In a column published today on the New York Times DealBook, as part of my column series, I focus on an important but largely overlooked aspect of the SEC’s expected consideration of tightening the 13(d) rules governing blockholder disclosure. The column, titled “Don’t Make Poison Pills More Deadly,” is available here, and it develops an argument I made in a Conference Board debate with Martin Lipton, available here.
The column explains that an unintended and harmful effect of the considered reform may be that it will help companies adopt low-threshold poison pills – arrangements that cap the ownership of outside shareholders at levels like 10 or 15 percent. The SEC, I argue, should be careful to avoid such an outcome in any rules it may adopt.
The SEC is planning to consider a rule-making petition, filed by a prominent corporate law firm, that proposes to reduce the 10-day period, as well as to count derivatives toward the 5 percent threshold. The push for tightening disclosure rules is at least partly driven by the benefits that earlier disclosure would provide for corporate insiders. Supporters of the petition have made it clear that tightening disclosure requirements is intended to alert not only the market but also incumbent boards and executives in order to help them put defenses in place more quickly.
The drafters of the Williams Act envisioned a landscape that would allow outsiders who were not seeking to control a company to keep accumulating shares, provided that they made the required disclosures. But companies in the United States have been increasingly using poison pills with low thresholds to limit the stakes of outside shareholders they disfavor.
Indeed, among the 637 companies with poison pills in the FactSet Systems database, 80 percent have plans with a threshold of 15 percent or less. No other developed economy grants corporate insiders the freedom to cap the ownership of blockholders they disfavor at such low levels.
The current ability of insiders to adopt low-threshold poison pills is a highly relevant factor for any assessment of the rules governing the relationship between incumbents and outside shareholders. In particular, the SEC should recognize that tightening disclosure requirements could impose costs on public investors and the economy by facilitating the use of such pills.
If the SEC does decide that tightening disclosure requirements is desirable, it should design the rules to avoid aiding the use of such poison pills. This could be done by limiting the application of tightened disclosure requirements to companies whose charters do not permit the use of low-threshold poison pills.
Proponents of the petition, which has thus far failed to attract any supportive comments from institutional investors, should endorse including such a limitation in any reform. Doing so is necessary to address concerns that tightened disclosure requirements might be aimed at protecting entrenched insiders rather than public investors.
Even if the petition’s proponents keep pressing for rules that would facilitate low-threshold poison pills, the SEC should avoid serving this objective. As the investor’s advocate, the SEC should ensure it does not take any action that would harm investors by facilitating the pernicious use of such poison pills.