For an excellent summary on the legal background regarding Third Point vs the FTC see the recent column by Matt Levine of Bloomberg View.
According to an August 27th blog in the Harvard Law School Forum on Corporate Governance and Financial Regulation, even billionaire hedge fund managers should have to play by the rules. The blog, written by Sabastian V. Niles, counsel in the Corporate Department of Wachtell, Lipton, Rosen & Katz, implies that Dan Loeb’s activist hedge fund Third Point got off relatively easy in the FTC’s recent decision that the fund did not deserve an exemption from disclosure that it claimed in it’s campaign in 2011.
Details on FTC decision against Third Point in 2011 Yahoo campaign
The blog notes that the Federal Trade Commission announced on August 24th that Loeb’s Third Point had agreed to settle a complaint alleging violations of the notification and waiting period requirements of the Hart-Scott-Rodino Act relating to purchases of Yahoo! stock in 2011.
The HSR Act says that acquirors must inform federal antitrust agencies of transactions that meet certain thresholds and observe a pre-acquisition waiting period. Acquisitions of up to 10% of a firm’s voting stock are exempt from HSR requirements if solely for the purpose of investment, and the acquirer “has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.”
Niles highlights that HSR requirements have largely been enforced strictly against public companies, officers, directors, and investors, with very few exceptions.
The FTC complaint alleges that Third Point came to own voting securities of Yahoo! above the HSR notification threshold in August pf 2011, and added to the position until September 8, 2011, when the firm filed a Form 13D with the SEC.
NIles emphasizes that Third Point did not file and observe the HSR waiting period prior to making those acquisitions, instead making the dubious claim they were made “solely for the purpose of investment.”
The FTC complaint points out that despite the claim of an “investment-only” stock purchase, Third Point “took actions that belied an investment-only intent,” such as contacting third parties to assess their interest in replacing the current CEO of Yahoo! or serving as a director on the Yahoo! board, planning the possible launch of a proxy fight to gain board seats and making public statements regarding offering an alternative slate of directors.
Not surprisingly, he FTC determined that Third Point was not eligible for the passive investment exemption and had clearly failed to meet the HSR notification and waiting period requirements. However, fortunately for Third Point, the FTC did not assess civil penalties and only insisted upon injunctive relief. The injunction, however, will prevent Third Point from improperly relying on the passive investment exemption if involved in a similar situation in the future.