The FTC Changes its Position on Put/Call Combos
The FTC has recently reversed its position of requiring HSR filings for put/call combos. For starters, financial derivatives such as puts and calls are not considered “voting securities,” and thus don’t come under the HSR act. (Note that the exercise of the options may require a filing, because that’s when the acquiring person actually starts holding the underlying voting securities.) Combining a put and a call, however, has been treated as requiring notification, presumably because in that case, the acquiring person holds the economic equivalent of ownership minus the voting rights. That, according to the FTC’s prior position, was sufficient to confer beneficial ownership of the underlying shares to the acquiring person. The FTC has backed off from this unconvincing position. As Bruce Prager and I explained in an recent article in The Deal ($):
[I]n a recent staff interpretation, the FTC reversed its position on [the put/call] issue. Based on the new interpretation, put-call combos no longer require HSR notification. Acquiring the economic equivalent of share ownership (minus the voting rights) … should therefore be permissible in most circumstances. For hedge funds, this is big news. The FTC’s change of heart now permits swift and nonpublic put-call trades in and out of significant positions without having to involve the antitrust regulators. The change might also give hedge funds greater leeway in approaching a target company’s management with suggestions on how to improve stock performance. The narrowly construed “only for investment purposes” exemption is needed to avoid a filing requirement only if the fund will hold actual voting securities. But as long as the fund only has put-call option contracts with a third party at the time that it approaches the board of the (future) target company, no HSR limitations on shareholder activism apply. Only when the fund intends to exercise its option must it comply with the HSR filing requirements before acquiring the underlying voting securities.
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