What Activist Investors Should Know About the ValueAct HSR Lawsuit

Most importantly, can it happen to you? Perhaps.

Earlier this month, the Department of Justice sued ValueAct, Jeff Ubben’s $16 billion activist fund, for violating Federal Hart-Scott-Rodino (HSR) anti-trust law. Activist investors that acquire enough of a portfolio company, around $75 million, might pay attention to the case.

ValueAct acquired much more than that, around $2.5 billion worth of Halliburton and Baker Hughes, in anticipation of the companies closing a merger. No mere merger arbitrageur, ValueAct also sought to interact with the two companies, and push them to closing. Matt Levine at Bloomberg recounts the facts well, so we need not do that here.

We instead wish to learn from the situation. PMs have relied on exemptions from HSR notification rules. It looks like the DoJ now seeks to interpret those exemptions more narrowly. If it succeeds, PMs should add HSR filings to SEC Form 13D.

HSR Notice

HSR requires a shareholder to notify the DoJ before it acquires $75 million in shares. Presumably, this allows regulators to block deals that might restrict competition. After a waiting period, the investor can proceed, unless of course the DoJ objects.

HSR has an exemption from the notice: a purchase “made solely for the purpose of investment,” and which also is less than 10% of the outstanding shares. FTC regulations further interpret the law such that the shareholder must have “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.”

ValueAct Moves

ValueAct disclosed clearly and properly its holdings in Form 13D filings. In memos and other correspondence cited in the complaint, ValueAct also appears to want to influence the companies in various ways:

  1. ?recommend the Valeant(!) exec comp plan, which ValueAct designed

  2. ?assist the companies with merger integration

  3. ?communicate with shareholders in advance of a vote

  4. ?restructure terms if the deal fails to close.

ValueAct expressed these ideas directly to the company management teams, and referred to its efforts in memos to its investors.

What is the “Purpose of Investment”?

Did ValueAct moves go beyond mere passive monitoring of its shareholding?

The DoJ obviously thinks so. It appears to rely on the FTC regulation, rather than the HSR language. It will likely argue that ValueAct’s various efforts constitute participation in “formulation, determination, or direction of basic business decisions” of Halliburton and Baker Hughes.

Naturally, ValueAct disagrees. It asserts the right to a “relationship with company management [and] conducting due diligence on investments.”

The answer matters. The DoJ complaint asks for almost $20 million in fines – not for antitrust violations, just for a failure to file the notice.

PMs Should Follow This

It’s way early to conclude how this will work out, seeing as ValueAct hasn’t even filed its reply to the complaint. It seems to us that the facts don’t favor it, though. Based only on the facts in the complaint, ValueAct made a range of efforts to influence management at both companies.

This is not the first time that ValueAct faced off with the DoJ on its interaction with a portfolio company. It settled its earlier matters and paid a fine, which suggests it might settle this one, too.

Third Point also had a similar situation with its Yahoo investment. It, too, settled the case, but without paying anything.

HSR is a little similar to the SEC Form 13D filing requirements, but with much more serious consequences:

  1. ?Form 13D rules allow a shareholder to acquire over 5%, and notify the SEC later. Failure to file properly generally means rectifying the situations with a proper filing.

  2. ?HSR poses an absolute limit of $75 million of shares, so a shareholder cannot exceed that level until the waiting period expires. Failure to file generally means paying hefty fines.

The DoJ appears to want to enforce HSR notice requirements. Activist investors should pay close attention.

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