DOJ Sends Message to Activist Hedge Funds on HSR Passive Investor Exemption
On Monday, April 4, 2016 the U.S. Department of Justice (the “DOJ”) announced a civil antitrust lawsuit against certain ValueAct Capital (“ValueAct”) entities for allegedly violating the reporting and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”). The DOJ’s Antitrust Division’s lawsuit seeks civil penalties and an injunction against further HSR Act violations.
The DOJ asserts that ValueAct purchased over $2.5 billion of Halliburton and Baker Hughes voting shares without complying with the HSR Act’s notification requirements because the shares were acquired notwithstanding what the DOJ characterizes as an intent to influence the companies’ business decisions and therefore, ValueAct could not in the DOJ’s view rely on the limited “investment-only” exemption to HSR notification requirements in connection with the acquisition of shares. According to the DOJ, ValueAct used its access to senior executives of both Halliburton and Baker Hughes to formulate merger and other business strategies with the companies.
“ValueAct’s substantial stock purchases made it one of the largest shareholders of two competitors in the midst of our antitrust review of the companies’ proposed merger, and ValueAct used its position to influence decision-making at both companies,” said Assistant Attorney General Bill Baer of the DOJ’s Antitrust Division. “ValueAct was not entitled to avoid HSR requirements by claiming to be a passive investor. Given the seriousness of the violation and ValueAct’s prior HSR violations, we will be seeking significant civil penalties and an injunction against further violations.”
ValueAct responded with a statement that it will fight the allegations and that having a relationship with a company’s management, conducting due diligence and engaging with other stock owners are basic principles of shareholder rights. A shareholder in Halliburton since 2012, ValueAct disclosed last January that it bought a stake in Baker Hughes in the belief that the deal was underpinned by the drop in oil prices.
The HSR Act imposes notification and waiting period requirements for transactions meeting certain size thresholds so that such transactions can undergo premerger antitrust review by the DOJ and the Federal Trade Commission. The HSR Act has an exemption for acquisitions of less than 10 percent of a company’s outstanding voting securities if that acquisition is made “solely for the purposes of investment”, which the DOJ and the Federal Trade Commission interpret very narrowly. Federal courts can assess civil penalties for premerger notification violations under the HSR Act in lawsuits brought by the DOJ. The maximum civil penalty for an HSR violation is $16,000 per day.
In recent years certain activist hedge funds have faced increased scrutiny from regulators over their reliance on the passive investor exemption. The announcement of the DOJ’s suit against ValueAct continues to demonstrate the incredible importance of properly understanding the HSR Rules when building positions in public company voting shares, especially if there is any foreseeable chance of not being purely passive in the future.
Partner Chris Davis was recently quoted in a Reuters article regarding the DOJ’s suit against ValueAct. Link to the article can be found here.