ANALYSIS: Activist Investors Beware—Your “Passive” Investments May Not Be So Passive

July 13, 2016, 1:45 PM

Activist investor ValueAct Capital Management agreed Tuesday to pay a record $11 million fine to settle a Department of Justice lawsuit related to ValueAct’s investments in Halliburton Co. and Baker Hughes Inc. as the two oil giants were attempting to merge.

The DOJ alleged in an April 4 complaint that ValueAct violated antitrust laws—specifically, the Hart-Scott-Rodino Act—when it failed to disclose its $2.5 billion worth of investments in the companies after they announced their intent to merge. The DOJ claimed that ValueAct purchased the stock with the intent to influence the merger—via its access to senior executives of both companies—and therefore did not qualify for the HSR exemption for passive investors.

Two days later, the DOJ sued to block Halliburton’s acquisition of Baker Hughes and the deal died the following month.

In a statement released Tuesday, Principal Deputy Assistant Attorney General Renata Hesse, head of the DOJ’s Antitrust Division, said, “ValueAct acquired substantial stakes in Halliburton and Baker Hughes in the midst of our antitrust review of the companies’ proposed merger, and used its position to try to influence the outcome of that process and certain other business decisions. ValueAct was not entitled to avoid the HSR requirements by claiming to be a passive investor, while at the same time injecting itself in this manner.”

ValueAct continues to disagree with the DOJ’s interpretation of the investments, but said it decided to settle in the face of a forthcoming 150 percent increase in daily fines for HSR violations. The Federal Trade Commission announced June 29 that the per-day penalty for HSR violations would increase from $16,000 to $40,000 as of Aug. 1.

What does all of this mean for activist investors?

The line between passive and active investments for the purpose of HSR notifications has always been a murky one. At what point does an activist’s discussions with an investment’s executives constitute an “active” role, or an attempt to influence business decisions?

One thing is clear—the FTC and DOJ are watching this closely. This suit marks the third time in four years that the FTC or DOJ has alleged HSR violations where a fund has claimed an investment-only exemption. This week’s record fine against ValueAct coupled with the upcoming increase in daily penalties for HSR violations mean institutional investors must be extremely careful when claiming the passive-investor exemption.

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