Locke Lord QuickStudy: HSR Reporting Requirements: They Can Apply to Conversions of Voting Securities, Too‎

Locke Lord LLP
September 9, 2019

Most corporate lawyers and investment professionals are probably familiar with the reporting requirements that apply to large corporate mergers and acquisitions.  Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”), parties planning to merge or acquire stock, or assets, in excess of certain dollar thresholds1 are required to notify the Federal Trade Commission (“FTC”) and the Department of Justice Antitrust Division (“DOJ”) and observe a statutory waiting period (usually 30 days) prior to the closing of the merger or acquisition.  The waiting period provides the federal agencies with an opportunity to investigate and seek an injunction to prevent the consummation of mergers or acquisitions that are likely to be anticompetitive.  Penalties for failure to comply with these requirements are currently up to $42,530 per day for each day in which the parties are in violation of the HSR Act.

What many lawyers and investment professionals may not realize is that these same HSR reporting and waiting period requirements also can apply if changes occur in an investor’s holdings of voting securities – even if the investor did not have an active role in causing the changes.  This less common application of the HSR reporting requirements was the focus of a recent DOJ action and negotiated settlement involving an investment fund manager that agreed to pay more than $600,000 in civil penalties after it was charged with HSR violations for failing to timely report that three funds it controlled would be receiving new voting securities of a corporation formed through a merger.

U.S. v. Third Point Offshore Fund, Ltd.

Third Point LLC is an investment fund manager that controlled three funds owning significant amounts of stock in Dow Chemical Company (“Dow”).  In December 2015, Dow and E.I. du Pont de Nemours (“DuPont”) entered into a Merger Agreement pursuant to which Dow and DuPont agreed to consolidate into a single company, to be called DowDuPont Inc. (“DowDuPont”).  In June 2016, Dow and DuPont issued proxy statements disclosing that, upon the completion of the transaction, Dow and DuPont would cease to have their common stock publically traded and their shareholders would instead own shares in the new DowDuPont.  This was later confirmed in joint press releases announcing that the transaction had received antitrust clearance by the DOJ and that the closing date for the transaction was scheduled for August 31, 2017.  A press release also announced that shares of Dow and DuPont would cease trading on the NYSE on August 31, 2017, and that shares of DowDuPont would begin trading on September 1, 2017.

On August 31, 2017, the three Third Point funds each received voting securities of DowDuPont that exceeded the HSR Act’s then-applicable $80.8 million “size-of-transaction” threshold.  As alleged by the FTC and DOJ, Third Point and the three funds were required to file HSR reports with the two agencies and observe the 30-day waiting period before acquiring and holding these new voting securities.  Instead, the three funds waited until November 8, 2017 to file notification and report forms under the HSR Act reflecting their acquisitions of DowDuPont voting securities.  The waiting period relating to these corrective filings expired on December 8, 2017, which was more than three months after the Third Point funds had received the DowDuPont shares.

At the request of the FTC, the DOJ filed a Complaint against Third Point and the three investment funds in the U.S. District Court for the District of Columbia.2  The Complaint was filed with an agreed final judgment that requires Third Point to pay $609,810 in civil penalties and enjoins Third Point from committing any future violations of the HSR Act in connection with a merger.  The Complaint alleges that the conversion of the Dow shares held by the Third Point funds did not excuse the funds’ obligation to file HSR notices because DowDuPont is not the same issuer as Dow within the meaning of the HSR Act and it “competes in additional lines of business from those in which Dow competed.”  The Complaint further alleges that because the three funds’ corrective HSR notifications were not filed until November 8, 2017, the funds were in violation of the HSR Act from the date that the Dow/DuPont merger closed (8/31/17) until the date the waiting period on their corrective filings expired (12/8/17).

The Third Point case did involve some rather unique facts, which were discussed in the Complaint and related statements by the federal agencies.  This was not the first time that Third Point had faced allegations from the FTC concerning HSR Act violations.  The Complaint noted that Third Point and the three funds previously violated the HSR Act when they failed to observe the HSR Act’s notification and waiting period requirements before acquiring voting securities of Yahoo! Inc. in 2011. In connection with those acquisitions, Third Point claimed that the funds were exempt from the filing requirements because the purchases were only for investment purposes.  The FTC disagreed, and said that the funds did not qualify for the passive investment exemption because Third Point was looking into influencing the leadership at Yahoo by communicating with third parties to see if they were interested in becoming the CEO or a board candidate.  These acquisitions resulted in a case that was filed by the DOJ in 2015.  In connection with that case, Third Point consented to a five-year agreement imposing certain injunctive relief, including a requirement to maintain an HSR compliance program.  Although consent decree in the Yahoo case still applies to Third Point, the FTC said in a statement that it does not believe the order was violated by the conduct alleged in the DowDuPont complaint.

Takeaways from the Third Point case

The recent Third Point case serves as a reminder of some important aspects concerning the HSR Act’s reporting requirements:

  • In the context of mergers, acquisitions, or even share conversions that do not require payment, parties acquiring even minority interests of voting securities should consider in advance whether the HSR Act’s filing and waiting period requirements apply to their acquisitions.
  • The HSR exemptions, including the passive-investment exemption at issue in the Yahoo case, are technical in nature and often narrowly construed.Parties should consult with experienced HSR counsel before assuming on their own that an HSR filing exemption applies to their acquisition of voting shares or assets.
  • If a party fails to timely file a required HSR notice, it should still file a corrective notice after the transaction to avoid additional penalties.The penalty Third Point agreed to pay in the DowDuPont matter was significantly less than the total fines the government could have imposed, which were over $4 million for each of the three Third Point funds. The DOJ, however, agreed to adjust the penalty downward from the maximum permitted under the HSR Act because the violation was deemed to be inadvertent and the Third Point funds self-reported the violations after their discovery and were willing to resolve the matter by a consent decree.

1. For 2019, the HSR “size-of-transaction” filing threshold is $90 million for most transactions unless an exemption or other HSR test applies.

2. See U.S. v. Third Point Offshore Fund, Ltd. et al., Case No. 1:19-cv-02593 (D. D.C. Aug. 28, 2019).