Views on improving the integrity of global capital markets
14 November 2012

The Debate Around SEC Schedule 13D Filing Requirements — Which Side Are You On?

What’s that? You say you haven’t gotten your daily fix of esoteric corporate governance U.S. Securities and Exchange Commission (SEC) filing issues? Well, you’ve come to the right place.

Earlier this week I attended a debate on the current state of Schedule 13D filings in the U.S. and came to a conclusion … this is something everyone should know about.

On 13 November, our friends at the Conference Board hosted a debate between Martin Lipton, father of the poison pill and founder of Wachtell, Lipton, Rozen & Katz, and Lucien Bebchuk, defender of activist investors and professor of law, economics, and finance at the Harvard School of Law (view the video).

The debate asked the eternal question, what is the proper disclosure a market should require of an investor acquiring a 5% position in a company’s shares. Keeps you up at night, doesn’t it?

This debate came about due to a rulemaking petition submitted to the SEC by Wachtell, Lipton, Rozen & Katz advocating a reduction in the period of time before the owner of 5% or more of a public company’s stock must disclose that position. Wachtell, Lipton, Rozen & Katz recommended changing the standard from the current 10 days to one day. During the debate, Lipton argued for a required disclosure the day following an investor reaching a 5% threshold, in addition to a “cooling off” period of two days in which the investor would be prohibited from acquiring additional ownership of a company’s shares. Lipton ascertained that in many cases, hedge funds or other activist investors will pass the 5% threshold and continue accumulating shares through actual buying of shares or derivative positions for up to 10 days before they have to make any disclosure. According to Lipton, the 10-day disclosure window allows corporate raiders with a short-termist mindset to accumulate outsized positions for 10 days before anyone knows what is going on.

Here is a summary of some of Lipton’s main points:

  • The current definition of beneficial ownership and the 10-day reporting lag after the Schedule 13D ownership threshold is crossed facilitates market manipulation and abusive tactics.
  • There is no good reason that purchasers of significant ownership stakes in public companies should be permitted to hide their actions.
  • Transparency, fairness, and equality of information in our financial markets have never been higher.
  • Since its adoption as part of the Williams Act in 1968, the purpose of beneficial ownership has been to alert the markets to potential changes in corporate control.
  • Impediments to immediate reporting no longer exist, and the 10-day window is an anachronism.
  • Other markets already have much shorter timeframes:
    • Australia requires 5% position disclosure within two business days
    • U.K. requires 3% position disclosure within two trading days
    • Hong Kong requires “notable interest” to be disclosed within three business days.
    • All positions that represent economic exposure to a security — including derivatives — should be part of Schedule 13D disclosures.

As you might expect, professor Bebchuk disagreed with Lipton. He recently co-authored a paper, The Law and Economics of Blockholder Disclosure, that attempts to rebut the positions advanced by the Wachtell, Lipton, Rozen & Katz petition. In the article, Bebchuk asks the SEC to provide a framework for examining the rules governing outside blockholders, arguing that there is currently no evidence supporting a need for a change to the rule. In the paper and during his recent debate, Bebchuk argues that a shortening of the disclosure window is designed as a corporate entrenchment mechanism, noting that many issuers would quickly adopt or activate an already existing poison pill if the 5% threshold were breeched, heading off any more meaningful accumulation of shares by an activist investor. In Bebchuk’s view, such action effectively allows issuers to set a ceiling to the number of shares an activist may acquire (summarized in a set of PowerPoint slides).

Here is a brief summary of Bebchuk’s arguments:

  • Current disclosure requirements should be tightened only if the SEC reaches a policy conclusion, after weighting relevant costs and benefits, that doing so would benefit investors.
  • Given existing impediments to the market for corporate control, outside blockholder activities, are especially important for reducing agency costs and managerial slack in public companies.
  • The drafters of the Williams Act recognized that outside blockholders “should not be discouraged, since they often serve a useful purpose by providing a check on entrenched but inefficient management.”
  • Having a blockholder representative on the compensation committee is correlated with a stronger CEO pay-performance link, stronger link between performance and CEO turnover, and lower CEO pay.
  • State-law rules now permit the adoption of low-trigger poison pills that prevent blockholders from acquiring even blocks that are widely recognized not to convey control.
  • These pills are now common at large public companies: among the 805 public companies in the SharkRepellent database with pills now in place, 76% have pills with triggers of 15% or less, and 15% have pills triggered by the acquisition of 10% or less of the company’s stock.

This was the fourth time the two men have debated on corporate governance issues in the last 10 years, and hopefully not the last. The discussion was intellectually engaging, with the two adversaries both noting that they remain friends, though neither expects his opinion to change.

You won’t be surprised to find that in the end, neither man would give ground on his point of view, with Lipton calling the investors in question corporate raiders and Bebchuk referring to them as activists.

Which side are you on?

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Photo credit: ©

About the Author(s)
Matt Orsagh, CFA, CIPM

Matt Orsagh, CFA, CIPM, is a senior director of capital markets policy at CFA Institute, where he focuses on corporate governance, ESG, and climate change analysis. He writes and speaks frequently on these topics on behalf of CFA Institute. His paper, Climate Change Analysis in the Investment Process was named “Best ESG Paper” by Savvy Investor in 2021.

3 thoughts on “The Debate Around SEC Schedule 13D Filing Requirements — Which Side Are You On?”

  1. Icahn says:

    This is an interesting debate, indeed. The most recent evidence regarding activist investors suggests that they are largely beneficial, both for firm operating performrance and stock performance, which is inconsistent with the pejorative “corporate raider” view held by some, so I tend to agree with Mr. Bebchuck. Given the empirical evidence of positive abnormal returns around both the announcements of 13-D filings and over the long run, it would seem that the only ones who would benefit from a shorter disclosure period would be managers. Until there is some convincing evidence that the 10-day disclosure period is somehow detrimental to other shareholders, why change it?

  2. My personal position is that there is no need to hide and disclosing ownership is the best way forward.

  3. Matt Orsagh, CFA, CIPM says:

    Both investors and companies seem to be finding better avenues for engagement, as evidenced by the number of engagement codes that have proliferated recently, as well as an increasing number of shareowner resolutions in recent years that have been willingly removed from the corporate proxy by shareowners who have struck a deal with companies.

    As far as the 10-day rule being shortened, I believe we would see more instances like we saw in the Sotheby’s case where corporate defenses seemed to be targeted at one type of investor. Better for companies to build relationships with investors through engagement, so when an unwanted raider comes calling a company will have investors willing to take its side in the contest of ideas put forth by said raider. This happened recently when investors largely stood by Apple when Carl Icahn and others pressed Apple for changes that institutional investors largely did not agree with.

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