Investment Fund to Pay More Than $600,000 for Inadvertent Violation of HSR Act
Third Point LLC (“Third Point”), along with three funds it controls, agreed to pay $609,810 to settle allegations that it violated the premerger notification and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”). U.S. v. Third Point Offshore Fund, Ltd., et al., Case No. 1:19-cv-02593 (D. D.C. Aug. 28, 2019). The alleged violation stemmed from the merger of Dow Inc. (“Dow”) and E.I. du Pont de Nemours & Company (“DuPont”) into DowDuPont, Inc. (“DowDuPont”), which resulted in the conversion of Dow shares into DowDuPont shares. Third Point, an investor in Dow, received shares of the new DowDuPont company following the merger. The case was referred to the Department of Justice (“DOJ”) by the Federal Trade Commission (“FTC”). The settlement must be approved by the court following a 60-day public comment period.
The HSR Act requires parties acquiring voting securities or assets, where jurisdictional dollar thresholds are met, to file a premerger notification and report form with the FTC and DOJ and to observe a statutory waiting period (usually 30 days) prior to consummating the transaction. The notification process and waiting period are designed to allow the federal antitrust agencies to analyze a proposed transaction before it is consummated to determine whether it will harm competition.
The merger of Dow and DuPont closed on August 31, 2017, resulting in the newly formed DowDuPont. Leading up to the merger, the merging parties had announced that their shareholders would cease to hold shares of Dow and DuPont, and would instead own shares in the new DowDuPont. A press release was also issued several weeks prior to the merger, announcing that the transaction would close on August 31, that the Dow and DuPont shares would cease trading that same day, and that the new DowDuPont shares would begin trading on September 1, 2017.
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 government also alleged that this was not Third Point’s first violation of the HSR Act. Third Point was already under a 2015 federal court order stemming from allegations that it violated the HSR Act for inappropriately relying on the investment-only exemption in connection with its acquisition of voting securities of Yahoo! Inc. However, the government did not allege in the current case that Third Point’s conduct violated the 2015 order. To prevent any further HSR Act violations, the settlement here also enjoins Third Point from any future violations of the HSR Act.
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. Nonetheless, particularly as a sophisticated investment fund, the government may have expected that Third Point should have been on notice of the conversion through the merging parties’ multiple press releases, and thus should have anticipated its HSR reporting obligation.