Antitrust Alert:  U.S. DOJ Requires HSR Filing by Activist Investors, Rejecting Claim of "Passive Investment"

Antitrust Alert: U.S. DOJ Requires HSR Filing by Activist Investors, Rejecting Claim of "Passive Investment"

The Department of Justice has filed a lawsuit claiming that two ValueAct Capital funds violated the Hart-Scott-Rodino Act by acquiring over $2.5 billion of voting securities in two oilfield services companies, Halliburton and Baker Hughes, without filing an HSR notification with the federal antitrust agencies. DOJ's complaint alleges that ValueAct's actions and statements were inconsistent with investment-only intent and thus ValueAct did not qualify for the "passive investment" exemption to the notification requirement of the HSR Act.

The HSR Act requires parties to notify DOJ and the Federal Trade Commission and delay closing mergers or acquisitions of assets or securities valued at or above $78.2 million, to allow the government time to review the transaction. The HSR Act exempts "passive investments" of less than 10% of the outstanding voting stock. HSR Act regulations state that, to qualify for the investment-only exception, the acquiring party must have "no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer."

According to the complaint, shortly after Halliburton and Baker Hughes agreed to merge in November 2014, ValueAct started purchasing shares of both companies. ValueAct did not file notifications under the HSR Act. ValueAct repeatedly met with both companies' management teams, lobbied other shareholders to vote for the merger, promoted specific integration plans and executive compensation strategies, and proposed operational and strategic changes at the companies. The complaint also pointed to ValueAct's website, which describes the funds' activist approach to investing.

This enforcement action indicates how closely the government is policing HSR compliance by activist investors acting through hedge funds and other vehicles. The agencies have repeatedly emphasized that they interpret the scope of the investment-only exemption narrowly―applying only to purchasers who intend to hold voting securities as passive investors; any indication of an intention to participate in the business decisions of the issuer can be construed negatively. The agencies have indicated that conduct such as nominating a candidate for the board of directors, holding a board seat or being an officer, proposing corporate actions that require shareholder approval, soliciting proxies, or being a competitor of the issuer are inconsistent with a claim of passive investment intent. The ValueAct lawsuit follows similar actions against other hedge funds, including another against ValueAct.

ValueAct has stated it will fight the case. We expect ValueAct will argue that the investment-only exemption, as the agencies narrowly interpret it, requires investors to give up basic shareholder rights, including the rights to communicate with other shareholders and managements in the ordinary course. This would be the first contest to an "investment only" enforcement action, giving the courts an opportunity to clarify the government's interpretation of the HSR statute. The DOJ action highlights the agencies' continued efforts to seek stronger penalties for repeated violations of the HSR Act. ValueAct previously faced similar charges over prior acquisitions and paid a $1.1 million fine. In the current action, DOJ is seeking the maximum fine available – at least $19 million – and an injunction against future violations.


If litigated to a conclusion, the ValueAct case could result in a watershed decision in an era of activist investing. Companies that become aware of activist investor purchases (such as through the government's publication of HSR waiting period early terminations) may be better positioned to respond to shareholder activism. If the agencies' interpretation is upheld, activist investors may be hindered, and delay from observing the HSR waiting period could increase the cost of their purchases. On the other hand, if ValueAct prevails, activist investors may propose value-enhancing measures or engage in proxy contests on a more accelerated basis. The ValueAct case is worth watching.

DOJ's April 4, 2016, complaint, filed in the Northern District of California, is available here.

Insights by Jones Day should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request permission to reprint or reuse any of our Insights, please use our “Contact Us” form, which can be found on our website at This Insight is not intended to create, and neither publication nor receipt of it constitutes, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.