This week the Department of Justice obtained a record $11 million fine for an investor's failure to comply with the premerger notification and waiting period requirements of the Hart-Scott-Rodino (HSR) Act. DOJ challenged hedge fund ValueAct's reliance on the "investment-only" exemption to the reporting requirements of the HSR Act, in connection with ValueAct's acquisition of voting securities of Halliburton and Baker Hughes. DOJ's settlement of its lawsuit against ValueAct in exchange for an unprecedented fine provides a stark reminder that the antitrust enforcement agencies favor narrow interpretations of HSR Act exemptions and pursue violators aggressively.

The HSR Act

The HSR Act requires merger or acquisition parties to notify DOJ and the Federal Trade Commission and to observe a waiting period prior to closing a transaction whose value exceeds the statute's thresholds, to allow the government time to review the proposed combination. Federal courts may assess civil penalties for violations of the HSR Act. The current maximum civil penalty for an HSR Act violation is $16,000 per day for each day of noncompliance, but will increase to $40,000 per day on August 1, 2016.

The HSR Act and its implementing regulations provide various exemptions to mandatory premerger reporting, including an exemption for acquisitions of less than 10% of a company's outstanding voting securities, regardless of the value of the stock, if the acquirer makes acquisition "solely for the purpose of investment." This exemption applies only if the acquirer has "no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer." The scope of the investment-only exemption has been construed narrowly by the FTC, which takes the position that conduct such as nominating a candidate for the board of directors, holding a board seat, serving as an officer, proposing corporate actions that require shareholder approval, soliciting proxies, or being a competitor of the issuer are inconsistent with passive investment intent.

ValueAct's acquisition of Halliburton and Baker Hughes securities

In 2014, oilfield services companies Halliburton and Baker Hughes announced their intention to merge in a $35 billion transaction. Shortly after that announcement, two ValueAct Capital funds acquired over $2.5 billion of Halliburton and Baker Hughes voting securities, but without filing HSR Act premerger notification. According to DOJ, ValueAct thereafter met with both companies' management teams, lobbied other shareholders to vote for the merger, promoted specific integration plans and executive compensation strategies, and proposed operational and strategic changes at the companies.

The DOJ complaint alleged that ValueAct acquired the shares intending to influence Halliburton and Baker Hughes' business decisions and therefore could not rely on the investment-only exemption. DOJ also pointed to ValueAct's website, which describes the funds' activist approach to investing, and to two prior transactions that ValueAct had failed to report under HSR Act.

ValueAct has agreed to pay a record $11 million fine—nearly double the highest fine previously imposed for HSR Act violations, and close to the maximum available penalty under the HSR Act. ValueAct also agreed to injunctive relief designed to prevent future violations, including designation of a legal compliance officer.

Lessons from ValueAct

The ValueAct settlement reflects how aggressively the antitrust enforcers pursue civil penalties for HSR Act violations by sophisticated investors, particularly those that repeatedly have failed to comply. The agencies have stated they may decline to seek civil penalties for first-time violators, where a violation is the result of understandable or simple negligence, the parties make corrective filings promptly, the parties did not benefit from the violation, and the parties explain how they will prevent future violations. ValueAct's having to pay close to the maximum available HSR Act penalty is explained by the lack of mitigating factors and ValueAct's previous violations.

The DOJ will consider public comments on the proposed settlement, which must be submitted within 60 days. The DOJ Competitive Impact Statement, explaining the rationale for the enforcement action and proposed settlement, is available here.