ValueAct Pays Record Fine to Resolve Alleged HSR Violations
On Tuesday, July 12, 2016, ValueAct agreed to pay a record fine of $11 million to settle allegations by the DOJ that it had violated the reporting requirements of the Hart-Scott-Rodino Act (“HSR Act”) by improperly relying on the “investment only” exemption. On April 4, 2016, the U.S. Department of Justice (“DOJ”) had filed a complaint against three ValueAct Capital-related entities (collectively, “ValueAct”), asserting that they had violated the reporting requirements of the HSR Act when they acquired voting securities, collectively valued at more than $2.5 billion, in both Baker Hughes and Halliburton. All three ValueAct entities allegedly made acquisitions that exceeded the filing threshold, and the issue, as framed in the complaint, was solely whether the “investment only” exemption from the HSR Act—which applies if the purchaser’s holdings constitute less than ten percent of the stock of the company and the acquisition is “solely for the purpose of investment”—applied. The DOJ alleged that the exemption did not apply in view of, among other things, ValueAct’s alleged efforts to influence the business decisions of both companies in connection with their proposed merger, which the DOJ sued to block. The DOJ emphasized that the HSR process is “crucial to our ability to prevent anticompetitive mergers and acquisitions”—here, the proposed merger of Baker Hughes and Halliburton—suggesting that while investors need to be particularly careful about relying upon the “investment only” exemption at all times, the scrutiny may be even higher when investing in firms whose merger is the subject of substantive antitrust reviews by the enforcement agencies.
According to the DOJ’s complaint, ValueAct acquired significant holdings of Baker Hughes and Halliburton shortly after their proposed merger was announced in November 2014. The complaint asserted that ValueAct made its investment anticipating that it would influence the business decisions of both companies, and told ValueAct’s potential investors that it would “be a strong advocate for the deal to close.” The DOJ complaint detailed a variety of communications between ValueAct and the two companies, culminating in a 55-page presentation that ValueAct made to Baker Hughes’s CEO proposing operational and strategic changes to the company.
Following the filing of the complaint, ValueAct issued a statement noting that ValueAct “strongly believes in the most basic principles of shareholder rights.” This included “having a relationship with company management, conducting due diligence on investments, and engaging in ordinary course communications with other shareholders.” Accordingly, VaueAct stated that it intended to “vigorously defend” its position. In now choosing to settle, ValueAct explained its decision as apparently affected by the recent increase in per day penalties from $16,000 to $40,000: “ValueAct fundamentally disagrees with DOJ’s interpretation of the facts. . . . However, due to the sudden and unanticipated 150 percent increase in the potential penalties associated with Hart Scott Rodino violations effective August 1, we felt we had no choice but to resolve this case as quickly as possible.”
The Competitive Impact Statement filed by the DOJ stated that ValueAct “did not have a passive intent when it acquired stock in Halliburton and Baker Hughes. The proposed merger of these competitors was central to ValueAct’s investment strategy . . . . Value Act intended from the outset to use its ownership stake in each firm to influence the firm’s management, as necessary, to increase the probability of the merger being consummated or propose alternatives if it could not be completed. An investor who is considering influencing basic business decisions—such as merger and acquisition strategy, corporate restructuring and other competitively significant business strategies (relating to price, production capacity or production output)—is not passive.”
The DOJ noted that it considered several factors in assessing the appropriate penalty, including its conclusion that ValueAct intended to take an active role in the business decisions of both Halliburton and Baker Hughes, that ValueAct had previously violated the HSR Act six times, and that the transaction at issue raised substantive competitive concerns. The DOJ did not seek the maximum penalty in light of ValueAct’s decision to resolve the matter without litigation. However, ValueAct is enjoined from relying on the investment intent exemption in the future if it intends to take any of the same actions it took in the Halliburton/Baker Hughes matter in a future transaction.
The DOJ complaint and the parties’ settlement raise difficult issues for institutional investors in a world where communications between shareholders and public companies are becoming both more routine and more substantive. While certain of ValueAct’s alleged activities appear to be of a type that traditionally has been viewed as consistent with the investment-only exemption, such as “being a strong advocate for the deal to close,” others, such as the alleged frequent meetings with the senior executives of both companies and ValueAct’s alleged intention “from the outset” to influence merger-related business decisions of both Baker Hughes and Halliburton, were more problematic. Of particular interest was the DOJ’s focus in its press release on the prophylactic role of the HSR Act itself, which it characterized as the “the backbone of the government’s merger review process, and crucial to our ability to prevent anticompetitive mergers and acquisitions.” This suggests that while investors always must be careful about relying on the “investment only” exemption, the scrutiny may be even higher in the context of investments in companies that are parties to merger agreements that are subject to significant competition review by the antitrust enforcers, as well as subsequent dealings with those companies during the merger-review process. It also suggests a need to consider carefully the risks of reliance on the “investment only” exemption in a situation where there has been a change in intention or intensity of engagement, as proving the absence of intention at the time of the relevant share purchases can be difficult.