On Monday, the FTC issued a Notice of Proposed Rulemaking that could mean big changes when it comes to the obligations of activist investors to make HSR filings. Here’s an excerpt from the FTC’s announcement:
The Notice of Proposed Rulemaking proposes two changes to the existing rules. The first proposed change would require filers to disclose additional information about their associates and to aggregate acquisitions in the same issuer across those entities. The second change is a new proposed rule that would exempt the acquisition of 10 percent or less of an issuer’s voting securities unless the acquiring person already has a competitively significant relationship with the issuer.
The first proposal would require funds to aggregate positions held by multiple investment vehicles under their control and will prevent acquirers from splitting up transactions among those investment vehicles in order to avoid reporting. That‘s a significant change, and one that could both complicate the process of determining whether an HSR filing is required & expand the number of situations in which fund entities would be required to make filings.
But it’s the second proposal that’s the real zinger, at least for public companies. There’s already an HSR exemption for acquisitions of voting securities below the10% level, but the acquisition must be “solely for the purpose of investment” in order for the exemption to apply. The way in which that exemption has been interpreted makes it very difficult for an activist that’s engaging in a campaign to qualify for it.
The FTC proposes to eliminate the investment intent requirement. Instead, a filing will only be required in situations where there is an existing competitively significant relationship, “such as where the acquiring person operates competing lines of business, has an existing vertical relationship with the issuer, or employs or is otherwise represented by an individual who is an officer or director of the issuer or a competitor.”
Since most activists rarely take a 10% stake in a target, the proposed rule change is likely to exempt almost most activist investors from an HSR filing requirement in connection with their acquisitions. When you couple that with the SEC’s proposed amendments increasing the 13F reporting threshold, activism could get a lot stealthier. Comments are due 60 days after publication in the federal register. If the SEC’s experience with the 13F amendments is any guide, the FTC will have plenty of comments to chew on.
-John Jenkins, DealLawyers.com September 23, 2020