ValueAct had settled earlier disputes by paying a penalty of $1.1 million. In this case however, the lawsuit hinges on the definition of “passive” holdings as defined in the Hart-Scott-Rodino (HSR) Act.
Citing violations of notification requirements related to Halliburton Co’s acquisition of Baker Hughes, the U.S. Department of Justice has sued activist investor ValueAct Capital. The hedge fund has responded by saying it will fight the case in court.
The lawsuit centers hinges on a 40-year old U.S. law that exempts investors who have purchased up to 10% of a company’s voting shares from disclosing the purchase as it is only for passive purposes.
As per the Department of Justice, ever since both companies merged in November 2014, ValueAct, an active investor in both companies from before the merger, started building up its position in the merged company and took too long to disclose its intentions thereby violating the Hart-Scott-Rodino (HSR) Act.
“Plainly the regulators are trying to send a message that their view of what constitutes passivity is far more restrictive than what some portfolio managers apparently believe,” said Christopher Davis, a partner at law in Kleinberg Kaplan who chairs its mergers practice.
As per the lawsuit, ValueAct used its contacts with senior executives at both companies Halliburton and Baker Hughes to formulate strategies, including that of the merger. The government is seeking “significant” damages of at least $19 million.
“ValueAct was not entitled to avoid HSR requirements by claiming to be a passive investor,” said Assistant Attorney General Bill Baer of the Justice Department’s Antitrust Division in a press release.
ValueAct has responded to the allegations saying it will contest the case. This is in stark departure to similar lawsuits arising out of notification violations with investors typically settling the cases with the government.
“We fundamentally disagree with the Department of Justice’s allegations in this case,” reads an e-mail from ValueAct.
This lawsuit is yet another body blow to the $16 billion hedge fund, which had to stomach massive losses on its investment in Valeant Pharmaceuticals International, currently under federal investigation.
As per ValueAct, conducting due diligence, engaging with other stock owners, and having a relationship with a company’s management all fall within the basic ambit of shareholder’s rights.
The case revolves around the definition of passive investment as defined in the Hart-Scott-Rodino (HSR) Act.
For activist shareholders, engaging with a company’s management teams directly is a key part of their strategy to push for value added changes in the management so as to boost the company’s stock price.
As for the government, federal officials have underscored through e-mails the fact that ValueAct hs crossed the “passive” boundary as early as a month after the closure of the Halliburton merger.
As per the lawsuit,ValueAct crossed the threshold of the “passive” boundary on December 5, 2014 wherein a ValueAct partner sent an e-mail to ValueAct’s CEO and founder Jeffrey Ubben, suggesting a new compensation structure for Halliburton’s CEO.
Significantly, Halliburton’s merger with Baker Hughes is still awaiting regulatory approval. At the time of the announcement, the deal was worth $35 billion. It has however depreciated by nearly 50%, with oil prices plunging to their record lows.
On Monday, the U.S. Justice Department noted that ValueAct had filed “corrective notifications” for three acquisitions in 2003 and in 2005 and had to pay to the government $1.1 million in civil penalties.
Categories: Regulations & Legal, Strategy
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