This has been called “the heyday of hedge fund activism,” and it is certainly true that today boards of directors must constantly be vigilant to the many and varied ways in which activist investors can approach a target. Commencing a proxy fight long has been an activist tactic, but it is now being used in a different way. Some hedge funds are engaging in proxy fights in order to exercise direct influence or control over the board’s decision-making as opposed to clearing the way for a takeover of the target company or seeking a stock buyback. In some cases, multiple hedge funds acting in parallel purchase enough target shares to hold a voting bloc adequate to elect their director nominees to the board. A recent Delaware case addressed a situation in which a board resisted a threat from hedge funds acting together in this manner. The court determined that a shareholder rights plan, or poison pill, could, in certain circumstances, be an appropriate response. As a general matter, boards of directors facing activist share accumulations and threats of board takeovers can take comfort in this latest affirmation of the respect accorded to an independent board’s informed business judgment.
Posts Tagged ‘Schedule 13D’
Schedule 13D Ten-Day Window and Other Issues: Will the Pershing Square/Valeant Accumulation of a 9.7% Stake in Allergan Lead to Regulatory Action?
As widely reported, a vehicle formed by Pershing Square and Valeant Pharmaceuticals acquired just under 5% of Allergan’s shares after Allergan apparently rebuffed confidential efforts by Valeant to get Allergan to negotiate a potential acquisition. The Pershing Square/Valeant vehicle then crossed the 5% threshold and nearly doubled its stake (to 9.7%) over the next ten days, at which point it made the required Schedule 13D disclosures regarding the accumulation and Valeant’s plans to publicly propose an acquisition of Allergan. The acquisition program has raised a number of questions.
Three years ago we petitioned the SEC to modernize the beneficial ownership reporting rules under Section 13(d) of the Securities Exchange Act of 1934 (see our rulemaking petition, our memos of March 7, 2011, April 15, 2011, March 3, 2008 and our article in the Harvard Business Law Review). Since we filed our petition, activist hedge funds have grown more brazen in exploiting the existing reporting rules to the disadvantage of ordinary investors.
The Canadian Securities Administrators (CSA) recently proposed changes to Canada’s early warning regime for the disclosure of substantial blockholdings, including to lower the initial reporting trigger to 5% from 10%, to require disclosure no later than the opening of trading on the next business day, and to include equity equivalent derivatives and securities lending arrangements in the ownership calculation. Separately, the CSA proposed a new policy of greater flexibility as to rights plans, including in connection with unsolicited takeover bids. These proposals reflect sensible and necessary improvements to Canadian market regulation, to protect shareholders from the sorts of activist and takeover techniques and abuses that militate for changes in the U.S.’s Section 13(d) rules, and which, in the context of unsolicited takeover bids, the U.S. acceptance of rights plans have largely banished from the U.S.
NYSE Euronext, the Society of Corporate Secretaries and Governance Professionals and the National Investor Relations Institute have jointly filed a rulemaking petition with the SEC, seeking prompt updating to the reporting rules under Section 13(f) of the Securities Exchange Act of 1934, as well as supporting a more comprehensive study of the beneficial ownership reporting rules under Section 13. The petitioners urge the SEC to shorten the reporting deadline under Rule 13f-1 from 45 days to two business days after the relevant calendar quarter, and also suggests amending Section 13(f) itself to provide for reporting on at least a monthly, rather than quarterly, basis, to correspond with Dodd-Frank’s mandate for at least monthly disclosure of short sales. We applaud the petitioners for urging the SEC to modernize Section 13’s reporting rules, both with respect to Section 13(f) and more generally.
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.
Next Tuesday, November 13, the Conference Board will host a debate in New York City between Lucian Bebchuk, a professor of Law, Economics and Finance at Harvard Law School, and Martin Lipton, a founding partner of Wachtell, Lipton, Rozen & Katz (WLRK) on the regulation of outside blockholders. Those interested in attending the debate can do so by RSVP’ing at the Conference Board website here by Wednesday, November 7.
This debate will be the fourth time over the past decade that Bebchuk and Lipton will engage in an exchange:
- In 2002, in a University of Chicago Law Review Symposium, Bebchuk and Lipton debated takeover defenses, with Lipton offering a response, titled Pills, Polls, and Professors Redux, to Bebchuk’s article, The Case Against Board Veto in Corporate Takeovers.
- In 2003, in an exchange published by the Business Lawyer, Bebchuk (in The Case for Shareholder Access to the Ballot) and Lipton (in Election Contests in the Company’s Proxy: An Idea whose Time Has Not Come) put forward opposing views on the merits of proxy access.
