More than Just Mergers: Individual Shareholder Fined Nearly $1 Million for HSR Violation

GameStop CEO fined for failing to submit an HSR filing in connection with open market purchases of Wells Fargo stock as “investment-only exemption” is deemed inapplicable

On September 18, 2024, the Federal Trade Commission (FTC) announced that Ryan Cohen, an entrepreneur and the current chairman and CEO of GameStop Corp., has agreed to pay $985,320 to settle charges that his acquisition of Wells Fargo & Company (Wells Fargo) stock violated the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) because he failed to submit an HSR filing on time. Given that the acquisition at issue resulted in Cohen holding less than 10 percent of the voting securities of Wells Fargo, this case serves as an important reminder of the broad scope of the HSR Act, and that even an individual’s acquisition of a small percentage of a company’s shares can trigger HSR obligations.

The HSR Act generally requires parties to file notifications with the FTC and the Department of Justice (DOJ) and observe a waiting period before closing if a proposed transaction—such as a merger, joint venture, stock acquisition, or exclusive license—meets specified dollar thresholds (as adjusted annually) and no exemptions apply.^[1] According to the DOJ’s complaint against Cohen, filed at the request of the FTC, Cohen began making periodic acquisitions of Wells Fargo voting securities on the open market in June 2016. In March 2018, Cohen allegedly acquired 562,077 Wells Fargo voting securities, which increased the value of his aggregate holdings of Wells Fargo above the operative HSR threshold at the time of the transaction.^[2] However, despite meeting the size thresholds under the HSR Act, Cohen did not submit an HSR notification at that time and continued to acquire Wells Fargo stock on the open market until he submitted a “corrective” HSR notification in January 2021.

Although Cohen’s March 2018 acquisition of Wells Fargo stock resulted in Cohen holding (in aggregate) less than 10 percent of the outstanding voting securities of Wells Fargo, the FTC determined that Cohen was required, but failed, to submit an HSR notification before completing the acquisition because he did not qualify for the “investment-only exemption” under the HSR rules. Under this narrow exemption, an acquisition that results in a party holding up to 10 percent of the voting securities of a company is generally exempt from HSR notification requirements if it is “solely for the purpose of investment.”^[3] The phrase “solely for the purpose of investment” means that the holder “has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.”^[4]

Importantly, the question of intent under the “investment-only exemption” is assessed at the time of acquisition. In Cohen’s case, the complaint alleged that his intent at the time of the March 2018 acquisition of Wells Fargo voting securities was to participate “in the formulation, determination, or direction of the basic business decisions” of Wells Fargo. In support, the complaint pointed to alleged evidence that Cohen emailed Wells Fargo’s CEO in February 2018 “to advise him of the contributions he could make to Wells Fargo should he become a member of the Board of Directors” and to suggest “how Wells Fargo could improve its operations, such as improving its technology and mobile app.” Cohen also allegedly maintained periodic communications with Wells Fargo’s leadership regarding suggestions to improve the business and seeking a board seat through at least April 2020. Although the DOJ acknowledged that Cohen’s failure to file an HSR notification in March 2018 was “inadvertent,” it nonetheless concluded that “it was not excusable negligence for him to be unaware of HSR Act legal requirements” because large-scale open market acquisitions, like Cohen’s acquisitions at issue, “require an acquirer to affirmatively and actively decide to acquire voting securities[.]”

Cohen agreed to pay $985,320 for a continuous violation of the HSR Act from March 2018 through February 2021, when the waiting period expired on his corrective filing. At the time of Cohen’s corrective filing, the maximum civil penalty for an HSR violation was up to $43,792 per day of noncompliance.^[5] The penalty imposed on Cohen therefore represents a significant downward adjustment from the maximum permitted under the HSR Act, which the DOJ justified on grounds that the violation was inadvertent and Cohen was willing to resolve the matter by proposed final judgment instead of a prolonged investigation and litigation.

At bottom, this enforcement action underscores the breadth of the HSR Act and the importance of a robust and proactive review of transactions that potentially exceed the HSR thresholds. The HSR requirements are highly technical, and a company’s failure to comply exposes it to potential investigations and significant fines. As this case illustrates, the HSR Act requirements apply even to acquisitions that may seem insubstantial at a quick glance, such as an individual’s acquisition of a small percentage of a company’s shares, even via separate purchases over a prolonged period. Moreover, consistent with prior HSR enforcement actions, this case further confirms that the “investment-only exemption” is a narrow exemption that applies only to purchasers who intend to hold voting securities as truly passive investors. The applicability of the “investment-only exemption” or any other HSR exemption must be analyzed on a case-by-case basis.

For HSR questions—especially those surrounding exemptions and decisions not to file an HSR notification—it is advisable to engage HSR counsel as early in the transaction process as possible. 

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