The due date for filing for the beneficial ownership statement depends on the category of the initial Schedule 13G filer: Passive Investor 13d-1 c Within 10 days of the acquisition of more than 5 percent but less than 20 percent.
Qualified Institutional Investor 13d-1 b Within 45 days of the end of the calendar year in which the beneficial owner acquired more than 5 percent and within 10 days of the end of the calendar month in which the beneficial owner acquired more than 10 percent. Exempt Investor 13d-1 d Within 45 days of the end of the calendar year in which the beneficial owner acquired more than 5 percent. Attention to detail is just the beginning. Trusted by Professionals. Real Service from Real People.
Questions about an upcoming or outstanding job request? Contact Us. Tell Us Your Story. These were considered to be the beneficial switches. Excluding investors who filed less than five filings in the time period, See supra note discussing rationale for excluding these investors. These are the switches that may be most suspect because, had an activist intention been announced earlier, the cost of acquisition of the additional ownership interest could have come at a steeper price.
A detailed example of such a beneficial switch may be enlightening: One investor filed its initial 13G at a point where it owned 9. In another example, an investor filed its initial 13G and announced it owned 7.
Had a 13D filing been utilized instead of the 13G filing, it is conceivable that stock prices would have risen and made the investment less attractive to the investor utilizing this tactic. Although this data alone cannot say whether these switches are improper, the analysis provides a natural starting point for regulatory scrutiny of possible misuse of the 13G filing. Timing to Switch. Close — Investors varied greatly as to the time delay between their initial 13G filing and the later switch to a 13D.
Of the 1, switches, occurred within thirty days and occurred within days. On the other end of the spectrum, switches occurred after more than two years, with forty-five of those switches occurring after more than five years.
The average number of days for a switch was , with the median number of days being The timing of a switch may contain some informational value as to the propensity for misuse, as it can be expected that switches occurring in a shorter time frame will be more suspect than switches occurring after a longer time.
Since acquiring shares can be done in a relatively short amount of time, investors who switch to an active position after a very large amount of time for instance a year or more are unlikely to have initially entered into the position with a secret intention. There were two investors who switched three separate times each within thirty days of their initial 13G filing—meaning that in three of their investments, they had filed a passive 13G and subsequently switched to an activist 13D within a month.
Nine investors had three or more switches occurring within days of an initial 13G filing, with one of those investors having six switches in this category. Close the suggestions here range from those where little additional resources are required to those necessitating much more significant changes. Regardless of whether and how extensively the SEC chooses to increase their supervisory presence, the 13G and 13D reporting rules are ripe for change.
Close The possibility of 13G misuse is closely interrelated to some of these hotly contested issues, If the SEC chooses to reduce the 13D ten-day reporting window, investors may turn to the 13G filing in an attempt to minimize market scrutiny while still increasing ownership interests.
Although a 13G filing would not be as advantageous for avoiding market reaction as the current nine extra days without any filing whatsoever, it may be an enticing alternative. It would therefore be highly beneficial from a regulatory standpoint to adopt additional protections against 13G filing misuse such as those advanced here at the same time as reducing the reporting window. This Part proposes two possible avenues of policy changes for consideration.
The second avenue consists of structural changes to the current filings and is discussed in section IV. As highlighted from the data above, there are trends in the data that suggest that misuse of the 13G filing option may be occurring.
Close Several of the same investors appear on the summary tables across multiple measures of suspect switches. These would make for a logical starting point to any regulatory review.
In their efforts to increase their supervisory presence in this area, the SEC should take guidance from the actions taken by the DOJ and FTC to prevent abuse of the passive investor exemption in the antitrust merger context. Close Therefore, improperly claiming a passive position may result in very significant penalties if the stock is held for a long period, Pfunder, supra note , at 77 n.
Close providing a strong disincentive for would-be abusers. The SEC is similarly authorized to impose civil penalties under the Act. Close Should the SEC choose to devote the resources needed to bring a federal enforcement action on the basis of 13G misuse, imposing substantial penalties could send a strong deterrence signal to future filers and would help cover the costs of such actions.
See Peter K. Chan et al. SEC Div. Therefore, to help in the review process, any 13D filing resulting from a switch should require a detailed statement from the investor explaining the circumstances of the switch. The agencies have brought a number of civil penalty cases against acquirers who claimed passive investor status but went on to exceed the set thresholds under the exemption, a clear violation. For instance, in , the DOJ pursued a civil penalty case challenging the asserted passivity of defendant Smithfield Foods.
Smithfield Foods, Inc. Smithfield was also considering and taking steps toward a Smithfield—IBP combination. It is worth noting that these assertions challenge not only the objective steps taken by Smithfield but their subjective state of mind as well. Close and successfully challenged the initial filing for lack of personal jurisdiction, United States v.
