On August 24, 2015, the U.S. Federal Trade Commission (FTC) announced a settlement with Third Point, LLC and three affiliated investment funds (collectively, Third Point) for violations of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) in connection with their 2011 acquisitions of shares in Yahoo! Inc. (Yahoo). Third Point had asserted that it was exempt from the premerger filing requirements of the HSR Act under the “solely for the purpose of investment” exemption. However, the FTC countered that Third Point took actions inconsistent with an investment-only intent, such as communicating with third parties to determine their interest in becoming the CEO or a board candidate of Yahoo.

The settlement highlights the need for vigilance in monitoring HSR Act compliance in connection with the acquisition of voting securities of any corporation (public or private). In addition, purchasers must consider the filing requirements of both the HSR Act and the Securities Exchange Act of 1934 (the Exchange Act) prior to acquiring voting securities of publicly traded companies. Counsel should be consulted in advance, especially with respect to complex HSR Act rules and exemptions.

Filing Requirements Under the HSR Act and Exchange Act

Under the HSR Act, parties must first file notifications with the FTC and U.S. Department of Justice (DOJ) and observe a waiting period before consummating certain acquisitions of voting securities, assets, or interests in non-corporate entities if the HSR Act threshold tests would be satisfied and no exemption would apply.

According to the complaint, Third Point made several open-market acquisitions of Yahoo’s voting securities between August 8 and August 30, 2011 that exceeded, in aggregate value, the size-of-transaction filing threshold, which was US$66 million at the time. However, although the acquisitions during this initial period exceeded the HSR Act thresholds, they did not trigger filing requirements under Section 13(d) of the Exchange Act.

Under Section 13(d) of the Exchange Act, any person who directly or indirectly acquires beneficial ownership of more than five percent of certain classes of equity securities registered under the Exchange Act must file a Schedule 13D with the Securities and Exchange Commission (SEC) disclosing such acquisitions (unless otherwise eligible to use the abbreviated disclosure form on Schedule 13G). The initial Schedule 13D filing is due within 10 days after the five percent threshold is exceeded.

Third Point did not cross the five percent threshold until September 7, 2011, when it made an additional acquisition. The next day, Third Point filed a Schedule 13D with the SEC publicly disclosing that it had acquired an aggregate of 5.15 percent of Yahoo’s outstanding shares of common stock. The filing included as an exhibit a letter from Third Point to Yahoo’s board of directors detailing its “principled demands for sweeping changes” to the board and executive leadership.

On September 16, 2011, Third Point filed corrective premerger notification and report forms under the HSR Act.

HSR Act Investment-only Exemption

Although Third Point’s August acquisitions did not subject it to filing requirements under Section 13(d) of the Exchange Act, the FTC charged that these acquisitions triggered the HSR Act filing requirements and were subject to the mandatory notification and waiting period under the HSR Act. As a result, according to the FTC, Third Point was required to file a notification and report form with the FTC and DOJ and observe a 30-day waiting period before acquiring and holding Yahoo’s voting securities in excess of US$66 million in the aggregate. Third Point, however, asserted that it was exempt from making such filings under the HSR Act, claiming the acquisitions were solely for investment purposes.
 
Under the “solely for the purpose of investment” exemption to the HSR Act, acquisitions of voting securities are exempt from the HSR Act filing requirements if the shares held do not exceed 10 percent of the outstanding voting securities of the issuer and the acquisitions were made “solely for the purpose of investment.” See 16 C.F.R. § 802.9. Acquisitions are deemed “solely for the purpose of investment” when “the person holding or acquiring such voting securities has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” See 16 C.F.R. § 801.1(i)(1).

The FTC rejected Third Point’s invocation of the “solely for the purpose of investment” exemption, alleging that Third Point engaged in a number of acts inconsistent with the exemption, including:

  • contacting certain individuals to gauge their interest in becoming the CEO or a board member of Yahoo;
  • assembling an alternate slate of Yahoo board candidates;
  • drafting correspondence to Yahoo announcing that Third Point was prepared to propose Yahoo board candidates;
  • internally debating whether to launch a proxy fight to elect directors of Yahoo; and
  • publicly stating that Third Point was prepared to propose a slate of director candidates at Yahoo’s next annual meeting.

