Voting this Week – October 13, ’23

Taken from Diligent’s ‘Activism and Voting this Week’ newsletter.

Facing new rules that many considered a threat to their business model, the Securities and Exchange Commission’s (SEC) amendments to the Schedule 13D notice deadlines are being considered a win for activist investors. 

“Today’s adoption updates rules that first went into effect more than 50 years ago. Frankly, these deadlines from half a century ago feel antiquated,” said SEC Chair Gary Gensler in a press statement on Tuesday. “In our fast-paced markets, it shouldn’t take 10 days for the public to learn about an attempt to change or influence control of a public company.”  

A high priority for the current SEC, modernizing the 13D rules meant shortening the period activists have between accumulating 5% of a company’s shares and reporting that to the market. Corporate interests pushed hard for a dramatically abbreviated time frame, one that activists felt would not only increase transparency but make their business model unviable. 

In a Tuesday announcement, the U.S. regulator revealed that activists must disclose ownership levels in a company within five business days after crossing the 5% ownership threshold, down from the prior timeline of 10 calendar days. Faced with the proposition of the timeline shortening to five calendar days, activists will be pleased that they have a little more leeway to build stakes before news of their involvement sends the price of shares up. 

“It’s far better than what we were concerned with,” said Ele Klein, co-chair of Schulte Roth & Zabel’s shareholder activism group, a view widely shared in the activist community. 

The SEC also fell back on recent guidance on securities-based-swaps, a kind of derivative that replicates economic interest usually without ownership rights, rather than adopting rules that one activist called “a solution in search of a problem.” Determining that swaps that do not afford the holder voting rights, the power to transfer the underlying shares, or the ability to acquire the shares within 60 days are unlikely to be counted as beneficial ownership, the SEC compromised again in a way that may allow activists to stay below the filing threshold and stay under the radar for longer. 

“You can’t vote or direct the disposition of shares underlying cash-settled swaps, so they shouldn’t count toward beneficial ownership. If there was ever a risk, the SEC decided not to touch that,” Elizabeth Gonzalez-Sussman, vice-chair of Olshan Frome Wolosky’s shareholder activism practice, told Diligent Market Intelligence (DMI) in an interview this week. 

Any amendments to Schedule 13Ds must now be filed within two business days, while passive investors filing on Schedule 13G will also see their reporting window shortened, with the length determined by the type of filer. The new rules have a variety of effective dates, with some not likely to affect the coming proxy season at all. 

The jury is still out as to whether the rule amendments have the potential to shake up how activist investors build their stakes and kickstart their campaigns. 

“These rules were quite measured, they don’t fundamentally change the way our clients have to think about engaging,” Gonzalez-Sussman told DMI. “The most material change is the shortened deadline which we didn’t find to be unreasonable.” 

“Does that narrow the time available to accumulate shares without moving the price? Yes, but it’s manageable,” Christopher Davis, a partner at Kleinberg, Kaplan, Wolff & Cohen, told DMI. 

The initial rule, proposed 18 months ago, had activists howling in despair. In an April 2022 comment letter, activist Irenic Capital Management described the shortened deadlines as “deleterious” amendments that “lack a compelling justification.” 

“The rule will drastically shorten the amount of time that a shareholder has to build an ownership stake in an issuer before the market learns of such interest, thereby disincentivizing critical shareholder engagement and monitoring activities at underperforming public companies,” Irenic said. 

The SEC also provided guidance on when two or more investors may be considered a group – a test that can have implications, including trading restrictions. 

In April, the Council of Institutional Investors’ (CII) warned the proposed rule had the potential to “chill” engagements between institutional investors, particularly investors looking to co-file shareholder proposals. 

However, Gonzalez-Sussman of Olshan told DMI that the final rule is unlikely to impact activist campaigns. “I don’t think their guidance deviates from how we’ve advised our clients. There generally needs to be an intentional decision or concerted action to form a group,” she said. 

“Supporting a shareholder who may be running a campaign independently, or doing a joint non-binding shareholder proposal, will not constitute group activity. Shareholders should have conversations and should be allowed to do that without the risk of an allegation,” Gonzalez-Sussman added. 

“[The SEC has] kept it as a fact and circumstances test to give themselves flexibility. But they’ve given some minor safe harbors – as long as there’s nothing else, these things won’t count as forming a group,” Davis said. 

“Guidance is always helpful,” said Klein. “But I don’t think there were any revelations.”