SEC proposal would require earlier disclosure of significant equity stakes

Proposed amendments to Regulation 13D-G would shorten the Schedule 13D filing deadline from 10 to 5 days, expand beneficial ownership to include cash-settled derivatives, and clarify when a group is formed. 

The US Securities and Exchange Commission (the “SEC”) has proposed amendments to Regulation 13D-G that would significantly shorten filing deadlines, expand the application of Regulation 13D-G to certain holders of cash-settled derivative securities and clarify the circumstances under which two or more persons have formed a "group." 

Background

Under Sections 13(d) and 13(g) of the US Securities Exchange Act of 1934 (the “Exchange Act”), persons or groups who own or acquire beneficial ownership of more than 5% of certain classes of equity securities registered under the Exchange Act are required to file ownership reports with the SEC. One purpose of the reporting obligation is to provide information to the public and the affected issuer about rapid accumulations of the issuer’s equity securities by persons who would then have the potential to change or influence control of the issuer.

Generally, if Section 13(d) is triggered, a person must file a Schedule 13D unless they are eligible to use Schedule 13G. Schedule 13G, a shorter form requiring less disclosure than Schedule 13D, is available to: 

• qualified institutional investors (“QIIs”), which among others includes registered broker-dealers, banks, insurance companies, registered investment companies and investment advisers, certain employee benefit plans, and savings associations;
• passive investors, which are persons who do not intend to control or change the control of a company; and
• exempt investors, which are beneficial owners of more than 5% at the end of the calendar year but who have not made an acquisition of beneficial ownership subject to Section 13(d).

Shortened filing deadlines for Schedules 13D and 13G

The length of the filings deadlines for Schedules 13D and 13G have come under criticism for some time, and in 2010, the Dodd-Frank Act provided the SEC with specific authority to shorten the filing deadlines. The SEC has proposed various changes to the Schedule 13D and 13G filing rules which you can see outlined in the full PDF of this alert, a link to which is at the bottom of this page.  

Expanding the beneficial ownership definition

The SEC is also proposing to revise Rule 13d-3 to expand the definition of beneficial ownership under Regulation 13D-G to include a holder of a cash-settled derivative security, other than a security-based swap, if the derivative is held with the purpose or effect of changing or influencing the control of the issuer of the reference securities, or in connection with or as a participant in any transaction having such purpose or effect.

Historically, holding derivatives that, by their terms, entitle the holder to nothing more than economic exposure to a covered class has not been considered sufficient to constitute beneficial ownership under Regulation 13D-G. Rule 13d-3 has been criticized, however, for failing to explicitly address the circumstances in which an investor in a cash-settled derivative may influence or control an issuer by pressuring a counterparty to make certain decisions regarding the voting and disposition of substantial blocks of securities. Instead, the courts have been left to wrestle with the cash-settled derivative question, such as in CSX Corp v. Children’s Investment Fund Management (UK) LLP, 562 F. Supp. 2d 511 (SDNY 2008), where the court addressed the issue but ultimately relied on Regulation 13D-G’s anti-evasion provision to find a violation. 

The proposed amendments would also revise Schedule 13D to clarify that a person is required to disclose interests in all derivative securities (including cash-settled derivative securities) that use the issuer’s equity security as a reference security.

Definition of “group”

The SEC is proposing to amend Rule 13d-5 to clarify its application to two or more persons who “act as” a group. Under current Regulation 13D-G, whenever two or more people agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer, the group formed by this agreement is deemed to have acquired beneficial ownership of all of the equity securities of the issuer that are beneficially owned by any member of the group as of the date they agree to form the group. For purposes of Sections 13(d) and 13(g), this group is deemed to be a "person."

The proposed amendments remove reference to an agreement in order to make clear that the determination as to whether two or more persons are acting as a group does not depend solely on the presence of an express or implied agreement. Depending on the particular facts and circumstances, concerted actions by two or more persons for the purpose of acquiring, holding or disposing of securities of an issuer would, under the proposal, be sufficient to constitute the formation of a group. 

The SEC is also proposing to add a new provision in Rule 13d-5 that would affirm that if a person, in advance of filing a Schedule 13D, shares information about the upcoming Schedule 13D, to the extent the information is not public and is communicated with the purpose of causing others to make purchases, and a person acquires securities in the covered class for which the Schedule 13D will be filed based on this information (a so-called “tipping arrangement”), then those persons are deemed to have formed a group within the meaning of Section 13(d)(3).

The proposed amendments would also provide new exemptions allowing investors to communicate and consult with each other, jointly engage with issuers, and execute certain transactions without being subject to regulation as a group. Specifically, those exemptions would address circumstances in which (1) investors communicate with one another or the issuer without the purpose or effect of changing or influencing control of the issuer (and are not made in connection with or as a participant in any transaction having such purpose or effect); and (2) investors and financial institutions enter into bona fide sales and purchase agreements governing the terms of derivative securities in the ordinary course of business.

Structured data requirement

Finally, the SEC is also proposing to require that Schedules 13D and 13G be filed using a structured, machine-readable data language. As proposed, all Schedule 13D and 13G disclosures (including quantitative disclosures, textual narratives, and identification checkboxes) would have to be filed using an XML-based language to make it easier for investors and markets to analyze information in the schedules. The requirement would not apply to the exhibits to the schedules, however.

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Comments are due 30 days after the proposal is published in the Federal Register, or April 11, 2022 (60 days after the SEC published the proposal), whichever is later. 

We will continue to monitor developments in these areas and encourage you to contact us if you have any questions.