On July 12, 2016, the Department of Justice (“DOJ”) announced that certain ValueAct Capital Management, L.P. entities (“ValueAct”) had agreed to pay a record fine of $11 million to settle DOJ allegations that ValueAct violated the reporting and waiting period requirements of the Hart-Scott-Rodino Act (the “HSR Act”). The DOJ asserted that the ValueAct adviser, a registered investment adviser that actively involves itself in the management of the companies in which it invests, improperly relied on the HSR Act’s “investment only” exemption in connection with purchasing voting shares of Baker Hughes and Halliburton in advance of their proposed merger. Voting securities are acquired “solely for the purpose of investment” if the acquirer has “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” According to the DOJ, after the two companies announced their plan to merge, ValueAct purchased over $2.5 billion of the two companies’ voting shares without complying with the HSR’s notification requirements (that obligated ValueAct to report to the DOJ and the Federal Trade Commission about its investment plans and observe a waiting period before making the investments) and, thereafter, attempted to influence the companies’ business decisions.
Against this backdrop, on July 14, 2016, the SEC’s Division of Corporation Finance updated a Compliance and Disclosure Interpretation. Question 103.11 has been added to confirm that a shareholder’s failure to satisfy the HSR Act’s “investment only” exemption does not automatically disqualify the shareholder from initially reporting, or continuing to report, beneficial ownership on Schedule 13G. Question 103.11 distinguishes between (1) engagement with an issuer’s management on executive compensation, social or public interest issues (e.g., environmental policies) and corporate governance matters (e.g., removal of staggered boards, adoption of majority voting standards in director elections, and elimination of poison pill plans) and (2) engagement with an issuer’s management on matters that specifically call for the sale of the issuer to another company, the sale of a significant amount of the issuer’s assets, the restructuring of the issuer, or a contested election of directors. Question 103.11 confirms that the examples in the first set of actions would not cause an investor to become ineligible to rely on Schedule 13G, while the examples in the second set would cause an investor to become ineligible to rely on Schedule 13G.