- In 2007, in the University of Virginia Law Review, Lipton published a response, titled The Many Myths of Lucian Bebchuk, to Bebchuk’s article, titled The Myth of the Shareholder Franchise, calling for reform of corporate elections.
The 2012 debate concerns an issue that became prominent last year when WLRK submitted a rulemaking petition (available here) to the SEC, advocating a tightening of the rules governing disclosure by outside blockholders under the Williams Act. In particular, the WLRK petition advocates reducing the period of time before the owner of 5% or more of a public company’s stock must disclose that position, from ten days to one day.
In our article Fair Markets and Fair Disclosure: Some Thoughts on The Law and Economics of Blockholder Disclosure, and the Use and Abuse of Shareholder Power forthcoming in Harvard Business Law Review, Spring 2012, and available at SSRN, we discuss the debate that has ensued following the March 2011 petition by our law firm, Wachtell, Lipton, Rosen & Katz, to the Securities and Exchange Commission to modernize the blockholder reporting rules under Section 13(d) of the Securities Exchange Act of 1934.
The petition sought to ensure that the reporting rules would continue to operate in a way broadly consistent with the statute’s clear purposes that an investor must promptly notify the market when it accumulates a block of publicly traded stock representing more than 5% of an issuer’s outstanding shares, and that loopholes that have arisen by changing market conditions and practices since the statute’s adoption over forty years ago could not continue to be exploited by stockholder activists, to the detriment of market transparency and fairness to all security holders. Among other things, the petition proposed that the time to publicly disclose such block acquisitions be reduced from ten days to one business day, given activists’ current ability to take advantage of the ten-day window to accumulate positions well above 5% prior to any public disclosure, in contravention of the clear purposes of the statute.
The New York Times DealBook published today a piece I wrote, titled Don’t Discourage Outside Shareholders. The piece, available here, focuses on the SEC’s ongoing consideration of a rulemaking petition that advocates tightening the rules governing how quickly shareholders must disclose when they hold 5 percent or more of a company’s shares. I argue that such tightening could well unduly discourage the creation and activism of outside blockholders.
In contrast to the claims of the petition’s authors, the proposal should not be viewed as a “technical” closing of a loophole but rather as one that raises significant policy issues. In considering these issues, considerable weight should be given to the significant empirical evidence that the presence and involvement of outside blockholders enhances a company’s value and performance. Furthermore, the rules governing the balance of power between incumbents and outside blockholders are now substantially tilted in favor of insiders — both relative to earlier times and to other countries — rather than outside shareholders. This tilt counsels against tightening SEC rules in ways that would further disadvantage outsiders.
The upcoming issue of the Harvard Business Law Review will feature our article The Law and Economics of Blockholder Disclosure. The article is available here, and PowerPoint slides describing the paper’s main points are available here.
The Securities and Exchange Commission is currently considering a rulemaking petition submitted by Wachtell, Lipton, Rosen & Katz (available here) that advocates tightening the rules under the Williams Act and, in particular, reducing the amount of time before the owner of 5% or more of a public company’s stock must disclose that position from ten days to one day. Our article explains why the SEC should not view the proposed tightening as a merely “technical” change necessary to meet the objectives of the Williams Act or modernize the SEC’s regulations. The drafters of the Williams Act made a conscious choice not to impose an inflexible 5% cap on pre-disclosure accumulations of stock to avoid deterring investors from accumulating large blocks of shares. We argue that the proposed changes to the SEC’s rules require a policy analysis that should be carried out in the larger context of the optimal balance of power between incumbent directors and these blockholders.
We discuss the beneficial role that outside blockholders play in corporate governance, and the adverse effect that any tightening of the Williams Act’s disclosure thresholds can be expected to have on such blockholders. We explain that there is currently no evidence that trading patterns and technologies have changed in ways that would make it desirable to tighten these disclosure thresholds. Furthermore, since the passage of the Williams Act, the rules governing the balance of power between incumbents and outside blockholders have already moved significantly in favor of the former—both in absolute terms and in comparison to other jurisdictions—rather than the latter.
Our analysis provides a framework for the comprehensive examination of the rules governing outside blockholders that the SEC should pursue. In the meantime, we argue, the SEC should not adopt new rules that would tighten the disclosure rules that apply to blockholders. Existing research and available empirical evidence provide no basis for concluding that the proposed tightening would protect investors and promote efficiency. Indeed, there is a good basis for concern that such tightening would harm investors and undermine efficiency.
Below is a more detailed account of the analysis in our article: