In April of this year, The Mogin Law Firm, P.C. published an article discussing an enforcement action by the Department of Justice (“DOJ”) against ValueAct Capital and its affiliated funds for violating the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (“HSR Act” or “Act”) premerger notification requirements. ValueAct came under fire for its 2014 purchases of voting shares in both Halliburton and Baker Hughes after those companies had announced their proposed merger. ValueAct failed to report these stock acquisitions under the HSR Act, citing the Act’s limited “investment only” exemption. DOJ challenged ValueAct’s reliance on the exemption in light of the investment firm’s activist nature. This week, DOJ announced that it has obtained record fines and injunctive relief from ValueAct to settle the litigation.
According to the Competitive Impact Statement filed on July 12, 2016, in the United States District Court for the Northern District of California, ValueAct agreed to pay a civil penalty of $11 million and to refrain from engaging in future conduct akin to that alleged in the aforementioned complaint. Specifically, ValueAct agreed to refrain from relying on the HSR Act’s investment only exemption if the company intends to take, or if its investment strategy identifies circumstances in which it may take, certain enumerated actions. In accordance with the Tunney Act, the proposed Final Judgment against ValueAct and related Competitive Impact Statement will be published in the Federal Register and a summary of the settlement terms will be published in certain newspapers for the next sixty (60) days, during which time the public is invited to comment on the proposed settlement.
At $11 million, the ValueAct settlement constitutes almost 690 days, or nearly two years, of maximum fines, by this firm’s calculations. According to the DOJ, ValueAct reached HSR thresholds, and thus should have complied with the Act’s premerger notification requirements, by December 1 and 5, 2014. The ValueAct settlement is the largest monetary fine paid to date for violating the HSR Act and nearly double the next largest fine paid for violating the Act, which was $5.67 million. DOJ cited several aggravating factors calling for such a substantial penalty, including ValueAct’s intention to take an active role in business decisions for both Halliburton and Baker Hughes, ValueAct’s failure to seek advice from the Federal Trade Commission’s (“FTC’s”) Pre-Merger Notification Office regarding its obligations under the HSR Act, the fact that ValueAct had previously violated the HSR Act an astonishing six times, and that the acquisitions, which were of shares in head-to-head competitors in at least 23 markets with significant market share in each, posed substantial competitive concerns.
Perhaps motivating ValueAct to settle is the fact that civil penalties for violating the HSR Act are set to more than double in the next few weeks. Currently, civil penalties for violating the HSR Act max out at $16,000 per day for each day that the offender is in violation of the Act. On August 1, 2016, the maximum civil penalty will increase to $40,000 per day for each day the defendant is in violation of the Act.
This is certainly not the first enforcement action taken by the federal antitrust agencies against activist investment firms relying on the HSR Act’s “investment only” exemption. For instance, in August 2015, the FTC obtained injunctive relief via a settlement with Third Point LLC for investments made by three of its funds into Yahoo! Inc. Similar to ValueAct, Third Point did not make the necessary premerger notification filings, relying on the “investment only” exemption.
What sets the ValueAct action apart is that the firm invested in two dominant firms in the oil field services industry. The April 2016 complaint alleges that ValueAct’s strategy from the beginning of its investment was to influence the merger between Halliburton and Baker Hughes. The ValueAct action marks the rare situation in which the federal antitrust agencies have sought enforcement for cross-ownership within a single market, but serves as an indicator of times to come in light of the current trend of institution investment in concentrated industries.
As this firm previously discussed, cross-shareholdings in horizontal competitors raises significant antitrust issues, particularly in concentrated markets. Noted antitrust scholar and Harvard Law Professor Einer Elhauge recently articulated that these transactions can in effect serve as de facto mergers since the “competing” firms will be taking actions to benefit the exact same shareholders. The net result could be that these transactions substantially lessen competition or even lead to monopolistic conduct in oligopolistic industries.
The DOJ’s action against ValueAct can be seen as a challenge to the activist investor model by antitrust authorities. Typically, investors such as ValueAct are concerned with compliance in the context of the securities laws. When this firm’s counsel is sought by investment professionals, because of our specialization we conscientiously provide advice concerning competition law for these reasons, among others, and we suspect that this type of counsel will become more prominent in the near future. Either way, the action taken by DOJ this week serves as a word of caution to investors engaging in cross-ownership among horizontal competitors: buyer-be-ware.
 Halliburton and Baker Hughes abandoned the merger in May 2016, after DOJ filed suit to block the transaction.
THE MOGIN LAW FIRM, P.C. specializes in representing businesses, entrepreneurs, consumers and investors in antitrust, unfair competition and complex business litigation. We have participated in some of the largest antitrust cases in the United States and are frequently requested by other law firms and often consult with law firms engaged in antitrust cases. Author Jodie Williams was an attorney in the Bureau of Competition of the Federal Trade Commission for several years prior to joining The Mogin Law Firm, P.C.
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