You’re a young portfolio manager looking to make a splash. You notice an undervalued U.S. public company that could be poised for growth. You want to buy a minority stake in the company and engage in a dialogue with management to improve performance. You don’t have to make any filings with the U.S. government, right? Unfortunately, you might.
In July, the U.S. Department of Justice announced a record-breaking USD11 million settlement with ValueAct Capital for its failure to make a Hart-Scott-Rodino filing for open market purchases in Halliburton and Baker Hughes because it did not qualify for the “investment only” exemption. Four days later the U.S. Securities and Exchange Commission staff issued guidance on whether greater than 5% shareholders can continue to report beneficial ownership on the short-form Schedule 13G, rather than the long-form Schedule 13D, even when the shareholder fails to qualify for the “investment only” HSR exemption.
Under the HSR Act, shareholders are exempt from notifying the government of acquisitions of U.S. public company shares over the USD78.2 million threshold under two conditions: the purchase is less than 10% of the company’s outstanding shares, and the acquisition is made “solely for the purpose of investment.” The DOJ takes a narrow view of the “investment only” exemption, prohibiting the investor from participating in any aspect of the business.
The SEC, however, has taken a broader view of “investment only” for its beneficial ownership reporting requirement, which permits shareholders to use a short-form Schedule 13G if it beneficially owns less than 20% of outstanding shares without the “purpose or effect of changing or influencing control of the issuer.”
In guidance released in July, the SEC staff said that engaging with management on executive compensation issues, social or public policy issues or corporate governance topics, without more, would not disqualify shareholders from using the short-form. But engaging with management on matters such as a sale to another company would be disqualifying.
As a result of these developments, institutional investors should closely analyze the HSR and SEC filing requirements before acquiring a significant stake in a U.S. public company and engaging with management.