United States: Investment Fund Violates "Investment-Only" HSR Exemption

Last Updated: August 27 2015
Article by Bruce D. Sokler, Dionne Lomax, Robert G. Kidwell and Farrah Short

At the request of the Federal Trade Commission ("FTC" or "Commission"), the Department of Justice ("DOJ") filed this week in federal court a proposed settlement to charges that an investment fund violated the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a ("HSR Act" or "Act") by improperly relying on the "investment-only" exemption. In the Matter of Third Point, FTC File No. 121-0019 (August 24, 2015). The matter arises out of the purchase through several transactions on the open market of voting securities of Yahoo! Inc. by several funds managed by Third Point LLC financial investment firm in 2011. The FTC voted 3-2 to refer the matter for enforcement. The settlement provides an extended list of actions that preclude the use of the exemption, and reinforces the Commission's stance that the likely competitive impact of a transaction is irrelevant to whether the HSR Act requirements are applicable.

This matter provides concrete and expanded guidance regarding conduct the FTC has deemed inconsistent with the investment-only exemption to the HSR Act's reporting requirements. While the FTC has long made clear that the exemption applies only to passive investors for holdings up to 10%, the settlement here further develops the list of specific examples that make the exemption unavailable. This matter also serves as a general reminder to investment firms that a strong HSR compliance program is critical to avoiding violations. Not only is such a program relevant to the correct application of the investment-only exemption, but it can also be essential to avoiding HSR violations that occur when the aggregate holdings of an entity cross the 10% threshold (when investment intent becomes irrelevant).

HSR Act

The HSR Act requires parties engaged in certain transactions to file a notification with the FTC and the Antitrust Division of the DOJ, and to observe a statutorily prescribed waiting period (usually 30 days) prior to closing, if the jurisdictional size thresholds are met.  Transactions potentially covered by the HSR Act include mergers, acquisitions, joint ventures, exclusive license deals, and minority investments. The purpose of the HSR Act is to maintain the competitive status quo during the waiting period while the federal antitrust agencies investigate whether the proposed transaction may substantially lessen competition in any relevant market in violation of the antitrust laws.

Because the HSR Act is a procedural requirement that applies regardless of the likely competitive impact of a transaction, exemptions to the Act are designed to eliminate the filing and waiting period requirement for those types of transactions that are most unlikely to have competitive significance. One such exemption is the so-called "investment only" exemption.  The HSR Act exempts acquisitions of voting securities if made "solely for the purpose of investment." The HSR rules state that acquisitions of less than 10% are exempt if the investor has "no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer." The Statement of Basis and Purpose ("SBP") issued at the time the Commission promulgated the HSR rules provides the following examples of conduct inconsistent with an investment-only intent:

  • nominating a candidate for the board of directors;
  • holding a board seat or being an officer;
  • proposing corporate action that requires shareholder approval;
  • soliciting proxies; or
  • being a competitor of the issuer.

Third Point's Violation

The FTC brought this action against Third Point LLC and three funds it manages (Third Point Offshore Fund, Ltd., Third Point Ultra, Ltd., and Third Point Partners Qualified L.P., each their own "ultimate parent entity" for HSR purposes) (collectively "Third Point"). Through multiple transactions in August 2011, the Third Point funds acquired on the open market voting securities of Yahoo! Inc. that in aggregate for each fund exceeded $66 million in value (the relevant jurisdictional threshold at the time). In reliance on the investment-only exemption, Third Point made the acquisitions without filing the required notifications under the HSR Act or observing the waiting period. In September 2011, after the acquisitions had already been consummated, Third Point corrected its violations by filing HSR notifications. The waiting periods for those notifications then expired in October 2011.

Arguing that the acquisitions did not qualify for the investment-only exemption, the FTC alleged that the entities were each in violation of the Act for the period from September to October. Specifically, the FTC argued that the following actions taken by Third Point at the time of the acquisitions belied an investment-only intention:

  • contacting certain individuals to gauge their interest and willingness to become the CEO of Yahoo or a potential board candidate of Yahoo;
  • assembling an alternate slate for the Yahoo Board;
  • drafting correspondence to Yahoo announcing that Third Point was prepared to join the Yahoo Board;
  • discussing internally the possible launch of a proxy battle for directors of Yahoo; and
  • stating publicly that it was prepared to propose a slate of directors at Yahoo's next annual meeting.

