On September 21, 2020, the Federal Trade Commission (the “FTC”) announced proposed amendments that, if enacted, would make significant changes to the premerger notification rules under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”). The proposal coincides with the FTC’s ongoing examination of the competitive implications of “common ownership” of minority holdings in competing entities.
One of these amendments would effectively expand the so-called “investment-only” exemption. This expansion would likely prove beneficial to activist investors and, potentially, hostile bidders, as it would exempt from HSR filings the acquisition of 10% or less of an issuer’s voting securities when the acquiror does not already have a competitively significant relationship with the issuer (see further description below). The new exemption would eliminate an early warning system⸺particularly applicable to mid- and large-cap issuers⸺that provides early notification of significant stock accumulations.
As a result, activist investors and, potentially, hostile bidders should find it easier to accumulate larger positions in an issuer’s stock on a confidential basis.
Early Warning Systems
In general, there are two early warning systems that alert an issuer that an acquiror has accumulated a significant position in its stock: Schedule 13D filings and premerger notification filings under the HSR Act.
- The rules of the Securities and Exchange Commission generally require an acquiror of 5% of an issuer’s stock to publicly disclose its acquisition on Schedule 13D. The initial disclosure, however, is not required to be made until 10 days after the 5% threshold is reached.
- Under the HSR Act, unless an exemption applies, premerger notification is required where (1) as a result of a transaction, the acquiring person would hold voting securities of an issuer valued at more than $94 million, and the acquiring and acquired persons have total assets or annual net sales of at least $188 million and $18.8 million, respectively, or (2) the transaction is valued at more than $376 million. Premerger notification filings are not public; however, for acquisitions of stock on the open market, the acquiror must notify the issuer of the transaction and its potential HSR filing obligation. Thus, the issuer becomes aware of the intended stock accumulation. In addition, the acquirer must observe a 30-day waiting period (15 days for cash tender offers) prior to completing the transaction, meaning it cannot purchase any additional issuer stock that would cross an HSR threshold and trigger a filing during that period.
These two early warning systems ordinarily give an issuer time to implement defensive measures, such as a shareholder rights plan, to protect against accumulations that its board believes are not in the best interests of the issuer.
Proposed Amendment to Exemption
The FTC’s proposed amendment would add a new exemption from the premerger notification requirement for acquisitions where the acquiror will not own more than 10% of the issuer’s stock and does not have a competitively significant relationship with the issuer. Specifically, the exemption would apply where, as a result of the acquisition:
- the acquiror does not hold more than 10% of the issuer’s voting securities;
- the acquiror is not a competitor of the issuer;
- the acquiror does not hold more than 1% of the voting securities or non-corporate interests of any entity that competes with the issuer;
- no representative of the acquiror is a director or officer of the issuer or of a competitor of the issuer; and
- there is no vendor-vendee relationship between the acquiror and the issuer, where the value of sales between them is greater than $10 million.
Activist investors⸺who typically acquire toehold positions in issuers under 10% and are unlikely to be competitors of the issuer⸺would be expected to qualify for this exemption under most circumstances. In addition, hostile bidders who are not competitors could also potentially avail themselves of the exemption.
Significance of Proposed Amendment
The proposed amendment will likely have the most significant effect on mid- and large-cap issuers (i.e., issuers with market caps of $2 billion or more) because an investor accumulating stock in such an issuer would often trigger the HSR filing threshold before it hit the Schedule 13D disclosure threshold. For example, for an issuer with a $5 billion market cap, 5% of its securities equates to $250 million in value⸺well above the HSR Act’s $94 million threshold. Accordingly, if no exemption applied, the investor accumulating this issuer’s stock would be required to file under the HSR Act (and, in turn, disclose its position to the issuer) before disclosing its ownership on Schedule 13D. If the proposed amendment is enacted, an investor falling within the exemption would no longer need to make a filing at the $94 million threshold, and would only first be required to disclose its ownership when it acquires 5% of the issuer’s stock (on Schedule 13D).
That said, it is unclear whether the proposed amendment, if enacted, would ultimately have a significant practical effect. First, the amendment is subject to a public notice-and-comment period and may ultimately take a different form than the proposed rulemaking. Second, reporting obligations and waiting periods under the HSR Act apply to “voting securities” that confer the present right to vote for the election of directors of the issuer. Acquisitions of non-voting stock, options, and other derivative securities, including those that give the investor equivalent economic exposure to an issuer’s stock, are typically not reportable. Accordingly, if an activist investor today purchases derivative securities that are non-voting under the HSR rules, it may not need to file and provide requisite notice to the issuer⸺and many activist investors do purchase these non-voting securities for this purpose. The proposed amendment, however, would likely make it easier and cheaper for activist investors to keep confidential their holdings because they would be able to directly buy an issuer’s stock and not need to incur any incremental cost of purchasing derivative securities.
In the end, it is not certain that the proposed exemption will become effective. In fact, a similar exemption was proposed in the late 1980s and it was never enacted. Regardless of whether it is enacted as proposed, it is clear that new HSR regulations in this area may be on the horizon. In addition, the FTC’s proposal underscores the importance of monitoring new developments to maintain a real-time understanding of HSR filing obligations and, just as importantly, opportunities to take advantage of applicable exemptions.
 FTC and DOJ Seek Comments on Proposed Amendments to HSR Rules and Advance Notice of Proposed HSR Rulemaking, FTC Press Release (Sept. 21, 2020),
 See Morrison & Foerster Client Alert, FTC Hearings Examine the Antitrust Implications of Common Ownership (January 2019).
 The HSR Act currently includes an exemption for acquisitions of 10% or less of the voting securities of an issuer made “solely for the purpose of investment.” (See 16 C.F.R. § 802.9) To qualify for the exemption an investor must have “no intention of participating in the formation, determination, or direction of the basic business decisions of the issuer.” (See 16 C.F.R. § 801.1(i)(1)) The FTC has recognized various conduct as inconsistent with a purely investment purpose, including: (1) nominating a candidate for the board of directors; (2) holding a board seat or being an officer; (3) proposing corporate action that requires shareholding approval; (4) soliciting proxies; and (5) being a competitor of the issuer. (See Statement of Basis and Purpose, See Fed. Reg. 33,450, 33,465 (July 31, 1978)) The FTC construes the exemption narrowly, and has imposed civil penalties on many occasions based on improper reliance on the exemption. (See e.g., FTC Guidance, “Investment-only” Means Just That (Aug. 24, 2015); Premerger Notification Practice Manual (5th ed.), Int. 127, 128) Under these guidelines, typical activist investor strategies such as nominating directors to the board and soliciting proxies do not qualify as “solely for the purpose of investment.” Therefore, activist investors are frequently unable to avail themselves of the exemption. In addition, because application of the investment-only exemption is highly fact-specific, there is often uncertainty as to whether it applies to specific types of investor engagement.
 In connection with the proposed amendment, Commissioner Phillips stated in his concurrence that the HSR Act “is not supposed to be an early-warning system for tender offers and corporate takeovers.”
 The premerger notification filing will become publicly available, however, if early termination of the HSR waiting period is requested.
 See 16 C.F.R. § 801.30.
 The FTC has proposed the following definition of “competitor”: “any person that (1) reports revenues in the same six-digit NAICS Industry Group as the issuer or (2) competes in any line of commerce with the issuer.”
 See 16 C.F.R. § 801.1(f)(1)(i).