United States: Further Guidance On The HSR Act Investment-Only Exemption For Seemingly "Passive" Investors Engaging With Management

Last Updated: November 10 2016
Article by Ngoc Hulbig and Amy W. Ray

Most Read Contributor in United States, September 2017

Investors considering engaging with management should take note of a recent informal interpretation received from the FTC's Premerger Notification Office (PNO) advising that certain seemingly "passive" behavior is inconsistent with the "investment-only" exemption freeing acquirers of voting securities from the reporting and notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act).1 Any investor – be it a mutual fund, merger arbitration fund, or activist – authoring a letter to a merger target that is in the process of responding to a bid should be aware that such action may not qualify as purely passive under the HSR Act.

Per the PNO, it would be "inconsistent with passive intent" for an investment fund manager (Investor) to send a letter to management of a merger target under the facts as presented. Here, there exists a publicly announced agreement by Company A to acquire target Company B. The Investor owns voting securities in Company B. The Investor is concerned about management's agreement to certain voting conditions in the merger agreement that permit a single minority shareholder to effectively control the outcome of the transaction, i.e., whether the transaction is approved in the shareholder vote. The Investor considered sending a letter to Company B's Transactions Committee that, citing recent market practice, highlights various alternative transaction structures that would preserve the value of the proposed merger for Company B's shareholders. Some of the alternatives discussed in the letter would require approval by Company B's shareholders. The PNO interpretation finds the contemplated letter non-passive, which could undermine the Investor's future reliance on the investment-only exemption.

Key Takeaways

  • This informal guidance is consistent with increasingly narrowed interpretation of passive intent required to invoke the HSR Act's investment-only exemption.
  • Further, it potentially places aspects of current shareholder engagement outside of the exemption. Under the PNO's interpretation, advice relating to merger and acquisition strategy could qualify as intent to influence management's "basic business decisions," including for matters that otherwise already require shareholder approval.2
  • Passive investors who have relied on the exemption should consider whether to file HSR for acquisitions that post-date engagement, or intent to contact, management of a target beyond making requests for information. Intention at the time of the acquisition trumps whether the investor actually takes actions to influence the issuer's management or business decisions.
  • The maximum civil penalty for an HSR violation increased to $40,000 per day as of August 1, 2016 – a substantial increase from the previous daily maximum of $16,000.

The Investment-Only Exemption

The HSR Act imposes notification and waiting period requirements for transactions meeting certain thresholds. The policy animating those requirements – which delay consummation of the proposed deal – is to allow time for the Department of Justice (DOJ) or the Federal Trade Commission (FTC) to conduct an antitrust review to ensure that the transaction at issue does not tend to create a monopoly or result in significant anticompetitive effects or a substantial lessening of competition.

By statute, and as a reflection of the policy judgment that they should present a low likelihood of harm to competition, pre-set categories of deals are exempt from HSR notification. As just one example, the HSR Act exempts the acquisition of additional "voting securities" when the acquirer already owns 50% of that issuer's voting shares. Pertinent here is the "investment-only exemption" that absolves HSR notification for acquisitions of less than 10% of an issuer's outstanding voting securities, regardless of the value of the securities, if that acquisition is made "solely for the purpose of investment." 15 U.S.C. § 18a(c)(9); 16 C.F.R. § 802.9. An acquirer relying on the exemption 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).

As a policy matter, the DOJ and the FTC interpret the "solely for the purpose of investment" requirement quite narrowly. For instance, merely voting the shares is considered consistent with passive intent. In addition, investors may request information from management about the company or may request a non-voting Board observer with rights to receive information delivered to the Board.3 The HSR Statement of Basis and Purpose (issued at the time the FTC promulgated the HSR Rules) provides a non-exhaustive list of conduct inconsistent with passive investment intent and, thus, falling outside the protections of the investment-only exemption.

Such non-passive acts include:

  • nominating a candidate for the issuer's Board of Directors;
  • proposing corporate action requiring shareholder approval;
  • soliciting proxies;
  • having a controlling shareholder, director, officer, or employee simultaneously serve as an officer or director of the issuer;
  • competing with the issuer; and
  • doing any of the above acts with an entity directly or indirectly controlling the issuer.

