Activist investors may be exempted from having to reveal stakes under 10% if they do not own a significant position in a competitor or are represented on the board, according to recent changes proposed by U.S. regulators.
The Federal Trade Commission (FTC) last month published a proposal to modify the Hart-Scott-Rodino Antitrust Improvements Act (HSR) by creating a new de minimis exemption that could help activist investors built a position of up to 10% in a target without having to disclose it, provided that they do not control more than 1% of a rival company.
“The de minimis exemption would benefit activist investors whose investment strategy often precludes reliance on the ‘investment-only’ exemption,” said New York-based law firm Olshan Frome Wolosky in a note.
Currently, investors who seek to influence a company are required to notify the issuer, file a notification with the FTC and the Department of Justice, Antitrust Division, and observe a waiting period before acquiring shares in a company above certain thresholds, the lowest being $94 million.
The proposal creates a new reporting exemption for investments of up 10% of the target company’s voting securities, regardless of value or whether the investor intends to influence management or remain passive.
However, the investor must not have a “competitively significant” relationship with the target company, which includes stakes in excess of 1% in a rival, and have no employee or affiliate on the board or management of the target or its competitors, among other conditions.
The rule change also expands the definition of “person” to include any “associates” of the investor, which regulators expect to lead to more transparency.
But this may limit the availability of the de minimis exemption, as expanding the definition of “person” may make it more difficult for an activist that controls several funds to satisfy the conditions to the exemption, according to Olshan Frome Wolosky.
“For the purpose of using the de minimis exemption, an acquiring fund would, for example, need to ensure that neither it nor any of its affiliated funds holds more than 1% of the voting securities of any competitor of the issuer,” the law firm explained.