On April 4, 2016, the U.S. Department of Justice (DOJ) announced that it had filed a civil antitrust complaint against investment fund ValueAct Capital, alleging that ValueAct improperly relied upon the "investment-only" exemption of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) in acquiring voting shares of Halliburton and Baker Hughes in 2014 and 2015.1 The DOJ is seeking civil penalties of $19 million in connection with the alleged violation. The suit highlights the pressing need to bring clarity to the "investment-only" exemption.
ValueAct, a San Francisco-based investment company, purchased shares of two large oilfield services providers, Halliburton and Baker Hughes, valued in excess of $2.5 billion in late 2014 and early 2015. At the time of the acquisitions, Halliburton and Baker Hughes had announced their intention to combine in a $35 billion merger that was then under antitrust review by the DOJ. ValueAct, relying on the "investment-only" exemption of the HSR Act, did not file a HSR notification for the acquisitions.
The "Investment-Only" 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 the 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.
While the Federal Trade Commission's (FTC's) Pre-Merger Notification Office has consistently taken a narrow view of the "investment-only" exemption,4 the exact parameters of the exemption have never been settled, and the exemption has never come before the court. The exemption did, however, attract significant attention in August 2015 when the FTC announced that it had filed a complaint against investment firm Third Point LLC in relation to its acquisition of Yahoo shares in 2011. In that case, the FTC settled with Third Point, and although no civil penalty was imposed, Third Point agreed to certain restrictions on future share acquisitions.5
DOJ Allegations Against ValueAct
In the current action, the DOJ alleges that ValueAct improperly relied on the "investment-only" exemption in its acquisition of Halliburton and Baker Hughes stock, and that those acquisitions therefore were made in violation of the HSR Act. The DOJ's complaint relies heavily on ValueAct's description of itself as an "active" investor on its website and in marketing materials, and the complaint also quotes a number of internal ValueAct documents and SEC filings that the DOJ claims demonstrate how ValueAct used its access to senior executives of both Halliburton and Baker Hughes to formulate high-level business strategies with the companies.
The DOJ largely cites post-acquisition evidence of ValueAct's active role in Halliburton and Baker Hughes, imputing intent at the time of purchase from such post-acquisition statements and documents. For example, the complaint cites memoranda sent to ValueAct investors in late January 2015—more than a month after ValueAct's first acquisitions that crossed the HSR thresholds—that allegedly "show that ValueAct's most senior executives planned from the outset to play an active role" in the two companies.
Likewise, the complaint focuses on ValueAct's statements and actions concerning the proposed merger and the DOJ's ongoing antitrust investigation, describing alleged discussions between ValueAct and both companies of contingency plans in the event the merger failed, including potential divestitures by Baker Hughes. Although much of the evidence of ValueAct's involvement with the merger process happened after ValueAct's share acquisition, from May 2015 to November 2015, the complaint alleges that these actions were "consistent with [ValueAct's] initial plans" in acquiring the shares.
Impact of the Complaint and the Need for Clarity
In a press release announcing the filing of the DOJ's complaint, Assistant Attorney General Bill Baer described how ValueAct's "substantial stock purchases made it one of the largest shareholders of two competitors in the midst of [the DOJ's] antitrust review of the companies' proposed merger," and referenced previous ValueAct HSR violations. Often in this scenario, parties settle the allegations concurrent with the filing of the complaint, and as such, the court has yet to address the boundaries of the "investment-only" exemption. In this instance, however, ValueAct has announced its intention to contest the DOJ's action and to "vigorously defend" the lawsuit, on the basis that "the most basic principles" of shareholders rights include "having a relationship with company management, conducting due diligence on investments, and engaging in ordinary course communications with other shareholders."6 Based on these statements, it appears that ValueAct may defend the suit in part on the basis that its actions were not inconsistent with its reliance on the "investment-only" exemption, and that by definition the "investment-only" exemption allows investors to engage in the types of activities cited in the DOJ's complaint.7 If so, this suit will involve an examination of the "investment-only" exemption at its core, and what that means for investors hoping to rely upon it.
The uncertainty surrounding the limitations of the exemption, and the antitrust agencies' traditionally narrow interpretation, may in some cases hamper investment decisions, as the filing requirement and attendant waiting period can have significant timing and financial implications. There have been calls to reform the rule, by, for example, exempting all acquisitions of less than 10 percent of voting rights, or establishing a bright line test for "active involvement." ValueAct's decision to contest the complaint means that the court may now be required to opine on the scope of the exemption and whether ValueAct's behavior falls outside that scope, which could bring some welcome definition to the rule.
In the meantime, clients seeking to invoke the investment-only exemption to the HSR rules should seek advice of counsel and proceed with caution when taking any "active" involvement in their investments. 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.