FREQUENTLY ASKED QUESTIONS ABOUT SECTION 13(D) AND SECTION 13(G) OF THE SECURITIES EXCHANGE ACT OF 1934

Transcription

1 FREQUENTLY ASKED QUESTIONS ABOUT SECTION 13(D) AND SECTION 13(G) OF THE SECURITIES EXCHANGE ACT OF 1934 General What is the general purpse f Sectin 13(d)? In 1968, the Williams Act amended the Securities Exchange Act f 1934, as amended (the Exchange Act ), enacting new prvisins and rules related t tender ffers. Specifically, Sectin 13(d) f the Exchange Act ( Sectin 13(d) ) was passed... in respnse t the grwing use f cash tender ffers as a means fr achieving crprate takevers. Prir t the Williams Act, crprate raids thrugh the use f exchange ffers and prxy slicitatins were regulated by Sectin 14(a) f the Exchange Act, as well as additinal rules adpted by the Securities and Exchange Cmmissin (the SEC ). The Williams Act, and specifically Sectin 13(d), was enacted t vercme the gap in the securities laws and require disclsure when hlders began accumulating large blcks f equity securities f publicly held cmpanies. Under Cnsistent with the general purpse f the U.S. securities laws, Sectin 13(d) prvides individual investrs with greater transparency thrugh infrmatinal disclsure. In many respects, Sectin 13(d) acts as an early warning, signaling every large, rapid aggregatin r accumulatin f securities, regardless f technique emplyed, which might represent a ptential shift in crprate cntrl. 1 Why was Sectin 13(g) added t the Exchange Act as part f the Dmestic and Freign Investment Imprved Disclsure Act f 1977? Sectin 13(g) f the Exchange Act ( Sectin 13(g) ), requiring certain beneficial hlders t file a Schedule 13G with the SEC, was added t the Exchange Act as part f the Dmestic and Freign Investment Imprved Disclsure Act f Sectin 13(g) aims t mandate disclsure when certain investrs accumulate large amunts f stck in a public Sectin 13(d), persns wh, within a shrt perid f time, have acquired large interests f equity securities, r increased the number f equity securities by a substantial amunt, must disclse pertinent infrmatin related t their hldings in a particular cmpany. 1 See Piper v. Chris Craft Industries, Inc., 430 U.S. 1, (1977); Msinee Paper Crpratin v. Rndeau, 354 F. Supp. 686, (W.D. Wis. 1973); GAF Crpratin v. Milstein, 453 F. 2d 709, 711 (2d Cir. 1971); Gearthart Industries v. Smith Internatinal, Inc., 741 F.2d 707, 713 (5th Cir. 1984); and Rndeau v. Msinee Paper Crpratin, 422 U.S. 49, 58 (1975). 2 Pub. L. N , 203, 91. Stat

2 cmpany. 3 Sectin 13(g) requires any persn wning beneficially mre than 5 percent f any class f a Sectin 13(d) security wh is nt currently required t reprt under Sectin 13(d)... t file with the [SEC] a shrt statement detailing relevant wnership infrmatin and t transmit such... statement t the issuer (see What are the general requirements under Sectin 13(g)? ). 4 Did the Ddd Frank Wall Street Refrm and Cnsumer Prtectin Act affect Sectin 13(d) and Sectin 13(g)? Yes. Sectin 929R ( Sectin 929R ) f the Ddd Frank Wall Street Refrm and Cnsumer Prtectin Act (the Ddd Frank Act ) amended Sectins 13(d) and 13(g) by eliminating the requirement that a filer send cpies f its Schedule 13D (r Schedule 13G, as applicable), and any amendments t its Schedule 13D (r Schedule 13G, as applicable), t the issuer and any exchange in which the securities beneficially wned are listed. Further, Sectin 929R prvides the SEC with the authrity t adpt rules t shrten the 10 day filing perid fr Schedule 13D and Schedule 13G filings. 5 Sectin 766 f the Ddd Frank Act ( Sectin 766 ) als amended Sectin 13(d)(1) by prviding the SEC with the authrity t require beneficial wnership reprting f security based swaps ( SBSs ) (see Must a hlder f mre than 5% f derivative securities in an issuer make a filing n Schedule 13D r Schedule 13G? ). 6 The SEC has nt yet altered its beneficial wnership reprting rules. 7 What are the general requirements under Sectin 13(d)? Under Sectin 13(d), any persn wh indirectly r directly becmes the beneficial wner f mre than 5% f an issuer s equity securities registered under Sectin 12 f the Exchange Act r any equity security f an insurance cmpany that is exempt frm registratin under Sectin 12(g)(2)(g) f the Exchange Act, must file with the SEC a Schedule 13D within 10 days after the acquisitin. 