HAL.WD Halliburton

   (FROM THE WALL STREET JOURNAL 4/5/16) 
   By David Benoit 

A U.S. government lawsuit against one of the biggest activist hedge funds could provide more clarity in a long-running debate over exactly what it means to be an activist investor.

The Justice Department on Monday accused ValueAct Capital Management LP of failing to properly disclose about $2.5 billion in purchases of shares in oil-field-services companies Baker Hughes Inc. and Halliburton Co. in late 2014. The suit seeks $19 million in damages from the hedge fund, which bought the shares after Halliburton reached a deal to buy Baker Hughes for $35 billion.

At issue is whether investors who intend to buy minority stakes in companies must seek antitrust clearance and, therefore, publicly disclose their purchases. The Justice Department said ValueAct sought to sway the management of both companies and exert influence over the merger, which should have triggered requirements to disclose the share purchases

ValueAct said the "most basic principles of shareholder rights" allow it to have a relationship with company management, conduct due diligence on investments and engage in "ordinary course communications" with other shareholders.

"We have acted entirely properly and in compliance with the law," Allison Bennington, the firm's general counsel, said in a statement.

Activists and their detractors have long argued about whether the investors, which typically seek to influence a company's decision making, should be able to acquire large stakes out of the public eye. This latest legal battle could provide more clarity about what counts as attempting to influence a company's management.

The Hart-Scott-Rodino Act, or HSR, requires acquirers of stock worth more than $76.3 million to publicly 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. Daniel Loeb's Third Point LLC initially fought a lawsuit from the Justice Department alleging that it violated the rules when it bought shares of Yahoo Inc., but the hedge fund settled last year without paying a fine.

In its lawsuit against ValueAct, filed with the U.S. District Court in San Francisco, the Justice Department accused the firm of planning to influence management of both Baker Hughes and Halliburton and the structure of their merger, citing internal emails and notes of meetings between ValueAct and executives at both companies. The activist supports the deal, which hasn't closed.

ValueAct thinks the investment was entirely passive when it was first made, according to a person familiar with the fund. It believed Halliburton and Baker Hughes would benefit from the combination, the person said.

The fund divulged its Baker Hughes stake when it crossed the ownership threshold of 5% -- the point at which Securities and Exchange Commission regulations mandate disclosure -- but it didn't disclose any specific plans to engage with the company's management.

When the merger hit antitrust trouble last year, ValueAct changed tack and decided to start seeking more influence, the person said. At that time, it amended its SEC filing and started to trim its Halliburton stake so it could put more money into Baker Hughes, the person said. Before increasing its exposure to Baker Hughes, ValueAct filed for HSR clearance, triggering a Justice Department investigation, the person added.

The fund had a 5.3% stake in Baker Hughes and about 1.9% of Halliburton as of its most recent regulatory filings, according to FactSet.

ValueAct has twice faced federal regulators over such disclosures on other stocks, and once paid the $1.1 million to settle similar claims. Both matters were self-reported by the hedge fund, ValueAct said.

In a statement Monday, Assistant Attorney General Bill Baer said: "ValueAct was not entitled to avoid HSR requirements by claiming to be a passive investor. Given the seriousness of the violation and ValueAct's prior HSR violations, we will be seeking significant civil penalties."

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Brent Kendall contributed to this article.

(END) Dow Jones Newswires

April 05, 2016 02:48 ET (06:48 GMT)

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