Council of Institutional Investors

Recent DOJ Move Could Have Implications for Institutional Investors
Thursday, April 14, 2016
by: Rosemary Lally

Section: CII Governance Alert

by Charlie Dunn
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The Department of Justice’s (DOJ) recent suit against ValueAct Capital may give institutional investors who interact with their portfolio companies pause. The department fired a shot over the bow at activist investment firms when it filed a civil antitrust suit against ValueAct Capital for violating notification requirements related to the Halliburton deal to buy Baker Hughes.

Shortly after Baker Hughes and Halliburton announced a plan to merge, ValueAct, an activist investment firm, purchased more than $2.5 billion of Halliburton and Baker Hughes voting shares without providing any notice that it was doing so. The suit says the activist investor violated the Hart-Scott-Rodino Antitrust Improvements Act by unlawfully relying on a narrow exemption in the act. The exemption says purchasers of less than 10 percent of a company’s outstanding voting securities are not required to notify the DOJ and Federal Trade Commission if the acquisition is made “solely for the purpose of investment” with no intention of participating in the company’s business decisions.

The DOJ says ValueAct took an active, not passive, role in business decisions related to the merger, and, therefore, did not qualify for the exemption. It points to emails within ValueAct discussing how to structure the Halliburton CEO’s compensation as part of the evidence of an active role.

The civil penalty for the action could be as high as $19 million.

In a statement, Value Act says it fundamentally disagrees with the DOJ’s allegations and it supports the basic principles of shareholder rights. “This includes having a relationship with company management, conducting due diligence on investments and engaging in ordinary course communications with other shareholders.” As a result, the activist fund says it plans to contest the DOJ’s action and vigorously defend its position.
As for the broader implications of this DOJ action for institutional investors, Allison Bennington, general counsel for ValueAct, says the standards implied in the lawsuit “could have a chilling effect on normal shareholder-company interactions.”

ValueAct’s outside counsel, Balil Sayyed, echoes Bennington’s remarks. “What is worrisome for all investors is that the DOJ identified the conduct that they engage in as part of their ordinary course as inconsistent with the HSR exemption,” he says. “This may cause them to question if they can continue to rely on it,” he adds. Sayyed also notes that the DOJ and FTC have not provided investors with any guidance on this issue.
“The line between shareholder activists and institutional investors is blurring,” says Broc Romanek on his “Once an institutional or similar traditionally passive investor crosses the line—either by cooperating with shareholder activists in certain situations or by taking an increasingly assertive role with its portfolio companies—such an institution will have to examine whether it can claim to have a truly ‘passive’ intent at the time of any future share purchases,” he warns.
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