On July 12, 2016, ValueAct agreed to pay a record fine of $11 million to settle the Department of Justice Antitrust Division’s (“DOJ”) allegations that ValueAct violated the reporting requirements under of the Hart-Scott-Rodino Act (“HSR Act”) by improperly relying on the “investment only” exemption.
The HSR Act imposes notification and waiting period requirements for transactions meeting certain size thresholds to ensure that such transactions undergo premerger antitrust review by the DOJ and the Federal Trade Commission. The HSR Act has a narrow exemption for acquisitions of less than 10 percent of a company’s outstanding voting securities if the acquisition is made “solely for the purposes of investment” and the purchaser has no intention of participating in the company’s business decisions. In other words, if a person or company intends to be a passive investor and the investment in securities is less than 10 percent of a company’s outstanding securities, the exemption may apply.
DOJ Complaint Against ValueAct
On April 4, 2016, the DOJ filed a complaint against three ValueAct related entities for allegedly violating the reporting requirements of the HSR Act when they acquired voting securities, collectively valued at more than $2.5 billion, in both Baker Hughes and Halliburton. The DOJ alleged ValueAct was an activist firm that acquired the securities with the intent of influencing the companies’ business decisions. In other words, the DOJ alleged that ValueAct was not a passive investor at all. All three ValueAct entities allegedly made acquisitions that exceeded the filing threshold, and the issue, as alleged in the DOJ’s complaint, was solely whether the “investment only” exemption —which applies if the purchaser’s holdings constitute less than ten percent of the stock of the company and the acquisition is “solely for the purpose of investment”—applied. The DOJ alleged that ValueAct’s investment was not passive given its access to Halliburton and Baker Hughes executives and ValueAct’s role in actively influencing the HSR process.
These cases usually settle without litigation, but ValueAct decided to push the issue and claimed that it would litigate rather than settle. Given the facts and the detail in the complaint, ValueAct’s decision to fight the DOJ was ill-advised. Accordingly, ValueAct ended up paying a record penalty and is enjoined from relying on the investment only exemption in the future if it intends on taking an active role in influencing the acquired entity’s business decisions.
The DOJ’s record monetary penalty and injunctive relief demonstrate the DOJ’s continued vigorous enforcement of the HSR notification and waiting period requirements. The HSR Act is crucial to the DOJ’s and FTC’s ability to prevent anticompetitive mergers and acquisitions. The HSR Act has a number of exemptions. Activist investors are now on notice that the narrow exemption for acquisitions of less than 10 percent of a company’s outstanding voting securities if the acquisition is made “solely for the purposes of investment” ONLY applies when the purchaser has no intention of participating in the company’s business decisions. Moreover, if the activist investor knows that it is taking a position in two firms that will be subject to a substantive antitrust review, it should be particularly careful about relying upon the “investment only” exemption. Here,the Second Request investigation allowed the DOJ the opportunity to discover documents that clearly indicated that the investment was active and not passive.