While the activities of a few high-profile personalities or protracted campaigns against companies such as Yahoo and Volkswagen grab much of the public’s attention, there have been a series of other significant developments recently related to activist investors.
Most recently, a trio of ethics and finance watchdog groups urged Congress to reform the rules governing how activists are required to report their various ownership stakes. Currently, activist investors that exceed a 5% ownership threshold have a maximum of 10 days to disclose that position to the Securities and Exchange Commission (“SEC”) pursuant to a Schedule 13D filing. In a letter to legislators, the Citizens for Responsibility and Ethics in Washington, the Government Accountability Project and New Rules for Global Finance argued for that period to be shortened to one day, as well as for the creation of a two-day “cooling-off period” during which the shareholder would not be able to acquire additional shares.
The more stringent requirements are designed to address the possibility that activist fund managers could quickly acquire significant stakes in a company – and therefore obtain a larger amount of influence – before being required to publicly disclose their investment.
The SEC has the authority to review these disclosure requirements under the Dodd-Frank Act; however, it hasn’t to this point indicated it will modify them. The agency did examine a related issue last year when it investigated whether multiple activist hedge funds had coordinated their activities to effectively acquire a share of greater than 5% in certain companies without individually exceeding the disclosure threshold.
Earlier this year, Democratic Senators Tammy Baldwin and Jeff Merkley introduced legislation designed to reduce the potentially negative impact of activist investors. Senators Bernie Sanders and Elizabeth Warren acted as co-sponsors of the bill, which aims to shorten the 10-day window for disclosing a newly acquired stake in a company to just two days. In addition, the bill will require investors to disclose net short positions in the company, which would allow shareholders to see if investors would profit from the company’s losses or demise. The bill is known as "the Brokaw Act," after the Wisconsin village that entered bankruptcy following a group of investors’ acquisition of a paper company and subsequent closing of the local mill. Although its fate is bleak in the current Congress, the legislation again demonstrates the desire for added scrutiny of Wall Street from legislators and the public alike.
DOJ Antitrust Action
In April, the U.S. Department of Justice (“DOJ”) filed a civil antitrust lawsuit against certain ValueAct Capital entities for alleged violations of the reporting and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”) in relation to Halliburton's takeover of Baker Hughes. In the lawsuit, filed in the U.S. District Court for the Northern District of California, the DOJ alleged activist investor ValueAct acquired a $2.5 billion combined stake in the two companies, after they had announced plans to merge, without complying with the HSR Act's notification requirements. Moreover, ValueAct did so with the intent of influencing the companies’ business decisions during the merger and, as a result, the firm couldn't rely on the limited "investment only" exemption to HSR notification requirements, the DOJ said. ValueAct disputes the DOJ’s claims.
The DOJ is seeking a civil penalty of "at least $19 million" in the lawsuit, which will capture the attention of other activist investment firms. The suit alleges that ValueAct held discussions, both internally and with Halliburton’s CEO, regarding potential changes to the company’s executive compensation practices. Although such communications can be part of a passive investment approach, the DOJ’s attention to this indicates that it considers it an attempt to influence the company and, as a result, fund managers relying on the investment-only exemption should review their disclosure obligations under the HSR Act.
2016 and Beyond
While none of these examples alone represents a substantial shift in the landscape for activist investors, together they demonstrate that the industry is garnering extra attention. This can be expected to continue, particularly in light of the ongoing presidential campaign after Democratic candidate Hillary Clinton outlined a series of tax measures designed to combat what she called “hit-and-run activists” – indicating the issue will likely remain in the spotlight in the coming months.