On August 24, 2015, the Federal Trade Commission (FTC) announced that it has reached an agreement with Third Point LLC and three affiliated investment funds (collectively "Third Point") to settle allegations that Third Point improperly relied upon the investment-only exemption to the Hart-Scott-Rodino (HSR) Act for acquisitions of Yahoo shares that it made in 2011.1 The FTC initiated this investigation based not upon Third Point's conduct at the time of, or prior to, its acquisition of these shares, but rather upon its behavior months afterwards. This challenge indicates a narrowing of the investment-only exemption, which was assumed to examine an acquirer's conduct at the time of, or before, the acquisition. The settlement does not include a civil penalty—seemingly a first for the FTC—but only imposes restrictions upon Third Point's share acquisitions for five years.
The "Solely for the Purpose of Investment" Exemption
The HSR Act exempts acquisitions of up to 10 percent of an issuer's outstanding voting securities as long as the acquisition is made "solely for the purpose of investment."2 Under HSR rules, an acquisition is made solely for the purpose of investment if the investor, at the time of the acquisition, has "no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer."3 The rules do not elaborate on these terms, but the Statement of Basis and Purpose (SBP) accompanying the initial HSR rules provides some examples, which include the investor: nominating a board candidate, serving as an officer or director, proposing corporate action requiring shareholder approval, soliciting proxies, or being a competitor of the issuer.
Alleged Conduct and Factual Background
The FTC alleged that Third Point engaged in conduct inconsistent with an investment-only intent when it acquired Yahoo shares in a series of transactions from around August 10, 2011, through September 8, 2011. According to the complaint, this conduct included:
contacting certain individuals to gauge their interest and willingness to become the CEO or a potential board candidate of Yahoo;
assembling an alternate slate for the Yahoo Board;
drafting correspondence to Yahoo announcing that Third Point was prepared to join the Yahoo Board;
internally discussing the possible launch of a proxy battle for directors of Yahoo; and
stating publicly that Third Point was prepared to propose a slate of directors at Yahoo's next annual meeting.
The complaint did not provide any details or rationale for Third Point's alleged actions. But public sources show that on September 8, 2011, Dan Loeb, Third Point founder and CEO, sent a letter to Yahoo's board criticizing the board and management's handling of the company.4 Third Point later publicly exposed errors on Yahoo's then-CEO Scott Thompson's resume and initiated a proxy fight.5 In May 2012, Mr. Loeb joined Yahoo's board, and Mr. Thompson resigned as CEO.6 Mr. Loeb played a role in attracting Marissa Mayer to become Yahoo's CEO.7
FTC Investigation and Consent Decree
At the time of the acquisitions, none of the preclusions listed in the SBP appear to have applied to Third Point. While Mr. Loeb obtained a seat on Yahoo's board and initiated a proxy battle months after the 2011 acquisitions, the SBP acknowledges that an investor may make an acquisition solely for the purpose of investment and later decide to participate in the management of the company. The FTC nonetheless investigated, and obtained a consent decree from Third Point for its behavior.
Accordingly, the FTC seems to be very narrowly defining the investment-only exemption to the HSR filing requirements. In fact, in the comments on the proposed settlement, FTC Bureau of Competition Director Deborah L. Feinstein stated: "Clear evidence of a non-passive intent, even if not accompanied by conduct," including "a statement of express intent (e.g., I plan to seek a board seat)" can make the exemption unavailable.8
Clients seeking to invoke the investment-only exemption to the HSR rules should avoid any action that may be considered "active" for at least several months after making any share acquisitions. This includes communicating with the board or management, making public statements about an issuer, internally discussing potential candidates for the board, or any other such discussions or statements.
1 See Final Judgment, United States v. Third Point, No. 1:15-cv-01366 (D.D.C. August 24, 2015), available at https://www.ftc.gov/system/files/documents/cases/158024thirdpointjudgment.pdf.
2 15 U.S.C. § 18(c)(9).
3 16 C.F.R. § 801.1(i)(1).
4 See Third Point LLC, Schedule 13D (September 8, 2011).
5 See Poornima Gupta, "Yahoo CEO Scott Thompson's Resume Is Faked, Third Point Alleges," Reuters, May 3, 2012, available at http://www.huffingtonpost.com/2012/05/03/scott-thompson-resume-yahoo_n_1475700.html.
6 See Callie Bost, "Yahoo Buys Back Third Point Shares as Loeb Exits Board," Bloomberg Business, July 22, 2013, available at http://www.bloomberg.com/news/articles/2013-07-22/yahoo-buys-back-third-point-shares-as-loeb-exits-board.
7 See Nicholas Carlson, "Dan Loeb Quits Yahoo Board After Making a Fortune," Business Insider, July 22, 2013, available at http://www.businessinsider.com/dan-loeb-resigns-from-yahoo-board-2013-7.
8 See Debbie Feinstein, Ken Libby, and Jennifer Lee, FTC Blog Post, "'Investment-Only' Means Just That," August 24, 2015, available at https://www.ftc.gov/news-events/blogs/competition-matters/2015/08/investment-only-means-just. Although two FTC commissioners, Maureen K. Ohlhausen and Joshua D. Wright, did dissent from enforcement action being taken against Third Point, Commissioner Wright has since resigned, and the majority seems to be in favor of a much more narrow application.