Last week, the U.S. Department of Justice filed a complaint against three affiliates of ValueAct Capital, a $16 bil. private hedge fund, charging violations of the reporting requirements of the Hart-Scott-Rodino (HSR) Act (15 USC § 18a), and seeking over $19 mil. in statutory penalties. United States v. VA Partners I LLC, 16-cv-01672 (N.D. Cal., April 4, 2016). For what is believed to be only the second time in HSR enforcement proceeding history, ValueAct has indicated it intends to contest the reporting requirement allegations.

In connection with the 2014 merger announcement between Baker-Hughes and Halliburton, ValueAct acquired nearly $2.5 bil. in the two companies’ voting securities. ValueAct believed the acquisition was exempt from HSR filing based on the “investment only” exemption in 16 CFR 802.9, which allows any person to acquire up to 10% of a company (regardless of dollar amount) if the acquisition is “solely for the purpose of investment.” Under the investment-only exception, the investor may not “participate in the management” of the company, limiting activities of activist shareholders.

The Federal Trade Commission has been very strict in interpreting the “solely for the purpose of investment” and not “participate in the management” requirements, rejecting a mixed or dominant intent approach. Little beyond merely owning and voting shares will qualify as solely for investment, and the FTC has indicted that having a representative on the board or acting as an officer of the company, proposing corporate action, or being a competitor of the company takes an investor outside of the exemption. The FTC is usually lenient on first-offenders (often waiving fines), but then makes referrals for prosecution on even inadvertent repeat non-filers.

In an unusual split vote, last year the FTC confirmed its position that the mere intent (there, evidenced by internal documents) to engage in non-investment activities at the time of an acquisition will disqualify a purchaser from the investment-only exception. See Statement of the Federal Trade Commission, In the Matter of Third Point, File No. 121-0019, (August 24, 2015) (“took actions that belied an investment-only intent while making the purchases”). The dissenting Commissioners in Third Point would have exercised discretion and not brought an enforcement action based on the lack of harm to competition and the possible benefits from activist shareholders.

Given that ValueAct intends to contest the enforcement action – with a defense expected to be based on what it claims are the normal entitlements of share ownership, including a relationship with company management, conducting due diligence, and engaging in ordinary communications with other shareholders – we may get a rare HSR court decision, interpreting the bounds of the investment-only exception and the FTC’s intent-only based violation interpretation. The DOJ and the FTC are likely to prosecute the matter vigorously because ValueAct is a third-time offender.

ValueAct shows the importance of carefully reviewing reliance on any HSR exemption before proceeding with any transaction in excess of the filing thresholds, and of starting such review early in the acquisition process. Although many transactions are exempt from HSR filing – based on the size, nature or substance of the transaction – in questionable cases it is often better to either file, or at least seek guidance from the FTC Premerger Notification Office before deciding not to file.

Additional Information

For more information on this and other merger and acquisition, Hart-Scott-Rodino and other antitrust matters, or if you have an upcoming merger or affiliation transaction, please contact Robert A. Jaffe or your Kutak Rock attorney. Mr. Jaffe has longstanding experience and expertise in antitrust matters, including analyzing transactions to determine if they present substantive antitrust issues and assisting with HSR filings and exemptions.