Investment-only exemption
‚ÄčKey takeaways


On July 12 2016 the Department of Justice announced that ValueAct Capital has agreed to pay a record $11 million civil penalty to settle allegations that the activist investment firm violated the notification and waiting period requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 when it acquired more than $2.5 billion in voting shares of Halliburton and Baker Hughes. The previous record fine for an Hart-Scott-Rodino Act violation was $5.67 million. This settlement comes three months after the Department of Justice announced the enforcement action. The settlement also includes injunctive relief prohibiting ValueAct from relying on the investment-only exemption to the Hart-Scott-Rodino Act's filing requirements when it acquires shares in order to take certain specified actions or if its investment strategy with respect to a certain issuer in which it plans to acquire shares identifies circumstances under which it might take certain specified actions.(1)


On November 17 2014 Halliburton and Baker Hughes announced their plan to merge. Between November 2014 and April 2016, when the Department of Justice filed its complaint, ValueAct entities purchased voting shares in both companies exceeding the then-applicable Hart-Scott-Rodino size-of-transaction threshold amount. ValueAct relied on the investment-only exemption to the Hart-Scott-Rodino reporting requirement, which is available only when an investor holds 10% or less of the outstanding voting securities of an issuer and has no intention of participating in or influencing the management of the issuer. The Department of Justice's complaint alleged that ValueAct improperly relied on the exemption and requested a civil penalty of at least $19 million and a restraint against ValueAct from any future violations of the act. The Department of Justice pointed to several instances where ValueAct's public statements, Securities and Exchange Commission filings, internal documents and communications with the issuer's management or directors signaled an intention to influence the management of the issuer.

Ivestment-only exemption

The investment-only exemption applies to the acquisition of voting shares of a corporation "if made solely for the purpose of investment and if, as a result of the acquisition, the acquiring person would hold ten percent or less of the outstanding voting securities of the issuer".(2) The Hart-Scott-Rodino Act rules define 'solely for the purpose of investment' to mean that "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".(3) In practice, merely exercising voting rights is not inconsistent with an investment-only purpose. However, the following types of conduct would be considered inconsistent with an investment-only purpose:

  • nominating a candidate for the board of directors of the issuer;
  • proposing corporate action requiring shareholder approval;
  • soliciting proxies;
  • having a controlling shareholder, director, officer or employee simultaneously serving as an officer or director of the issuer;
  • being a competitor of the issuer, holding more than a 10% interest in a competitor of the issuer or having a board seat on a competitor of the issuer; or
  • doing any of the foregoing with respect to any entity under common control with the issuer.(4)

Key takeaways

There are a number of significant takeaways from the the Department of Justice's Competitive Impact Statement (CIS) filed with the proposed final judgment.

Caution for investors whose general investment strategies "may" involve influencing a company's business decisions
The Department of Justice stated that "the Defendants may not rely on the Hart-Scott-Rodino Act's investment-only exemption if they intend to take, or their investment strategy identifies circumstances in which they may take" certain actions including, among other things, "proposing a merger, acquisition, or sale to which the issuer of the acquired voting securities is a party" or "proposing changes to the issuer's strategies regarding pricing, production capacity, or production output of the issuer's products and services".(5) Similarly, the Department of Justice's complaint and the CIS both emphasised that ValueAct's website described its investment strategy as one of "active, constructive involvement" in the management of the companies in which it invests and noted that "[t]he goal in each investment is to work constructively with management and/or the company's board to implement a strategy or strategies that maximize returns for all shareholders".(6)

Investing entities that espouse (whether publicly or not) strategies of potentially taking certain actions under certain identified circumstances to influence management of the companies in which they invest may not qualify for the investment-only exemption in connection with their acquisition of shares in such companies, regardless of their immediate intent at the time of the acquisition. At a minimum, such entities should not rely on the investment-only exemption without first consulting with Hart-Scott-Rodino counsel.

Caution for investors considering activist role in future
The Department of Justice stated that "[a]n 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".(7) Again, investors should proceed with extreme caution before relying on the investment-only exemption if they even consider influencing management of the company in which they are investing.

FTC Pre-merger Notification Office (PNO) is valuable resource
The Department of Justice cited several factors that it took into account in determining the proper penalty in the ValueAct case. In doing so, the Department of Justice noted that ValueAct should have realised the investment-only exemption did not apply in connection with its investments in Halliburton and Baker Hughes due to its intent to "take an active role in the business decisions" of both entities and if it "had any doubt about its obligations, it could have sought the advice of the [PNO], but did not do so".(8)

This statement serves as a useful reminder that PNO staff are ready and willing to answer questions about the application of the Hart-Scott-Rodino threshold tests and exemptions to transactions. In fact, it is standard practice for Hart-Scott-Rodino practitioners to reach out to the PNO by telephone or email, without disclosing party names, describing relevant hypothetical facts and seeking guidance on, among other things, whether specific exemptions would apply to such facts. The PNO staff do an excellent job of responding to these queries quickly. Investors which are uncertain whether the investment-only exemption applies to their upcoming acquisition should discuss with their Hart-Scott-Rodino counsel whether to consult with the PNO on this issue (again without disclosing the names of any parties).

Although ValueAct did not acknowledge any wrongdoing as part of the settlement, it publicly stated that the recent 150% increase in civil penalties for violations of the Hart-Scott-Rodino Act motivated its decision to settle. Under the new penalties, which take effect on August 1 2016, the Department of Justice could have sought a maximum penalty of nearly $50 million. Given the US antitrust agencies' recent enforcement actions targeting reliance on the investment-only exemption, and the significant increase in penalties, acquiring parties intending to rely on the investment-only and other Hart-Scott-Rodino Act exemptions should consult with Hart-Scott-Rodino counsel before closing their transactions.

For further information on this topic please contact Michele S Harrington at Hogan Lovells US LLP's McLean office by telephone (+1 703 610 6100) or email ([email protected]). Alternatively, contact Robert Baldwin at Hogan Lovells US LLP's Washington DC office by telephone (+1 202 637 5600) or email ([email protected]). The Hogan Lovells website can be accessed at


(1) The actions include proposing to:

  • an officer or director of the issuer that the issuer merge with, acquire or sell itself to another party;
  • an officer or director of any other company in which ValueAct owns voting securities or an equity interest the potential terms on which that company might merge with, acquire or sell itself to the issuer;
  • an officer or director of the issuer new or modified terms for any publicly announced merger or acquisition to which the issuer is a party;
  • an officer or director of the issuer an alternative to a publicly announced merger or acquisition to which the issuer is a party, either before consummation of the publicly announced merger or acquisition or on its abandonment;
  • an officer or director of the issuer changes to the issuer's corporate structure that require shareholder approval; or
  • an officer or director of the issuer changes to the issuer's strategies regarding the pricing of the issuer's product(s) or service(s), its production capacity or its production output (proposed final judgment at 4).

(2) 16 CFR Section 802.9.

(3) 16 CFR Section 801.1(i)(1).

(4) FTC Statement of Basis and Purpose for the Hart-Scott-Rodino Regulations. 43 Fed Reg 33450 33465 (FTC July 31 1978).

(5) CIS at 6 (emphasis added).

(6) Complaint at 2, 4; CIS at 4.

(7) CIS at 6 (emphasis added).

(8) CIS at 8.