Investors Beware: The Bar Is Being Raised on HSR Violations
Under the Hart-Scott-Rodino (HSR) Act, parties to transactions meeting certain size thresholds are required to notify the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission and to observe a waiting period before closing their transaction, unless an exemption applies. The HSR Rules are complex—for example, catching relatively small acquisitions where an investor already has a position in the target as well as the exercise of stock options and other instruments that investors may not think about as formal transactions.
Over the past four months, the FTC and DOJ have raised the bar on HSR compliance. They have increased the civil penalties for HSR violations, potentially resulting in much higher fines in the future, and have brought several enforcement actions illustrating the complex nature of the HSR Rules and exemptions.
Penalties Increase Substantially
In June, the FTC announced that, effective August 1, 2016, the penalties for failing to comply with the HSR requirements would increase significantly from a maximum of $16,000 per day to a maximum of $40,000 per day.1 Penalties are calculated from the closing of the acquisition that should have been reported.
Historically, the agencies have given investors a mulligan for a first infraction, with second and third violations resulting in settlements ranging from $250,000 to several million. But in light of the recent penalty increase, these historical ranges likely underestimate future penalties.
Caledonia Misses Clearance Window
On August 10, 2016, Caledonia Investments PLC agreed to pay a $480,000 penalty for failure to comply with the HSR Act in connection with its acquisition of voting securities in Bristow Group Inc. According to the DOJ, Caledonia incorrectly relied on an expired clearance to acquire Bristow voting securities.
Under the HSR Rules, once an HSR filing has been made, an investor may make additional acquisitions for a period of up to five years, as long as such acquisitions are below the next filing threshold. Caledonia had obtained HSR clearance to acquire Bristow voting securities in June 2008, and therefore was able to acquire additional voting securities up to the next filing threshold without another HSR filing until June 2013. About eight months later, in February 2014, Caledonia acquired additional Bristow voting securities without first filing under the HSR Act.
Caledonia learned of its obligation to file about one year after its acquisition, and made a corrective filing on February 4, 2015. Due to a previous HSR violation back in 1996, Caledonia was required to pay a penalty of nearly half a million dollars, but that penalty pales in comparison to what it could have been at up to $40,000 per day after a year's filing delay.
ValueAct Can't Rely on Passive Investment Exemption
On July 12, 2016, the DOJ settled claims against ValueAct Capital for failing to notify its investments in Halliburton and Baker Hughes for $11 million.2 This is the highest-ever settlement for an HSR violation to date. According to the DOJ, ValueAct had failed to file, erroneously claiming that its acquisitions were exempt as "investment only."
Under the passive investment exemption, an acquirer that will hold 10 percent or less of the issuer's voting securities for passive investment purposes only is not required to file an HSR notification. This exemption is frequently claimed by private equity firms and hedge funds.
After Baker Hughes and Halliburton announced their proposed $35 billion merger in late 2014, ValueAct, an activist investor hedge fund that pursues a strategy of "active, constructive involvement," purchased around $2.5 billion of Baker Hughes and Halliburton voting shares without filing HSR notifications. Citing ValueAct's internal communications, investor communications, communications with Baker Hughes and Halliburton, and statements in ValueAct's 13D filing, the DOJ asserted that the investment exemption did not apply because ValueAct purchased the shares with the intent to influence the companies' business decisions.
Notably, ValueAct's violation was alleged to have taken place during the DOJ's investigation and subsequent challenge of the Baker Hughes/Halliburton merger, and ValueAct is a three-time HSR violator. No enforcement action was taken for ValueAct's first violation, and it paid a $1.1 million penalty for its second violation. ValueAct's repeated HSR violations, combined with the fact that it acquired the shares with an intent to influence the merger, may account for its record-setting penalty.
The ValueAct case represents the third time in the past four years that the agencies have pursued HSR violations by investors claiming the investment exemption and emphasizes the importance of consistency in both internal and external communications related to acquisitions.
The federal agencies' recent actions highlight the importance of obtaining HSR advice early in any substantial share acquisition—or any acquisition that will lead to a substantial holding—to help navigate the Act's highly technical requirements. The recent enforcement actions highlight the particular importance of strict HSR compliance for past offenders.
1Press release, FTC Raises Civil Penalty Maximum to Adjust for Inflation (June 29, 2016), available at https://www.ftc.gov/news-events/press-releases/2016/06/ftc-raises-civil-penalty-maximums-adjust-inflation.
2United States v. VA Partners I, LLC, 16-cv-01672 (N.D. Cal. July 12, 2016).