On October 10, 2023, the U.S. Securities and Exchange Commission adopted new rules (the Amendments) that amend Regulation 13D-G under the Securities Exchange Act of 1934 (the Exchange Act), which provide companies, and the markets more broadly, with visibility into the ownership of public company shares. The Amendments are discussed in the SEC’s Adopting Release. The SEC initially proposed the Amendments in February 2022, as we discussed in our prior alert (which more fully describes Schedules 13D and 13G and the related filing obligations).
Most significantly, the Amendments shorten the time periods within which Schedules 13D and 13G, including amendments thereto, are required to be filed. They also expand the time frame on a given day within which filings must be made, remove any implication that a person is not required to disclose interests in all derivative securities that use a covered class as a reference security, and address the deemed acquisition by a group when any member acquires additional securities. Further, the Amendments require that Schedules 13D and 13G be filed using a structured, machine-readable data language. The Adopting Release also provides guidance on the applicability of Rule 13d-3 of the Exchange Act to cash settled derivative securities (other than security-based swaps) and the circumstances under which investors may, or may not, constitute a “group” for the purposes of the filing requirements.
The Amendments are intended to provide all market participants with enhanced transparency, and will provide public companies with greater visibility regarding significant shareholders and their activities, allowing for more prompt identification of potential activists and their share acquisitions than under the current reporting requirements of Regulation 13D-G.
Changes to Filing Deadlines
The Adopting Release contains a chart that succinctly sets forth the new filing dates under the Amendments and current filing dates. This chart is included in Appendix A, with capitalized terms defined in the Adopting Release.
The most notable changes resulting from the Amendments are to shorten the periods within which Schedules 13D and 13G, and amendments thereto, are required to be filed. In particular, the Amendments shorten the deadline for filing an initial Schedules 13D from 10 calendar days to five business days following the acquisition of more than 5% of a covered class of securities. Other deadline changes included in the Amendments are:
- A Qualified Institutional Investor (QII) or Passive Investor that has filed a Schedules 13G and thereafter develops an intent to acquire or hold the securities for the purpose or effect of changing or influencing the control of a company or acquires more than 20% of a covered class of securities of a company will be required to file a Schedules 13D within five business days of developing such intent or acquiring such additional securities, as the case may be. The current rule requires filing the Schedules 13D within 10 calendar days.
- If any “material change” occurs in an investor’s holdings or status from that reported in its Schedules 13D, such investor is required to file an amended Schedules 13D within two business days. The current rule requires such amendment to be filed “promptly.”
- A QII or Exempt Investor will be required to file an initial Schedules 13G within 45 calendar days after the last day of the calendar quarter in which beneficial ownership first exceeds 5%. The current rule requires QIIs and Exempt Investors to file Schedules 13G within 45 calendar days of the end of the year in which their ownership exceeds 5% of a covered class. A consequence of this change is that holders who acquired a greater than 5% stake in the company prior to its IPO will now be required to file the Schedule 13G within 45 days of the end of the calendar quarter in which the IPO is completed, rather than 45 days of the end of that year.
- A Passive Investor will be required to file an initial Schedules 13G within five business days of acquiring beneficial ownership of more than 5% of a covered class. The current rule requires Passive Investors to file their Schedules 13G within 10 calendar days of exceeding the threshold.
- An investor will be required to file an amendment to its Schedules 13G within 45 calendar days after the end of the calendar quarter in which a reportable change occurs. The current rule requires such filing within 45 calendar days of the end of the year in which any such change occurs. In addition, the Amendments require an amendment only for a “material change” from the information presented in the previous filing, while the current rule requires the reporting of “any changes.” While the SEC declined to expressly quantify in the Amendments what percentage change in ownership would constitute a “material change,” it indicated that a change in beneficial ownership of 1% or more would be considered material.
- A QII will be required to amend its Schedules 13G five business days after the end of the month in which its beneficial ownership first exceeds 10% and thereafter within five business days of the end of a month in which a more than 5% increase or decrease in beneficial ownership occurs. The current rules require such filing within 10 calendar days of the end of the month in which any such thresholds are exceeded.
- A Passive Investor will be required to amend its Schedules 13G within two business days of exceeding 10% beneficial ownership or an increase or decrease of more than 5% of the covered class. The current rules require such filing “promptly” after exceeding such 10% ownership or increasing or decreasing beneficial ownership by more than 5%.
Under amended Rule 13(a) of Regulation S-T, Schedules 13D and 13G, and any amendments thereto, that are submitted by direct transmission on or before 10 p.m. eastern time on a given business day will be deemed to have been filed on the same business day. Under the current rules, a filing must be submitted by 5:30 p.m. eastern time to be deemed filed on that day. In addition, the Amendments require all disclosures on Schedules 13D and 13G, including quantitative disclosures, textual narratives and identification checkboxes, be filed using a structured, machine-readable data language. Specifically, the Amendments require all Schedules 13D and 13G be filed using an XML-based language. Only the exhibits to Schedules 13D and 13G can remain unstructured.
