The activist investing community hasn’t been all that concerned with the HSR Act and the case of Dan Loeb’s Third Point versus the US Department of Justice.
The HSR Act is the Hart-Scott-Rodino Act that requires buyers of stock worth more than $76.3 million to notify antitrust regulators and observe a waiting period before closing the transaction.
The big deal with Third Point goes back to its August 2011 purchase of Yahoo (NASDAQ: YHOO) shares. Three separate Third Point funds bought $66 million worth of stock ($66 million was the applicable HSR filing threshold at the time), yet none of the funds made an HSR filing, instead relying on the “investment only” exemption to the HSR Act.
The HSR Act provides an exemption from reporting requirements for acquisitions that result in holding 10 percent or less of a company’s voting securities and are made “solely for the purpose of investment.”
The HSR rules provide that voting securities are held or acquired “solely for the purpose of investment” if the investor has “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.”
Now activists, like Loeb, generally aren’t quiet investors, but they also (usually) have no anti-competitive intentions.
Failure to file the HSR form carries a civil penalty of up to $16,000 per day and may force an acquirer to divest assets or securities acquired.
In Loeb’s case, the FTC decided against pressing for a fine which would have been around 2.8 million dollars. The settlement prohibits the Third Point Funds from making an acquisition of an issuer without filing and observing the HSR waiting period for five years — so zero penalties, a five-year commitment to file HSR forms.
In the strict sense, Loeb and Third Point broke the law. The gray area comes into play on whether the law should apply to activist shareholders trying to make companies more competitive.
It’s really much ado about nothing. Activists likely won’t resort to synthetic swaps to avoid the act, but we likely won’t see a reform to the near 50 year old act either.