How SEC rule changes may impact engagement with activists

A pair of long-discussed and highly anticipated regulatory changes affecting activist investors and the US companies they target are coming down the pike. But advisers say that rather than creating a fundamental power shift, the reforms are likely to underscore the importance to each side of having effective engagement and a good story to tell. The value of playing well with others is becoming more widely accepted, they say.

Back in February, the SEC proposed rule changes governing beneficial ownership reporting under Securities Exchange Act Sections 13(d) and 13(g). The proposal includes accelerating the filing deadlines for Schedule 13D beneficial ownership reports and, overall, the changes are seen by many as making it more difficult for activists to quietly build stakes in companies.

‘Investors can currently withhold market-moving information from other shareholders for 10 days after crossing the 5 percent threshold before filing a Schedule 13D, which creates an information asymmetry between these investors and other shareholders,’ said SEC chair Gary Gensler in announcing the proposal.

‘The filing of Schedule 13D can have a material impact on a company's share price, so it is important that shareholders get that information sooner. The proposed amendments would also clarify when and how certain derivatives acquired with control intent count toward the 5 percent threshold, clarify group formation and create related exemptions.’

NIRI gave a warm welcome to the measure following years of advocacy over beneficial ownership rules. ‘Today’s proposed rulemaking is an important step forward in bringing more transparency to the marketplace and closing certain 13(d) loopholes that have allowed certain investors to amass large positions in company stock without adequate public disclosure,’ said Gary LaBranche, then-president and CEO of NIRI, in a statement at the time.

WHO BENEFITS?

Advisers to companies on activist campaigns are broadly cautious in predicting the impact of the SEC’s proposal. For one thing, the measures will most likely not come into effect until next year and may evolve from the original version.

Bruce Goldfarb, founder, president and CEO of Okapi Partners, says that regardless of the rule changes the best strategy for companies remains knowing who their investors are and how they behave by communicating with them regularly at roadshows, around the proxy season and beyond.

Michael Verrechia, managing director of the M&A and activism advisory group at Morrow Sodali, says it remains to be seen how the changes will affect different activists. He notes that accelerated filings would eliminate days of uncertainty for the company affected, adding that smaller activists may face more of a challenge in getting to the position they want after filing Schedule 13D and the company’s share price goes up. But top-tier activists already often file within a couple of days of breaching the 5 percent threshold and do so with ‘their ducks in a row’ in terms of the position they want, he notes.

In many cases there is a lot of interaction behind the scenes between an activist and a company before a campaign even launches, mostly resulting in a settlement and meaning that a speedier filing requirement would be irrelevant, Verrechia observes. Over the past two years he has become involved as an adviser even further in advance of a company’s AGM – for example, in the August ahead of an AGM the following May or June – because activists are doing so.

This is an extract of an article that was published in the Summer 2022 issue of Corporate Secretary sister publication IR Magazine. Click here to read the full article.