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ValueAct, Activism Tactics, and Beneficial Ownership

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Posted by Ethan A. Klingsberg, Cleary Gottlieb Steen & Hamilton LLP, on Wednesday, May 18, 2016
Editor's Note: Ethan A. Klingsberg is a partner in the New York office of Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Klingsberg, Steven J. Kaiser, and Elizabeth Bieber. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

The filing by the DOJ of a complaint in federal court on April 4, 2016 against ValueAct—claiming that ValueAct’s purchase of shares of two public companies violated the HSR Act’s notification and waiting period requirements and seeking $19 million in civil penalties (based on the $16,000 per day penalty provisions of the HSR Act)—has the potential to have an immediate impact on the tactics used by brand name “activist hedge funds,” such as ValueAct, to accumulate shares without prior notice to either the issuers in question or the market generally.

As some of the activism advocates from academia have observed, the imposition of any limitations on the ability of these hedge funds to accumulate shares without prior public disclosure that these accumulations are or will be occurring “can be expected to reduce the returns to [activist] blockholders and thereby reduce the incidence and size of outside [activist] blocks as well as [activist] blockholders’ investments in monitoring and engagement.” [1] In other words, impediments to the ability to buy shares “under the radar” will hit activist hedge funds where it counts most—i.e., by increasing their upfront investment costs.

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