July 22, 2016

Are You Acquiring Voting Securities with Investment Intent? It Depends on Who’s Asking

The Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) exempts certain acquisitions of voting securities from the notification and waiting period requirements of the HSR Act if made “solely for the purpose of investment” (HSR Act § 7A(c)(9) and Rule § 802.9 thereunder),[1] which is defined to mean that the acquirer “has no intention of participating in the formulation, determination or direction of the basic business decisions of the issuer” (HSR Act Rule § 801.1(i)(1)). The Rules under the Securities Exchange Act of 1934 (1934 Act) exempt certain acquisitions of voting securities from the Schedule 13D filing requirements under the Williams Act[2] if they are made, inter alia, “not with the purpose nor with the effect of changing or influencing the control of the issuer or as a participant in any transaction having such purpose or effect” (1934 Act Rule 13d-1), where “control” is defined in terms of the “power to direct or cause the direction of the management and policies of a person.” (1934 Act Rule 12b-2). Despite the similarity of the concepts reflected in these exemptions, the agencies that administer them have applied them differently, with the antitrust agencies taking a narrower view of the exemption.

On July 12, 2016, VA Partners I, LLC and two of its affiliated activist funds (collectively, ValueAct) agreed to settle charges brought by the Department of Justice relating to ValueAct’s acquisition of voting securities in both Halliburton Company and Baker Hughes Incorporated without filing the Notification and Report Forms with the Federal Trade Commission and DOJ in reliance on the “solely for purposes of investment” exemption under the HSR Act. ValueAct’s acquisitions were made over a period of several months following Halliburton and Baker Hughes’ announcement of their intent to merge on November 17, 2014. Eventually, ValueAct acquired more than $2.5 billion in securities of the two companies.

In its complaint, the DOJ alleged ValueAct intended to use its ownership stake in each firm to influence the firm’s management, as necessary, to either increase the probability of consummation of the merger, or, if not consummated, to propose alternatives. The DOJ alleged that this intention disqualified ValueAct from relying on the “investment” exemption.

As part of the settlement, ValueAct will pay a civil penalty of $11 million dollars, the largest civil penalty ever imposed for violations of the HSR Act.[3] In addition, the final judgment prohibits ValueAct from making acquisitions that rely on the “investment” exemption if either its investment strategy contemplates or it intends to take any of the following actions:[4]

  1. proposing a merger, acquisition or sale to which the issuer of the acquired voting securities is a party;
  2. proposing to another person in which ValueAct has an ownership stake the potential terms for a merger, acquisition or sale between the person and the issuer;
  3. proposing new or modified terms for a merger or acquisition to which the issuer is a party;
  4. proposing an alternative to a merger or acquisition to which the issuer is a party, either before consummation or upon abandonment;
  5. proposing changes to the issuer’s corporate structure that require shareholder approval; or
  6. proposing changes to the issuer’s strategies regarding pricing, production capacity or production output of the issuer’s products and services.

The final judgment also requires the designation of a compliance officer and related certifications. In addition, a DOJ representative will be able to conduct interviews of ValueAct’s personnel and inspect its records and documents during the 10-year term of the final judgment.

This decision, combined with the FTC’s recent settlement with Third Point LLC,[5] demonstrates that the antitrust agencies intend to continue to take a narrow view of the “investment” exemption, and that even preliminary internal activities whose ultimate goal is to influence management, company policies or obtain board representation will preclude an acquirer from relying on it. Investors should, therefore, proceed with caution when relying upon this exemption. The opinions of the FTC staff on the matter, which can be found on its Bureau of Competition’s Blog,[6] are particularly revealing, noting that :

  • The test for the “investment” exemption is the acquirer’s intention, and such determination may not turn on any particular conduct.
  • Evidence of non-passive intent, even if not accompanied by conduct, will make the “investment” exemption unavailable.
  • No particular conduct is likely dispositive, and the agencies will assess a variety of factors to determine if an investor has properly invoked the “investment” exemption.

On the same day that the DOJ announced the ValueAct settlement, the SEC’s Division of Corporation Finance issued a new Compliance and Disclosure Interpretation (CDI) emphasizing that even if a shareholder is disqualified from relying on the “investment” exemption under the HSR Act (due to its efforts to influence an issuer’s management on a particular topic), such shareholder may still be eligible to file a short-form Schedule 13G (rather than the more onerous Schedule 13D) in the absence of “control intent.”

The analysis of “control intent” in the Schedule 13G context will be based on all relevant facts and circumstances. In making the determination, the CDI notes that the subject matter of the shareholder’s discussions with management may be dispositive, although the context for such discussions will also be highly relevant. The CDI gives two examples of the types of activities that, without more, would not preclude the use of Schedule 13G, so long as such activities are not undertaken with the purpose or effect of changing or influencing control of the issuer: (i) engagement with an issuer’s management on executive compensation and social or public interest issues (such as environmental policies); and (ii) engagement on corporate governance topics, such as removal of staggered boards, majority voting standards in director elections and elimination of poison-pill plans, as part of a broad effort to promote its view of good corporate governance practices for all of its portfolio companies (rather than to facilitate a specific change in control in a particular company). On the other hand, a shareholder would be ineligible to use Schedule 13G if such shareholder engages with the issuer’s management on matters that specifically call for the sale of the issuer to another company, the sale of a significant amount of the issuer’s assets, the restructuring of the issuer or a contested election of directors.

This CDI demonstrates that the SEC believes that there is some behavior that may represent an intention to participate in “the formulation, determination or direction of the basic business decisions” of an issuer, yet would not rise to the level of “changing or influencing control” of such issuer. For example, although the final judgment prohibits ValueAct from relying on the “investment” exemption if it proposes “changes to the issuer’s corporate structure that require shareholder approval,” this activity (if it adheres to the parameters for corporate governance topics set forth in the CDI) would not jeopardize Schedule 13G eligibility. However, the areas of disparate treatment may be somewhat limited. As described above, the CDI specifically mentions (as disqualifying behavior for Schedule 13G purposes) engagement on certain extraordinary corporate transactions, which would also preclude reliance on the “investment” exemption of the HSR Act, and notes at the outset that the subject matter of the shareholder’s discussions with management may be dispositive. As a result, acquirers should analyze their actions and intentions carefully when making HSR Act and Schedule 13G determinations.


[1] Section 7A(c)(9) and Rule § 802.9 exempt purchases of 10 percent or less of an issuer’s outstanding voting securities, regardless of the dollar value, if the acquiring person has the requisite investment intent.

[2] The rules subject those acquisitions to a more lenient Schedule 13G filing requirement. The exemptions are limited to specified institutional investors and other persons who have beneficial ownership of less than 20 percent of the class of securities acquired.

[3] The HSR Act currently provides a maximum civil penalty of $16,000 per day for each day a party is in violation of its provisions. This maximum penalty will be increased to $40,000 per day as of August 1, 2016, pursuant to the Federal Civil Penalties Inflation Adjustment Act.

[4] The six prohibitions contained in the final judgment do not represent a comprehensive list of all conduct that would disqualify an acquiring person from relying on the “investment” exemption.

[5] See Third Point Settles with the FTC over Improper Reliance upon the “Investment-Only” Exemption.

[6] See “‘Investment-only’ means just that,” FTC Bureau of Competition Blog, dated August 24, 2015.

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