The Federal Trade Commission (FTC) announced a settlement on August 24, 2015, with Third Point Funds for failing to file a notification under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act) in connection with the acquisition of shares in Yahoo! Inc. (Yahoo) in 2011. Third Point Funds initially did not file and observe the HSR waiting period because it believed its acquisitions were exempt under the so-called “investment-only” exemption. The settlement provides insight into how the FTC interprets the investment-only exemption, and an important reminder that the HSR Act is a procedural statute for which the lack of competitive effect has no bearing on how the FTC chooses to enforce violations of its reporting requirements.
The investment-only exemption to the HSR Act exempts acquisitions of voting securities “solely for the purpose of investment” if, as a result of the acquisition, the securities held do not exceed 10 percent of the outstanding voting securities of the issuer, regardless of the value of the voting securities. The HSR Rules define “solely for the purpose of investments” as having “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” (16 C.F.R. § 801.1(i)(1).)
Here, Third Point Funds acquired voting securities of Yahoo in August 2011, the value of which exceeded the then-current HSR size of transaction threshold, but represented less than 10 percent of the issued and outstanding voting securities of Yahoo. Third Point Funds relied on the investment-only exemption when it initially did not file and observe the statutory 30-day waiting period prior to acquiring these voting securities. The FTC alleges that Third Point Funds could not rely on the investment-only exemption because it filed a Schedule 13D disclosure with the Securities and Exchange Commission, which the FTC has said (in informal interpretations of the HSR rules) is inconsistent with an intent to purchase voting securities solely for the purposes of investment. More tellingly, though, the FTC alleges that at the same time it relied on the exemption, Third Point Funds and/or agents acting on Third Point’s behalf, contacted certain individuals to gauge their willingness to be chief executive officer or a potential board candidate of Yahoo. Third Point also considered launching its own candidacy to join the Yahoo board or launching a proxy battle, and made public statements that it was prepared to propose a slate of directors at Yahoo’s next annual meeting. These are actions that the FTC believes were inconsistent with the exemption’s requirement that the acquirer have “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” (16 C.F.R. § 801.1(i)(1).)
Third Point made a filing on September 16, 2011, less than two months after allegedly violating the HSR Act by making acquisitions of Yahoo’s voting securities that were not exempt from the reporting requirements of the HSR Act.
The proposed settlement does not include civil penalties – which could have totaled up to $16,000 per day for each day Third Point was in violation of the HSR Act – but instead prohibits certain conduct by Third Point. For example, Third Point cannot rely on the investment-only exemption if at the time of the acquisition it, or an entity it controls, does any of the following in the four months prior to the acquisition: nominates a candidate for the board of directors of the issuer, proposes corporate action requiring shareholder approval, solicits proxies with respect to the issuer, has a representative serve as an officer or director of the issuer, is a competitor of the issuer, inquires of a third party whether he or she is interested in being a candidate for the board or chief executive officer of the issuer, communicates with the issuer about potential candidates for the board or chief executive officer of the issuer, or assembles possible candidates for the board or chief executive officer of the issuer. The presumption is that any of these activities would be inconsistent with a passive “investment-only” intent, and thus would prohibit an acquirer from relying on the investment-only exemption. The FTC’s prior interpretations indicate these actions are not consistent with investment-only intent.
Notably, Third Point will only be subject to the consent order for a period of five years or less, if during the five year period, the investment-only exemption is replaced with a “flat exemption” that exempts acquisitions of a certain percentage of the issued and outstanding voting securities of an issuer by an acquirer who is not a competitor of the issuer. There have been calls to amend the investment-only exemption in a variety of ways to provide more relief to activist investors that hold a de minimis percentage of shares, or executives who receive compensation in voting securities. Two of the five Commissioners of the FTC dissented to the agency’s settlement with Third Point, and also called for an investment-only exemption that simply exempts acquisitions of 10 percent or less of an issuer’s voting securities, regardless of the investor’s behavior. This provision of the consent decree and the dissenting Commissioners’ remarks may presage an exemption possibly under consideration by the FTC, so acquirers of minority interests in issuers may want to watch for future developments.
The dissenting Commissioners disagreed with the settlement in part because there were no substantive anticompetitive concerns as a result of Third Point acquiring less than 10 percent of the voting securities of Yahoo, and even if there had been, it could have been easily remedied with little burden to the parties. However, the majority of the Commissioners believed that regardless of the lack of substantive antitrust concern, a procedural violation of the HSR Act had occurred, and that violation warranted some kind of remedy. The larger takeaway is that regardless of the de minimis holdings or lack of competitive concern, the FTC will enforce the HSR Act where it sees black-letter violations.