On July 12, 2016, two ValueAct funds and their common general partner (collectively, “ValueAct”) agreed to pay an $11 million penalty and adopt extensive compliance procedures1 to settle alleged violations of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”).2 The $11 million penalty marks the highest fine recorded for an HSR Act violation settlement, almost double the previous highest penalty.3 The complaint alleged that ValueAct inappropriately relied on the investment-only HSR Act exemption and failed to comply with HSR Act premerger notification requirements when the two funds acquired shares of Halliburton Company (“Halliburton”) and Baker Hughes Incorporated (“Baker Hughes”) in 2014 through 2015; our Weil alert from April provides additional background on the complaint and allegations.4 This alert examines the factors that contributed to the record fine and provides some guidance for investors.

Analysis

At least two circumstantial factors contributed to the record fine:

  1. ValueAct settled alleged HSR Act violations on behalf of two different funds and their common general partner, with each subject to distinct HSR Act violation counts. Civil monetary penalties under the HSR Act are assessed on a per violation, per day basis, and the DOJ Complaint alleged that each of the two ValueAct funds and their common general partner violated the HSR Act by acquiring Halliburton and/or Baker Hughes stock in excess of the HSR Act size of transaction threshold (currently $78.2 million and adjusted annually) without submitting an HSR Act Notification and Report Form (an “HSR Filing”) and observing the statutory waiting period. In this case, not only did each of two different ValueAct funds that share a common general partner acquire Halliburton stock in excess of the HSR Act threshold, but one of the two funds also acquired Baker Hughes stock in excess of the HSR Act threshold. Thus, given the multiple entities involved and acquisitions made in excess of the HSR Act threshold, multiple HSR Act violations were alleged.
  2. The alleged violation period for each ValueAct entity extended over 300 days. The current maximum for civil monetary penalties is $16,000 per violation, per day (soon to be adjusted up to $40,000, effective August 1, 2016).5 In order to stop the accrual of additional civil monetary penalties, the acquirer must either submit a corrective HSR Filing and observe the statutory waiting period or sell sufficient shares to decrease the acquirer’s holdings to below the relevant HSR Act size of transaction. In its Complaint, the DOJ noted that one ValueAct entity was still in violation of the HSR Act, suggesting that ValueAct did not take steps to fully mitigate the accrual of potential civil monetary penalties.

Additionally, the DOJ cited three factors, which can be described as aggravating factors, in determining its assessment of the record civil monetary penalties:

  1. “ValueAct has previously violated the HSR Act six times.”6 The FTC/DOJ typically provides leniency for first time offenders whose violations were inadvertent and may, in its discretion, choose not to seek civil monetary penalties.7 Here, both the DOJ press release and Competitive Impact Statement made clear that ValueAct was a repeat offender that had been afforded leniency in connection with prior violations. Accordingly, in the current matter, the DOJ determined that these subsequent violations “call for a substantial penalty,”8 and ValueAct has agreed to pay $11 million in civil penalties.
  2. “[T]he [DOJ] considers it an aggravating factor that the transactions at issue raised substantive competitive concerns.”9 The DOJ viewed ValueAct’s acquisitions of Halliburton and Baker Hughes stock and actions “to actively and simultaneously participate in the management of each company” as inconsistent with “investment only” intent.10 Moreover, the DOJ noted that ValueAct attempted to intervene in the Halliburton and Baker Hughes merger, which “prejudiced the Department’s ability to enforce the antitrust laws.”11
  3. “To the extent ValueAct had any doubt about its obligations [under the HSR Act], it could have sought the advice of the Federal Trade Commission’s Premerger Notification Office, but did not do so.”12 The FTC’s Premerger Notification Office (“PNO”) offers and encourages the public to contact its office with filing questions. The PNO accepts questions on a no-names basis. In past actions, the DOJ has also cited in complaints instances of parties having the opportunity to contact the PNO but not doing so prior to violating the HSR Act.

Commentary

Because ValueAct did not fully litigate this matter, as it initially stated,13 this case will not redefine the boundaries of the investment-only exemption. The settlement does, however, reinforce the antitrust agencies’ continued interest in pursuing HSR Act violations and maintaining the integrity of the notification and waiting requirements of the premerger antitrust review process. Investors should carefully monitor the amount of stock they acquire and hold in an issuer as well as be mindful of the level and type of engagement they plan to have with an issuer’s management. The Statement of Basis and Purpose of the HSR Act, the HSR rules, informal interpretations published by the PNO, the evolving precedent, including this matter, engagement with the PNO, and knowledgeable antitrust counsel are not only resources that investors should consider, but resources that the antitrust agencies expect investors to utilize in their analyses of the investment-only exemption and their potential reliance on the exemption.

As a final takeaway, investors who may be in violation of the HSR Act should seek counsel and act quickly to mitigate the continued accrual of potential civil monetary penalties. As noted earlier, while ValueAct’s record penalties were calculated based on a $16,000 per day, per violation possible maximum penalty, the maximum penalty will be raised to $40,000 per day, per violation, effective August 1, 2016.14 Any civil penalties assessed after August 1, 2016 will be subject to the new maximums, “including civil penalties whose associated violation predated the effective date.”15