This week the Department of Justice obtained a record $11 million fine for an investor's failure to comply with the premerger notification and waiting period requirements of the Hart-Scott-Rodino (HSR) Act. DOJ challenged hedge fund ValueAct's reliance on the "investment-only" exemption to the reporting requirements of the HSR Act, in connection with ValueAct's acquisition of voting securities of Halliburton and Baker Hughes. DOJ's settlement of its lawsuit against ValueAct in exchange for an unprecedented fine provides a stark reminder that the antitrust enforcement agencies favor narrow interpretations of HSR Act exemptions and pursue violators aggressively.
The HSR Act
The HSR Act requires merger or acquisition parties to notify DOJ
and the Federal Trade Commission and to observe a waiting period
prior to closing a transaction whose value exceeds the
statute's thresholds, to allow the government time to review
the proposed combination. Federal courts may assess civil penalties
for violations of the HSR Act. The current maximum civil penalty
for an HSR Act violation is $16,000 per day for each day of
noncompliance, but will increase to $40,000 per day on August 1,
2016.
The HSR Act and its implementing regulations provide various
exemptions to mandatory premerger reporting, including an exemption
for acquisitions of less than 10% of a company's outstanding
voting securities, regardless of the value of the stock, if the
acquirer makes acquisition "solely for the purpose of
investment." This exemption applies only if the acquirer has
"no intention of participating in the formulation,
determination, or direction of the basic business decisions of the
issuer." The scope of the investment-only exemption has been
construed narrowly by the FTC, which takes the position that
conduct such as nominating a candidate for the board of directors,
holding a board seat, serving as an officer, proposing corporate
actions that require shareholder approval, soliciting proxies, or
being a competitor of the issuer are inconsistent with passive
investment intent.
ValueAct's acquisition of Halliburton and Baker Hughes securities
In 2014, oilfield services companies Halliburton and Baker
Hughes announced their intention to merge in a $35 billion
transaction. Shortly after that announcement, two ValueAct Capital
funds acquired over $2.5 billion of Halliburton and Baker Hughes
voting securities, but without filing HSR Act premerger
notification. According to DOJ, ValueAct thereafter met with both
companies' management teams, lobbied other shareholders to vote
for the merger, promoted specific integration plans and executive
compensation strategies, and proposed operational and strategic
changes at the companies.
The DOJ complaint alleged that ValueAct acquired the shares
intending to influence Halliburton and Baker Hughes' business
decisions and therefore could not rely on the investment-only
exemption. DOJ also pointed to ValueAct's website, which
describes the funds' activist approach to investing, and to two
prior transactions that ValueAct had failed to report under HSR
Act.
ValueAct has agreed to pay a record $11 million fine—nearly
double the highest fine previously imposed for HSR Act violations,
and close to the maximum available penalty under the HSR Act.
ValueAct also agreed to injunctive relief designed to prevent
future violations, including designation of a legal compliance
officer.
Lessons from ValueAct
The ValueAct settlement reflects how aggressively the antitrust
enforcers pursue civil penalties for HSR Act violations by
sophisticated investors, particularly those that repeatedly have
failed to comply. The agencies have stated they may decline to seek
civil penalties for first-time violators, where a violation is the
result of understandable or simple negligence, the parties make
corrective filings promptly, the parties did not benefit from the
violation, and the parties explain how they will prevent future
violations. ValueAct's having to pay close to the maximum
available HSR Act penalty is explained by the lack of mitigating
factors and ValueAct's previous violations.
The DOJ will consider public comments on the proposed settlement,
which must be submitted within 60 days. The DOJ Competitive Impact
Statement, explaining the rationale for the enforcement action and
proposed settlement, is available
here.
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