Public companies are, in one popular view, owned by their shareholders. A company’s managers have a duty to act in the shareholders’ interests. The managers answer to the directors, who are elected by the shareholders. The shareholder democracy isn’t perfect, the duties to shareholders aren’t absolute, the concept of ownership is inexact, and some companies play by different rules, but this is more or less a reasonable model for how companies work.
Since the shareholders are the owners, and since the managers’ job is to make them happy, it makes sense that the managers might meet with shareholders every now and then to keep the shareholders up to date, see how they’re feeling, listen to their opinions, ask if there’s anything that the managers could be doing better, whatever. Of course, you can do this in big formal annual shareholder meetings, but that is sort of a stilted environment, and there are lots of small shareholders with idiosyncratic concerns who tend to dominate those meetings. If a big shareholder wants to talk about the business privately, well, the shareholders are the managers’ bosses, and it is only polite to meet with your bosses from time to time to see what’s on their minds.
So these meetings happen. But they’re kind of a mess.
One reason that they’re a mess is that it is very awkward for management to tell shareholders things. We talk about this concern from time to time; we talked about it just yesterday in the context of Tesla’s proposed merger with SolarCity, an idea that Tesla boss Elon Musk had previously “bandied about” with big shareholders. The general idea is that regulators don’t like it when managers give one shareholder any “material” information that they haven’t given to all the other shareholders. So the chief executive officer of Company A isn’t supposed to call up big Shareholder B and say, “Oh hey, by the way we’re going to acquire Company C.” Because then Shareholder B might trade on that tip, which would be unfair to the other shareholders.1
That sounds straightforward, but the harder issue is whether the CEO can call up Shareholder B and say “Hey, you’re a smart guy with a lot of shares — we’re thinking about buying Company B: Do you think that’s a good idea, or what?” That question conveys information to the shareholder, which is awkward. But it is also a real question. The managers should care what the shareholders think. There are formal ways to ask what they think, but those formal ways are kind of bad. Like, the managers could negotiate a merger agreement, announce the merger, and then hold a shareholder vote. But once you’ve done that, you are pretty committed; having a merger voted down is awkward and expensive and messy. Asking a few big shareholders informally first can save a lot of heartache. But it is arguably a bit rough on all the shareholders you didn’t ask, who didn’t know about the merger in advance.
There are some rules, or at least rules of thumb, about how to handle these issues, but they remain vexing.2
But the U.S. Department of Justice has another objection to meetings between managers and shareholders, one that is even stranger, and that has nothing to do with what managers might tell the shareholders. It has to do with what the shareholders might tell the managers, and it’s an antitrust objection.
Sort of. There is a rule of antitrust law, the Hart-Scott Rodino Antitrust Improvements Act of 1976, that says that you have to notify the government and wait 30 days, give or take, before you acquire a company. The idea is that if one company in an industry wants to acquire another company in that industry, the government gets a month to examine the deal and decide if it’s bad for competition. If it is, the government can block the deal before it happens, instead of having to come in afterwards and try to unscramble a merger that has already happened. And since there are lots of ways to acquire influence over a company, the rule doesn’t apply just to mergers: Any time you buy more than about $78 million worth of stock in any company, you have to file and get government approval.3
But that is sort of silly and overbroad: The point of this rule is to prevent one competitor from buying a big chunk of another competitor and using its influence for anticompetitive purposes. The point isn’t to prevent, like, a Vanguard Group index fund from buying a lot of stock in a company just because it happens to be in an index. (Though, as we often discuss, there are those who think that Vanguard does use its influence for anticompetitive purposes, and should be prevented from buying stock in companies in the index!) So there is an exemption from HSR for investors who buy less than 10 percent of the stock “solely for the purpose of investment,” which is meant to capture normal market shareholding, as opposed to the sort of strategic acquisition that could be bad for competition.
But that exemption, too, is uncertain and contested because it is hard to know what sorts of activities are consistent with normal shareholding “solely for the purpose of investment,” and what sorts of activities raise antitrust concerns. Obviously, if one public company acquires shares in a competitor and then calls it up to demand price changes, that would be bad. Not quite as obviously, if an investor buys shares and then runs a proxy fight to replace the company’s board of directors, that also doesn’t qualify as “solely for the purpose of investment.” Just investing in a company is one thing; trying to take over its management is another.
But what about talking to the company? Meeting with managers, asking about their plans, suggesting some ideas of your own? On the one hand, I mean, sure, you could spend your time in those meetings suggesting anticompetitive things: big mergers, price increases, whatever. On the other hand, it seems weird to conclude that meeting with management isn’t a normal part of investing, that owning shares “solely for the purpose of investment” precludes a sharing of ideas. The investors, again, are the owners; why shouldn’t they talk to their agents about how the business is doing?
Anyway yesterday the Justice Department reached an $11 million settlement with ValueAct, an activist fund that bought stock in Halliburton and Baker Hughes after they announced their plans to merge, without (initially4 ) making an HSR filing, and then talked to both companies’ managements about the merger and their businesses generally:
“ValueAct acquired substantial stakes in Halliburton and Baker Hughes in the midst of our antitrust review of the companies’ proposed merger, and used its position to try to influence the outcome of that process and certain other business decisions,” said Principal Deputy Assistant Attorney General Renata Hesse, head of the Justice Department’s Antitrust Division. “ValueAct was not entitled to avoid the HSR requirements by claiming to be a passive investor, while at the same time injecting itself in this manner. The HSR notification requirements are the backbone of the government’s merger review process, and crucial to our ability to prevent anticompetitive mergers and acquisitions.”