Recent enforcement actions4 have resulted in settlements further prohibiting investors from, e.g., proposing to an officer or director of an issuer:

  • new or modified terms for any publicly announced merger or acquisition to which the issuer is a party; or
  • changes to the issuer's corporate structure that require shareholder approval.

PNO Informal Interpretations of the Investment-Only Exemption

Despite several resolutions of alleged HSR Act violations in the recent past, the PNO has published relatively few postings related to the investment-only exemption in its searchable database of informal interpretations.5 Moreover, in 2016, three prior informal interpretations were withdrawn.6

Additional resources are available to investors, such as filings and statements resulting from enforcement actions and blog posts describing the U.S. antitrust agencies' current enforcement stance.7 The FTC's Bureau of Competition advises to contact the PNO "[w]hen in doubt about the application of the investment-only exemption (or any other aspect of the HSR law or rules) . . . Our HSR experts are available to discuss your questions before you act."8

It is possible that the PNO has opted not to publish a broad set of informal interpretations related to the investment-only exemption. By doing so, PNO staff encourages practitioners to call on a case by-case basis.

Practical Implications

Nonetheless, a lack of guidance on available, fact-specific past interpretations injects uncertainty into shareholder engagement – including informal shareholder contact with management that traditionally would not be viewed as activist – from which corporate governance and competition benefit as a whole. Combined with further narrowing interpretation of the investment-only exemption over time, a dearth of guidance would tend to chill beneficial engagement between shareholders and management.

Prophylactic HSR notifications would protect shareholders who intend to continue to acquire shares, but the attendant waiting periods are impractical for investors seeking to maintain maximum flexibility in their trading positions.


  • Investors have incomplete guidance on the extent of contact with management that the U.S. antitrust agencies view as incompatible with purely passive intent. Shareholders who engage or intend to engage with an issuer's management for any reason beyond requesting information may violate the HSR Act in the eyes of the PNO, the FTC, and the DOJ. Failure to file HSR now triggers a costly maximum penalty of $40,000 per day. The informal interpretation described herein – in combination with the FTC's recent enforcement actions against Third Point, ValueAct, and Sarofim – serve as cautionary examples to the broader investment community.
  • Large mutual funds and other investors who consider themselves "passive" and who typically do not file HSR notifications should seriously consider reassessing their practices and voicing support for amendments to rules applying the investment-only exemption. We should anticipate less fulsome discourse between companies' management and a broad swath of institutional investors unless and until regulations accompanying the HSR Act clarify the scope of engagement between management and shareholders that qualifies as passive. Absent more extensive input from the investment community on burdens caused by uncertainty in the exemption's application, the FTC is not slated to review the applicable rules until 2020.9


1 See, FTC, About Informal Interpretations ("Informal interpretations provide guidance from previous staff interpretations on the applicability of the HSR rules to specific fact situations. You should not rely on them as a substitute for reading the Act and the Rules themselves. These materials do not, and are not intended to, constitute legal advice.")

2 "Basic business decisions" is an undefined term in the HSR Act.

3 See PNO Informal Interpretation No. 1203011.

4 See United States v. Third Point Offshore Fund, Ltd. (2015); United States v. VA Partners I, LLC (2016).

5 See, FTC, About Informal Interpretations (noting limits to the database in cautioning that users "should not rely on [informal interpretations] as a substitute for reading the Act and the Rules themselves, but rather as a supplement that may address specific questions.").

6 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 more than 10% of a competitor either by the target (of a competitor of the acquiring person) or the acquiring person (of a competitor of the target) is presumed to be non-passive).

7 See, e.g., D. Feinstein, et al., FTC Bureau of Competition, "Investment-only" means just that (Aug. 24, 2015).

8 Id.

9 FTC, Regulatory Review Schedule, Notice of Intent to Request Public Comments, 81 Fed. Reg. 7,716, 7,717 (Feb. 16, 2016).

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.

In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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.


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.


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.


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.


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.


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.


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.