Rule 13d-3 defines beneficial ownership for the purposes of applying the various provisions of Regulation 13D-G. Rule 13d-3 does not currently directly address the beneficial ownership implications of cash-settled derivative securities. In lieu of adopting a new subsection to Rule 13d-3, as originally proposed, which would have treated an investor in a cash-settled derivative security (excluding securities-based swaps) as the beneficial owner of the derivative’s reference securities, the SEC amended Item 6 of Schedules 13D to remove any implication that a person is not required to disclose interests in derivative securities that use a covered class as a reference security. The SEC also provides guidance in the Adopting Release regarding how such holders may be subject to current Rule 13d-3.
Rule 13d-5 addresses when persons acting in concert may be regarded as a “group” whose activities must be aggregated for the purposes of Regulation 13D-G. The SEC decided against amending Rule 13d-5, as originally proposed, and instead offers guidance on how Sections 13(d)(3) and 13(g)(3) of the Exchange Act would apply to certain shareholder engagement activities. The Amendments also amend Rule 13d-5 to specify attribution of additional securities purchased by members of a group to the group, carve out intra-group transfers of securities and provide for other technical changes. Similarly, the SEC decided against amending Rule 13d-6, as proposed, to set forth the circumstances under which two or more persons could become subject to regulation as a group, including with respect to ownership of derivative securities.
For the most part, the SEC’s guidance identifies actions that would not result in the formation of a group and, unhelpfully, provides very limited guidance of activities that would result in the formation of a group. Please see Appendix B for the Q&As provided in the adopting release.
Compliance and Timing
The Amendments become effective 90 days after the date of publication in the Federal Register. However, beneficial owners may continue to comply with current reporting deadlines for Schedules 13G through September 29, 2024. Compliance with the structured data requirement for Schedules 13D and 13G will not be required until December 18, 2024.
The visibility intended by the Amendments may lead to opportunities for companies to engage sooner with key shareholders to address concerns before they escalate into formal demands. Further, activist investors often slowly accumulate holdings prior to crossing the filing trigger threshold for Schedules 13D and then use the pre-filing period to rapidly accumulate additional securities to maximize their holdings prior to the filing deadline. The Amendments may limit such additional stealth accumulations to the extent impacted by volume and pricing considerations over the shorter period provided for under the Amendments.
Footnotes have been omitted from the excerpts below.
Question: Is a group formed when two or more shareholders communicate with each other regarding an issuer or its securities (including discussions that relate to improvement of the long-term performance of the issuer, changes in issuer practices, submissions or solicitations in support of a non-binding shareholder proposal, a joint engagement strategy (that is not control related), or a “vote no” campaign against individual directors in uncontested elections) without taking any other actions?
Response: No. In our view, a discussion whether held in private, such as a meeting between two parties, or in a public forum, such as a conference that involves an independent and free exchange of ideas and views among shareholders, alone and without more, would not be sufficient to satisfy the “act as a . . . group” standard in Sections 13(d)(3) and 13(g)(3). Sections 13(d)(3) and 13(g)(3) were intended to prevent circumvention of the disclosures required by Schedules 13D and 13G, not to complicate shareholders’ ability to independently and freely express their views and ideas to one another. The policy objectives ordinarily served by Schedules 13D or Schedules 13G filings would not be advanced by requiring disclosure that reports this or similar types of shareholder communications. Thus, an exchange of views and any other type of dialogue in oral or written form not involving an intent to engage in concerted actions or other agreement with respect to the acquisition, holding, or disposition of securities, standing alone, would not constitute an “act” undertaken for the purpose of “holding” securities of the issuer under Section 13(d)(3) or 13(g)(3).
Question: Is a group formed when two or more shareholders engage in discussions with an issuer’s management, without taking any other actions?
Response: No. For the same reasons described above, we do not believe that two or more shareholders “act as a . . . group” for the purpose of “holding” a covered class within the meaning of those terms as they appear in Section 13(d)(3) or 13(g)(3) if they simply engage in a similar exchange of ideas and views, alone and without more, with an issuer’s management.
Question: Is a group formed when shareholders jointly make recommendations to an issuer regarding the structure and composition of the issuer’s board of directors where (1) no discussion of individual directors or board expansion occurs and (2) no commitments are made, or agreements or understandings are reached, among the shareholders regarding the potential withholding of their votes to approve, or voting against, management’s director candidates if the issuer does not take steps to implement the shareholders’ recommended actions?
