Institutional investors need to keep in mind that open market acquisitions of corporate stock may require a HSR filing, even if an acquisition only amounts to a minority interest in a company. This lesson is one that a New York-based investment firm recently learned to its dismay.

On August 24, 2015, the Federal Trade Commission announced the filing of an enforcement action against Third Point LLC and three of its managed funds for failing to file premerger notification forms required by the Hart-Scott-Rodino Act. Third Point had made multiple open-market acquisitions of Yahoo! Inc. stock on behalf of its funds, which resulted in each of the funds holding voting securities valued in excess of $66 million (which was the applicable HSR filing threshold at the time).

To settle the case, Third Point has agreed to a consent decree that includes an injunction prohibiting acquisitions of stock under certain conditions without making an HSR filing.

Third Point took the position that its acquisitions were covered by the provisions of the HSR Act exempting certain acquisitions of voting securities if made “solely for the purpose of investment.” The FTC Rules interpreting the Act state that acquisitions of less than 10% of the outstanding stock are exempt from filing but only if the investor has “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.”

While many investors seem to be aware of the 10% rule, many forget the second prong of the test: it is an intent-based rule, not a bright-line test. In promulgating the 10% rule, the FTC emphasized that certain conduct is inconsistent with an acquisition being made “solely for the purpose of investment.” For example, the following conduct evidences an intention to participate in management, rather than to act merely as a passive investor:

• nominating a candidate for the board of directors,

• holding a board seat or being an officer,

• proposing corporate action that requires shareholding approval,

• soliciting proxies, or

• being a competitor of the issuer.

Of course, the exemption does not apply at all if the acquirer will hold over 10% of the issuer’s voting securities, regardless of any intention to participate in management.

While acquiring Yahoo shares, Third Point engaged in conduct that was inconsistent with an “investment only” purpose in Yahoo, including stating publicly that it was prepared to propose a slate of directors at Yahoo’s next annual meeting and assembling an alternate slate for the Yahoo Board.

The HSR Act provides for civil penalties of up to $16,000 for each day an acquirer is in violation of the Act. In this case, however, the FTC decided to seek only injunctive relief against Third Point. The Commission noted that Third Point promptly filed the required HSR forms when the matter was brought to their attention and that this was Third Point’s first violation of the HSR Act, which can be a factor in determining the appropriate consequences when parties mistakenly rely on an HSR exemption.

The Third Point complaint and settlement is an important reminder for investors as well as CEOs and board members about the HSR implications of conduct that is inconsistent with an intent to be a “passive” investor. As the FTC has warned in its statement on the Third Point case, “[C]lear evidence of a non-passive intent, even if not accompanied by conduct, can make the investment exemption unavailable.”

While activist investor conduct can be beneficial for shareholders, competition, and consumers, the investment-only exemption is set forth in the statute enacted by Congress and must be carefully adhered to.