When it comes to HSR compliance, creativity in deal structuring only goes so far. That’s something that Canon & Toshiba recently found out the hard way when they agreed to settle FTC charges that the companies violated the premerger notification & waiting period requirements of the HSR Act when Canon bought Toshiba Medical Systems Corporation in 2016.
The complaint alleges that during March 15-17, 2016, in a multi-step process, Toshiba, transferred ownership of TMSC to Canon, but in a way designed to evade HSR notification requirements. First, Toshiba rearranged the corporate ownership structure of TMSC to make the plan possible: it created new classes of voting shares, a single non-voting share with rights custom-made for Canon, and options convertible to ordinary shares.
Second, Toshiba sold Canon TMSC’s special non-voting share and the newly-created options in exchange for $6.1 billion, and at the same time transferred the voting shares of TMSC (a $6.1 billion company) to MS Holding Corporation (“MS Holding”) in exchange for a nominal payment of nine hundred dollars. Later, in December 2016, Canon exercised its options and obtained formal control of TMSC’s voting shares. MS Holding was a special corporation formed by Toshiba and Canon to implement the plan.
The complaint further alleges that the transactions masked the true nature of the acquisition. When Toshiba sold its interests in TMSC, while nominal voting-share ownership was divested by Toshiba and passed to MS Holding, true beneficial ownership passed to Canon. MS Holding bore no risk of loss, and no meaningful benefit of gain, for any decrease or increase in TMSC’s value.
The FTC alleged that MS Holding merely provided a temporary resting place for TMSC voting securities for Canon’s benefit, & that Canon became TMSC’s owner March 2016 when it paid Toshiba the $6.1 billion purchase price for the company. As a result, the FTC contended that an HSR filing was required.
Under the terms of the settlement, Canon & Toshiba agreed to, among other things, pay $2.5 million each in civil penalties, implement HSR compliance programs & comply with inspection and reporting requirements.
– John Jenkins