What defines a passive investor as opposed to an activist investor?
The Department of Justice (DOJ) announced on Monday April 4, 2016, that legal action has been taken against ValueAct Capital for their activist investor position related to the merger agreement between Halliburton and Baker Hughes. The lawsuit alleges impropriety with the lead up to the merger and accuses ValueAct of violating notification requirements related to their influence over the merger proposal. ValueAct has said it will fight these allegations.
The lawsuit centers on a 40-year-old U.S. law called the Hart-Scott-Rhodino (HSR) Act that exempts investors who buy up to ten percent of a company’s voting securities from disclosing purchases made only for passive investment purposes. The DOJ believes that the intent of ValueAct accruing this position was to be an activist, and not a passive investment. Shortly after the November 2014 merger agreement, the hedge fund violated the law by waiting too long to disclose its intentions, according to the DOJ.
“ValueAct’s substantial stock purchases made it one of the largest shareholders of two competitors in the midst of [the DOJ’s] antitrust review of the companies’ proposed merger, and ValueAct used its position to influence decision-making at both companies,” said Assistant Attorney General Bill Baer of the Justice Department’s Antitrust Division in a press release. “ValueAct was not entitled to avoid HSR requirements by claiming to be a passive investor. Given the seriousness of the violation and ValueAct’s prior HSR violations, we will be seeking significant civil penalties and an injunction against further violations.”
At issue for the DOJ is what defines “passive investing,” and when does an investor officially become an activist. Engaging with management teams is pretty standard across the industry for many investors, but doesn’t always constitute activism. ValueAct and other activist shareholders utilize engagement with management teams as a key part of their strategy to push for changes that activists feel is needed to boost a company’s stock price. The line between the two can get thin.
The Build Up to the Merger
ValueAct has held a position in Halliburton since 2012. In November 2014, Halliburton announced its intentions to buy rival oil services firm Baker Hughes in what (at the time) amounted to a $34.6 billion deal, which has since fallen to nearly half that amount following the plunge in commodity prices. In January 2015, ValueAct purchased more shares in Halliburton and established a position in Baker Hughes.
A regulatory filing from ValueAct in January 2015, disclosed the position in Baker Hughes as more than five percent of the company. In October 2015, after the deal had hit several roadblocks and began looking shaky, ValueAct amended the filing to say that it was taking an activist position in Baker Hughes. The following month, ValueAct filed its HSR disclosure.
Reuters reported the lawsuit says that on December 5, 2014, the day ValueAct’s Halliburton holdings crossed the HSR Act threshold, a ValueAct partner sent an email to ValueAct’s founder and CEO Jeffrey Ubben suggesting a new compensation structure for Halliburton’s chief executive.
According to the Reuters report, the partner suggested that the compensation plan of Valeant’s CEO – a plan that is heavily weighted toward stock-based incentives – would be a good model for Halliburton’s chief executive, the government says in its complaint, to which Ubben agreed.
Halliburton is still awaiting regulatory approval for the acquisition, which faces hurdles in both the U.S. and Europe for violation of anti-trust laws.
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