Introduction
Filing requirements
Hart-Scott-Rodino investment-only exemption
Settlement
Key takeaways
On August 24 2015 the Federal Trade Commission (FTC) announced a settlement with Third Point, LLC and three affiliated investment funds (collectively, Third Point) for violations of the Hart-Scott-Rodino Antitrust Improvements Act 1976 in connection with their 2011 acquisitions of shares in Yahoo! Inc. Third Point had asserted that it was exempt from the pre-merger filing requirements of Hart-Scott-Rodino under the 'solely for the purpose of investment' exemption. However, the FTC countered that Third Point took actions that were inconsistent with an investment-only intent, such as communicating with third parties to determine their interest in becoming the chief executive officer (CEO) or a board candidate of Yahoo!.
The settlement highlights the need for vigilance in monitoring Hart-Scott-Rodino compliance in connection with the acquisition of voting securities of any corporation (public or private). In addition, purchasers must consider the filing requirements of both the Hart-Scott-Rodino Act and the Securities Exchange Act 1934 before acquiring voting securities of publicly traded companies. Counsel should be consulted in advance, especially with respect to complex Hart-Scott-Rodino rules and exemptions.
Under the Hart-Scott-Rodino Act parties must first file notifications with the FTC and Department of Justice and observe a waiting period before consummating certain acquisitions of voting securities, assets or interests in non-corporate entities if the Hart-Scott-Rodino threshold tests will be satisfied and no exemption applies.(1)
According to the complaint, Third Point made several open-market acquisitions of Yahoo's voting securities between August 8 and August 30 2011 that exceeded, in aggregate value, the size-of-transaction filing threshold, which was $66 million at the time. However, although the acquisitions during this initial period exceeded the Hart-Scott-Rodino thresholds, they did not trigger filing requirements under Section 13(d) of the Securities Exchange Act.
Under Section 13(d) of the Securities Exchange Act, anyone that directly or indirectly acquires beneficial ownership of more than 5% of certain classes of equity securities registered under the Securities Exchange Act must file a Schedule 13D with the Securities and Exchange Commission (SEC) disclosing such acquisitions (unless otherwise eligible to use the abbreviated disclosure form on Schedule 13G). The initial Schedule 13D filing is due within 10 days once the 5% threshold is exceeded.
Third Point did not cross the 5% threshold until September 7 2011, when it made an additional acquisition. The next day, Third Point filed a Schedule 13D with the SEC publicly disclosing that it had acquired an aggregate of 5.15% of Yahoo's outstanding shares of common stock. The filing included as an exhibit a letter from Third Point to Yahoo's board of directors detailing its "principled demands for sweeping changes" to the board and executive leadership.
On September 16 2011 Third Point filed corrective pre-merger notification and report forms under the Hart-Scott-Rodino Act.
Hart-Scott-Rodino investment-only exemption
Although Third Point's August acquisitions did not subject it to filing requirements under Section 13(d) of the Securities Exchange Act, the FTC charged that these acquisitions triggered the Hart-Scott-Rodino filing requirements and were subject to the mandatory notification and waiting period under the act. As a result, according to the FTC, Third Point was required to file a notification and report form with the FTC and the Department of Justice and observe a 30-day waiting period before acquiring and holding Yahoo's voting securities in excess of $66 million in aggregate. However, Third Point asserted that it was exempt from making such filings under the Hart-Scott-Rodino Act, claiming that the acquisitions were solely for investment purposes.
Under the 'solely for the purpose of investment' exemption, acquisitions of voting securities are exempt from Hart-Scott-Rodino filing requirements if the shares held do not exceed 10% of the outstanding voting securities of the issuer and the acquisitions were made solely for the purpose of investment.(2) Acquisitions are deemed to be solely for the purpose of investment when "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)
The FTC rejected Third Point's invocation of the exemption, alleging that Third Point had engaged in a number of acts inconsistent with the exemption, including:
- contacting certain individuals to gauge their interest in becoming the CEO or a board member of Yahoo!;
- assembling an alternate slate of Yahoo! board candidates;
- drafting correspondence to Yahoo! announcing that Third Point was prepared to propose Yahoo! board candidates;
- internally debating whether to launch a proxy fight to elect directors of Yahoo!; and
- publicly stating that Third Point was prepared to propose a slate of director candidates at Yahoo!'s next annual meeting.
Third Point disclosed a number of these acts in its Schedule 13D filed with the SEC on September 8 2011.
