A hidden perk: Antitrust filing fee reimbursement

NEW YORK — In light of new regulations requiring greater disclosure on executive pay, directors are scrambling to justify every nickel spent on perks for the top ranks. Country club dues, personal use of private jets, even tax gross-ups — where companies boost an exec’s gross pay or pad their reimbursement totals to cover the personal income taxes imposed on perks — are coming under growing scrutiny from shareholders.
But perhaps the grossest of gross-ups has escaped shareholders and compensation experts alike. Buried in the proxies of some of the nation’s biggest companies is a little-known and oft-overlooked antitrust filing fee — to comply with the Hart-Scott-Rodino Act — that is being paid on behalf of individual executives using shareholders’ money.
What makes it so noxious to some is that only the richest folks, those acquiring humongous stakes (currently around $60 million or more in a company), are charged such fees in the first place — and the ordinary shareholder is footing the bill for the filing fee and often the tax gross-up, as well.
Living large
And such fees are hardly small potatoes. Last year, Legg Mason Inc. of Baltimore paid $170,000 to cover the HSR fees for chief executive Raymond “Chip” Mason. In 2004, J.P. Morgan Chase & Co. of New York paid $250,000 in filing fees for president and CEO Jamie Dimon. Richard Kovacevich, CEO of Wells Fargo & Co. of San Francisco, was reimbursed for $125,000 in filing fees in 2004, while in 2005, Sanford I. Weill, then chairman of New York-based Citigroup Inc., was repaid $739,734 for such fees.
None of these totals included gross-ups, which often are reported separately in a company’s compensation disclosures and, in this tax bracket, typically are almost as large as the filing fee itself. Merrill Lynch & Co. Inc., for example, covered $45,000 in HSR filing fees for CEO E. Stanley O’Neal in 2005, according to a filing by the New York company which also cited $44,021 in a “related tax gross-up.”
Antitrust lawyers said that only a select few have the financial clout to trigger an HSR fee. However, this ultrarich club seems likely to grow in coming years. “As executive compensation has risen so rapidly, the chance of triggering such fees has really increased,” said Randall Allen, a lawyer at Atlanta-based Alston & Bird LLP.
Several of the companies contacted by sister publication Financial Week said they paid the filing fees and gross-ups because their top executives are required to hold large portions of the company stock they are given as compensation — a policy that a spokeswoman for Citigroup referred to as a “blood oath.”
That reasoning doesn’t wash with Alexandra Higgins, senior compensation analyst at the Corporate Library LLC in Portland, Maine, who learned of the superperk only after being contacted by Financial Week: “All of a sudden, these executives own an enormous amount of stock, and I can’t understand why shareholders should have to pay their filing fees and taxes associated with those fees. It doesn’t add to the value of the company or the interests of the shareholders; it wastes shareholders’ money.”
The Hart-Scott-Rodino Act usually applies to corporate mergers and acquisitions, and requires notifying the Federal Trade Commission and often paying a fee prior to closing a transaction. Yet the act does not always differentiate between acquisitions that raise antitrust concerns and large purchases of voting securities.
An HSR filing may be required when an individual acquires stock, or voting securities, in a corporation through any means (an open-market transaction, the exercise of options) and then holds more than a specified dollar amount of company stock in the aggregate. (Each year, the threshold is adjusted for inflation; the current level is $59.8 million.) Likewise, a filing may be required if the executive buys 10% or more of the voting securities in a company.
One way out for many executives is the “size of person” test. Basically, the acquirer must have at least $12 million in assets to trigger the fee. That number may not seem like much these days, but Peter Guryan, an antitrust lawyer at New York-based Fried Frank Harris Shriver & Jacobson LLP, said that many individuals may not meet the size-of-person test (which applies to holdings that do not top $239.2 million), because those without regularly prepared balance sheets are permitted to exclude any stock already held in the company for which stock is being acquired. “An officer or director may already have a substantial position in the company,” he explained, “and still not trigger the size-of-person threshold.”
For those remaining fat cats who meet the threshold, a transaction greater than $59.8 million but less than $119.6 million costs $45,000 in HSR fees, while one valued at $119.6 million or greater but less than $597.9 million results in a fee of $125,000. Purchases greater than $597.9 million cost $280,000 in filing fees.
Of course, there are exceptions, and antitrust lawyers admit that the act is complicated enough that many officers and directors of public companies are unaware that when they convert large chunks of options, they may have to file.
“I’ve always been surprised you don’t see more filings by individuals,” said Harry Robins, a lawyer at Morgan Lewis & Bockius LLP of Philadelphia. “Maybe now that compensation is coming under such close scrutiny, executives are going to be more compliant with regulations like this that they’ve never been aware of. We’ll probably see more and more of these.”
Gates forks up 800G
Failure to comply can be extremely costly. In 2004, Bill Gates, co-founder of Redmond, Wash.-based Microsoft Corp., agreed to fork over $800,000 to the Federal Trade Commission in a settlement after he purchased more than 10% of the shares of Bothell, Wash.-based ICOS Corp., where he served as a director, without filing an HSR notification. The failure to file can cost up to $11,000 per day from the time the unreported acquisition closed.
“The Federal Trade Commission and Department of Justice are finding some of these offenders, but they aren’t finding all of them,” Mr. Allen said. “And it’s not any malevolence on the part of the individuals. But when you’re dealing with huge exercises of stock options and complicated compensation practices, many people don’t know about the HSR Act.”
Even the FTC has taken some action: In 2005, it held a “brown bag” session to alert the private bar that “inadvertent violations” of the HSR Act were occurring with “some frequency.” An FTC spokeswoman said that the agency has no total for such violations and doesn’t distinguish between filings from individuals and those from companies or other entities.
Meanwhile, shareholders are likely to continue to pay for these HSR fees, as almost nobody’s heard of them.
“I can’t say I’ve come across these, but it’s certainly the kind of incentive or perk companies pay for,” said Charles Peck, a compensation expert at The Conference Board Inc. in New York. “If the executives don’t get it paid for in one place, they’ll get it paid for in another.”
CNS