The Antitrust Division of the US Department of Justice has brought a complaint against a company which it believes erroneously relied on the "solely for the purpose of investment" Hart-Scott-Rodino exemption when it acquired minority interests in another corporation without first filing a notification report and observing the necessary waiting period. The 'investment-only' exemption allows those who acquire and hold 10% or less of a corporation's voting securities not to report their acquisition pursuant to the Hart-Scott-Rodino requirements, regardless of the dollar value of the securities they acquire and hold, as long as the acquirer is purchasing "solely for the purpose of investment". As it is unclear what actions allegedly taken by the company in this case have been found to be inconsistent with the investment-only exemption, the recent enforcement action raises potential new risks for acquirers, including institutional investors, who seek to rely on this exemption.
On February 28 2003 the Antitrust Division filed a complaint in the US District Court for the District of Columbia, charging Smithfield Foods, Inc with violating the Hart-Scott-Rodino Antitrust Improvements Act 1976 (as amended) when it made minority investments in IBP, Inc. The Antitrust Division maintained that Smithfield had violated the act when it acquired over $15 million worth of IBP voting securities on June 26 1998, without first filing a Hart-Scott-Rodino notification with the Federal Trade Commission (FTC) and Antitrust Division and observing the Hart-Scott-Rodino waiting period.(1) According to the complaint, on October 1 1998 Smithfield began to liquidate some of its IBP holdings and the value of its IBP voting securities fell below $15 million. The Antitrust Division also alleges that Smithfield again violated the Hart-Scott-Rodino Act on December 8 1999, when it acquired additional IBP voting securities in excess of $15 million. Smithfield held those securities until January 12 2001, when it again liquidated enough of its holdings in IBP to cause these holdings to fall below $15 million.
The Antitrust Division is seeking the maximum statutory civil penalty of $11,000 per day for each day that Smithfield held over $15 million worth of IBP voting securities, allegedly in violation of the Hart-Scott-Rodino Act (ie, 97 days in 1998 and 401 days from 1999 to 2001) - a sum amounting to almost $5.5 million.
Smithfield and the Antitrust Division disagree as to whether Smithfield's purchases of IBP voting securities in 1998 and again between 1999 and 2000 qualified for the investment-only exemption. The Antitrust Division alleges that the acquisitions were not exempt because "Smithfield was also considering and taking steps toward a Smithfield-IBP combination" at the time it acquired minority interests in IBP.(2) The specific steps Smithfield allegedly took are not identified.
The investment-only exemption provides as follows:
"An acquisition of voting securities shall be exempt from the requirements of the act...if made solely for the purpose of investment and if, as a result of the acquisition, the acquiring person would hold 10% or less of the outstanding voting securities of the issuer, regardless of the dollar value of voting securities so acquired or held."(3)
Voting securities are held 'solely for the purpose of investment' if "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".(4)
US antitrust enforcement agencies maintain that the acquirer's subjective intent at the time that it makes an acquisition determines whether the exemption applies in cases where the acquirer will acquire and hold 10% or less of the outstanding voting securities of a corporation. However, the agencies have also made clear that certain facts and conduct are inconsistent with a subjective intent to purchase solely for the purpose of investment (ie, to be a passive investor). Merely exercising the right to vote the stock is not considered inconsistent with an intent to acquire and hold shares "solely for the purpose of investment". However, the following types of conduct could be considered inconsistent with an intent to be a passive investor:
"(1) [n]ominating a candidate for the board of directors of the issuer;
(2) proposing corporate action requiring shareholder approval;
(3) soliciting proxies;
(4) having a controlling shareholder, director, officer or employee simultaneously serving as an officer or director of the issuer;
(5) being a competitor of the issuer; or
(6) doing any of the foregoing with respect to any entity directly or indirectly controlling the issuer."(5)
The position of the FTC Pre-merger Notification Office is that the intent to acquire and hold in the future over 10% of the voting securities of a corporation does not in and of itself prevent an acquiring person from relying on the investment-only exemption. However, the intent to acquire or seek to acquire even "working control" of the corporation (which can involve less than the 50% ownership required for control under the Hart-Scott-Rodino Act) would preclude reliance on the exemption, even if the acquiring person would hold shares that fall below 10% of the corporation's outstanding voting securities.
Significantly, although the Antitrust Division alleges that Smithfield and IBP are competitors, it has not claimed that the exemption was unavailable to Smithfield for this reason. This is surprising, given the fact that the FTC Statement of Basis and Purpose for the Hart-Scott-Rodino Regulations expressly notes that the investment-only exemption may not apply when the acquiring person and the target are competitors. Neither did the Antitrust Division allege that Smithfield had engaged in the other specific types of conduct referred to in the Statement of Basis and Purpose as inconsistent with reliance on the exemption.
Instead, the Antitrust Division has apparently taken the position that the exemption was unavailable to Smithfield because, at the time it made the acquisitions at issue, Smithfield was allegedly simultaneously "considering and taking steps toward" a future combination with IBP.(6) Acquiring persons may need to look to future disclosures in the proceedings against Smithfield, or to future Antitrust Division or FTC statements, to determine what subjective intent or preparatory steps for a broader acquisition are deemed sufficient to prevent them from relying on the investment-only exemption in connection with what could otherwise be an exempt minority investment.
The Antitrust Division complaint thus serves notice that US antitrust enforcement agencies are closely scrutinizing reliance on the investment-only exemption, even regarding minority acquisitions that occurred years ago. Companies and individuals contemplating minority investments in a corporation would thus be well advised to seek Hart-Scott-Rodino counsel's advice before relying on this exemption, even if they will hold 10% or less of the corporation's voting securities and do not seek to influence its management in the ways described in the Statement of Basis and Purpose. Acquirers relying on the exemption should also keep in mind that if, after making an exempt acquisition of a corporation's voting securities, their investment intention should change from one "solely for the purpose of investment" to one seeking to influence management of the corporation, or to acquire at least working control of the corporation, then future acquisitions of additional voting securities of the same corporation may not be exempt, even if the acquirer will hold less than 10% of the issuing corporation's voting securities.
For further information on this topic please contact Philip C Larson or Joseph G Krauss at Hogan & Hartson LLP's Washington office by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email ([email protected] or or [email protected]). Alternatively, contact Michele S Harrington at Hogan & Hartson's McLean office by telephone (+1 703 610 6100) or by fax (+1 703 610 6200) or by email ([email protected]).
Endnotes
(1) Until February 1 2001 the Hart-Scott-Rodino size-of-transaction threshold test was satisfied if an acquiring person acquired and held in excess of $15 million worth of voting securities and assets of an acquired person. On February 1 2001 the size-of-transaction threshold test was raised to $50 million.
(3) 16 CFR Section 802.9. See also 15 USC 18a(c)(9).
(4) 16 CFR Section 801.1(i)(1).
(5) FTC Statement of Basis and Purpose for the Hart-Scott-Rodino Regulations, 43 Federal Register 33450, 33465 (July 31 1978).
(6) This is not the first time an antitrust agency has taken this position. Pursuant to a 1995 consent decree with the FTC, William F Farley agreed to pay $425,000 in civil penalties. Farley was charged with violating the Hart-Scott-Rodino Act when his company acquired minority holdings valued in excess of $15 million in a corporation without first filing a Hart-Scott-Rodino notification and observing the necessary waiting period. The FTC charged that Farley could not invoke the investment-only exemption because his company was considering the possibility of acquiring the corporation at the time his company purchased minority holdings in that corporation.