The recent United States v. Manulife Financial Corporation case is an important reminder of the traps for the unwary under the "investment only" exemption under the Hart-Scott-Rodino Antitrust Improvements Act (HSR Act). The case, which was recently settled by Manulife, shows how narrowly the antitrust enforcement agencies (the Federal Trade Commission and the U.S. Department of Justice) construe this exemption. Understanding the scope of the exemption is important as M&A activity continues to increase.

HSR Basics

Unless an exemption is available, the HSR Act requires persons with sales or assets in excess of $100 million that acquire assets or voting securities of a company worth more than $50 million to report the transaction to the antitrust agencies at least 30 days before the acquisition and pay a filing fee that can run from $45,000 to $280,000. The $50 million threshold can be met by a single purchase, or a series of smaller purchases that, in the aggregate, represent holdings of more than $50 million.

"Investment Only" Exemption

The HSR Act contains exemptions from reporting, including one for purchases of no more than 10% of the voting securities of a company, provided the purchase is "solely for the purpose of investment." Deciding investment intent is fact-specific. The Government contends this exemption is designed for purely passive investments and is available only when, in the Government's words, the investor or purchaser has "no plan of participating in the formulation, determination, or direction of the basic business decisions of the issuer." A "pure" (and thus HSR-exempt) investment is one in which the investor simply votes its shares with other shareholders. Having the right to nominate directors of the target, taking part in the target's management decisions or purchasing shares of a direct competitor all weigh against a "pure" investment finding.

Manulife Case

In spring 2003, Manulife—a large Canadian insurance firm—made a series of open-market purchases of John Hancock Financial Services common stock. Taken together, Manulife's purchases exceeded the HSR Act's $50 million notification threshold, although they aggregated far less than 10% of the voting securities. Manulife did not report these purchases under the HSR Act and claimed that the purchases were made solely for investment purposes. The Government disagreed, citing several factors, including:

• Manulife and John Hancock were competitors that had discussed the possibility of a business combination in November 2002;

• Manulife's CEO contacted John Hancock's CEO about a possible business combination in April 2003;
• The CEOs of the two companies held more formal discussions about a potential business combination starting in July 2003;
• The companies signed a merger agreement in September 2003; and
• John Hancock's CEO told investors that the merger agreement "was not a sudden engagement."

Manulife agreed to settle the Justice Department's Complaint by paying a $1 million penalty.

Lesson From the Manulife Case

The Manulife case is an important reminder of the critical eye with which the Government will review reliance on the "investment only" exemption of the HSR Act, especially in the context of investments in potential merger candidates. Under Manulife, purchases of stock of an entity with which a company is exploring a merger or other business combination may not qualify as an acquisition "solely for investment" even if, during the period following the purchases, the acquirer does not (a) have a board seat, (b) take part in management decisions, or (c) otherwise try to influence the target's operations. For these reasons and to avoid liability, before undertaking large open-market stock purchases or making other significant investments in an entity that may be an acquisition candidate, acquirers should explore with counsel the possibility that the transaction will require HSR filings and the effect of the additional costs and delays that may be associated with those filings.

Additional Information

This Update is intended only as a summary of the decision in United States v. Manulife Financial Corporation. You can find the full text of the case at http://www.usdoj.gov/atr/cases/manulife.htm. You can find discussion of other recent cases and other topics of interest on our website.