confirmed that a search for documents had been performed.  Seeing no competitive problems on the face of the HSR filing, the government granted early termination of the 30-day waiting period.  DOJ, however, issued a civil investigative demand focused on the documents created in connection with the transaction.  DOJ discovered at least three sets of documents it believed were required by Item 4, leading it to conclude that the party, despite filing, had violated the HSR Act by submitting an incomplete filing.  HSR Act violations can result in a $16,000 per day civil penalty.  The company paid a civil penalty of $550,000.

Additionally, if a transaction leads to complaints from consumers or competitors, a post-closing investigation by the agency can lead to the discovery of Item 4 documents.  In one case, because the HSR filing on its face did not present competitive concerns, no investigation was ordered and the parties were allowed to close following the expiration of the HSR waiting period.  Following the public announcement of the transaction, concerns and complaints were reported to the FTC.  In response to an FTC subpoena, several documents were produced that the FTC believed should have been provided as Item 4 materials, and the FTC concluded the company did not even perform a search for Item 4 documents.  The company paid a civil fine of  $2.97 million.

Another way in which non-produced Item 4 documents can be discovered is if they are produced in response to a subpoena, second request or civil investigative demand in a matter unrelated to the transaction for which the Item 4 document was created.

Failing to Produce Item 4 Documents Has Serious Consequences
Failing to submit Item 4 documents can lead to significant consequences for the company and its executives.

Restart of the HSR waiting period: If the waiting period has not yet expired or an investigation has begun and Item 4 documents are discovered that did not accompany the original filing, DOJ and FTC may restart the original 30-day HSR waiting period, and issue a new Second Request.  In a time-sensitive deal, this sort of delay could lead to the transaction being abandoned altogether.

Civil and criminal penalties: Failure to submit Item 4 documents can lead to civil penalties of up to $16,000 per day.  As noted, in some cases these have ranged from $550,000 to almost $3 million for the company, and in some cases penalties have been imposed on executives certifying the HSR filing as complete.  Most of these cases have been pursued civilly as violations of the HSR Act.  In the most recent case, where the defendant affirmatively altered pre-existing documents to mislead the regulators, the DOJ pursued the matter criminally as obstruction of justice.  A corporation obstructing justice can face fines of $100,000 per violation.  The corporate executive mentioned at the beginning of this article will actually serve a prison term as a result of his conduct.

Divestiture and disgorgement: If a transaction is completed, but would have been investigated and blocked if the Item 4 documents had been provided, a party may need to divest the acquired business and potentially disgorge its profits.  As noted, Item 4 compliance is taken seriously by the antitrust regulators, and filing parties likewise should ensure their compliance.

Practical Steps to Take in Preparing an HSR Filing

1. Parties should perform a thorough and exhaustive search for Item 4 documents, and should document this search process.  Item 4 compliance is not about producing the most relevant documents, but rather producing all responsive documents. \
2. Parties should produce all of the Item 4 documents they have.  As noted above, withholding documents can lead to severe civil penalties, up to and including divesting acquired assets and disgorgement.
3. Parties should produce Item 4 documents as they are.  Once a document is completed, and is no longer a draft, retroactive editing of the document outside of the normal drafting process can be pursued as obstruction of justice.  Obstruction is a criminal offense that can subject a company and its executives to criminal fines and prison sentences.

From a practical perspective, it is important to understand that documents discussing competitive implications of a transaction will be reviewed by DOJ and FTC.  To minimize agencies’ scrutiny of transactions, companies should exercise appropriate care in drafting business and strategic plans in the ordinary course of business, as well as documents analyzing a proposed transaction.  But once documents are completed, subsequent alteration, especially if designed to mislead the regulators, creates substantial legal risk.