Over a Barrel: Strategic Considerations for Investment Funds At the Crossroads of Antitrust and Securities Law

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By Richard B. Holbrook Jr., Kelly G. Howard, Ryan C. Tisch, and Christie L. Stahlke, Crowell & Moring LLP

On September 25, 2012, the U.S. Federal Trade Commission (FTC) and the Department of Justice (DOJ) publicly announced a settlement1 with Biglari Holdings Inc. (Biglari) for failure to file a timely notification under the Hart-Scott-Rodino (HSR) Act2 in connection with its purchases of shares of Cracker Barrel Old Country Store (Cracker Barrel). Biglari agreed to pay an $850,000 civil penalty as part of the settlement.

Under the HSR Act, parties to a transaction in excess of a specified monetary size must notify the FTC and the DOJ and comply with the applicable waiting periods and other requirements before closing the transaction, even if the transaction does not raise substantive issues under U.S. antitrust law. The FTC and DOJ view compliance with the filing, waiting period, and other HSR requirements as a bedrock of U.S. antitrust law and regularly impose penalties and other sanctions for violations of these requirements, whether or not the transactions raise substantive issues under U.S. antitrust law. The FTC-Biglari settlement and penalty are only the latest FTC action that investment funds have faced for violations of HSR requirements, and again highlight the need for investment funds engaged in significant investment and other M&A activities to integrate antitrust reporting and compliance into their overall investment strategies and legal compliance.


Biglari is a NYSE-listed diversified holding company, led by Sardar Biglari (Mr. Biglari), which conducts investment management and restaurant operation businesses. Cracker Barrel, a NASDAQ-listed company, operates a restaurant and retail business through over 600 Cracker Barrel restaurants.

Starting on May 24, 2011, Biglari began making incremental purchases of Cracker Barrel shares on a daily basis. The aggregate value of the shares purchased by Biglari exceeded the then-applicable threshold for HSR filings on June 8, 2011, but Biglari nevertheless continued purchasing Cracker Barrel shares through June 13, 2011. Biglari filed its initial Schedule 13D with the SEC on June 13, 2011, disclosing beneficial ownership of 9.7% of Cracker Barrel’s shares and reporting the purpose of the transaction as planning “to evaluate [its] investment in the Shares on a continuous basis” and “to communicate with the Issuer’s management and members of the Board regarding the business, governance and future plans of the Issuer.” No HSR notification was filed at that time.3

Immediately after filing its initial Schedule 13D, Mr. Biglari began contacting Cracker Barrel’s management. At a June 23, 2011 meeting with Cracker Barrel’s CEO and CFO, Mr. Biglari said he “had ideas to improve traffic at Cracker Barrel” and requested the immediate appointment of himself and Biglari’s Vice Chairman to Cracker Barrel’s board. Cracker Barrel’s board unanimously declined Mr. Biglari’s offer due to “conflict, legal and other issues,” but made a counteroffer to appoint independent directors named by Biglari so long as they fit certain criteria. Brief negotiations occurred but were not successful in resolving the stand-off.4

On August 26, 2011, more than two months after Biglari crossed the then-applicable threshold for HSR filings and began pressing Cracker Barrel for operational changes and board seats, Biglari filed an HSR notification. The HSR waiting period ultimately expired on September 22, 2011. It does not appear that Biglari purchased additional shares between June 13 and August 26, 2011. Biglari later began purchasing Cracker Barrel shares again, and its share ownership increased to 9.9% by October 21, 2011.5

Biglari’s August 26, 2011 HSR filing coincided with a flurry of activity between Biglari and Cracker Barrel. Mr. Biglari publicly challenged Cracker Barrel’s management, writing an August 23, 2011 letter to Cracker Barrel’s CEO complaining about the company’s reporting practices. On September 1, Biglari announced it was nominating Mr. Biglari for election to Cracker Barrel’s board and later issued a letter from Mr. Biglari to Cracker Barrel’s shareholders stating “the Cracker Barrel Board has failed to perform up to the Company’s potential” and making a case for Biglari’s representation on the board. The board fought back. On September 23, Cracker Barrel’s board announced that it was adopting a poison pill. In the months leading up to its December 2011 annual shareholder meeting, the Cracker Barrel board criticized Biglari’s proxy fight and at the annual shareholder meeting, Cracker Barrel shareholders rejected Mr. Biglari’s bid for a board seat and elected the nominees put forward by Cracker Barrel’s board.6 In 2012, Biglari increased its beneficial ownership to 17.6% and waged an unsuccessful proxy fight to elect Mr. Biglari and the Biglari Vice Chairman to the Cracker Barrel board at the November 15, 2012 annual shareholder meeting.7