The FTC stated that it did not seek civil penalties because the violation was inadvertent and short lived and Third Point had not previously violated the Hart-Scott-Rodino Act. However, the settlement prohibits Third Point from relying on the investment-only exemption if, in the four months before an acquisition of voting securities that is otherwise subject to the reporting requirements of the Hart-Scott-Rodino Act, it engaged in certain activities. These activities include:
- nominating a candidate for the board of directors of the issuer;
- proposing corporate action requiring shareholder approval;
- soliciting proxies; or
- under certain circumstances, assembling a list of board or CEO candidates.
Third Point must also establish a compliance programme to implement the terms of the settlement and appoint a compliance officer to oversee the programme. The settlement is effective for five years.
Although the investment-only exemption has been the subject of controversy in the context of activist investing, this enforcement action is relevant to any investors relying on the exemption as it highlights the exemption's narrow interpretation. The action also raises the possibility of future review and modification of the Hart-Scott-Rodino exemption.
According to Bureau of Competition Director Deborah Feinstein, as quoted in the FTC's August 24 2015 press release:
"The investment-only exemption is a narrow exemption limited to those situations in which the investor has no intention to influence the management of the target firm. Here, Third Point's conduct demonstrated that it intended to have more than a passive interest in Yahoo."
Commissioners Maureen K Ohlhausen and Joshua D Wright objected to this reading of the exemption, arguing in their dissenting statement of August 24 2015 that "it is likely to chill valuable shareholder advocacy while subjecting transactions that are highly unlikely to raise substantive antitrust concerns to the notice and waiting requirements of the [Hart-Scott-Rodino] Act". However, they did not disagree that a Hart-Scott-Rodino violation had occurred.
On August 24 2015 the FTC issued an explanatory public statement relating to the matter, which countered Ohlhausen and Wright's dissent by noting that there is "a public interest associated with the legitimate expectation of the business community, practitioners, and the general public that the antitrust agencies will act clearly, consistently, and transparently in their interpretation and enforcement of the [Hart-Scott-Rodino] Act and rules".
In contrast to the dissent, in its public statement the FTC said "the public interest does not hinge on whether Third Point's acquisitions of Yahoo stock were likely to produce any competitive harm". Further, the FTC observed that the legislative and rule-making record relating to the pre-merger filing requirements did not support the dissent's suggestion that "shareholder advocacy, even if beneficial, will almost never produce anticompetitive consequences".
Significantly, the dissenting commissioners encouraged the FTC and the Department of Justice to "reconsider the parameters of the investment-only exemption" beyond this particular enforcement action, including possibly allowing an exemption for acquisitions that do not result in the acquiring person holding in excess of 10% of the issuer's outstanding voting securities (regardless of the purpose of such acquisition).
For now, it is apparent that the antitrust agencies will continue to read the investment-only exemption narrowly. Therefore, acquirers should exercise caution in relying on this exemption in connection with their purchases of voting securities. Acquiring parties should be especially mindful that their statements in SEC filings regarding intended actions towards the issuer are relevant in assessing whether the Hart-Scott-Rodino investment-only exemption will apply.
Further, acquirers should remain aware of the aggregated value of their purchases and ensure that filing requirements under the Hart-Scott-Rodino Act are satisfied before the aggregate value crosses the relevant thresholds, even for transactions that do not raise competitive concerns or Securities Exchange Act filing obligations.
In addition to the reporting obligations under Section 13(d), acquirers should also keep in mind the reporting and disgorgement obligations that arise under Section 16 of the Securities Exchange Act for persons (in addition to directors and officers of the issuer) who are attributed with beneficial ownership of more than 10% of certain classes of equity security registered under the Securities Exchange Act.
Given the FTC's continued focus on the enforcement of these rules, notwithstanding a divergence of views among the FTC commissioners, minority investors are strongly encouraged to consult with experienced counsel to navigate the complex valuation and aggregation regulations of the Hart-Scott-Rodino Act to determine when filings are required.
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), fax (+1 703 610 6200) or email ([email protected]). Alternatively, contact Joseph Gilligan at Hogan Lovells US LLP's Washington DC office by telephone (+1 202 637 5600), fax (+1 202 637 5910) or email ([email protected]). The Hogan Lovells website can be accessed at www.hoganlovells.com.
Endnotes
(1) The FTC adjusts the Hart-Scott-Rodino filing thresholds annually. In 2011 the minimum value of voting securities or other interests that must be exceeded to trigger a Hart-Scott-Rodino filing was $66 million. In 2015 the minimum size of transaction threshold is $76.3 million.
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