8 The SEC s Divisin f Crpratin Finance (the Divisin r Staff ) has maintained a strict interpretatin f the 5% threshld. Fr example, the SEC nted in guidance that even where a brker errneusly purchases 5% f a cvered equity security, the custmer wuld nevertheless be required t file a Schedule 13D r Schedule 13G. A persn des nt have t have scienter t vilate Sectin 13(d) s prvisins. 9 Sectin 13(d) requires that the beneficial wner disclse t the SEC pertinent infrmatin n its security hldings fr a particular issuer, including the backgrund, identity, residence, and citizenship f, and the nature f the beneficial wnership by, the investr, the surce and amunt f the funds r ther cnsideratin used r t be used in making the purchases, the purpse f the transactin, the number f 3 See S. Rep , 1977 U.S.C.C.A.N. 4098, Id. 5 See the Ddd Frank Act, Pub. L. N , 124 Stat 1376 (2010), 929R. 6 See id. at See SEC Chair Mary J White, Remarks at the Transatlantic Crprate Gvernance Dialgue, Dec. 15, 2011, available at 8 See Rule 13d 1. 9 Exchange Act Sectins 13(d) and 13(g) and Regulatin 13D G Beneficial Ownership Reprting, Cmpliance and Disclsure Interpretatins ( C&DI ), Questin (Jan. 3, 2014), available at Mrrisn & Ferster LLP 2

3 shares f the security which are beneficially wned, and infrmatin as t any cntracts, arrangements, r understandings with any persn with respect t any securities f the issuer (see What infrmatin must be prvided n a Schedule 13D? ). Hwever, Rule 13d 1 under the Exchange Act ( Rule 13d 1 ) prvides the purpses f enhancing transparency in the marketplace and strengthening versight ver activist hedge funds. The legislatin was re intrduced in August 2017 by Senatr Baldwin and Senatr David Purdue. Mst ntably, the current versin f the draft Brkaw Act wuld direct the SEC t: SEC with discretin t require additinal infrmatin it deems necessary r apprpriate in the public interest r fr the prtectin f investrs. 10 Wh is exempt frm filing a Schedule 13D? Under Sectin 13(d)(6) f the Exchange Act, beneficial wners will nt need t file a Schedule 13D in the case f: (1) any acquisitin r ffer t acquire securities shrten the amunt f time in which a Schedule 13D may be filed with the SEC (frm 10 days t fur business days); require any persn that acquires a direct r indirect shrt interest in a class f equity securities (representing at least 5% f that class f securities) t file a Schedule 13D; and made r prpsed t be made by means f a registratin statement under the Securities Act f 1933, as amended; (2) any acquisitin f beneficial wnership f a security, which des nt exceed 2% f the entire class f securities in a 12 mnth perid; and (3) any acquisitin f an equity security by the issuer f thse securities. 11 Additinally, Sectin 13(d)(6)(D) prvides that the SEC may, thrugh rder r regulatin, exempt any acquisitin r prpsed acquisitin f a security frm Sectin 13(d) s reprting requirements. 12 Is the U.S. Cngress currently cnsidering amendments t Sectins 13(d) and 13(g)? Yes. In March 2016, U.S. Senatrs Tammy Baldwin and Jeff Merkley intrduced legislatin (the Brkaw Act ) 13 that wuld amend Sectins 13(d) and 13(g) fr the expand the definitin f beneficial wnership t include persns hlding [a] pecuniary r indirect pecuniary interest in at least 5% f a particular class f securities. The Brkaw Act wuld als specify the methdlgy t be used fr calculating beneficial wnership in the cntext f derivative instruments. 14 What are the general requirements under Sectin 13(g)? A persn may generally file a shrt frm statement n Schedule 13G in lieu f a Schedule 13D if the persn qualifies as either: a qualified institutinal investr (under Rule 13d 1(b)); a passive investr (under Rule 13d 1(c)); r an exempt investr (under Rule 13d 1(d)). 10 See Rule 13d See 13(d)(6) f the Exchange Act. 12 See id. at 13(d)(6)(D). 13 The Brkaw Act is named fr a Wiscnsin twn that went bankrupt after an ut f state investr clsed a paper mill in the twn. 14 See the Brkaw Act, S. 1744, 115th Cng. (2017), available at cngress/senatebill/1744/all inf. Mrrisn & Ferster LLP 3

