Last week, the U.S. Securities and Exchange Commission's (the "Commission") Division of Corporation Finance revised two Compliance and Disclosure Interpretations ("C&DIs") relating to beneficial ownership disclosures on Schedules 13D and 13G. Schedule 13D is required to be filed to report 5% or greater ownership of a class of equity securities of a public company, while the short-form Schedule 13G is available to certain beneficial owners who meet the Schedule 13G eligibility requirements. In order to report on Schedule 13G, the beneficial owner must certify that the subject securities were not acquired and are not held "for the purpose of or with the effect of changing or influencing the control of the issuer." The C&DIs, which replaced existing guidance, will lead asset managers and other investors to carefully weigh their approach to engagement with SEC reporting companies if they wish to avoid Schedule 13D reporting, as opposed to the less-onerous Schedule 13G reporting. This change is one of several the SEC has made in recent weeks that seem to align with the current Republican-led Commission's pro-issuer stance, especially as relates to shareholder involvement in social policy issues.
As revised, C&DI 103.11 states that The Hart-Scott-Rodino ("HSR") Act provides an exemption from certain HSR Act provisions for an acquisition of securities made "solely for the purpose of investment," where the acquiror has "no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer." The C&DI clarifies that an acquiror who is unable to rely on this HSR Act exemption is not necessarily required to file a Schedule 13D. Instead, the acquiror should determine its eligibility to file a Schedule 13G based on a facts-and-circumstances analysis of factors such as "whether the shareholder acquired or is holding the subject securities with the purpose or effect of changing or influencing control of the issuer" (as "control" is defined in Exchange Act Rule 12b-2).
Revised C&DI 103.12 addresses the circumstances under which a shareholder's engagement with an issuer's management could disqualifying a shareholder from certifying that the subject securities were not acquired and are not held "for the purpose of or with the effect of changing or influencing the control of the issuer," such that the shareholder would be required to report on Schedule 13D. Similar to C&DI 103.11, the C&DI states that this determination must be made via a facts-and circumstances analysis, considering whether the shareholder acquired or is holding the subject securities with a purpose or effect of "changing or influencing" control of the issuer (as "control" as defined in Exchange Act Rule 12b-2).
However, the C&DI goes on to state that the subject and/or the context of the shareholder's engagement with management can be important in making this determination. The C&DI draws a line between a shareholder who discusses their views on an issue with management and one who "exerts pressure on management to implement specific measures or changes to a policy," which is more likely to result in an obligation to file a Schedule 13D. Specifically enumerated examples of shareholders who may be ineligible to file a Schedule 13G include:
- A shareholder who "recommends that the issuer remove its staggered board, switch to a majority voting standard in uncontested director elections, eliminate its poison pill plan, change its executive compensation practices, or undertake specific actions on a social, environmental, or political policy and, as a means of pressuring the issuer to adopt the recommendation, explicitly or implicitly conditions its support of one or more of the issuer's director nominees at the next director election on the issuer's adoption of its recommendation; or
- discusses with management its voting policy on a particular topic and how the issuer fails to meet the shareholder's expectations on such topic, and, to apply pressure on management, states or implies during any such discussions that it will not support one or more of the issuer's director nominees at the next director election unless management makes changes to align with the shareholder's expectations."
Find the revised C&DIs here.
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