Third Point disclosed a number of these acts in its Schedule 13D filed with the SEC on September 8, 2011.

Settlement

The FTC stated that it did not seek civil penalties because the violation was inadvertent and short-lived, and because Third Point had not previously violated the HSR Act. However, the settlement prohibits Third Point from relying on the investment-only exemption if, in the four months prior to an acquisition of voting securities otherwise subject to the reporting requirements of the HSR Act, it engages in certain activities. These activities include, but are not limited to: nominating a candidate for the board of directors of the issuer; proposing corporate action requiring shareholder approval; soliciting proxies; or, under certain circumstances, assembling a list of board or CEO candidates.
 
Third Point must also establish a compliance program to implement the terms of the settlement and appoint a compliance officer to oversee the program. The settlement is in effect for five years.

Key Takeaways

Although the investment-only exemption has been a subject of controversy in the context of activist investing, this enforcement action is relevant to any investors relying on the exemption as it highlights the exemption’s narrow interpretation. The action also raises the possibility of future review and modification of the HSR Act exemption.

According to Bureau of Competition Director Deborah Feinstein as quoted in the FTC’s August  24, 2015 press release, “[t]he investment-only exemption is a narrow exemption limited to those situations in which the investor has no intention to influence the management of the target firm. Here, Third Point’s conduct demonstrated that it intended to have more than a passive interest in Yahoo…”

Commissioners Maureen K. Ohlhausen and Joshua D. Wright objected to this reading of the exemption, arguing in their Dissenting Statement dated August 24, 2015 that “it is likely to chill valuable shareholder advocacy while subjecting transactions that are highly unlikely to raise substantive antitrust concerns to the notice and waiting requirements of the HSR Act.” They did not, however, disagree that a violation of the HSR Act had occurred.

The FTC issued an explanatory public statement related to the matter dated August 24, 2015 (Public Statement), which countered Commissioners Ohlhausen’s and Wright’s dissent by noting that there is “a public interest associated with the legitimate expectation of the business community, practitioners, and the general public that the antitrust agencies will act clearly, consistently, and transparently in their interpretation and enforcement of the HSR Act and rules.”

In contrast to the dissent, the FTC said in its Public Statement, “the public interest does not hinge on whether Third Point’s acquisitions of Yahoo stock were likely to produce any competitive harm.” Further, the FTC observed that the legislative and rule-making record related to the premerger filing requirements did not support the dissent’s suggestion that “shareholder advocacy, even if beneficial, will almost never produce anticompetitive consequences.”

Significantly, the dissenting Commissioners encouraged the FTC and DOJ to “reconsider the parameters of the investment-only exemption” beyond this particular enforcement action, including possibly allowing an exemption for acquisitions that do not result in the acquiring person holding in excess of 10 percent of the issuer’s outstanding voting securities (regardless of the purpose of such acquisition).

For now, it is apparent that the antitrust agencies will continue to read the investment-only exemption narrowly. Therefore, acquirers should exercise caution in relying on this exemption in connection with their purchases of voting securities. Acquiring parties should be especially mindful that their statements in SEC filings regarding intended actions towards the issuer are relevant in assessing whether the HSR Act investment-only exemption will apply.  

Further, acquirers should remain aware of the aggregated value of their purchases and ensure that filing requirements under the HSR Act are satisfied prior to the aggregate value crossing the relevant thresholds, even in transactions that do not raise competitive concerns or Exchange Act filing obligations.

Acquirers should also keep in mind, in addition to the reporting obligations under Section 13(d), the reporting and disgorgement obligations that arise under Section 16 of the Exchange Act for persons (in addition to directors and officers of the issuer) who are attributed with beneficial ownership of more than 10 percent of certain classes of equity securities registered under the Exchange Act. 

Given the FTC’s continued focus on the enforcement of these rules notwithstanding a divergence of views among the FTC Commissioners, minority investors are strongly encouraged to consult with experienced counsel to navigate the complex valuation and aggregation regulations of the HSR Act to determine when filings are required.

With contributions by Michael P. Glasser, Professional Support Lawyer