4 A persn that qualifies as a qualified institutinal investr (see Wh qualifies as an institutinal investr under Sectin 13 f the Exchange Act? ) will need t file a Schedule 13G within 45 days after the end f the calendar year (i.e., February 14 th ) in which the persn acquired beneficial wnership (i.e., greater than 5% wnership f a class f equity securities). 15 A persn wh qualifies as a passive investr (see Wh qualifies as a passive investr under Sectin 13 f the Exchange Act? ) must file a Schedule 13G within 10 days after acquiring beneficial wnership (but nt mre than 20% f the class f equity securities. 16 A persn wh qualifies as an exempt investr (see Wh qualifies as an exempt investr under Sectin 13 f the Exchange Act? ) must file a Schedule 13G within 45 days after the end f the calendar year in which the persn became a beneficial wner f a class f equity securities. 17 Generally, all persns, excluding thse that rely n the exempt investrs exemptin, that file n a Schedule 13G must certify that they have acquired the subject securities with a passive investment purpse. 18 Wh qualifies as a passive investr under Sectin 13 f the Exchange Act? A persn may file a Schedule 13G in lieu f a Schedule 13D under the passive investr exemptin, within 10 days f the triggering reprting event if the persn: (1) has nt acquired the securities with any purpse f, r with the effect f, changing r influencing the cntrl f the issuer, r in cnnectin with r as a participant in any transactin having that purpse r 15 See Rule 13d 1(b)(2). 16 See Rule 13d 1(c)(1) (3). 17 See Rule 13d 1(d). 18 See Rule 13d 1(b) (d). effect, including any transactin subject t Rule 13d 3(b); (2) is nt a qualified institutinal investr; and (3) is nt, either indirectly r directly, a beneficial wner f 20% r mre f the security that is the subject f the Schedule 13G filing. 19 Des the fact that a sharehlder is disqualified frm relying n the HSR Act exemptin due t its effrts t influence management f the issuer n a particular tpic, by itself, disqualify the sharehlder frm reprting beneficial wnership n Schedule 13G? The Hart Sctt Rdin Act (the HSR Act ) prvides an exemptin frm the HSR Act s ntificatin and waiting perid prvisins if, amng ther things, the acquisitin f securities was made slely fr the purpse f investment, with the acquirr having n intentin f participating in the frmulatin, determinatin, r directin f the basic business decisins f the issuer. The inability t rely n the HSR Act exemptin alne wuld nt preclude a sharehlder frm filing n Schedule 13G. Instead, eligibility t use Schedule 13G will depend, amng ther things, n whether the sharehlder acquired r is hlding equity securities with the purpse r effect f changing r influencing cntrl f the issuer. This determinatin is based upn all the relevant facts and circumstances. The SEC has nted that the subject matter f the sharehlder s discussins with the issuer s management may be dispsitive in making this determinatin, althugh the cntext in which the discussins ccur is als highly relevant. Fr example: Generally, engagement with an issuer s management n executive cmpensatin and 19 See Rule 13d 1(c). Mrrisn & Ferster LLP 4

5 scial r public interest issues, withut mre, wuld nt preclude a sharehlder frm filing n Schedule 13G as lng as such engagement is nt undertaken with the purpse r effect f changing r influencing cntrl f the issuer and the sharehlder is therwise eligible t file n Schedule 13G. Engagement n crprate gvernance tpics, such as remval f staggered bards, majrity vting standards in directr electins, and eliminatin f pisn pills, withut mre, generally wuld nt disqualify an therwise eligible sharehlder frm filing n Schedule 13G if the discussin is being undertaken by the sharehlder as part f a brad effrt t prmte its view f gd crprate gvernance practices fr all f its prtfli cmpanies, rather than t facilitate a specific change in cntrl in a cmpany. Wh qualifies as an institutinal investr under Sectin 13 f the Exchange Act? Any persn wh wuld therwise be required t file a Schedule 13D may file a Schedule 13G in lieu f the Schedule 13D if: (1) that persn has acquired the securities in the rdinary curse f business and nt with the purpse r effect f changing r influencing the cntrl f the issuer, r in cnnectin with r as a participant in any transactin having such purpse r effect, including any transactin subject t Rule 13d 3(b), ther than activities slely in cnnectin with a nminatin under Rule 14a 11; (2) that persn has prmptly ntified any ther persn (r grup within the meaning f Sectin 13(d)(3)) n whse behalf it hlds, n a discretinary basis, securities exceeding 5% f the class, f any acquisitin r transactin n behalf f that ther persn which might be reprtable by that persn under Sectin 13(d); and (3) that persn is either: By cntrast, Schedule 13G wuld be unavailable a brker r dealer registered under the if a sharehlder engages with the issuer s Securities Act; management n matters that specifically call fr the sale f the issuer t anther cmpany, the sale f a significant amunt f the issuer s a bank as defined in Sectin 3(a)(6) f the Securities Act; assets, the restructuring f the issuer, r a an insurance cmpany as defined under cntested electin f directrs. 20 Sectin 3(a)(19) f the Securities Act; an investment cmpany registered under Sectin 8 f the Investment Cmpany Act f 1940, as amended (the 1940 Act ); registered as an investment adviser under Sectin 203 f the Investment Advisers Act f 20 See Exchange Act Sectins 13(d) and 13(g) and Regulatin 13D G Beneficial Ownership Reprting, C&DI, Questin (July 24, 2016), available at: , as amended, r under the laws f any state; Mrrisn & Ferster LLP 5

6 an emplyee benefit plan as defined in Sectin 3(3) f the Emplyee Retirement Incme Security Act f 1974 ( ERISA ) that is subject t the prvisins f ERISA (r any plan that is nt subject t ERISA that is maintained primarily fr the benefit f the emplyees f a state r lcal gvernment r instrumentality, r an endwment fund); a parent hlding cmpany r cntrl persn (prvided the aggregate amunt held directly by the parent r cntrl persn, and directly and indirectly by their subsidiaries r affiliates that are nt persns specified under Rule 13d 1(b)(1)(ii)(A) (J), des nt exceed 1% f the securities f the subject class); a savings assciatin as defined in Sectin 3(b) f the Federal Depsit Insurance Act; a church plan that is excluded frm the definitin f an investment cmpany under Sectin 3(c)(14) f the 1940 Act); a nn U.S. institutin that is the functinal equivalent f any f the institutins listed in Rule 13d 1(b)(1)(ii)(A) (L) (s lng as the nn U.S. institutin is subject t a regulatry scheme that is substantially cmparable t the regulatry scheme applicable t the equivalent U.S. institutin); r a grup, prvided that all the members are persns specified in Rule 13d 1(b)(1)(ii)(A) (J). 21 Institutinal investrs must file a Schedule 13G within 45 days after the calendar year in which the investr hlds mre than 5% as f the year end r within 10 days after the end f the first mnth in which the persn s beneficial wnership exceeds 10% f the class f equity securities cmputed as f the end f the mnth. Wh qualifies as an exempt investr under Sectin 13 f the Exchange Act? A persn will qualify as an exempt investr if it hlds mre than 5% f a class f subject securities at the end f the calendar year, but has nt made an acquisitin subject t Sectin 13(d), including persns that acquire all f its securities prir t the issuer registering the subject securities under the Exchange Act and persns that acquire n mre than 2% f a class f subject securities within a 12 mnth perid. Fr example, an investr may hld a significant prtin f a private cmpany s equity securities, but becme subject t these filing requirements after the cmpany s initial public ffering, even thugh that investr has nt purchased any additinal shares. An exempt investr must file a Schedule 13G within 45 days after the end f the calendar year in which the event triggering the reprting bligatin ccurred. 22 What are the bligatins, under Sectin 13 f the Exchange Act, f a hlder f mre than 5% f a class f equity securities after the issuer cmpletes an initial public ffering (r ther ging public transactin)? Any sharehlder that hlds 5% r mre f an issuer s class f equity securities prir t an initial public 21 See Rule 13d 1(b)(1)(i) (ii)(a) (K). 22 See Rule 13d 1(d); and Sectin 13(d)(6)(B) f the Exchange Act; and C&DI, Questin (Jan. 3, 2014). Mrrisn & Ferster LLP 6

7 ffering ( IPO ), r any ther ging public transactin, must file a Schedule 13G within 45 days f the IPO r persn, either directly r indirectly, has r shares: (1) vting pwer, including the pwer t vte, r t ging public transactin. Such a sharehlder wuld direct the vting f, the security; r (2) investment nly be required t file a Schedule 13D if that sharehlder acquired greater than 2% f the issuer s equity securities within the 12 mnth perid fllwing the IPO r any ther ging public transactin (see Wh qualifies as an exempt investr under Sectin 13 f the Exchange Act? ). Is the infrmatin prvided t the SEC n a Schedule 13D r Schedule 13G cnfidential? N. Schedule 13D and Schedule 13G filings are a matter f public recrd, and any infrmatin prvided will be available fr review n the SEC website. A beneficial wner must file its Schedule 13D r pwer, including the pwer t dispse, r t direct the dispsitin f, the security. Further, any persn wh, directly r indirectly, creates r uses a trust, prxy, pwer f attrney, pling arrangement, r any ther cntract, arrangement, r device fr the purpse r effect f divesting the persn f beneficial wnership f a security r preventing the vesting f beneficial wnership as part f a plan r scheme t evade the reprting requirements under the Exchange Act will be deemed t be the beneficial wner f the security (see What cnstitutes a grup fr purpses f beneficial wnership? ). T calculate ttal beneficial wnership, all securities f the same class are aggregated tgether. Schedule 13G with the SEC. Rule 12b 11 f the The First, Secnd, Third, and Seventh U.S. Federal Exchange Act als requires a beneficial wner t deliver a cpy t each applicable exchange n which the Circuit Curts have all affirmed that the crux f Rule 13d 3 rests nt n whether a persn is the recrd beneficial wner has securities registered. Beneficial wner f the stck, but instead, n whether a particular wners may satisfy the delivery requirement by filing the Schedule 13D r Schedule 13G n the SEC s Electrnic Data Gathering, Analysis and Retrieval System ( EDGAR ). 23 persn can actually vte the shares. 24 Rule 13d 3 s wide net als encmpasses persns wh have the right t acquire beneficial wnership. Generally, a persn is deemed a beneficial wner f a security if that persn has the right t acquire beneficial Beneficial Ownership wnership f an equity security within 60 days. 25 What is the definitin f beneficial wnership under Sectin 13(d) and 13(g)? Under Rule 13d 3 f the Exchange Act ( Rule 13d 3 ), a persn is a beneficial wner f an equity security if that 23 See Rule 13d See, e.g., Calvary Hldings, Inc. v. Chandler, 948 F.2d 59, 64 (1st Cir. 1991); GAF Crp., 453 F.2d at 716; and Bath Industries, 427 F.2d at Under Rule 13d 3, the right t acquire beneficial wnership is established (i) thrugh the exercise f any ptin, warrant r right; (ii) thrugh the cnversin f a security; (iii) thrugh the pwer t revke a trust, discretinary accunt, r similar arrangement; r (iv) upn the autmatic terminatin f a trust, discretinary accunt r similar arrangement. See id. Mrrisn & Ferster LLP 7

8 What types f securities are cvered fr purpses f beneficial wnership under Sectin 13 f the Exchange Act? Sectins 13(d) and 13(g) apply t: (1) any ʺequity security f a class that is registered under Sectin 12 f the Exchange Act; (2) any equity security f any insurance cmpany that wuld have been required t be s registered except fr the exemptin cntained in Sectin 12(g)(2)(G) f the Exchange Act; r (3) any equity security issued by a clsed end investment cmpany registered under the 1940 Act. 26 Equity security has the meaning set frth in Rule 3a11 1 under the Exchange Act. 27 As nted under Sectin 13(d), the term equity securities des nt include securities f a class f nn vting securities. 28 Mrever, the Divisin has explained that certain types f securities, such as American Depsitary Receipts, are nt cnsidered a separate class f equity securities fr purpses f calculating beneficial wnership f securities. 29 When des a persn maintain vting pwer ver equity securities under Sectin 13 f the Exchange Act? The SEC has nted in its guidance that vting pwer is synnymus with the ability t cntrl r influence the vting r dispsitin f the securities. Accrdingly, the mere pssessin f the legal right t vte securities under applicable state r ther law (i.e., a management prxy cmmittee) may nt be determinative f wh is a beneficial wner f such securities inasmuch as anther persn r persns may have the pwer whether legal, ecnmic, r therwise, t direct such vting. 30 If ne persn has pssessin f the legal right t vte while anther has the actual pwer t vte, nly the individual able t direct the vting must file a Schedule 13D. 31 Fr example, in First Natinal Bank f Chicag, the SEC Staff tk n actin against the First Natinal Bank f Chicag after it amended its standard secured nte frms t delete the prvisins that granted it the pwer t vte prir t default, prhibiting the bank (as pledgee) frm vting prir t default. 32 Likewise, in Ri 26 See 13(d) and 13(g) f the Exchange Act. 27 Rule 3a11 1 under the Exchange Act defines an equity security as any: (1) stck r similar security, certificate f interest r participatin in any prfit sharing agreement, prerganizatin certificate r subscriptin, transferable share, vting trust certificate r certificate f depsit fr an equity security, limited partnership interest, interest in a jint venture, certificate in a business trust; (2) security future n any such security; (3) cnvertible, with r withut cnsideratin int such a security, r carrying any warrant r right t subscribe t r purchase such a security; (4) such warrant r right; r (5) put, call, straddle, r ther ptin r privilege f buying such a security r frm selling such a security t anther withut being bund t d s. 28 See Gulf United, SEC n actin letter (Apr. 28, 1979) (... [A]ll nn vting securities have been remved frm the definitin f an equity security stated in Rule 13d 1(d)... ). 29 Ownership Reprts and Trading By Officers, Directrs and Principal Security Hlders, SEC Release N (May 23, 1991) (ʺ[a] reprting bligatin under Sectin 13(d) is Grande Industries, the SEC Staff tk n actin against trustees f pensin funds under the Santa Fe Plan (the SF Plan ) wh simply maintained the authrity t vte shares in accrdance with the directins f the SF Plan s participants. 33 The SEC Staff has similarly granted nactin relief under Rule 13d 3 t clearinghuses, whlly determined by wnership f the class f depsited securities, including wnership f thse securities thrugh ADRs. ). 30 Adptin f Beneficial Ownership Disclsure Requirements, Exchange Act Release N , WL , at *5 (February 4, 1977). 31 Calvary Hldings, Inc., 948 F. 2d at First Natinal Bank f Chicag, SEC n actin letter (July 24, 1978). 33 Ri Grande Industries, Inc., SEC n actin letter (Apr. 5, 1989). Mrrisn & Ferster LLP 8

9 wned subsidiaries with n ability t initiate a prpsal fr acquisitin r dispsitin f shares, and minrity partners, where the majrity partners maintained all discretin ver vting stck wned by the partnership. 34 U.S. curts have similarly established that ne wh has the right t determine hw the stck is vted has a beneficial interest under Rule 13d Accrdingly, in Calvary Hldings, Inc. v. Chandler, the Curt held that merely wning a stck in name nly, and withut the ability t dispse f r vte the stck, is nt tantamunt t beneficial wnership. When des a persn maintain investment pwer ver equity securities under Sectin 13 f the Exchange Act? Investment pwer includes the pwer t dispse, r t direct the dispsitin, f [a] security. 36 The SEC has explained that a persn will be said t have investment pwer ver securities where the persn has the ability t change r influence cntrl. Investment pwer is nt predicated n legal title t stck, whether a particular persn is the registered wner f the security r whether the security is in the name f a particular persn. Further, investment pwer may be maintained even where a particular persn may nt participate in the ecnmic benefits f a particular security. Investment pwer may be held by a single beneficial wner r shared amng a grup f beneficial wners. 37 In Wellman v. Dickinsn, the Curt f Appeals fr the Secnd Circuit nted that Cngress intended investment pwer t include [t]he pwer t dispse f a blck f securities represent[ing] a means fr effecting changes in crprate cntrl In CSX Crp. v. Children s Investment Fund Management (UK) LLP et al., the Curt f Appeals fr the Secnd Circuit further nted that ne must generally... have sme measure f active cntrl... that [is]... exercisable. The curt in CSX Crp. fund that merely having a lng psitin in a cash settled ttal return equity swap [did] nt cnstitute having the pwer, directly r indirectly, t direct the dispsitin f shares that a cunterparty purchases t hedge its swap psitins, and thus des nt cnstitute having investment pwer fr purpses f Rule 13d 3(a). 39 What cnstitutes a grup fr purpses f beneficial wnership? The term beneficial wner is nt defined under Sectin 13(d). Hwever, under Rule 13d 3, a beneficial wner encmpasses any persn wh, directly r indirectly, thrugh any cntract, arrangement, understanding, relatinship, r therwise maintains any vting r investment pwer with respect t a security. An aggregatin f persns r entities (i.e., a grup ) may be the beneficial wner f 5% r mre f a particular registered security t the extent they act 34 See, e.g., The Suthland Crpratin, SEC n actin letter (Aug. 10, 1987); Depsitry Trust Cmpany, SEC n actin letter (Feb. 23, 1979); Bank America Capital Crpratin, SEC n actin letter (May 6, 1979); and Overseas Shipbuilding Grup, Inc., SEC n actin letter (Oct. 31, 1977). 35 Bath Industries, Inc. v. Blt, 305 F.Supp. 526, 537 (E.D. Wis. 1969). 36 See Rule 13d 3(a)(2). 37 See Filing and Disclsure Requirements Relating t Beneficial Ownership, Securities Act Release N. 5925, Exchange Act Release N. 14,692 (Apr. 28, 1978). 38 See Wellman v. Dickinsn, 682 F.2d 355, 365 (2d Cir. 1982). 39 See CSX Crp. v. Children s Investment Fund Management (UK) LLP, et al., 654 F.2d 276, (2d Cir. 2011). Mrrisn & Ferster LLP 9

10 fr the purpse f indirectly r directly btaining securities as part f a plan r scheme... t be the infrmatin required by Schedule 13D r Schedule 13G with respect t the same securities, prvided that: beneficial wner f such securities. The fundamental factr fr determining whether an aggregatin f persns cnstitutes a grup is whether the persns are cmbined in furtherance f a cmmn bjective. 40 Such a cncerted actin by the grup s members des nt need t be frmally memrialized in writing. 41 The legislative histry f Sectin 13(d)(3) under the Exchange Act expressly establishes cngressinal intent t ensure that thse grups are subject t the requirements f Schedule 13D r Schedule 13G, even where the individuals alne wuld nt exceed the 5% reprting threshld. 42 Hwever, the SEC Staff has made it clear that the frmatin f a grup under Sectin 13 des nt, withut mre, result in the attributin f beneficial wnership t each grup member f the securities beneficially wned by ther members. 43 each persn n whse behalf the statement is filed is individually eligible t use the schedule n which the infrmatin is filed; each persn n whse behalf the statement is filed is respnsible fr (i) the timely filing f the statement and any amendments made t the statement and (ii) the cmpleteness and accuracy f the infrmatin cncerning that persn cntained in the statement hwever, each individual persn is nt respnsible fr the cmpleteness r accuracy f the infrmatin cncerning the ther members f the grup unless such persn knws r has reasn t believe that such infrmatin is inaccurate ; and Must each member f a grup file a Schedule 13D r Schedule 13G individually? Under Rule 13d 5, a grup s filing bligatin n either Schedule 13D r Schedule 13G may be satisfied by either a single jint filing amng all the members f the grup r by a single filing by each member f the grup. A grup may file a single statement cncerning the the statement identifies all grup members, cntains the required infrmatin with regard t each such persn, indicates that such