On 12 July 2016, the U.S. Department of Justice (DOJ) announced that ValueAct Capital (ValueAct) agreed to pay a record US$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 (HSR Act) when it acquired more than US$2.5 billion in voting shares of Halliburton and Baker Hughes. The previous record fine for an HSR Act violation was US$5.67 million. This settlement comes three months after DOJ announced the enforcement action. The settlement also includes injunctive relief prohibiting ValueAct from relying on the “investment-only” exemption to the HSR Act’s filing requirements when it acquires shares with the intent 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 17 November 2014, Halliburton and Baker Hughes announced their plan to merge. Between November 2014 and April 2016, when DOJ filed its Complaint, ValueAct entities purchased voting shares in both companies exceeding the then-applicable HSR size-of-transaction threshold amount. ValueAct relied on the “investment-only” exemption to the HSR reporting requirement, which is only available when an investor holds ten percent or less of the outstanding voting securities of an issuer and has no intention of participating in or influencing the management of the issuer. DOJ’s Complaint alleged that ValueAct improperly relied on the exemption and requested a civil penalty of at least US$19 million and a restraint against ValueAct from any future violations of the Act. DOJ pointed to several instances where ValueAct’s public statements, SEC filings, internal documents, and communications with the management or directors of the issuers signaled an intention to influence the management of the issuer.

The HSR investment-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,….” 16 C.F.R. Section 802.9. The HSR 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.” 16 C.F.R. Section 801.1(i)(1). 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 over 10% interests 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.2

Key Takeaways

There are a number of significant takeaways from the DOJ’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 – DOJ stated that “the Defendants may not rely on the HSR 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 others, “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.” CIS at 6 (emphasis added). Similarly, DOJ’s Complaint and the CIS both emphasized that ValueAct’s website described ValueAct’s 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.” Complaint at 2, 4; CIS at 4. 

Investing entities that espouse (publicly or not) strategies of potentially taking certain actions under certain identified circumstances to influence management of the companies in which they invest possibly 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 HSR counsel.

  • Caution for Investors Considering an Activist Role in the Future – DOJ 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.” CIS at 6 (emphasis added). 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.
  • The FTC’s Premerger Notification Office (PNO) Is a Valuable Resource – DOJ cited several factors it took into account in determining the proper penalty in the ValueAct case.  In doing so, DOJ noted that ValueAct should have realized 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.” CIS at 8. 

This statement serves as a useful reminder that PNO staff is ready and willing to answer questions about application of the HSR threshold tests and exemptions to transactions. In fact, it is standard practice for HSR practitioners to reach out to the PNO by telephone or e-mail, 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 does an excellent job of responding to these queries quickly. Investors who are not certain that the investment-only exemption applies to their upcoming acquisition should discuss with their HSR counsel whether such counsel should consult with the PNO on this issue (again without disclosing the names of any parties).     

Though ValueAct did not acknowledge any wrongdoing as part of the settlement, it has publicly stated that the recent 150% increase in civil penalties for violations of the HSR Act motivated its decision to settle. Under the new penalties, effective 1 August 2016, DOJ could have sought a maximum penalty of nearly US$50 million. Given the U.S. 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 HSR Act exemptions should consult with HSR counsel before closing their transactions.