Shareholder engagement has become a more fraught topic following Corp Fin’s issuance earlier this year of updated CDIs suggesting that engagement on certain governance topics could jeopardize a major investor’s ability to report its holdings on the short-form Schedule 13G.  Since that’s the case, it will undoubtedly come as welcome news to investors that a recent FTC/DOJ Statement of Interest indicates that corporate governance engagements generally won’t give rise to concerns under the federal antitrust laws. This excerpt from Fried Frank’s memo on the statement explains:

The recent FTC/DOJ Statement of Interest in connection with the State of Texas’ antitrust lawsuit against institutional investors BlackRock, State Street and Vanguard provides valuable insights into the agencies’ interpretation of the antitrust “solely for investment” exemption. Notably, the agencies make clear that investors’ engagement with issuers to influence corporate governance structures and processes is consistent with passive investment under the antitrust laws.

While there has always been an understanding in the investor community that engagement with issuers on certain corporate governance matters would not preclude an investor from relying on the Hart-Scott-Rodino (“HSR”) Act’s “solely for investment” exemption, this is the first time that the antitrust agencies have explicitly confirmed that position to the market. The FTC and DOJ statements provide important clarity on how investors can engage with issuers without losing the ability to rely on the HSR exemption for passive investments.

The memo notes that, with this statement, the antitrust agencies have for the first time issued clear guidance that engagement with and attempts to influence issuers concerning certain corporate governance matters, including board size, compensation policies, and public reporting practices, are consistent with consistent with passive investment.

– John Jenkins