Although no details have been made publicly available, at some point the FTC began an investigation of Biglari’s share acquisitions and failure to make an HSR filing. This investigation culminated in the FTC and DOJ’s September 25, 2012 public announcement of a settlement with Biglari. Despite settling, Biglari has publicly claimed that its failure to file was inadvertent, denied that it chose not to make an HSR filing based on its intentions for investment in Cracker Barrel, and insisted it never intended to exert day-to-day control over the company or nominate individuals to the Cracker Barrel board, until after its HSR filing was made.8

The Hart-Scott-Rodino Act 9  

Filing Requirements and Waiting Periods; Comparison with Exchange Act Disclosures

Under the FTC’s so-called “size of transaction” test, unless an exemption otherwise applies, an HSR filing must be submitted for most transactions that will result in a purchaser holding more than a specified dollar value of voting securities10 issued by the target issuer.11 This threshold is annually adjusted to keep pace with GNP and is currently $68.2 million (as of 2012). Additional reports (in the form of amended or new HSR notifications) must be filed in certain circumstances.

Separate and apart from this FTC “size of transaction” test, Section 13(d) and Section 16 of theSecurities Exchange Act of 1934 (Exchange Act) require public disclosure based on the percentage of the target issuer’s registered class of equity securities that an investor directly or indirectly beneficially owns.12 Section 13(d) reporting is triggered once a person, or group of persons acting together, exceed 5% beneficial ownership of an issuer’s registered class of securities; Section 16 reporting is triggered once the 10% threshold is crossed.13

The result of these differing focuses is that, depending upon the market capitalization of the issuer, certain transactions may require disclosure under Section 16 and/or Section 13(d) of the Exchange Act but not the HSR Act (where the value of 5% or 10% of the issuer’s voting securities have a value less than the “size of transaction” threshold); other transactions may require disclosure under the HSR Act but not under Section 16 and/or Section 13(d) of the Exchange Act (for target issuers with very large market capitalizations); and still other transactions may require disclosure under both the HSR Act and under Section 16 and/or Section 13(d) of the Exchange Act.

Information required for an HSR filing overlaps somewhat with Schedule 13D disclosure requirements,14 but the HSR filing typically requires more extensive and, at times, more complex deal-related information, including the existence of transaction plans, the planned transaction structure and mechanics, and certain planning documents incorporating competitive analysis of the transaction. Of particular note to many funds are the HSR rules regarding the entities in whose name the filings must be submitted and reporting of ownership: the filing must be made in the name of the ultimate parent entity, which may result in disclosure of certain aspects of a fund’s ownership.15 Although the HSR filing is confidential, even this disclosure can cause discomfort for many funds. Finally, HSR filings require a fee that currently ranges from $45,000 to $280,000 depending on the size of the transaction, while there is no fee for Section 13(d) or Section 16 filings.16

A purchaser cannot consummate a transaction for which an HSR filing is required until the filing is submitted and the waiting period lapses (either without agency action, or potentially after a longer period of investigation, after which the reviewing agency may negotiate to impose conditions on the transaction). In a common application to investment funds outside the M&A context, a fund cannot, whether through open market purchases or otherwise, acquire or continue acquiring voting securities of a target in excess of this threshold until this HSR filing is submitted and this waiting period lapses (for many financial buyers, further antitrust scrutiny will not be necessary).17

Impact on Investment Strategies  

Although calculating ownership of holdings can be complex, the FTC’s “size of transaction” test indicates clearly when a fund must make an HSR notification, absent an exemption. A fund can choose to purchase voting securities with a value of less than this “size of transaction” test and be confident that it will not be subject to penalties under the HSR Act. For economic, strategic, or other reasons, however, a fund may want to purchase voting securities in excess of the “size of transaction” threshold. In those cases, a fund must consider the impact of the FTC filing, waiting period, and compliance requirements on its investment strategy.

First, although the HSR filing is not itself made public by the FTC or DOJ, HSR filings for certain acquisitions of securities must include an affidavit attesting that the acquirer has notified the target that an acquisition is planned, and of the acquisition’s scope, including the specific class and number of shares the acquirer intends to purchase.18 The target is then obliged to make its own separate HSR filing.19 In many situations, the target will already be aware of the fund’s interest, whether through the fund’s SEC filings, prior communications, or public statements. For larger targets, however, theExchange Act Section 13(d) 5% beneficial ownership filing threshold may be much higher than the level at which the “size of transaction” test would be met, and so this HSR filing certification may force the fund to tip its hand to the target. The target, of course, has no obligation to keep mum about the HSR notification or planned transaction, and may make public statements or take defensive actions, thereby increasing the fund’s cost to purchase the target’s shares after the waiting period elapses. In addition, to put pressure on the fund, the target may choose to provide evidence to the FTC or DOJ adding to regulatory risk for the fund or try to spark a government investigation and enforcement action against the fund.

