AABA Altaba Inc

By David Benoit 

Activist investors on Monday got a reminder that their investments are subject to antitrust review, a warning that will shine a spotlight on a debate over why that is.

The Federal Trade Commission and Justice Department on Monday announced a settlement with Third Point LLC over allegations the New York hedge fund failed to properly file for antitrust clearance when it built its position in Yahoo Inc. in late 2011.

The government had alleged that Third Point's interactions with Yahoo crossed a threshold requiring investors to notify regulators if they have taken an activist position.

Third Point, founded by outspoken activist Daniel Loeb, won't pay a fine, though it could have faced millions of dollars in penalties under the rules. The fund entered into a five-year agreement with the FTC and Justice Department to make all appropriate filings.

Activists and some antitrust lawyers have argued that the rule requiring such filings lacks clarity and should be abolished, but the debate hasn't garnered as much attention as a similar discussion regarding securities laws that require investors to disclose when they own more than 5% of a stock.

The FTC's allegations against Third Point, one of the most high-profile activist funds, could change that.

The Hart-Scott-Rodino Act, or HSR, requires acquirers of stock worth more than $76.3 million to alert regulators. The rule is meant to allow the government to get ahead of any deals that may potentially violate antitrust regulations.

Purchases of less than 10% of a company's shares that are made "solely for the purpose of investment" are exempt from the filing requirement. But investors can only rely on that exemption if they are passive, or have "no intention of participating in the formulation, determination or direction of the basic business decisions."

What that means has been a question for activists and antitrust lawyers for years. Most activists end up filing the notification.

"There are few concrete guide posts for the exemption," lawyers from Fried, Frank, Harris, Shriver & Jacobson LLP wrote in a February memo to clients.

The Third Point judgment does little to shed more light on the subject. It says Third Point must file before talking with a company about taking board seats or to third parties about being director nominees.

Third Point filed for HSR clearance in September 2011. Ultimately, the fund helped remove Yahoo's chief executive and install Marissa Mayer as CEO. Mr. Loeb became a Yahoo board member.

The FTC argued that Third Point should have filed earlier than it did because it indicated to Yahoo it would consider seeking board seats and had talked to others about being CEO or directors of the company.

Third Point argued to the FTC that it wasn't necessary to file until it had made a decision to actually seek those board seats, people familiar with the matter said.

The agency, however, stuck to a more narrow interpretation of the exemption.

"The investment-only exemption is a narrow exemption limited to those situations in which the investor has no intention to influence the management of the target firm," FTC Competition Director Deborah Feinstein said in a statement. "Here, Third Point's conduct demonstrated that it intended to have more than a passive interest in Yahoo, which obligated its affiliated funds to make an HSR filing and wait before acquiring its shares."

Activists and some antitrust lawyers have argued that the filing requirement is too costly. The cost of filing the HSR notification can range from as little as $45,000 to as much as $280,000, depending on how much stock an investor owns.

Third Point went as far as to argue the FTC's interpretation was unconstitutional, saying it essentially forces investors to pay the government in order to speak, the people said.

Activists also argue that the filings force them to disclose their positions to companies too early, a key concern for investors. While activists have to file with the Securities and Exchange Commission when they cross 5% of a company's stock, those stakes often far exceed the value of HSR levels.

A separate debate has raged in recent years on whether the activists should be forced to make that SEC disclosure sooner.

Some have called for the FTC to move away from the passive and active distinction in favor of a flat exemption for any investor who isn't a competitor and is under 10% or 15%. The agency explored such a change in 1988.

Two FTC commissioners dissented from the decision to file a complaint against Third Point and issued a separate comment saying the rules should be updated. They suggested a flat exemption for those under 10% as one possible solution.

Third Point's agreement ends in five years unless a flat exemption becomes law before then.

Brent Kendall contributed to this article

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(END) Dow Jones Newswires

August 24, 2015 16:30 ET (20:30 GMT)

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