On September 18, 2024, the US Federal Trade Commission (FTC) announced a settlement with Ryan Cohen, managing partner of RC Ventures, LLC and Chairman and CEO of GameStop Corp., resolving allegations that Mr. Cohen violated the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act) by failing to submit a timely HSR Act filing relating to his March 2018 acquisition of shares of Wells Fargo & Company (Wells Fargo).
The Investment-Only Exemption (the Exemption) provides that share acquisitions of up to 10% are exempt so long as the investor does not have the intent to participate in the business decisions of the company. The FTC alleged that Mr. Cohen inappropriately relied on this Exemption to avoid a filing obligation, notwithstanding his outreach to the Wells Fargo board offering business advice and requesting a board seat. Pursuant to the terms of the settlement, Mr. Cohen agreed to pay a fine of $985,320. This settlement, far less than the $46 million he could have been assessed based on the daily fine calculated for the time he was allegedly in violation, reinforces that the FTC interprets the Exemption narrowly and that parties should be careful not to overstep the Exemption’s boundaries when engaging with their investments.
Key Takeaways:
- The FTC continues to interpret the Exemption strictly. Any action reflecting a party’s intent to influence corporate decision-making, such as Mr. Cohen’s emails to Wells Fargo, can overstep the Exemption’s boundaries.
- Once a party ceases to behave as a passive investor and instead becomes an active participant, such as by seeking a board seat, the Exemption will almost certainly become unavailable.
- Even though this was his first violation, this settlement reinforces the FTC’s policy to closely scrutinize and enforce HSR Act violations, despite its sometime “one free bite” practice, for open-market acquisitions.
FTC’s Allegations Focus on Mr. Cohen’s Intent Regarding Wells Fargo’s Business
Mr. Cohen first started buying Wells Fargo shares in 2016. In 2018, Mr. Cohen started emailing the Wells Fargo leadership, including its CEO. The complaint alleges that in these emails, Mr. Cohen advocated to join the Wells Fargo board and made suggestions about how to improve Wells Fargo’s business. Mr. Cohen allegedly had “periodic” communications with Wells Fargo leadership about potential business improvements and to advocate for a board seat through at least April 2020.
On March 22, 2018, Mr. Cohen bought approximately 562K shares of Wells Fargo on the open market, bringing the aggregate value of his holdings to more than $168.8 million, which was higher than the applicable HSR Act threshold in place at that time. Although Mr. Cohen held less than 10% of Well’s Fargo’s shares, the FTC alleged that his emails proved he “intended to influence Wells Fargo’s business decisions.” Abstaining from exerting such influence is requisite to obtaining the benefit of the Exemption.
The FTC further alleged that Mr. Cohen continued to make large, open-market purchases of Wells Fargo shares until September 2, 2020. On January 5, 2021, Mr. Cohen made a corrective HSR Act filing for his March 2018 acquisition of shares.
The heart of the FTC’s analysis focuses on Mr. Cohen’s alleged inappropriate reliance on the Investment-Only Exemption, which provides that an otherwise reportable share acquisition is exempt from an HSR Act filing when it is made “solely for the purpose of investment” and so long as the buyer holds less than 10% of the outstanding shares of the company. Shares are acquired “solely for the purpose of investment” if the buyer has no “intention of participating in the formulation, determination, or direction of the basic business decisions” of the company. When a party holds shares passively and then shifts to active engagement, an HSR Act filing could be required the next time a party buys even a single share in the company if that share crosses a reportability threshold.
The FTC asserts that Mr. Cohen’s February 2018 outreach to Wells Fargo leadership, including its CEO, indicated his “intention of participating in the formulation, determination, or direction of the basic business decisions” such that the Exemption was no longer available. This meant that his March 2018 acquisition was reportable under the HSR Act, and Mr. Cohen should have submitted an HSR Act filing at that time and abided by the required waiting period prior to acquiring the shares.
Intent Leads to Fine for a First-Time Violation
The complaint alleges that Mr. Cohen’s open-market transactions required him to “affirmatively and actively” purchase shares. Because of the “scope” of these acquisitions, the FTC alleged that “it was not excusable negligence for him to be unaware of the HSR Act legal requirements." Effectively, the FTC alleged that the size, number, and method of acquisitions made it untenable for Mr. Cohen to argue that he could not have known that the HSR Act applied to him.
Historically, the FTC has allowed parties “one free bite” at the apple and only brought enforcement actions for a party’s second HSR Act offense. When a party makes large intentional stock purchases, however, the FTC often takes a stricter approach and will enforce a first-time violation. In 2022, the FTC fined Clarence L. Werner, founder and director of Werner Enterprises, nearly $500,000 on a first-time offense for violating the HSR Act relating to acquisitions of shares of his own company, including several large, open-market purchases. Holly Vedova, then Director of the FTC’s Bureau of Competition, described Mr. Werner as an “active participant in these transactions” who “should have realized that he might have regulatory obligations and sought legal advice.” Similarly, the FTC alleges that, by making open-market purchases, Mr. Cohen had to “actively decide to acquire” Wells Fargo shares. And Mr. Cohen did this repeatedly between March 2018 and September 2020. Like Mr. Werner, the FTC believes that Mr. Cohen simply should have known better.
Conclusion
This settlement serves as a reminder to shareholders to tread carefully when engaging with their investments. Any outreach that could be seen as outside the bounds of the strictly interpreted Investment-Only Exemption could make it inapplicable and should be discussed with qualified HSR counsel. Parties engaging in open-market acquisitions should be particularly mindful of their affirmative obligations to comply with the HSR Act. Thinking carefully about HSR can help ensure that the game is not over before it begins.
