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E-MailBarry A. Nigro Jr., is a partner in the Antitrust and Competition and Corporate Practices and chair of the Antitrust Department at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Nigro, Nathaniel L. Asker, and Aleksandr B. Livshits. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.
The Antitrust Division of the Department of Justice announced that activist investor ValueAct Capital has agreed to pay a record $11 million fine to settle allegations that it violated the notification requirements of the Hart-Scott-Rodino Act. The settlement highlights two important trends in HSR enforcement: continued scrutiny of activist investors that seek to rely on the “investment-only” exemption to HSR filing requirements; and increased fines for violations of the HSR Act. In addition, the settlement deprives the broader investment community and issuers of potential judicial guidance on the scope of the investment-only exemption, which could have provided welcome clarity, particularly in the area of investor communications with management.
Under the HSR Act, most acquisitions of voting securities valued in excess of $78.2 million (adjusted annually) must be notified to the DOJ and the Federal Trade Commission and cannot be consummated until expiration of a 30-day waiting period. On April 4, 2016, the DOJ filed suit against ValueAct seeking a $19 million fine in connection with the firm’s $2.5 billion investment in Halliburton Company and Baker Hughes Inc. ValueAct argued that HSR filings were not required because it qualified for the investment-only exemption, which permits acquisitions of up to 10% of voting securities of a company that are made “solely for the purpose of investment.” [1] The DOJ’s suit followed recent settlements with activists Third Point and Biglari Holdings charging that certain communications with management and other conduct disqualified these investors from claiming the exemption. ValueAct vowed to fight the DOJ’s charges, stating that “basic principles of shareholder rights” were at stake, including investors’ ability to engage with management. [2]
Instead, on July 12, ValueAct settled the case, citing the “sudden and unanticipated” increase in fines for HSR Act violations. [3] Last month, the FTC announced that fines for HSR Act violations would increase 150%, from $16,000 per day to $40,000 per day. The new fines will apply to penalties assessed after August 1, 2016, and cover violations that predate the effective date. While the $11 million fine on ValueAct is almost double the highest previous fine levied for an HSR violation, ValueAct’s potential exposure was much larger under the new regulations.
As a result of the settlement, there continues to be no case law addressing the scope of the investment-only exemption. Instead, investors and companies must rely on language in settlements with alleged violators, FTC speeches, and informal interpretations of HSR rules for guidance. [4] The ValueAct settlement provides another important reference. Under the settlement, ValueAct may not rely on the investment-only exemption if it intends to engage in any of the following communications with an officer or director of an issuer: [5]
- Proposing a merger, acquisition, or sale to which the issuer is a party;
- Proposing to an officer or director of another firm in which ValueAct has an equity interest the potential terms for a merger, acquisition, or sale between the firm and the issuer;
- Proposing new or modified terms for any publicly announced merger or acquisition to which the issuer is a party;
- Proposing an alternative to a publicly announced merger or acquisition to which the issuer is a party, either before consummation or upon abandonment;
- Proposing changes to the issuer’s corporate structure that require shareholder approval; or
- Proposing changes to the issuer’s strategies regarding pricing, production capacity, or output.
In addition, the settlement prohibits ValueAct from claiming the exemption if it identifies circumstances in which it may pursue any of the actions listed above. This restriction serves as a reminder that the test for the investment-only exemption is the investor’s intent, and that the antitrust agencies have expressed skepticism of change of intent arguments. Thus, even investors that consider themselves purely passive at the time of an acquisition should consider HSR compliance if they contemplate scenarios in which they may become active in the future. Also notable is that the settlement does not prohibit certain communications that the DOJ had alleged in its complaint to be inconsistent with investment-only intent, including meeting with management to propose changes to executive compensation plans.
Whether the language of the ValueAct settlement reflects the antitrust agencies’ policies for the investment community at large is not clear. The agencies examine the totality of the circumstances to determine if the investment-only exemption was properly invoked. According to the DOJ’s complaint, ValueAct met with management of Halliburton and Baker Hughes over 15 times to discuss their proposed merger. In announcing the settlement, the DOJ noted that ValueAct used its positions in the companies “to try to influence the outcome” of the DOJ’s antitrust review of the transaction. [6] The companies abandoned the merger on May 2, 2016, after the DOJ filed suit to block the deal. Furthermore, the DOJ identified ValueAct as a repeat offender that had failed to file HSR notifications for six prior acquisitions. [7] Finally, the DOJ in its complaint cited ValueAct’s history of activist campaigns.
The ValueAct settlement and the record fine (which, with the imminent penalty increase, may not remain the record for long) serve as a reminder that the antitrust agencies take HSR violations very seriously and view the investment-only exemption to be quite narrow. Investors and issuers should consider seeking guidance from antitrust counsel on the potential applicability of the exemption to the specific facts at hand.
Endnotes:
[1] To qualify for the exemption, an acquirer must have “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” 16 C.F.R. § 801.1(i)(1). For certain institutional investors, passive acquisitions of up to 15% of the voting securities of a company may be exempt.
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[2] See “ValueAct Sued by DOJ over Holdings in Oilfield Services Groups,” Financial Times, Apr. 4, 2016.
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[3] See “ValueAct to Pay Record $11 Million to Settle Justice Department Suit,” Wall Street Journal, July 12, 2016.
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[4] In recent months, the FTC has withdrawn several interpretations that had previously provided guidance on the scope of the exemption. See PNO Informal Interpretation No. 1308003 (withdrawing interpretation that non-passive intent of a third-party fund manager does not necessarily impute non-passive intent to the fund making the investment); PNO Informal Interpretation No. 1202014 (withdrawing interpretation that an investor is not disqualified from relying on the exemption if the investor competes with the issuer outside the U.S., but not in the U.S.); PNO Informal Interpretation No. 1403011 (withdrawing interpretation that holding 10% or less of a competitor of the issuer does not create a presumption that the investment is non-passive).
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[5] Communications with individuals whose job responsibilities primarily relate to investor relations are specifically excluded from these restrictions.
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[6] See Press Release, U.S. Dep’t of Justice, “Justice Department Obtains Record Fine and Injunctive Relief against Activist Investor for Violating Premerger Notification Requirements (July 12, 2016).” The DOJ considered it an “aggravating factor” that the investment involved a transaction raising substantive concerns, and stated that ValueAct’s conduct “prejudiced the [DOJ]’s ability to enforce the antitrust laws.” See Competitive Impact Statement, United States v. VA Partners I, LLC, at 8.
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[7] See Competitive Impact Statement, United States v. VA Partners I, LLC, at 8.
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