Proposed Settlement

The Stipulated Order, which requires approval and entry by a federal judge pursuant to the Tunney Act, prohibits Third Point from making acquisitions in reliance on the investment-only exemption if Third Point has engaged in certain enumerated conduct at the time of the acquisition or in the four months prior:

  • nominating a candidate for the board of directors of the issuer;
  • proposing corporate action requiring shareholder approval;
  • soliciting proxies with respect to such issuer;
  • having a representative serve as an officer or director of the issuer;
  • being a competitor of the issuer;
  • doing any of the above activities with regard to an entity controlled by the issuer;
  • asking third parties about interest in being a candidate for the board or CEO of the issuer, and not abandoning such efforts;
  • communicating with the issuer about potential candidates for the board or CEO of the issuer, and not abandoning such efforts; or
  • assembling a list of possible candidates for the board or CEO of the issuer, if done with the knowledge of the CEO.

The settlement also requires Third Point to maintain a compliance program to ensure adherence to the terms of the settlement.

The HSR Act, at the discretion of the antitrust agencies, allows for civil penalties of up to $16,000 for each day of violation. Here, the Commission, in consultation with the DOJ, decided to seek only injunctive relief. The FTC's decision to exercise its discretion not to levy a monetary penalty was based on the relatively short period of the violation, Third Point's observance of the Act's filing and waiting period requirements for subsequent purchases of Yahoo voting securities, and the fact that this was Third Point's first HSR violation.

Dissent

FTC Commissioners Maureen K. Ohlhausen and Joshua D. Wright dissented. They did not dispute the Commission's conclusion that Third Point violated the HSR Act. Rather, the dissent argued that the public interest did not support a referral of the matter for enforcement, and thus they would have exercised prosecutorial discretion not to take any action against Third Point. The dissent argued that the Commission's position is a "narrow interpretation" of the exemption that is "likely to chill valuable shareholder advocacy while subjecting transactions that are highly unlikely to raise substantive antitrust concerns" to the HSR Act notification requirements. They further argued that the HSR Act "must adapt to allow antitrust agencies to focus on those proposed transactions that are most likely to result in a substantial lessening of competition."

Advocating for renewed efforts to modify the investment-only exemption and to reevaluate its proper scope, the dissent proposed two possible changes: i) amending the rules to create an exemption for all acquisitions that do not result in the holding of more than 10%  of the issuer's outstanding voting securities (regardless of intent); or ii) interpreting the investment-only exemption to exclude only the specific types of conduct described in the SBP (rather than the expanded list created in this settlement).

In the Competitive Impact Statement filed with the settlement, the Commission emphasized that the HSR Act "is critical to the federal antitrust agencies' ability to investigate large acquisitions before they are consummated, prevent acquisitions determined to be unlawful under Section 7 of the Clayton Act [ ], and design effective divestiture relief when appropriate."  In response to the dissent, the Commission explained that enforcement in this matter is in the public interest because it instills respect for the HSR Act, deters violations, and provides a clear, consistent, and transparent interpretation of the exemption. The Commission noted that whether the transaction was likely to produce any competitive harm is not relevant to the public interest question because the Act is procedural and thus it is expected that the vast majority of the reported transactions will not result in challenges by the antitrust agencies.

Clear Guidance

The FTC emphasized that "[s]ince 1978, the Commission has consistently and narrowly defined the phrase 'solely for the purpose of investment' to mean that an acquiring person must 'not intend to participate in the formulation of the basic business decisions of an issuer.'" The expanded list of investor actions contained in the proposed settlement provides clear guidance for interpreting that definition and creates a compliance roadmap for any party contemplating the use of the HSR investment-only exemption.

Importantly, it is also worth highlighting the phrase "at the time of the acquisition." The investment intent relevant to the applicability of the exemption is the intent of the purchaser at the time of the acquisition. The FTC on other occasions has made clear that it is conceivable that an investor may be passive at the time of the acquisition (and thus appropriately use the exemption), but later become an active investor (and thus no longer able to use the exemption for subsequent acquisitions). Such a determination would be very fact specific, and an investigation into the use of the exemption would involve a review of the investor's business documents from the time of and shortly prior to the acquisition.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Bruce D. Sokler
Dionne Lomax
Robert G. Kidwell
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions