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E-MailJonathan H. Gaines and David S. Rosenthal are Partners and Christopher Soares is an Associate at Dechert LLP. This post is based on their Dechert memorandum. Related research from the Program on Corporate Governance includes The Law and Economics of Equity Swap Disclosure (discussed on the Forum here) by Lucian Bebchuk; The Law and Economics of Blockholder Disclosure (discussed on the Forum here) by Lucian Bebchuk and Robert J. Jackson Jr.; and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon P. Brav, Robert J. Jackson Jr., and Wei Jiang.
The U.S. Securities and Exchange Commission (the “SEC”) announced on April 28, 2023, that it has reopened the comment period for its February 2022 Modernization of Beneficial Ownership Reporting rule proposal (the “Proposed Rule”). As discussed in our OnPoint on the proposal, the Proposed Rule would amend the beneficial-ownership reporting requirements under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, among other changes, by accelerating the filing deadlines for both Schedule 13D and Schedule 13G. The public comment period will now remain open until June 27, 2023, or until 30 days after the date of publication of the reopening release in the Federal Register, whichever is later.
The release for the reopening does not propose any changes to the Proposed Rule. The decision to reopen the comment period comes in light of the analysis performed by the SEC’s Division of Economic and Risk Analysis (the “Risk Division”) that the SEC published together with the reopening release.
The Risk Division’s findings provide additional background and “baseline data” on Schedule 13D and 13G filings, with analyses of the potential effects on shareholder activism that may result from the proposed change to the initial Schedule 13D filing deadline and the potential harms to certain selling shareholders under the existing Schedule 13D filing deadline. To estimate the potential effect on shareholder activism, the Risk Division looked at the typical timing for accumulation of target company shares after the acquisition of a 5% beneficial-ownership stake triggers a 13D filing requirement. Finding an average of four activists per year that accumulate 25% or more of their stake after day five and assuming that they would completely abandon their campaigns due to a shortened filing deadline, the Risk Division estimated that shortening the filing deadline from ten calendar days to five could result in a foregoing of aggregate shareholder value of $810 million per year.
The Risk Division also attempted to quantify the risk being borne by shareholders selling to “opportunistic traders” who have become aware of the activist’s campaign before the Schedule 13D has been filed. The Risk Division estimated that the aggregate potential harms that could be avoided by shortening the filing deadline to five calendar days is about $93 million—assuming no activists abandon their campaigns due to the accelerated filing deadline—or about $66 million per year under an assumption that 25% of activists would abandon their campaigns because of the rule change.
The SEC has already received numerous comments on the Proposed Rule, which can be found here. Several comment letters from various asset managers have raised concerns in particular about the proposal to accelerate the Schedule 13D and 13G filing deadlines. With the reopening of the comment period, interested parties have another opportunity to provide their insights and concerns regarding the proposed amendments to the beneficial-ownership reporting requirements.
