DOJ Announces $11 Million Fine in HSR Settlement
The U.S. Department of Justice (DOJ) yesterday announced it had reached a settlement with three entities associated with investment fund firm ValueAct Capital (collectively, ValueAct) for alleged violations of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act). Under the settlement, ValueAct agreed to pay a record $11 million in civil penalties and to refrain in certain circumstances from using the exemption under Section 802.9 of the rules promulgated pursuant to the HSR Act for an acquisition of voting securities “solely for the purpose of investment.” The announced fine is almost double the previous record high of $5.67 million.
The settlement follows the April 4, 2016 filing of a complaint by the DOJ against ValueAct for allegedly failing to comply with the HSR Act’s notification and waiting-period requirements. Following a November 17, 2014 announcement by competitors Baker Hughes and Halliburton that they planned to merge, ValueAct purchased over $2.5 billion in Baker Hughes and Halliburton shares. According to the complaint, ValueAct used its ownership positions in both companies to influence management decisions to increase the chances that the deal would go through. ValueAct asserted that it was entitled to the “investment-only” exemption under Section 802.9. That provision exempts an acquisition of voting securities from the HSR Act’s requirements if the acquiring person will hold 10 percent or less of the issuer’s outstanding voting securities and is making the acquisition “solely for the purpose of investment,” i.e., “has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer,” 16 C.F.R. § 801.1(i)(1). The complaint alleged that ValueAct’s activities, including meetings with senior management at each firm, did not fall within the Section 802.9 exemption.
The government originally sought a fine of $19 million, based in part on six prior violations by ValueAct of the HSR Act’s notification requirements. The last three of these prior violations resulted in a $1.1 million fine in 2007. The $11 million fine in the current case is almost 60 percent of the originally-sought penalty.
As described in the proposed Final Judgment, the injunctive provisions would bar each of the ValueAct defendants from relying on the Section 802.9 “investment-purpose” exemption
if at the time of such Covered Acquisition (i) the Defendant intends to take any of the below actions, or
(ii) the Defendant’s investment strategy specific to such Covered Acquisition identifies circumstances in which the Defendant may take any of the below actions:
(A) Propose to an Officer or Director of the Issuer that the Issuer merge with, acquire, or sell itself to another Person;
(B) Propose to an Officer or Director of any other Person in which the Defendant owns Voting Securities or an equity interest the potential terms on which that Person might merge with, acquire, or sell itself to the Issuer;
(C) Propose to an Officer or Director of the Issuer new or modified terms for any publicly announced merger or acquisition to which the Issuer is a party;
(D) Propose to an Officer or Director of the Issuer an alternative to a publicly announced merger or acquisition to which the Issuer is a party, either before consummation of the publicly announced merger or acquisition or upon its abandonment;
(E) Propose to an Officer or Director of the Issuer changes to the Issuer’s corporate structure that require shareholder approval; or,
(F) Propose to an Officer or Director of the Issuer changes to the Issuer’s strategies regarding the pricing of the Issuer’s product(s) or service(s), its production capacity, or its production output.
Consent settlements often include “fencing-in provisions” that impose stricter prohibitions on defendants than the law would impose in the absence of a violation, so readers cannot be certain that the injunctive provisions in the settlement strictly conform to the agencies’ views of the limits of the Section 802.9 exemption. These provisions do suggest, however, (a) that FTC and DOJ antitrust enforcers now regard issuers’ decisions relating to mergers and acquisitions as “basic business decisions,” a position that is more limiting than the view the FTC’s Premerger Notification Office (PNO), which has primary responsibility for administering the government’s HSR Act program, has sometimes expressed in the past; and (b) that the agencies view “intent” under Section 802.9 as an expansive concept that encompasses a state of mind in which an investor has identified a course of action as reasonably possible under specific circumstances, even though the investor has not yet decided to pursue the action even under those circumstances.
The government’s enforcement action against ValueAct is the second action brought in eight months related to the Section 802.9 exemption. As noted previously, on August 24, 2015, the DOJ filed a complaint against and settlement agreement with several Third Point investment funds for alleged violations of the HSR Act. The Third Point funds had asserted that their acquisition of Yahoo! Inc. shares fell under the Section 802.9 exemption. The government did not seek a monetary penalty in that case because the alleged violations were found to have been inadvertent, were short-lived, and were each fund’s first HSR Act violation.
In addition to the number of recent enforcement actions brought, there have been other signs that the government is narrowing its view of the Section 802.9 exemption. The PNO has recently added notices to certain of its past informal staff opinions related to this exemption stating that these informal precedents do not reflect the PNO’s current enforcement positions. See, e.g., PNO Informal Staff Opinions Nos. 1308003 and 1202014.
FTC Announces a Major Increase in Civil Penalties for HSR Act and Various Other Violations
In a related development, on June 29, 2016, the FTC announced an increase to the maximum civil penalty for violations of 16 provisions the FTC enforces, including the HSR Act’s penalty provision, 15 U.S.C. § 7A(g)(1). Effective August 1, 2016, the maximum civil penalty for some of these provisions will increase by 150 percent, from $16,000 to $40,000 per violation per day. In addition to the HSR Act, these provisions are Section 5(l) of the FTC Act (related to violations of certain final Commission orders) and Section 5(m)(1) of the FTC Act (related to unfair and deceptive trade practices).
In matters that have settled involving alleged HSR Act violations, past defendants have typically paid less than the current-maximum penalty of $16,000 per day. Future penalties assessed at the full $40,000 per violation per day may therefore not materialize, but, given the marked increase in the maximum penalty, the government will likely seek significantly larger penalties in future enforcement actions under the HSR Act.
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