Response: No. Where recommendations are made in the context of a discussion that does not involve an attempt to convince the board to take specific actions through a change in the existing board membership or bind the board to take action, we do not believe that the shareholders “act as a . . . group” for the purpose of “holding” securities of the covered class within the meaning of those terms as they appear in Sections 13(d)(3) or 13(g)(3). Rather, we view this engagement as the type of independent and free exchange of ideas between shareholders and issuers’ management that does not implicate the policy concerns addressed by Section 13(d) or Section 13(g).
Question: Is a group formed if shareholders jointly submit a non-binding shareholder proposal to an issuer pursuant to Exchange Act Rule 14a-8 for presentation at a meeting of shareholders?
Response: No. The Rule 14a-8 shareholder proposal submission process is simply another means through which shareholders can express their views to an issuer’s management and board and other shareholders. For purposes of group formation, we do not believe shareholders engaging in a free and independent exchange of thoughts about a potential shareholder proposal, jointly submitting, or jointly presenting, a non-binding proposal to an issuer in accordance with Rule 14a-8 (or other means) should be treated differently from, for example, shareholders jointly meeting with an issuer’s management without other indicia of group formation. Accordingly, where the proposal is non-binding, we do not believe that the shareholders “act as a . . . group” for the purpose of “holding” securities of the covered class within the meaning of those terms as they appear in Section 13(d)(3) or 13(g)(3). Assuming that the joint conduct has been limited to the creation, submission, and/or presentation of a non-binding proposal, those statutory provisions would not result in the shareholders being treated as a group, and the shareholders’ beneficial ownership would not be aggregated for purposes of determining whether the five percent threshold under Section 13(d)(1) or 13(g)(1) had been crossed.
Question: Would a conversation, email, phone contact, or meetings between a shareholder and an activist investor that is seeking support for its proposals to an issuer’s board or management, without more, such as consenting or committing to a course of action, constitute such coordination as would result in the shareholder and activist being deemed to form a group?
Response: No. Communications such as the types described, alone and without more, would not be sufficient to satisfy the “act as a . . . group” standard in Sections 13(d)(3) and 13(g)(3) as they are merely the exchange of views among shareholders about the issuer. This view is consistent with the Commission’s previous statement that a shareholder who is a passive recipient of proxy soliciting activities, without more, would not be deemed a member of a group with persons conducting the solicitation. Activities that extend beyond these types of communications, which include joint or coordinated publication of soliciting materials with an activist investor, might, however, be indicative of group formation, depending upon the facts and circumstances.
Question: Would an announcement or a communication by a shareholder of the shareholder’s intention to vote in favor of an unaffiliated activist investor’s director nominees, without more, constitute coordination sufficient to find that the shareholder and the activist investor formed a group?
Response: No. We do not view a shareholder’s independently determined act of exercising its voting rights, and any announcements or communications regarding its voting decision, without more, as indicia of group formation. This view is consistent with our general approach towards the exercise of the right of suffrage by a shareholder in other areas of the Federal securities laws. Shareholders, whether institutional or otherwise, are thus not engaging in conduct at risk of being deemed to give rise to group formation as a result of simply independently announcing or advising others—including the issuer—how they intend to vote and the reasons why.
Question: If a beneficial owner of a substantial block of a covered class that is or will be required to file a Schedule 13D intentionally communicates to other market participants (including investors) that such a filing will be made (to the extent this information is not yet public) with the purpose of causing such persons to make purchases in the same covered class, and one or more of the other market participants make purchases in the same covered class as a direct result of that communication, would the blockholder and any of those market participants that made purchases potentially become subject to regulation as a group?
Response: Yes. To the extent the information was shared by the blockholder with the purpose of causing others to make purchases in the same covered class and the purchases were made as a direct result of the blockholder’s information, these activities raise the possibility that all of these beneficial owners are “act[ing] as” a “group for the purpose of acquiring” securities of the covered class within the meaning of Section 13(d)(3). Such purchases may implicate the need for public disclosure underlying Section 13(d)(3), and these purchases could potentially be deemed as having been undertaken by a “group” for the purpose of “acquiring” securities as specified under Section 13(d)(3). Given that a Schedule 13D filing may affect the market for and the price of an issuer’s securities, non-public information that a person will make a Schedule 13D filing in the near future can be material. By privately sharing this material information in advance of the public filing deadline, the blockholder may incentivize the market participants who received the information to acquire shares before the filing is made. Such arrangements also raise investor protection concerns regarding perceived unfairness and trust in markets. The final determination as to whether a group is formed between the blockholder and the other market participants will ultimately depend upon the facts and circumstances, including (1) whether the purpose of the blockholder’s communication with the other market participants was to cause them to purchase the securities and (2) whether the market participants’ purchases were made as a direct result of the information shared by the blockholder.