The Department of Justice (the “DOJ”) recently announced that Canon Inc. (“Canon”) and Toshiba Corporation (“Toshiba”) each agreed to pay $2.5 million to settle allegations that they devised a scheme to avoid complying with the Hart-Scott-Rodino Act (the “HSR Act”) in connection with Canon’s acquisition of Toshiba’s subsidiary, Toshiba Medical Systems Corporation (“TMSC”). These allegations stem from Canon’s and Toshiba’s efforts to consummate the transaction prior to the end of Toshiba’s fiscal year without notifying the federal antitrust agencies and observing the waiting period required under the HSR Act, exposing both companies to civil penalties in the United States and potentially in other jurisdictions as well.

Under the HSR Act, parties engaged in a transaction (including non-U.S. parties) where certain size-of-transaction and size-of-party thresholds are met are typically required to notify the Federal Trade Commission (the “FTC”) and the DOJ of the transaction and observe a waiting period (usually 30 days) before consummating the transaction, unless an exemption applies. The notification process and waiting period required by the HSR Act allows the federal antitrust agencies to review the proposed transaction for potential anticompetitive effects before they occur. However, transactions or devices entered into or employed for the purpose of avoiding the obligation to comply with the requirements of the HSR Act are strictly prohibited. As of February 2019, the maximum civil penalty for failing to comply with the HSR Act was $42,530 per day (subject to annual inflation adjustments).

According to the DOJ’s complaint, Toshiba was facing financial difficulty due to long-running financial irregularities at Toshiba that became public in 2015. In an effort to shore up its financial position, Toshiba decided to sell TMSC to Canon with the goal of recognizing the proceeds of that sale before the end of its fiscal year on March 31, 2016. As the end of the fiscal year approached, the parties recognized that there was not enough time to close before the fiscal year ended and still comply with the necessary premerger notification and waiting period requirements of the HSR Act. Instead, the DOJ alleged that the parties devised a scheme to avoid the HSR Act requirements by taking advantage of the distinction between voting and non-voting securities under the HSR Act (i.e., acquisitions of voting securities valued over applicable dollar thresholds are reportable, but the acquisition of non-voting securities or options, regardless of value, are not).

First, Toshiba changed the ownership structure of TMSC by creating new classes of voting and non-voting securities, as well as options convertible into ordinary shares. Toshiba then sold all of the voting shares to a special purpose company for a nominal payment of $900 and sold to Canon a single non-voting share and the aforementioned options for $6.1 billion. An HSR Act filing was not made until April 26, 2016 in connection with Canon’s exercise of its options to acquire TMSC’s voting shares.

The DOJ asserted that this deal structure served no purpose other than to permit Toshiba to close the transaction before complying with the HSR Act, and that Canon had acquired beneficial ownership of TMSC prior to their HSR Act filing despite this scheme to avoid the HSR Act’s requirements. The parties ultimately agreed to each pay $2.5 million (which was much less than the statutory maximum penalty of $6.36 million per company) as part of their settlement with the DOJ.

The DOJ’s complaint is another important reminder to parties contemplating transactions potentially reportable under the HSR Act that the antitrust agencies will investigate and take action against any schemes to avoid compliance. Failure to file for reportable transactions in accordance with the HSR Act can result in substantial penalties.

If you have any questions concerning the foregoing, or the HSR Act generally, please contact your Seward & Kissel relationship attorney.