Second, and equally important, are considerations relating to the waiting period. Assuming that the FTC and/or DOJ do not make a so-called “second-request” for information or otherwise raise competitive issues, the generally applicable waiting period under the HSR Act is 30 days.20 At the end of this 30 days, absent objection by the antitrust agencies, the fund can consummate the transaction (or continue purchasing the target’s voting securities). In these circumstances, the agencies will publicize neither the filing of an HSR notification nor the end of the waiting period. However, the length of this waiting period increases the risk to the fund’s plans—whether through leaks, adverse market conditions, target share price movements, or otherwise. As an alternative, the FTC rules permit a fund to request (or the FTC or DOJ to grant, without being asked) “early termination” of the waiting period where competitive issues do not appear serious or may be addressed through consultation with the FTC.21 This shorter waiting period can help a fund to re-start or consummate purchases more quickly. Where a fund’s interest has not been public, however, early termination has a significant drawback: if granted, the agencies will publish notice of the early termination on their websites, potentially alerting the market to the fund’s interest.

Third, as interpreted by the federal antitrust agencies, the HSR Act limits the actions that a fund can take vis-à-vis the target during the waiting period; in addition to not consummating the proposed transaction or acquiring additional voting securities, a fund cannot attempt to exercise control over the target during the waiting period.22 Any act suggesting control, including attempts to seat a board member or influence the target’s decisionmaking, may be considered “gun-jumping” in violation of the HSR Act, risking penalties and jeopardizing the goodwill of antitrust regulators. In our experience, typical activist investor actions, such as meetings with management, director appointment demands, and issuing press releases, can raise all of these concerns and require careful consideration from a legal and compliance perspective.

Passive Investor Exemption  

Not surprisingly, the combination of complexity, cost, and risk associated with an HSR filing and its impact on funds’ investment strategies lead funds to seek exemptions to HSR filing requirements where possible. One key exemption is the so-called “passive investor” or “investment only” exemption.

The HSR Act’s “passive investor” exemption, which differs from the Exchange Act‘s definition of “passive investor,”23 applies to transactions where the fund both: (1) will hold less than 10% of the target’s voting securities and (2) is purchasing those securities “solely for the purpose of investment.”24 As FTC Chairman Jon Leibowitz pointedly noted in the FTC’s consent decree with Biglari, “[t]he passive investment exemption is a narrow one, and we will not hesitate to seek civil penalties against companies that try to abuse it.”25

The FTC has applied a facts-and-circumstances test to determine whether a purchaser has “an intent inconsistent with investment purpose.”26FTC guidance provides some insight into actions the FTC has deemed evidence of such intent:

• Nomination of a candidate to an issuer’s board of directors;

• Proposing corporate action requiring shareholder approval;

• Soliciting proxies;

• Having a controlling shareholder, director, officer, or employee of the acquirer serving as an officer or director of the issuer;

• Being a competitor of the issuer; or

• Doing any of the foregoing with respect to another entity that directly or indirectly controls the issuer.27

Determination of eligibility for the “passive investor” exemption is normally made, in consultation with legal counsel, at the time of the closing of a transaction or acquisition of voting securities that would exceed the HSR filing thresholds. If a fund has a good basis for relying on the “passive investor” exemption at that time, a subsequent change of intent (together with actions such as those described above) will not in and of itself require the fund to make a filing. However, if the fund subsequently makes any additional purchases, no matter how small, the fund may have eliminated its ability to utilize the “passive investor” exemption. More troubling, the scope and frequency of a fund’s subsequent actions can call into question whether in fact the fund ever really had an intent consistent with investment purposes. In that case, the retroactive disqualification of a fund’s ability to rely upon the “passive investor” exemption can increase the magnitude of penalties to which the fund and its managers are subject. Accordingly, careful consideration of, and expert guidance on, the applicability of the “passive investor” exemption is crucial before crossing the “size of transaction” threshold in reliance upon such exemption.

The FTC has historically been willing in certain, limited circumstances, to excuse a purchaser’s erroneous belief that it qualifies for the “passive investor” exemption. The FTC has noted that although it “has often declined to seek penalties from a party that makes an inadvertent mistake and fails to file, once he is aware that he doesn’t have a complete understanding of the HSR Act he needs to go back and learn about the Act so he doesn’t make a second mistake.”28 The FTC will not excuse such an omission that does not appear to be inadvertent, or where the purchaser should have been familiar with the HSR requirements and the details of the exemption. Where a fund is attempting to rely upon this good-faith erroneous belief defense, the FTC will often look to determine what compliance policies and procedures the fund had in place and utilized to determine its eligibility for the “passive investor” exemption. Non-tailored compliance policies that do not specifically address antitrust compliance generally provide little protection to funds.


