United States: Beneficial Ownership Reporting And The Brokaw Act

On March 17, 2016, Senators Tammy Baldwin (D-WI) and Jeff Merkley (D-OR) introduced legislation that, if enacted into law and implemented accordingly, would dramatically change the course of beneficial ownership reporting for purposes of the federal securities laws. Referred to as the Brokaw Act,1 the legislation is reportedly named for a small town in Wisconsin that went bankrupt after an out-of-state hedge fund closed a paper mill that provided jobs to the town for over 100 years.2 The aim of the bill is to increase transparency and strengthen oversight of activist hedge funds,3 and it could potentially provide companies with the ability to respond more quickly to takeover threats.

This client alert will address at a high level the changes to the beneficial ownership reporting system proposed by the Brokaw Act, briefly touch upon the potential impact of the Brokaw Act, if enacted, and highlight its current legislative status.

Beneficial Ownership Reporting Rules

Subject to certain exceptions, Securities and Exchange Commission ("SEC") rules currently require beneficial owners of more than 5% of a registered class of equity security to file a beneficial ownership report on Schedule 13D to disclose such ownership interests. The Schedule 13D must be filed with the SEC within 10 days after the beneficial owner crosses the 5% threshold. The Brokaw Act would direct the SEC to shorten this period to two business days and require disclosure of short interests representing more than 5% of the class of equity security.

In addition to tightening the reporting period and requiring disclosure of short interests, the Brokaw Act would direct the SEC to amend the definition of beneficial ownership for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act"). Currently, security holders have beneficial ownership over securities if they have voting and/or investment power over the securities. The Brokaw Act would extend the definition of beneficial ownership to any person who has a pecuniary or indirect pecuniary interest in the security, both of which are defined by the proposed legislation. The Brokaw Act would also provide additional guidance as to the calculation of beneficial ownership when the beneficial owner has interests in derivative securities. Such guidance includes instructions for how to calculate beneficial ownership when the beneficial owner holds both long and short interests in the same security. For example, the beneficial owner would not be able to calculate the beneficial ownership interest by using a net calculation; instead, such beneficial owner would be required to use the greater percentage of its short interest or its long interest and calculate beneficial ownership in accordance with existing Exchange Act Rule 13d-3(d)(1).

Finally, the Brokaw Act would define "person" for purposes of beneficial ownership reporting to include two or more persons acting as a partnership, limited partnership, syndicate, or other group, or otherwise coordinating the actions of the persons, for the purpose of (i) acquiring, holding, or disposing of securities of an issuer; (ii) seeking to control or influence the board, management, or policies of an issuer; or (iii) evading, or assisting others in evading, designation as a "person." The term would also include a hedge fund or a group of hedge funds or persons that are, as determined by the SEC, working together to evade the beneficial ownership reporting requirements.

Potential Impact of the Brokaw Act

Increased Transparency

Perhaps the greatest potential impact of the Brokaw Act stems from the increased transparency that would result to both issuers and the market. This includes transparency through expedited reporting, clearer disclosure of a beneficial owner's position in an issuer's securities through the reporting of derivative and short interests, and reporting of coordinated activity captured by the definition of "person."

By shortening the reporting period between the time that a beneficial owner crosses the 5% threshold and the time that such beneficial owner is required to file a Schedule 13D, the Brokaw Act would mitigate one of the perceived drawbacks of the current beneficial ownership reporting rules. In this regard, the 10-day reporting period allows an activist, or group of activists, to build a larger stake in an issuer's securities before making public disclosure of such interest, which may cause a company to be delayed in implementing any potential anti-takeover strategies.4 In today's governance climate, very few companies actually implement a poison pill.5 A company that has fully briefed its board on the effects of the poison pill and prepared all of the paperwork in advance may choose to keep the pill "on the shelf" rather than implement it. This strategy is no doubt partially a result of ISS's voting policy of recommending "withhold" votes for directors if a company has implemented a poison pill without shareholder approval.6 If a perceived takeover threat emerges, a company can quickly take the pill off the shelf, tailor it as necessary, and implement the pill with prompt board action before the takeover threat acquires a significant stake in the company. If the Brokaw Act were enacted and implemented accordingly, corporate boards would have a better "heads up" for tailoring and then implementing their poison pills.

In addition, while current SEC beneficial ownership reporting rules cover only securities over which a person has voting and/or investment power, including securities for which the person has the right to acquire voting and/or investment power within 60 days, the Brokaw Act would elicit more complete disclosure of a person's interests in the securities of an issuer. In this regard, the Brokaw Act would require disclosure of a person's pecuniary or indirect pecuniary interests in the issuer's securities, i.e., any direct or indirect opportunity a person has to profit from, or share in any profit derived from, a transaction in the subject security, including through both long and short positions and through family members, thereby eliciting a more complete picture of a person's overall position in an issuer's securities. For example, a beneficial owner would not be able to conceal the fact that its long position in a security is outweighed by its short position in the same security. Such information could be very important for a company to communicate to its shareholders in a proxy fight.

