Investment Fund Family Pays $609K Penalty for Missed HSR Filings Related to Stock Conversions
On August 28, 2019, the Federal Trade Commission (FTC) settled allegations that an investment advisor and three funds it manages failed to make required HSR Act filings when the funds received shares of a newly merged company in exchange for holdings in one of the merging parties.1 Third Point LLC and its managed funds Third Point Offshore Fund, LTD., Third Point Ultra LTD. and Third Point Partners Qualified L.P. agreed to pay $609,810 for three separate HSR Act violations that FTC alleged occurred when each fund received shares of the newly merged DowDuPont Inc. (DowDuPont) in exchange for Dow Chemical Company (Dow) shares each fund held.
Although each fund was under the common management of Third Point LLC, each was a separate ultimate parent entity with separate potential reporting obligations under the HSR Act. According to the FTC's Complaint,2 when the new DowDupont shares issued, each fund received shares valued in excess of the then effective filing threshold. The FTC also highlighted that Third Point had advance warning that it would receive these shares: the merger between Dow and E.I. du Pont de Nemours and Company (DuPont) was announced December 11, 2015; a proxy statement for the consolidation was issues on June 10, 2016 disclosing the plan to consummate the merger by issuing shares in the new combined entity; on June 15, 2017, the parties announced they received antitrust clearance; and on August 4, 2017, the parties announced a closing date of August 31, 2017.3
The FTC credited Third Point with promptly self-reporting the violation and determined it was inadvertent.4 The FTC also acknowledged that Third Point funds had appropriately filed for their initial acquisitions of Dow shares. However, it clarified that the exemption under 16 CFR § 802.21, which allows for certain additional acquisitions of the same issuer for which an HSR filing has been made previously, did not apply because the merged DowDupont was a new entity and in particular, one with assets and lines of business that expanded beyond the areas where Dow competed.
Notably, these same Third Point entities previously violated the HSR Act, which the FTC cited as a reason for seeking the current monetary penalties. In 2015, the same Third Point entities entered into a settlement related to acquisitions of Yahoo! stock where the passive, investment only exemption, 16 CFR § 802.9, was relied on but unavailable due to Third Points activities to assemble an alternate slate of board members, among other activities.5 Third Point settled the 2015 case by agreeing to not rely on the exemption when engaging in certain non-passive activities with respect to the issuer's business and management, but did not pay any monetary penalty for its first offense. At the time the FTC could have requested a financial penalty up to approximately $2.8 million. It is worth noting in that case, two FTC Commissioners dissented on the decision to sue due to the lack of risk of competitive harm from the particular transaction as well as the type of transaction–i.e., one done to create the threat of a takeover to encourage current managers to improve firm performance.6 Regardless, the majority of the commission voted in favor of the enforcement action to create a bright line for compliance with the HSR Act's filing requirements.7
In the present case, Third Point filed a corrective filing roughly two months after its acquisition, which led to the government adjusting the penalty significantly below the statutory maximum, currently assessed at a rate in excess of $42,000 per day.
- The FTC continues to aggressively pursue those who violate the HSR Act. In the present case, Third Point self-reported and, as the FTC found, inadvertently failed to file, but nevertheless, the FTC sought penalties as this was not Third Point's first violation of the HSR Act.
- HSR filing requirements can be triggered by someone else's transaction. Potentially reportable "acquisitions" under the HSR Act can occur not only when merging companies issue shares in a new entity as was the case here, but also when an acquiring party uses cash and an issuance of its own shares as consideration. If individual shareholders of the target receive such shares directly, they could have a reportable acquisition irrespective of any filings made for the primary transaction. Other types of potentially reportable acquisitions can include option exercises or stock vesting.
- The HSR rules are complex and require an HSR specific compliance program. Third Point did make required SEC filings related to its acquisition of the DowDupont shares, but not the HSR filing. The missed filing was inadvertent according to the FTC, but underscores the need for particular attention to the HSR rules anytime new shares are expected to come in the door.
- Repeat offenders can expect financial penalties to become more severe with each offense, further underscoring the need for a robust compliance program. While initial offenses may not result in the imposition of a monetary penalty, it is not uncommon for repeat offenders to receive penalties in excess of $1 million depending on the severity of the offence, and as recently as 2016, one family of funds had to pay a record $11 million penalty in a repeat offense situation.
© Arnold & Porter Kaye Scholer LLP 2019 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.
Proposed Final Judgment, United States v. Third Point Offshore Fund, LTD, 1:19-cv-02593 (D.D.C. August 28, 2019). Note that the case was brought in court by the Justice Department Antitrust Division on behalf of the FTC.
See Competitive Impact Statement, United States v. Third Point Offshore Fund, Ltd., 1:15-cv-01366 (D.D.C. Aug. 24, 2015). See also Third Point Settles with FTC over Improper Reliance upon the "Investment-Only" Exemption.