United States: Activism (Re)Defined: DOJ Files Complaint Against ValueAct For Alleged HSR Act Violation

On April 4, 2016, the US Department of Justice ("DOJ") filed a civil antitrust suit against activist investor ValueAct Capital ("ValueAct") seeking at least $19 million of civil penalties for ValueAct's alleged violation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. § 18a ("the HSR Act").

According to the DOJ complaint, ValueAct purchased over $2.5 billion of voting securities of Halliburton and Baker Hughes after the two companies announced their merger in November 2014. While its stake represented less than 10% of each company's voting share capital, according to the complaint, ValueAct purchased the shares with the intent to influence the companies' business decisions in connection with the merger and therefore it could not rely on the HSR "investment-only" exemption, which the Federal Trade Commission ("FTC") and DOJ interpret narrowly.

Under the investment-only exemption, acquisitions of voting securities made solely for the purpose of investment, regardless of the dollar value of the securities, are exempt from the requirements of the HSR Act provided that the purchaser will not hold more than 10% of the issuer's voting securities as a result of the transaction. Voting securities are held or acquired "solely for the purpose of investment" if the person holding or acquiring such voting securities has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer. The mere voting of the stock will not be considered evidence of the absence of investment intent; however, any investor who anticipates seeking to influence management decisions is regarded by the DOJ and FTC as an "active investor" and is not entitled to rely on the investment exemption.

While the agencies view any amount of influence over management as inconsistent with the investment-only exemption, in a statement on Monday, ValueAct said that basic shareholder rights include "having a relationship with company management, conducting due diligence on investments and engaging in ordinary course communications with other shareholders." Unlike most investors facing HSR Act suits who choose to settle with the antitrust regulators in exchange for reduced fines, ValueAct reportedly plans to contest the DOJ's actions, arguing that its actions are in compliance with the law. If this occurs, it will be the first time the courts will have interpreted the scope of the investment-only exemption.

Solely for the Purpose of Investment

Drawing from the HSR Statement of Basis and Purpose (which is part of the rule making proceeding required to be filed with the promulgation of the HSR Rules and essentially serves a Congressional history for the Rules), the agencies have always deemed certain types of conduct to be evidence of a lack of investment intent and therefore inconsistent with the investment-only exemption. Such conduct includes: (1) nominating a candidate for the board of directors of the issuer; (2) proposing corporate action requiring shareholder approval; (3) soliciting proxies; (4) having a controlling shareholder, director, officer, or employee simultaneously serving as an officer or director of the issuer; (5) being a competitor of the issuer; and (6) doing any of the foregoing with respect to any entity directly or indirectly controlling the issuer.

In 2015, the agencies again demonstrated their view that this is a narrow exemption when they charged hedge fund Third Point with misapplying the exemption for its acquisition of Yahoo stock in 2011. Although Third Point didn't actually engage in any of the above six activities, the fund took enough "activist" steps to negate a purely passive intent. According to the agencies, Third Point was not a passive investor because it: (i) communicated with third parties to determine their interest in becoming the CEO of Yahoo or a potential board member, and took other steps to assemble an alternate slate of board of directors for Yahoo; (ii) drafted correspondence to Yahoo to announce that Third Point was prepared to join the board of Yahoo; (iii) internally deliberated the possible launch of a proxy battle for directors of Yahoo; and (iv) made public statements that they were prepared to propose a slate of directors at Yahoo's next annual meeting.

The agencies did not seek civil penalties against Third Point, but the enforcement action put activist investors on notice that the agencies would continue to interpret the exemption as applicable only to the most passive style of investing.

Court to Be the Arbiter

As with Third Point, the complaint does not contend that ValueAct engaged in any of the conduct that the Statement of Basis and Purpose originally included as inconsistent with the investment-only exemption. Rather, the complaint characterizes ValueAct as an "activist," focusing in part on how ValueAct describes itself on its website and marketing materials, and then details how ValueAct used its access to senior executives of both Halliburton and Baker Hughes to formulate merger and other business strategies with the companies, allegedly in violation of the HSR Act. The complaint quotes drafts of an investment memorandum in which ValueAct states that it "would likely seek to take a more active role in overseeing the company" should the merger not go through and highlighting that ValueAct's "[a]ctive role" is an additional reason to invest in both companies. The final memo that went to ValueAct's investors did not include similar language. Since ValueAct is challenging the DOJ's interpretation, it may now be up to a court to define what scope of activism, if any, is consistent with the HSR investment-only exemption.

While it remains untested with the agencies, there is a level of communication between investors, even otherwise activist investors, and a company that should still keep the investor within the scope of the exemption. For example, a simple request by a large shareholder that it wants to see "better governance" can hardly be viewed as an attempt to participate in the "basic business decisions" of the company.

Unless and until a court rules on the scope of the exemption, the lesson learned is not a new one—the antitrust enforcement agencies interpret the investment-only exemption as being limited to those investors whose sole—not merely principal or predominant—purpose is investment. Activist investors who push the boundaries face significant risks of DOJ or FTC investigation and potentially large fines.

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
 
In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.