District and transferring case to Eastern District of Virginia. Close Smithfield eventually settled the case for two million dollars. Close The DOJ brought a similar suit around the same time against Manulife Financial Corporation for its failure to file after acquiring an interest in competitor John Hancock. Manulife Fin. May 3, , WL Close Manulife similarly settled, this time for one million dollars.
May 27, The mere fact that antitrust regulators have shown a willingness to pursue legal action against abusers of the antitrust passive investor exemption creates a disincentive in the minds of prospective filers. A similar action by the SEC could help send a message to the markets that the SEC takes misuse of 13G filings seriously and may prompt investors to think twice when choosing between a 13G and a 13D.
Berkenblit, Kate L. An enforcement action based on intentional misuse, instead of mere inadvertence, would likely have an even greater response from the legal community and therefore a larger deterrence impact on prospective filers.
Close These structural changes would seek to have supposedly passive investors more fully explain their subjective intent behind the filings, thus allowing regulators to easily follow up on suspect switches.
Close This can be accomplished by including additional free text fields on the 13G filing form, similar to how the current 13D form allows for additional exhibits and descriptions to be added to the filing. Close This will better identify the relationship between the investor and issuer and will help raise red flags to possible activist actions. Close Furthermore, requiring too much information could reduce the incentive to use the 13G filing option, See supra notes 52—54 and accompanying text discussing chief benefits of 13G filing over 13D filing.
Close which would harm the legitimate public policy purposes for the short-form filing. Considering this criticism, the increased disclosure requirements should only be imposed on the investors filing under the Rule 13d-1 c passive investor exception, as they have a greater potential to misuse the 13G filing.
Close Those institutional and other exempt investors utilizing the 13G filing under Rule 13d-1 b or d would not be required to report these additional details, consistent with the current framework. Close This could in effect create a new medium-intensity filing for self-professed passive investors, falling somewhere between the long-form 13D and the short-form 13G. See supra Table 1 delineating between Schedule 13Gs filed by passive investors under Rule 13d-1 c and those filed by institutional and other exempt investors under Rule 13d-1 b , d.
Finally, the SEC might consider adjusting the 13D schedule as well. The 13D form already includes a check box for the filer to note if he previously utilized a 13G filing to report the stock position. Close Checking this box could trigger an additional set of questions to be answered, based on the sorts of inquiries discussed under the antitrust framework by which regulators can decipher whether a switch was proper.
Close This increased disclosure could act as a deterrent on those investors who consistently use the switch tactic, See supra section III. Furthermore, this would better aid regulators in investigating suspect switches, as well as provide sources of possible misleading or untrue statements as part of a 10b-5 securities fraud claim. The possible misuse of 13G filings by truly active investors has been a seemingly accepted but unaddressed facet of securities markets.
This Note has introduced a theory of why such misuse may be occurring and analyzed empirical trends in the data that support that theory. Should policymakers agree that this data shows suspicious behavior and therefore additional inquiries are warranted, this Note has also proposed enhancements to the current regulatory regime.
These supervisory and structural changes seek to assist the SEC in identifying suspect behavior, in the hope that these enhancements will better assure the market that those transactions which might lead to a change in control are being properly reported.
However they choose to respond, policymakers should be cognizant of the need to add deterrence incentives into a space of unlawful activity that has up until now been too much ignored.
Introduction Out of the merger between retail giants Sears and Kmart, a battle emerged over two little letters: D and G. Close From the initial Schedule 13G filing on July 1, , until the day the merger was finalized and announced on November 16, , 7 7 ESL eventually filed a Schedule 13D indicating an activist intent on the day the merger was announced.
Close Of relevance here is section 13 d , which governs disclosures of beneficial ownership interests in excess of five percent of certain classes of equity securities. Close Disclosure requirements in section 13 d —and throughout the Williams Act—were intended to provide shareholders with adequate information to decide whether to accept a tender offer.
Close The SEC, in amendments adopted in , significantly expanded the short-form 13G filing option by including a new category of allowed investors: self-proclaimed passive investors. Close Rule 13d-1 c now allowed a person that would otherwise be required to file a long-form Schedule 13D to elect to make a short-form filing on Schedule 13G, provided that person: 1 Has not acquired the securities with any purpose, or with the effect, of changing or influencing the control of the issuer, or in connection with or as a participant in any transaction having that purpose or effect.
Close C. Benefits to Investors from Choosing to Misuse 1. Close On the other hand, an activist who properly files a detailed Schedule 13D after forming an activist intent can face increased economic costs.
The schedule is often filed in connection with a tender offer. Test your knowledge on common investing terms and strategies and current investing topics. Learn about investing risks in certain companies that provide exposure to China-based businesses.
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