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In a case that could test the boundaries of the pre-merger notification law, the Department of Justice on Friday sued Smithfield Foods Inc. for failing to file Hart-Scott-Rodino Act notices when it bought large chunks of IBP Inc. stock. The antitrust division is seeking $5.5 million in civil penalties, the maximum allowed by law. Smithfield said in a prepared statement that the government’s case was without merit and it vowed to litigate the dispute. The HSR Act requires corporations to notify the government 30 days before buying a company or making a significant investment in a business that could lead to an acquisition. Exempt are stock acquisitions intended solely as an investment. The Justice Department said Smithfield violated the HSR Act twice in the period from 1999 to 2001. During that time frame, the law required HSR notices if the value of the acquisition was more than $15 million. The threshold has since been raised to $50 million. The antitrust division said Smithfield acquired IBP stock but failed to file HSR notices. It said the acquisitions were not for investment purposes because Smithfield was taking steps to acquire IBP. The Smithfield, Va.-based company eventually lost a bidding war for IBP in late 2000. “Companies cannot evade Hart-Scott-Rodino Act filing obligations by ignoring the plain language of the exemption,” Principal Deputy Assistant Attorney General Deborah P. Majoras said. “Acquisition of stock in a firm that is also a potential takeover target or merger candidate is not an acquisition that is ‘solely’ for investment.” The law permits the Justice Department to seek $11,000 for each day a company is in violation of the pre-merger law. The government said Smithfield failed to file HSR notices for a 97-day period in 1998 and a 401-day period from 1999 to 2001. These were periods in which it held IBP stock, the government said. The dispute is likely to spark deep interest in the antitrust bar and among corporations that make minority investments in other companies because there is little court guidance on how the HSR rules work. Joel Mitnick, a partner at law firm Sidley, Austin, Brown & Wood in New York, said the investment-only exemption is included in the Clayton Act and defined in the HSR Act rules and in guidance issued by the Federal Trade Commission explaining how the premerger notification system will be implemented. Yet Mitnick said there has been almost no judicial review of the FTC’s interpretation of the exemption. “This could be very interesting,” Mitnick said. “Most of the law here is less law and more lore.” One Washington lawyer said the case largely will depend on Smithfield’s intent when it bought the stock. “You could have an investment-only intent when you bought it and then changed your mind,” the lawyer said. Yet he said the Smithfield purchases “look suspicious” because the 1999 to 2001 period covers the time frame in which Smithfield made several bids for IBP, before losing the auction to Tyson Foods Inc. “You cannot be thinking about buying the company and be a passive investor at the same time,” the lawyer said. FTC guidance on the HSR Act says the investment-only exemption is available if the buyer holds less than 10 percent of the target’s stock. It also may not participate in the management of the target’s business. This is later defined to include nominating candidates for the board, proposing corporate actions requiring shareholder approval, soliciting proxies, and having a controlling shareholder serving as an officer of the company making the investment. Yet the fifth condition could pose trouble for Smithfield. It says evidence that is inconsistent with an investment-only intent is being a competitor to the target. Both Smithfield and IBP are major pork processors. The government and Smithfield are expected to appear shortly before a U.S. district judge in Washington. Copyright �2003 TDD, LLC. All rights reserved.

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