Where is the line drawn between acquisitions of securities made “solely for the purpose of investment” on one hand, and influencing control, thereby requiring regulatory approval, on the other hand? That is the central cautionary question that was reinforced by the July 12, 2016, Department of Justice (“DOJ”) settlement with ValueAct Capital. The well-known activist investment firm agreed to pay $11 million to settle a suit alleging that it violated the premerger reporting and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”). ValueAct purchased more than $2.5 billion of shares in two oil companies, Baker Hughes Inc. and Halliburton Co., after they announced they would merge. The DOJ alleged that ValueAct used its ownership position to influence the proposed merger and other aspects of Baker Hughes and Halliburton, and thus could not rely on the exemption.
The HSR Act imposes premerger notification and waiting period requirements for transactions meeting certain thresholds, but contains an exemption for acquisitions that constitute less than 10 percent of the company’s stock and are made “solely for the purpose of investment.” (15 U.S.C. §18a(c)(9)) Under the HSR Rules, for this exemption to apply, the purchaser of stock must have “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” (Rule 801.1(i)(1))
In an August 24, 2015 Blog Post (here), FTC Bureau Director Debbie Feinstein and other senior officials at the agency explained that the exemption is intended to be a narrow one. In addition, they identified several actions as indicative of “non-passive intent” negating the applicability of the exemption, including:
- nominating a candidate for the board of directors of the issuer;
- proposing corporate action requiring shareholder approval;
- soliciting proxies;
- serving as an officer or director of the issuer; or
- being a competitor of the issuer.
They emphasized that the test for the “investment only” exemption is the acquirer’s subjective intent and merely “considering” or “expecting” to take certain actions may be sufficient to make the exemption inapplicable. For instance, buying stock “with the intention of influencing the basic business decision of the issuer” would render the exemption unavailable “even if the investor has not yet acted on those intentions.”
The DOJ alleged that ValueAct used its ownership position to influence the proposed merger and other aspects of Baker Hughes and Halliburton, and thus could not rely on the exemption. As part of the settlement, ValueAct agreed to injunctive relief barring future reliance on the exemption when it intends to influence, or is considering influencing, certain business decisions, including those relating to merger strategy, pricing, and production. Baker Hughes and Halliburton ultimately abandoned their proposed merger in the face of DOJ opposition.
The $11 million fine is the largest imposed for HSR Act violations to date, and represents the latest action in the federal agencies’ increased enforcement of potential HSR Act violations. Prior settlements and fines include:
- 2015: An injunctive settlement with Third Point LLC in connection with its purchase of Yahoo! Inc. stock;
- 2015: A $656,000 fine levied on investor Len Blavatnik relating to his purchase of shares in startup TangoMe;
- 2015: $240,000 fine on Leucadia National Corporation for its conversion of ownership interest in financial services company KCG Holdings, Inc.;
- 2014: Flakeboard America Limited for $5 million in civil penalties and disgorgement of profits for failing to adhere to HSR Act waiting period requirements in connection with a proposed merger; and
- 2014: Berkshire Hathway Inc. for $896,000 relating to its purchase of stock in USG Corporation.
The DOJ settlement with ValueAct also comes on the eve of increased penalties for violations of the HSR Act. As previously noted here, under current law, violators of the premerger and waiting period requirements face a maximum fine of $16,000 per day for every day they fail to comply, but as of August 1, 2016, that fine increases to $40,000 per day. Companies should be on the lookout for future agency activity around this issue.