A recent interpretation by the staff of the U.S. Securities and Exchange Commission (“SEC”) of the beneficial ownership reporting rules under the Securities Exchange Act and the recent settlement of a lawsuit by the U.S. Department of Justice/ Antitrust Division alleging a failure to make disclosure filings under the Hart-Scott-Rodino Antitrust Improvements (“HSR”) by activist investor ValueAct have created a double edged sword available to publicly traded companies that have become the target of activist investors. The SEC disclosure rules require public disclosure by the activist of voting stock acquisitions resulting in holdings in excess of 5% of any class of the Company’s outstanding shares while the HSR rules either require the activist to make a pre-acquisition notification filing, pay a substantial filing fee and wait a designated period before significant stock acquisitions may be consummated or face the imposition of a significant fine for failing to do so.The SEC staff interpretation concerned the availability of the “passive investor” exception to the Schedule 13D filing requirements. The occasion for the interpretation was whether the “passive investor” exception was automatically lost if the investor could not qualify for the “solely for the purpose of investment” exemption to the HSR filing obligation. The SEC staff responded that there would be no automatic disqualification. See U.S. Securities Exchange Commission, Compliance and Disclosure Interpretations: Exchange Act Sections 13(d) and 13(g). In particular, the investor could engage in the following conduct and still retain its Schedule 13G eligibility (and not require the filing of a Schedule 13D):
But the Schedule 13G exception would not be available (and the filing of a Schedule 13D will be required) if the acquiring shareholder engaged the issuer’s management specifically on the following issues:
The HSR “solely for purposes of investment” rule looks to conduct that is somewhat parallel to determine exemption eligibility. First and foremost however, the exemption only applies when the acquiring person would hold not more than 10% of the of the outstanding voting shares of the issuer, regardless of the dollar value of the shares. Once this threshold is met, the exemption is unavailable. The type of conduct that can preclude the exemption is noted below:
The conduct of acquirers described in two recent failure-to-file HSR cases is helpful in fleshing out prohibited conduct that voids the exemption. In United States v. Third Point Offshore Fund, Ltd, et al., Civil Action No. 1:15-cv-01366 (D.D.C. filed August 24, 2015), the acquirer while claiming the exemption, was engaged in communications with third parties about their interest in becoming the CEO of Yahoo or joining its board. In addition, the acquirer put together an alternate slate of board of directors and internally discussed a possible proxy bid for the Yahoo board. The Department of Justice (“DOJ”) complaint focused on the intent of the acquirer in making its voting stock purchases as manifested by this and other conduct. In connection with the settlement of the case, Federal Trade Commission Bureau of Competition staff posted a blog entitled “Investment-only” means just that (August 24, 2015) which emphasized that the exemption is intended to be narrow and that if an entity acquires voting shares with the intention of “influencing the basic business decisions of the issuer, or with the intention of participating in the management of the issuer, the exemption is not available.”In United States v. VA Partners I, LLC, et al., Civil Action No. 3:16-cv-01672 (N.D. Cal. Filed April 4, 2016), the acquirer, a self-proclaimed activist investor, purchased in excess of $2.5 billion of the outstanding voting shares of Hallilburton and Baker Hughes, two companies engaged in a previously announced merger transaction that was then being examined by the DOJ for competitive concerns. ValueAct openly advertised itself as having an “active, constructive involvement” investment strategy in the management of the companies in which it invests. It sent memoranda to its investors outlining its intent to work cooperatively with Hallilburton and Baker Hughes management to close the deal or “help develop new terms.” Through its significant stockholdings (DOJ alleged that it was the largest shareholder in both companies) ValueAct had access to companies’ senior management, frequently meeting with them to discuss ongoing operations of the companies and the status of the merger.
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