Let's talk about two tenuously related stories about government filings, why not. I don't have much to say about this Mitt Romney Bain thing today but go read it, it is fascinating. Basically Mitt Romney certified under penalty of perjury in some federal electoral forms* that he was not involved with Bain Capital after 1999, and he also certified under penalty of perjury in some SEC forms that he was CEO of Bain Capital from 1999 to 2002, so by the fallacy of the excluded middle (?) he is definitely guilty of a federal felony,** which sounds terrible until you realize that so is everyone else, really, because breathing air is a federal felony, but this is a different obsession of mine.
Anyway Dan Primack is defending Romney and basically saying "being the CEO of some old fund for SEC filing purposes is not the same thing as actually running a private equity firm, and you can tell from the fund marketing documents that he wasn't actually running it," which I suspect is roughly correct as a matter of his working life, and as a matter of acquitting him of felonies, though also not entirely politically palatable - "when I said I wasn't involved with Bain Capital after 1999, I meant except for being CEO," etc. etc.
Moving on quickly to the other piece of federal filing arcana: Bill Ackman is buying some P&G stock so he can sell shampoo at Burger King or something. Buy! Or sell! Or something. But the weird thing to me was: how often do you see a story that is like "activist investor is granted early termination on HSR filing"? Is "never" the right answer? Maybe?
Mr. Ackman's move became known via the Federal Trade Commission, which gave Mr. Ackman's hedge fund antitrust clearance to proceed with the investment. Moves by activists are usually made known by filings to the Securities and Exchange Commission. Buying enough stock to require a quick SEC filing—5%—would cost about $8.8 billion.
Right? The ur-form of this story is "Ackman files Schedule 13D with the SEC disclosing a 6% stake in P&G," or whatever, and you don't have that here. The Journal says "It's unclear how much P&G stock Mr. Ackman's hedge fund, Pershing Square Capital Management LP, has bought or whether the stake is large enough to persuade other shareholders his efforts are credible. People familiar with the matter said the stake was 'large,'" and I guess we should believe them since they're familiar with the matter, but the stake could be "zero" for all we know from the antitrust filing - the filing just lets him buy more than $68.2mm of P&G stock.
This led me down a stupid rabbithole. You can actually go to the FTC's web site and read the early termination of HSR review that Ackman got; it is pretty short and dull so good eye whatever trader and/or journalist spotted it. But there's a search box so, also, go search. Search for other recent activist situations and you will find ... well, I definitely didn't find any early termination for Dan Loeb's investment in Yahoo; I found one for Carl Icahn's investment in Forest Labs but it's from a week after he announced that investment in an SEC filing. The FTC announces all early terminations of antitrust reviews on its website; if you file for review and don't request early termination, on the other hand, then the review expires after 30 days and is not publicly announced. (The company, though, finds out when you file.)
So there is let's say no uniformity of activist hedge funds getting announced publicized clearance before buying their stakes. Which, if you were just a regular human, you might say: "well but why does Bill Ackman need antitrust approval to buy stock in P&G? Is he building some sort of horrible shampoo-burger monopoly?" And the answer is: it does seem weird doesn't it? Here are some lawyers who will tell you:
Normally, a fund holding 10 percent or less of the outstanding voting securities with passive intent can take advantage of of an "investment exemption" to the filing and clearance requirement. However, where a fund is acting with other than a passive intent, as would likely be the case if the fund intends to seek to effect change in the policies of the target company, it is likely such exemption will not be available. This requires a filing with the U.S. regulatory authorities and formal notification to the target company, which means that the target company will become aware of the fund's ownership position at the $56.7 million level and the fund will have to clear the HSR waiting period (typically up to 30 days after filing with the regulatory authorities) before the fund can purchase shares which would result in ownership exceeding the $56.7 million threshold.
Here is another lawyer who will tell you that that is kind of bullshit: these are antitrust filings, and "it is unlikely that speech by a hedge fund or other investor will result in anticompetitive effects." Dan Loeb's investment in Yahoo did not give Yahoo a monopoly on educational fraud.***
If you're an activist hedge fund, then, your choices are basically:
(1) Don't file for HSR, claim you're just buying for investment purposes, and then if you happen to find out that the CEO has a fake degree, how can you not bring it to the board's attention? This is maybe a little risky if the FTC determines that you actually had an activist intent, but avoids the whole mess of pissing off the company before you've bought your stock.
(2) File for HSR, request early termination, and announce to the world (and to P&G) that you're planning to buy stock before you do - at some cost to yourself (PG is up 3.75% today).
(3) File for HSR, not request early termination, and announce only to the company and not the world that you're planning to buy stock - at the cost of waiting 30 days before you buy.****
These are sort of lame choices aren't they? Much like the securities laws, the antitrust laws in theory protect consumers but in practice are often used to protect companies from investors whose views they don't want to hear. P&G and Ackman so far seem cordial, but I'm sure P&G appreciated the early warning from the FTC that an activist investor was snooping around their stock. I also suspect Ackman didn't appreciate having to show his hand early. What's less clear is why consumers of shampoos or burgers, or an antitrust regulator charged with protecting them, would care one way or the other.
Mitt Romney stayed at Bain 3 years longer than he stated [Boston Globe]
Docs prove Romney didn't manage Bain funds [Term Sheet]
Ackman Sizes Up Procter & Gamble [WSJ]
* Also commercials but those are not subject to perjury.
** Thank God for the statute of limitations, Romney maybe said. ALSO: half of people talking about this are like "if he lied on his election financial disclosure forms, he committed a felony," and the other half are like "if he lied on his SEC forms, he committed a felony," but: OBVS BOTH.
*** Or Internet search HAHAHAHAHAHAHAHAHA.
**** Of course this oversimplifies: you can just buy synthetically using swaps or deep-in-the-money options, file for HSR, wait thirty days, and when the waiting period expires poof your swaps or options into actual shares. This is a good approach and probably the real reason you rarely see these early terminations: if you buy synthetically, you don't need the public disclosure of an early termination unless you're in a hurry to get shares. Because, for instance, there's a vote or a dividend coming up.