September 4, 2019

Antitrust: Activist Investor Gets Caught in HSR Net

The HSR Act has once again proven that it contains some of the most formidable traps for the unwary in the entire U.S. Code. This time, it was activist hedge fund Third Point Capital that found itself caught in the HSR’s net. According to this FTC press release, Third Point and 3 affiliated funds agreed to settle charges that they failed to comply with applicable pre-merger notification & waiting period requirements in connection with the 2017 merger of Du Pont and Dow Chemical.

This Mintz Levin memo points out the inadvertent & highly technical nature of the alleged violation:

Prior to the Dow/DuPont merger—in 2014—Third Point had filed an HSR notification and observed the waiting period to acquire Dow voting securities. Third Point still held those Dow voting securities at the time of the merger. Following the merger, in exchange for the Dow shares, each Third Point fund received voting securities of DowDuPont valued in excess of the HSR jurisdictional threshold. Under one of the HSR exemptions, Third Point was permitted for a period of five years following the 2014 HSR waiting period to acquire additional shares of Dow without filing another notification, so long as the value did not exceed the next higher threshold.

However, that exemption did not apply to the acquisition of the DowDuPont shares because Dow and DowDuPont are not the same issuer. Although Third Point should have filed an HSR notification prior to its acquisition of the DowDuPont shares as a result of the merger, it did not do so until more than two months later on November 8, 2017. The waiting period for that “corrective” HSR notification then expired on December 8, 2017.

The government alleged violation of the HSR Act between Aug. 31, 2017 (when Third Point acquired the converted DowDuPont shares without first filing a notification and observing the waiting period) and Dec. 8, 2017 (when the waiting period for the corrective HSR notification expired). Civil penalties for violating the HSR Act in 2017 were a maximum of $40,654 per day of violation, resulting in a possible maximum penalty of over $4 million. The actual civil penalty imposed for HSR Act violations is at the discretion of the government up to the maximum. Here, the government adjusted the penalty significantly downward because the violation was inadvertent and the violation was self-reported.

The actual amount of the civil penalty paid by the Third Point funds was $609,810, and Third Point was enjoined from any future violations of the HSR Act. In addition to fining Third Point much less than it could have, the government also cut it some slack by not holding Third Point in violation of an existing injunction against violations the HSR Act. The memo notes that the settlement is a reminder that sometimes, HSR compliance is something that can be thrust upon investors without any action on their part:

This case reminds investors to actively evaluate all changes in their voting security holdings for potential HSR reporting triggers. Third Point did not have an active role in the “acquisition” that resulted in the violation; rather, its legally acquired voting securities were converted to voting securities of another issuer due to the merger of third parties.

It isn’t just an acquisition that can result in a need to file an HSR notification by an innocent bystander. As I blogged a few years ago, the FTC sanctioned another investor for failing to file when certain RSUs that it owned vested. Be careful out there, everybody.

John Jenkins