Finally, by expanding the definition of "person" to capture two or more persons coordinating actions for the purpose of acquiring, holding, or disposing of securities of an issuer, seeking to control or influence the issuer, or evading designation as a "person," the Brokaw Act targets "wolf packs." "Wolf pack" is the term generally given to activists who do not explicitly agree to act together as a "group," as such term is defined under Exchange Act Rule 13d-5(b)(1), but who nonetheless choose to coordinate actions and act in parallel with one another. If a wolf pack falls into the Brokaw Act's definition of "person," disclosure of the wolf pack's collective stake in an issuer's securities above the 5% threshold would be required. Therefore, issuers would be better informed about concerted activity in the acquisition of their securities.

Market Consequences and Other Considerations

While the expedited reporting and enhanced disclosure requirements of the Brokaw Act would provide issuers, retail investors, and the rest of the market with a more complete picture of hedge fund and other activist investor perceptions of an issuer's securities, allowing all such stakeholders to adapt appropriately, it remains to be seen exactly how the market would respond to such changes. For example, will hedge funds and other activist investors be discouraged from acquiring meaningful positions in certain issuers, or will they create and adopt new investment strategies in response to the new disclosure requirements? What will be the overall effect of expedited reporting and the reporting of short positions on the price of an issuer's securities? Whatever its impact, the Brokaw Act's attempt to modernize the beneficial ownership reporting rules in today's technological, fast-paced marketplace assumes that the reporting beneficial owners will almost always be sophisticated, experienced investors able to quickly comply with the reporting requirements, and perhaps this is accurate given the intent of Schedule 13D filers. If it is not, or if disclosures are too complex or too evolving, results may include late filings of Schedules 13D.

Legislative Status

Before the Brokaw Act can attempt to fulfill its intended purpose or provide any benefit to issuers and the market, it must first successfully move through Congress. Assigned to the Senate Banking, Housing, and Urban Affairs Committee, the Committee's Chairman, Richard Shelby (R-AL), must determine whether the legislation will move past the committee stage. The legislation is co-sponsored by Senator Elizabeth Warren (D-MA)7 and Senator and presidential candidate Bernie Sanders (I-VT) and already has strong populist appeal due to the closing of the Wisconsin paper mill. Further, in light of its potential benefits to issuers, the legislation should also have conservative pro-business support. Notably, however, prior appeals to the SEC for similar reform to the beneficial ownership reporting rules have not been successful,8 and according to at least one source, the prognosis of the Brokaw Act being enacted is only 2%.9 The legislation may nevertheless be one to watch as the public becomes more aware of it. For updates on the Brokaw Act's movement through the legislative process, refer to www.govtrack.us

Footnotes

1. Brokaw Act, S. 2720, 114th Cong. (2016).

2 U.S. Senators Tammy Baldwin and Jeff Merkley Introduce Legislation to Strengthen Oversight of Activist Hedge Funds, (Mar. 17, 2016), available at https://www.merkley.senate.gov/news/press-releases/us-senators-tammy-baldwin-and-jeff-merkley-introduce-legislation-to-strengthen-oversight-of-activist-hedge-funds.

3 Id.

4 Similarly, the premerger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR") may not necessarily provide sufficient notice for issuers to implement anti-takeover strategies. In this regard, activists and potential acquirers may be eligible to rely on an exemption from the requirement to make an HSR notice filing or may simply fail to make such a filing. But see, Arthur F. Golden, et al, Does ValueAct Have Implications for Institutional Shareholders?, Harvard Law School forum on Corporate Governance and Financial Regulation, (Apr. 7, 2016), available at https://corpgov.law.harvard.edu/2016/04/07/does-valueact-have-implications-for-institutional-shareholders/ (discussing a $19 million enforcement action against ValueAct by the U.S. Department of Justice based on allegations that ValueAct did not qualify for the passive investor exemption from filing under the HSR).

5 As reported by ISS, "As of Dec. 31 of last year, only 19 companies in the S&P 500, and 175 in the rest of the R3000, maintained any sort of poison pill, shareholder approved or not. Over the course of 2015, there was a 1.6 percentage point drop in the number of companies with a pill in place in the S&P 500, and a 2.6 percentage point drop in companies with a pill in the R3000. These numbers are more substantial considering how few companies maintained pills at the beginning of 2015." ISS Governance Insights, What's (Really) Hot: A QuickScore Analysis of 2015's Real Governance Trends, (Jan. 8, 2016), available at http://www.issgovernance.com/governance-exchange/governance-insights/#1452866844042-c6b24eea-1b36.

6 ISS United States Summary Proxy Voting Guidelines, (Feb. 23, 2016), at 12, available at http://www.issgovernance.com/file/policy/2016-us-summary-voting-guidelines-23-feb-2016.pdf.

7 Both Senator Warren and Senator Merkley are members of the Senate, Banking, Housing, and Urban Affairs Committee to which the legislation is assigned.

8 See, e.g., Letter to Elizabeth M. Murphy, U.S. Securities and Exchange Commission, (Mar. 7, 2011), from Wachtell, Lipton, Rosen & Katz, available at http://www.wlrk.com/docs/Letter_to_the_SEC_re_%2013(d)(final%20version).pdf.

9 The website, https://www.govtrack.us/congress/bills/114/s2720, reports a 2% prognosis of the Brokaw Act being enacted. As reported by the website, factors considered in determining this prognosis include the committee to which the legislation was referred, the fact that at least two co-sponsors serve on the committee to which the legislation was referred, and the fact that the sponsor is a member of the minority party.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions