Goodwin Insights January 07, 2019

HSR Definition of Passive Investor Exemption Narrowed

Under the HSR Act, an acquisition of voting securities that exceeds the $84.4 million (as adjusted annually) size of transaction threshold may be exempt if the buyer will hold 10% or less of the target’s voting securities and will hold the stock solely for purposes of investment. The HSR Act rules define the term “solely for purposes of investment” to mean that the buyer has “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.”

The types of conduct that the antitrust agencies have identified in the past as being evidence of an activist intent to influence management and the basic business decisions of the company include:

  • Holding a board seat or nominating a candidate for the board of directors;
  • Proposing corporate action that requires shareholding approval;
  • Soliciting proxies;
  • Being an officer of the issuer;
  • Being a competitor of the issuer; and/or
  • Holding, directly or indirectly, more than 10% of the outstanding voting stock of an entity that is in the same business and competes with the target. 

Until recently, FTC said that holding a non-voting board observer seat was not inconsistent with a passive investment intent. No longer. In a November 2018 update, FTC said that “depending on the level of involvement with the Board that the role entails,” the passive investor exemption may not be available to an investor who holds a non-voting board observer seat. This new interpretation of the passive investor exemption is consistent with other recent cases that show the antitrust agencies believe an investor is active if it even considers taking action that would influence management or the direction of the target’s business. In their view, that consideration of potential future action makes an investor ineligible to use the passive investor HSR Act exemption.

A narrow exemption has become even more so. Goodwin can provide guidance regarding the scope of the exemption depending on the nature of your particular circumstances.