US securities laws require beneficial owners of more than 5% of the stock of a public reporting company to promptly file an amendment when there is a material change in the facts previously reported by them on Schedule 13D, commonly referred to as a "beneficial ownership report." The disclosure requirements include plans or proposals that would result in certain transactions, such as a going private transaction.
On 13 March 2015, the SEC charged eight officers, directors or major shareholders for failing to update their stock ownership disclosures to reflect material changes, including steps to take the companies private. Each of the respondents, without admitting or denying the SEC's allegations, agreed to settle the proceedings by paying a financial penalty.
While an acquisition or disposition of 1% or more of the stock of an issuer is deemed to be a "material" change in the facts set forth in Schedule 13D requiring an amendment, the SEC's orders make clear its position that an amendment is also required in order to update qualitative disclosures regarding the beneficial owner's plans for its investment. In particular, the SEC has stated that generic disclosures that simply reserve the right to engage in certain corporate transactions do not suffice when there are material changes to those plans, including actions to take a company private.
The SEC's orders find that the respondents took steps to advance undisclosed plans to effect going private transactions. Some determined the form of the transaction to take the company private, obtained waivers from preferred shareholders and assisted with shareholder vote projections, while others informed company management of their intention to privatize the company and formed a consortium of shareholders to participate in the going private transaction. As described in the SEC orders, each respective respondent took a series of significant steps that, when viewed together, resulted in a material change from the disclosures that each had previously made in their Schedule 13D filings.
Public companies and other filers should make certain that they have robust policies and procedures in place to ensure that their filings comply with all applicable SEC disclosure requirements and are made within the required deadlines. Companies should also have policies requiring compliance with reporting obligations by their officers, directors and major shareholders, particularly if the company has agreed to provide assistance to insiders. Public companies should view the announcement of these enforcement actions as an opportunity to remind their officers, directors and major shareholders of their reporting obligations.
The related SEC press release is available at:
http://www.sec.gov/news/pressrelease/2015-47.html.
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