12 April 2016
Practice Group(s):
Antitrust,
Competition & Trade
Regulation
Activist Funds Should Heed the Latest Enforcement
of the HSR Act
Antitrust, Competition & Trade Regulation Client Alert
By Brian K. McCalmon and Kenneth S. Knox
The limits on an investor’s ability to acquire stock under the “investment-only” exemption to
the HSR Act’s reporting requirements take center stage as the Antitrust Division of the U.S.
Department of Justice (the “DOJ”) filed suit against ValueAct Capital (“ValueAct”) for violating
the reporting and waiting period requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 in connection with the pending merger of Halliburton and Baker
Hughes. In its Complaint, the DOJ alleged that ValueAct invested over $2.5 billion in voting
securities of both companies after they announced their plans to merge. According to the
DOJ, the investment was made in order to “obtain access to management, to learn
information about the merger and the companies’ strategies in private conversations with
senior executives, to influence those executives to improve the chances that the merger
would be completed, and to influence other business decisions whether or not the merger
went forward.”
Federal regulations provide an exemption from HSR notification requirements for up to 10
percent of the outstanding voting securities of an issuer, regardless of value, on the condition
that the buyer intends to be a passive investor. But the exemption is only available when
“the person holding or acquiring [the] voting securities has no intention of participating in the
formulation, determination, or direction of the basic business decisions of the issuer.” When
it adopted the exemption in 1978, the Federal Trade Commission (the “FTC”), which
regulates the HSR Act, listed several activities that it claimed would be presumed
inconsistent with a purely passive investment, and this list has guided advice in the HSR field
ever since. The activities include, among other things, “proposing corporate action requiring
shareholder approval.” In its Complaint, the DOJ claimed that both ValueAct’s investment
philosophy (as outlined on its website) and its explicit communications to its shareholders
demonstrate its intent to use its large ownership stake to influence the outcome of the
proposed merger and other important corporate actions.
The FTC and DOJ are aggressive in their interpretation of the exemption, and litigation over
it, though rare, is not unprecedented. The government sued Barry Diller in 2013 for
acquiring voting securities in Coca Cola Company above the then-current HSR notification
threshold, because he “intended to participate in the formulation, determination, or direction
of the basic business decisions of Coke through his membership on the board of directors.”
The parties eventually settled on a civil fine of $480,000. And although the FTC and DOJ
extend “free bite at the apple” for one inadvertent failure to file, that option was never
available here; in 2007, ValueAct agreed to pay $1.1 million to settle government charges
that it violated pre-merger notification requirements related to its investments.
Investors, particularly those with activist strategies, should watch this case closely. If it is not
settled, a federal court may provide rare and important guidance on the scope of a very
important exemption. In the meantime, investors should be cautious when making
Activist Funds Should Heed the Latest Enforcement of the HSR Act
investment decisions that may result in holdings of an issuer altogether worth more than
$78.2 million, the current HSR notification threshold, and should be cautious about
undertaking activities that arguably are intended to influence the business decisions of the
issuer.
Authors:
Brian K. McCalmon
brian.mccalmon@klgates.com
+1.202.661.6230
Kenneth S. Knox
kenneth.knox@klgates.com
+1.202.661.3878
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