Further Guidance on the HSR Act Investment-Only Exemption for Seemingly “Passive” Investors Engaging with Management

by Cadwalader, Wickersham & Taft LLP

Cadwalader, Wickersham & Taft LLP

Investors considering engaging with management should take note of a recent informal interpretation received from the FTC’s Premerger Notification Office (PNO) advising that certain seemingly “passive” behavior is inconsistent with the “investment-only” exemption freeing acquirers of voting securities from the reporting and notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act). Any investor – be it a mutual fund, merger arbitration fund, or activist – authoring a letter to a merger target that is in the process of responding to a bid should be aware that such action may not qualify as purely passive under the HSR Act.

Per the PNO, it would be “inconsistent with passive intent” for an investment fund manager (Investor) to send a letter to management of a merger target under the facts as presented. Here, there exists a publicly announced agreement by Company A to acquire target Company B. The Investor owns voting securities in Company B. The Investor is concerned about management’s agreement to certain voting conditions in the merger agreement that permit a single minority shareholder to effectively control the outcome of the transaction, i.e., whether the transaction is approved in the shareholder vote. The Investor considered sending a letter to Company B’s Transactions Committee that, citing recent market practice, highlights various alternative transaction structures that would preserve the value of the proposed merger for Company B’s shareholders. Some of the alternatives discussed in the letter would require approval by Company B’s shareholders. The PNO interpretation finds the contemplated letter non-passive, which could undermine the Investor’s future reliance on the investment-only exemption.

Key Takeaways

  • This informal guidance is consistent with increasingly narrowed interpretation of passive intent required to invoke the HSR Act’s investment-only exemption.
  • Further, it potentially places aspects of current shareholder engagement outside of the exemption. Under the PNO’s interpretation, advice relating to merger and acquisition strategy could qualify as intent to influence management’s “basic business decisions,” including for matters that otherwise already require shareholder approval.
  • Passive investors who have relied on the exemption should consider whether to file HSR for acquisitions that post-date engagement, or intent to contact, management of a target beyond making requests for information. Intention at the time of the acquisition trumps whether the investor actually takes actions to influence the issuer’s management or business decisions.
  • The maximum civil penalty for an HSR violation increased to $40,000 per day as of August 1, 2016 – a substantial increase from the previous daily maximum of $16,000.

The Investment-Only Exemption

The HSR Act imposes notification and waiting period requirements for transactions meeting certain thresholds. The policy animating those requirements – which delay consummation of the proposed deal – is to allow time for the Department of Justice (DOJ) or the Federal Trade Commission (FTC) to conduct an antitrust review to ensure that the transaction at issue does not tend to create a monopoly or result in significant anticompetitive effects or a substantial lessening of competition.

By statute, and as a reflection of the policy judgment that they should present a low likelihood of harm to competition, pre-set categories of deals are exempt from HSR notification. As just one example, the HSR Act exempts the acquisition of additional “voting securities” when the acquirer already owns 50% of that issuer’s voting shares. Pertinent here is the “investment-only exemption” that absolves HSR notification for acquisitions of less than 10% of an issuer’s outstanding voting securities, regardless of the value of the securities, if that acquisition is made “solely for the purpose of investment.” 15 U.S.C. § 18a(c)(9); 16 C.F.R. § 802.9. An acquirer relying on the exemption must have “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” 16 C.F.R. § 801.1(i)(1).

As a policy matter, the DOJ and the FTC interpret the “solely for the purpose of investment” requirement quite narrowly. For instance, merely voting the shares is considered consistent with passive intent. In addition, investors may request information from management about the company or may request a non-voting Board observer with rights to receive information delivered to the Board. The HSR Statement of Basis and Purpose (issued at the time the FTC promulgated the HSR Rules) provides a non-exhaustive list of conduct inconsistent with passive investment intent and, thus, falling outside the protections of the investment-only exemption.

Such non-passive acts include:

  • nominating a candidate for the issuer’s Board of Directors;
  • proposing corporate action requiring shareholder approval;
  • soliciting proxies;
  • having a controlling shareholder, director, officer, or employee simultaneously serve as an officer or director of the issuer;
  • competing with the issuer; and
  • doing any of the above acts with an entity directly or indirectly controlling the issuer.

