On August 24, 2015, Third Point LLC and its affiliated hedge funds (collectively, Third Point) agreed to settle charges that they violated the pre-merger notification filing requirements found in the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the Act). The US Department of Justice brought the charges at the request of the FTC. The complaint alleged that Third Point acquired voting securities in Yahoo! in an amount exceeding the filing thresholds without filing Notification and Report Forms with the FTC and DOJ, as required under the Act. Third Point admitted they did not observe the HSR requirements, but stated they did so in reliance on the “investment-only exemption” which exempts transactions where the acquirer of securities “has no intention of participating in the formulation, determination or direction of the basic business decisions of the issuer.”
The agencies found that the investment-only exemption did not apply to Third Point because they: (i) contacted individuals about serving as CEO or on the Yahoo! board of directors; (ii) took other steps to assemble an alternative slate of directors; (iii) drafted correspondence announcing they were prepared to join the Yahoo! board; (iv) internally discussed the possibility of a director proxy battle; and (v) made public statements that they were prepared to propose a slate of directors at the next annual meeting.
The Stipulated Order, which will require approval and entry by a federal court judge, prohibits Third Point, during a five-year term, from making acquisitions in reliance upon the investment-only exemption if Third Point engages in any of the following conduct four months prior to acquiring voting securities:
- Nominating a candidate for the board of directors of the issuer;
- Proposing corporate action requiring shareholder approval;
- Soliciting proxies with respect to such issuer;
- Having a representative serve as an officer or director of the issuer;
- Being a competitor of the issuer;
- Doing any of the above activities with regard to an entity controlled by the issuer;
- Asking third parties about interest in being a candidate for the board or CEO of the issuer, and not abandoning such efforts;
- Communicating with the issuer about potential candidates for the board or CEO of the issuer, and not abandoning such efforts; or
- Assembling a list of possible candidates for the board or CEO of the issuer, if done with the knowledge of the CEO of the investor.
The Stipulated Order also contemplates the establishment of a compliance program which will, among other things, require the designation of a compliance officer, delivery of certifications and the submission of an annual compliance report that shall provide details of certain specified activity by Third Point. In addition, the Stipulated Order sets forth access and inspection procedures whereby a DOJ representative can conduct interviews of Third Point’s personnel and inspect its records and documents during the term of the Stipulated Order. The FTC chose not to pursue monetary penalties against Third Point in part because: (i) the violation was accidental and short-lived; (ii) they filed Notification and Report Forms shortly after the violations occurred; and (iii) it was their first violation under the Act.
The agencies concluded that Third Point’s failure to comply with the Act’s pre-merger notification and waiting period requirements undermined the purpose and statutory scheme of the Act and precluded timely review of the acquisition by the FTC and DOJ. In a statement authored by a majority of the FTC’s commissioners, they claim that the public interest was met by enforcing the Act’s rules and requirements against Third Point in order to deter would-be violators, and to demonstrate that the FTC and DOJ would interpret and enforce such rules and regulations in a clear, consistent and transparent manner.
Two commissioners filed a dissenting opinion, arguing against the FTC’s “narrow” interpretation of the investment-only exemption and urging the FTC and DOJ to reconsider enforcement of these types of transactions because they found that the transaction at issue and similar transactions did not harm competition and generally produced market benefits.
This decision demonstrates that the FTC continues to take a narrow view of the investment-only exemption and that even very preliminary internal activities whose ultimate goal would be to influence management or obtain board representation will not allow a transaction to fall within the investment-only exemption. What we find most telling about the FTC’s thinking concerning the investment-only exemption can be found in the FTC’s Bureau of Competition’s Blog, where members of the staff indicate the following:
- The test for the investment-only exemption is the acquirer’s intention, and such determination may not turn on any particular conduct.
- Evidence of nonpassive intent, even if not accompanied by conduct, will make the investment unavailable.
- No particular conduct is likely dispositive, and the agencies will assess a variety of factors to determine if an investor has properly invoked the investment-only exemption.
The enforcement action and settlement reconfirmed that the majority can be expected to narrowly interpret the phrase “solely for the purpose of investment.” Investors should, therefore, proceed with caution when relying upon the investment-only exemption.