FTC Cautions Against Improper Reliance on “Investment-Only” Exemption

by Ropes & Gray LLP

Investment manager Third Point LLC and three of its affiliated funds have entered into a proposed settlement agreement with the federal antitrust authorities for violations of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, arising from improper reliance on the “investment-only” exemption. According to the Federal Trade Commission, Third Point failed to obtain HSR clearance in 2011 prior to acquiring voting securities of Yahoo! Inc. in excess of the then-applicable $66 million threshold of the act, relying on the investment-only exemption despite taking action deemed to be inconsistent with passive investment intent. This enforcement action and related FTC guidance reminds investors that the investment-only exemption continues to be narrowly construed, and that enforcing compliance with the HSR Act remains a top priority of the federal antitrust authorities even where a transaction involves a minority stake and does not pose competition issues. 

HSR reporting is required for an acquisition if an investor will hold voting securities in excess of the “size of transaction” threshold of the Act, currently $76.3 million. Under the investment-only exemption, however, acquisitions that result in holding ten percent or less of an issuer’s issued and outstanding voting securities – regardless of dollar value – are exempt so long as the investor acquires the shares with passive investment intent – i.e., without the intention of participating in management or influencing the basic business decisions of the issuer. 

In the transaction at issue, the funds acquired securities through open market purchases resulting in holdings exceeding the notification threshold but representing less than ten percent of the issuer’s shares. Despite reporting its holdings of Yahoo! on a Schedule 13D, indicating non-passive intent, Third Point relied on the investment-only exemption and did not initially file HSR notifications. The FTC, however, contended that at the time of its acquisitions Third Point engaged in actions that foreclosed the availability of the exemption. Specifically, Third Point’s conduct included:

  • contacting certain individuals to gauge their interest and willingness to become the CEO or a potential board candidate of the issuer; 
  • assembling an alternative slate for the issuer’s board; 
  • drafting correspondence to the issuer announcing that Third Point was prepared to join the board; 
  • internally discussing the possible launch of a proxy battle for directors; and 
  • stating publicly that Third Point was prepared to propose a slate of directors at the next annual meeting. 

The FTC has long held that certain conduct is inconsistent with passive investment, including nominating a candidate for the board of directors of the issuer; proposing corporate action requiring shareholder approval; soliciting proxies with respect to such issuer; having a representative serve as an officer or director of the issuer; being a competitor of the issuer; or doing any of the aforementioned activities with regard to an entity controlled by the issuer. The Third Point settlement further delineates actions that preclude the use of the investment-only exemption, including:

  • asking third parties about interest in being a candidate for the board or CEO of the issuer, and not abandoning such efforts;
  • communicating with the issuer about potential candidates for the board or CEO of the issuer, and not abandoning such efforts; or
  • assembling a list of possible candidates for the board or CEO of the issuer, if done with the knowledge of the CEO.

The settlement reinforces that the investor’s subjective intent with respect to an issuer determines the availability of the exemption. Based on the conduct involved here, as in past enforcement actions, it is important to note that purely “internal” conduct (such as discussing the launch of a proxy contest) may be viewed circumspectly as “external” conduct (communicating with the issuer about candidates for the board). Further, investors must exercise caution with respect to statements regarding intent made in securities filings – including, possibly, the mere filing of a Schedule 13D (a long form beneficial ownership disclosure statement typically filed for transactions entered into for the purpose, or which may have the effect, of influencing control of an issuer) as opposed to a Schedule 13G (a short form beneficial ownership disclosure statement typically used by passive investors). 

The FTC did not levy any fines against Third Point, taking into account that this was their first offense and that they filed the necessary corrective filings soon after the violation. The FTC is likely to be less lenient on repeat offenders, however; fines for non-compliance with the Act can amount to as much as $16,000 per day for every day of non-compliance.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ropes & Gray LLP | Attorney Advertising

Written by:

Ropes & Gray LLP

Ropes & Gray LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.