Recent enforcement actions have resulted in settlements further prohibiting investors from, e.g., proposing to an officer or director of an issuer:

  • new or modified terms for any publicly announced merger or acquisition to which the issuer is a party; or
  • changes to the issuer’s corporate structure that require shareholder approval.

PNO Informal Interpretations of the Investment-Only Exemption

Despite several resolutions of alleged HSR Act violations in the recent past, the PNO has published relatively few postings related to the investment-only exemption in its searchable database of informal interpretations. Moreover, in 2016, three prior informal interpretations were withdrawn.

Additional resources are available to investors, such as filings and statements resulting from enforcement actions and blog posts describing the U.S. antitrust agencies’ current enforcement stance. The FTC’s Bureau of Competition advises to contact the PNO “[w]hen in doubt about the application of the investment-only exemption (or any other aspect of the HSR law or rules) . . . Our HSR experts are available to discuss your questions before you act.”

It is possible that the PNO has opted not to publish a broad set of informal interpretations related to the investment-only exemption. By doing so, PNO staff encourages practitioners to call on a case‑by-case basis.

Practical Implications

Nonetheless, a lack of guidance on available, fact-specific past interpretations injects uncertainty into shareholder engagement – including informal shareholder contact with management that traditionally would not be viewed as activist – from which corporate governance and competition benefit as a whole. Combined with further narrowing interpretation of the investment-only exemption over time, a dearth of guidance would tend to chill beneficial engagement between shareholders and management.

Prophylactic HSR notifications would protect shareholders who intend to continue to acquire shares, but the attendant waiting periods are impractical for investors seeking to maintain maximum flexibility in their trading positions.


  • Investors have incomplete guidance on the extent of contact with management that the U.S. antitrust agencies view as incompatible with purely passive intent. Shareholders who engage or intend to engage with an issuer’s management for any reason beyond requesting information may violate the HSR Act in the eyes of the PNO, the FTC, and the DOJ. Failure to file HSR now triggers a costly maximum penalty of $40,000 per day. The informal interpretation described herein – in combination with the FTC’s recent enforcement actions against Third Point, ValueAct, and Sarofim – serve as cautionary examples to the broader investment community.
  • Large mutual funds and other investors who consider themselves “passive” and who typically do not file HSR notifications should seriously consider reassessing their practices and voicing support for amendments to rules applying the investment-only exemption. We should anticipate less fulsome discourse between companies’ management and a broad swath of institutional investors unless and until regulations accompanying the HSR Act clarify the scope of engagement between management and shareholders that qualifies as passive. Absent more extensive input from the investment community on burdens caused by uncertainty in the exemption’s application, the FTC is not slated to review the applicable rules until 2020.




  1.    See, FTC, About Informal Interpretations (“Informal interpretations provide guidance from previous staff interpretations on the applicability of the HSR rules to specific fact situations. You should not rely on them as a substitute for reading the Act and the Rules themselves. These materials do not, and are not intended to, constitute legal advice.”)
  2.    “Basic business decisions” is an undefined term in the HSR Act.
  3.    See PNO Informal Interpretation No. 1203011.
  4.    See United States v. Third Point Offshore Fund, Ltd. (2015); United States v. VA Partners I, LLC (2016).
  5.    See, FTC, About Informal Interpretations (noting limits to the database in cautioning that users “should not rely on [informal interpretations] as a substitute for reading the Act and the Rules themselves, but rather as a supplement that may address specific questions.”).
  6.    PNO Informal Interpretation No. 1308003 (withdrawing interpretation that non-passive intent of a third-party fund manager does not necessarily impute non-passive intent to the fund making the investment); PNO Informal Interpretation No. 1202014 (withdrawing interpretation that an investor is not disqualified from relying on the exemption if the investor competes with the issuer outside the U.S., but not in the U.S.); PNO Informal Interpretation No. 1403011 (withdrawing interpretation that holding more than 10% of a competitor either by the target (of a competitor of the acquiring person) or the acquiring person (of a competitor of the target) is presumed to be non-passive).
  7.    See, e.g., D. Feinstein, et al., FTC Bureau of Competition, “Investment-only” means just that (Aug. 24, 2015).
  8.    Id.
  9.   FTC, Regulatory Review Schedule, Notice of Intent to Request Public Comments, 81 Fed. Reg. 7,716, 7,717 (Feb. 16, 2016).

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.

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