Violations of the HSR Act—including failures to file timely and violations of the waiting period—are subject to penalties and other consequences.

The agencies may seek civil penalties of up to $16,000 per day, beginning from the day that an acquirer’s purchases yielded ownership of stock or assets in excess of the “size of transaction” threshold.29 In Biglari’s case, for example, Biglari had to pay a penalty of $850,000. However, the FTC and DOJ could have charged twice that amount—roughly $1.7 million (based on 106 days running from June 11, 2011, when Biglari exceeded the “size of transaction” threshold, until September 22, 2011, when the waiting period expired following Biglari’s August 26, 2011 HSR filing).

FTC and DOJ penalties are only a part of the overall cost of a violation. The FTC and DOJ can sue to enjoin a transaction, preventing any further acquisitions until a filing has been made and the requisite waiting period has expired. Biglari’s public statements alluded to “the unnecessary legal expense caused by the FTC process,” which, in its view, would be “far in excess of $850,000” as another reason for settlement.30 Governmental investigations can also pose a significant distraction to a fund’s other business goals and potentially have reputational consequences, including raising questions from limited partners and/or causing limited partners to submit redemption requests. Disclosure may also be required under other regulations to which a fund may be subject. For example, a registered investment adviser or broker-dealer could be required to disclose previous penalties for HSR noncompliance on a Form ADV or Form BD, on offering documents, or otherwise. All of these consequences can potentially be avoided through proper consideration of antitrust issues as part of the overall investment strategy at the outset.

Continued Emphasis on HSR Enforcement  

The Biglari case continues recent agency emphasis on HSR compliance. In the investment fund context, in 2007, the FTC penalized ValueAct $1.1 million for violations of HSR filing requirements.31Also in 2007, the FTC penalized James Dondero $250,000 for violations of HSR filing requirements where Mr. Dondero was the ultimate parent entity of the acquiring fund.32 In 2005, the FTC likewise penalized Scott Sacane, a hedge fund manager (and ultimate fund parent), $350,000 for violations of HSR filing requirements.33 2012 also saw an unprecedented five month jail sentence imposed on a Korean executive for alterations to business documents filed with an HSR notification in Hyosung’s abandoned bid to acquire Triton (a Hyosung affiliate paid a fine of $200,000).34

Lessons Learned  

The government’s action against Biglari again draws attention to the importance of consideration of antitrust reporting and compliance issues, and not just SEC reporting, as investment funds engage in investment and other M&A activities:

• HSR Compliance and a Transaction’s Competitive Merits Are Separate Issues. Substantial penalties are possible even in a deal like Biglari’s, which garnered early termination because it raised no substantial competition issues.

• Failure to Meet the Requirements of the Investment-Only Exemption Does Not Require Actual Influence. The government did not allege that Biglari was successful in directing Cracker Barrel’s strategy, or in seating new members on its board. Allegations of intent can be sufficient to undermine eligibility under the “passive investor” exception and to prompt enforcement action.

• Conduct May Serve as Retrospective Evidence of Intent. The government relied on Biglari’s alleged contacts with Cracker Barrel as evidence of its intent to participate in basic business decisions as early as the point at which the transaction became reportable, nearly a week before the contacts were alleged to have taken place. Investment funds should carefully consider their potential future strategies with respect to the targets and voting securities acquired, since later conduct may be offered as evidence of impermissible intent at the time of acquisition.

• Compliance Should Be Assessed on an Ongoing Basis. Where the parties’ strategic goals shift over time, funds should continuously assess whether their prior interpretations of reportability under the HSR Act continue to be supportable. The need for assessment continues even where a fund has already made a filing and is considering a follow on transaction. These reassessments, in our experience, can prevent HSR violations or substantially reduce their duration along with associated penalties.

Richard B. Holbrook and Kelly G. Howard, partners in the Washington, D.C., office of Crowell & Moring LLP, practice in the Corporate Group in the areas of Corporate/Securities and Investment Funds. Ryan C. Tisch is a partner and Christie L. Stahlke is an associate in the firm’s Antitrust Group engaged in business counseling and merger compliance.  

All the authors thank their four colleagues—Nicholas James, Shawn Johnson, Richard Massony, and Eden L. Rohrer—for their invaluable contributions to this piece.  



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