December 1, 2022

Activist funds won’t need U.S. antitrust nod under new proposal

Activist investors who buy up to 10% of a company’s shares won’t need to first get U.S. antitrust approval for the purchases under a new proposal by competition regulators.

The Federal Trade Commission on Monday proposed a rule that would exempt such investments from antitrust filing requirements in certain circumstances.

Money managers had pushed the agency to make the change, which would make it easier for activist funds to build stakes in companies without first alerting management of their plans and waiting for antitrust approval to proceed.

The FTC voted 3-2 along party lines to advance the proposal and gather public comment before it becomes final.

Republican Commissioner Noah Phillips wrote in a statement that exempting reporting requirements for investments of 10% or less of a company would reduce regulatory burdens on investment activity that doesn’t harm competition.

Investors have to notify the target company, wait as long as a month and pay up to $280,000 in fees, according to Mr. Phillips. During the review period, the target company can publicize the investor’s plan, which can drive up the share price, and management can take defensive measures, Mr. Phillips wrote.

“All of that leads investors to hold off, to keep quiet and to hide what they are doing,” he said. “They are less likely to pressure management, or share ideas, dampening operational and financial improvement — and, ultimately, competition.”

The Managed Funds Association, which represents hedge funds, said it was pleased with the FTC’s decision to propose the change.

Filing requirements for share purchases of 10% or less “come at a big cost to underlying investors in a fund, including pensions, foundations and endowments,” the organization said. “This means lower returns for investors and significant uncertainty for investment advisers.”

Out of the 1,800 filings made between fiscal year 2001 and 2017 for share purchases of 10% or less, none were challenged by the FTC or the Justice Department, according to the FTC.”In the agencies’ experience, these filings almost never present competition concerns,” the FTC said.

Democratic Commissioners Rohit Chopra and Rebecca Kelly Slaughter dissented. Ms. Slaughter wrote that even though enforcers haven’t challenged the deals, that doesn’t mean an acquisition of 10% or lower could never be problematic.

“The agency will receive no information whatsoever from the buyer or the seller that the transaction even occurred,” Mr. Chopra said. “This adds to the burdens and information asymmetries that the agency already faces when it comes to detecting potentially harmful transactions.”

Under current rules, hedge funds that want to buy 10% or less of a company’s voting securities are exempt from filing for antitrust approval only if the purchase is made “solely for the purpose of investment” with no intention of participating in the direction of “the basic business decisions of the issuer.”

The new proposal would exempt those investments from reporting requirements as long as the investor doesn’t already own a stake in the company and the new purchase would put it over a 10% holding, and the investor doesn’t own more than 1% of the shares of a company that competes with the issuer.

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