statement is filed n behalf f all such persns, and includes, as an exhibit, their agreement in writing that such a statement is filed n behalf f each f them. 44 T the extent the grup s members elect t make their wn filings, each filing must identify all members f the 40 Bath Industries, 427 F.2d at 111. See als Crenc Crp. v. Schiavne & Sns, Inc., 488 F.2d 207, 217 (2d Cir. 1973); Texasgulf Inc., v. Canada Develpment Crp., 366 F.Supp. 374, 403 (S.D.TX. 1973) 41 Securities and Exchange Cmmissin v. Savy Indus., Inc., 587 F.2d 1149, 1163 (D.C. Cir. 1978) 42 See Wellman, 682 F.2d at (citing S. Rep. N. 550, 90th Cng., 1st Sess. 8 (1967); H.R. Rep. N. 1711, 90th Cng., 2d Sess. 8 9 (1968), reprinted in (1968) U.S. Cde Cng. & Admin. News 2811, 2818). 43 See C&DI, Questin grup; hwever, the disclsed beneficial wnership infrmatin cncerning the ther persns making the filing need nly reflect infrmatin which the filing persn knws r has reasn t knw See Rule 13d 1(k)(1). 45 See Rule 13d 1(k)(2). Mrrisn & Ferster LLP 10

11 As previusly discussed, when tw r mre persns agree t act tgether fr the purpse f acquiring, hlding, vting r dispsing f an issuer s equity securities, the grup shall be deemed t have acquired beneficial wnership fr purpses f Sectin 13(d) and Sectin 13(g) as f the date f the agreement. Hwever, a grup will be deemed t nt have acquired beneficial wnership f equity securities as a grup (in a transactin nt invlving a public ffering) prvided that: all the members f the grup are persns specified in Rule 13d 1(b)(1)(ii); the purchase is in the rdinary curse f each grup member s business and nt with the purpse nr the effect f changing r influencing cntrl f the issuer, nr in cnnectin with r as a participant in any transactin having such purpse r effect, including any transactin subject t Rule 13d 3(b) ; there is n agreement amng r between any members f the grup t act tgether in cnnectin with acquiring an issuer s securities (except fr the purpse f facilitating the specific purchase invlved); and directly related t the cmpletin f the ffer r sale f the securities. 46 Must a hlder f mre than 5% f derivative securities in an issuer make a filing n Schedule 13D r Schedule 13G? Yes. Under the SEC s current rules, hlders f SBSs may be subject t beneficial wnership reprting requirements where an SBS cnfers vting and/r investment pwer (r a persn therwise acquires such pwer based n the purchase r sale f [an SBS]), grants a right t acquire an equity security, r is used with the purpse r effect f divesting r preventing the vesting f beneficial wnership as part f a plan r scheme t evade the reprting requirements Under Rule 13d 3(a), where an SBS prvides a persn with exclusive r shared... vting and/r investment pwer ver an equity security thrugh a cntractual term f the SBS r therwise, the persn is cnsidered a beneficial wner f the equity security. 48 Furthermre, in accrdance with Rule 13d 3(b), if a persn utilizes an SBS with the purpse r effect f divesting a persn f beneficial wnership r preventing the vesting f beneficial wnership as part f a plan r scheme t evade [the reprting requirements] under Sectin 13(d) r 13(g), that persn will be deemed t be a beneficial the nly actins amng r between the grup members with respect t the issuer s securities subsequent t the clsing date f the nn public ffering are thse which are necessary t cnclude ministerial matters wner f the equity security. 49 Lastly, if a persn has the right, thrugh an SBS, t acquire an equity security within 60 days r hlds that right with the purpse r effect f changing r influencing cntrl f the issuer f 46 See Rule 13d 5 et seq. 47 Beneficial Ownership Reprting Requirements and Security Based Swaps, Exchange Act Release N (Mar. 17, 2011), at Id. 49 Id. Mrrisn & Ferster LLP 11

12 the security fr which the right is exercisable, the persn will be deemed a beneficial wner under Rule 13d 3(d)(1). As previusly discussed, Sectin 766 f the Ddd Frank Act added new Sectin 13() t the Exchange Act, which establishes that... a persn shall be deemed t acquire beneficial wnership f an equity security based n the purchase r sale f a[n SBS], nly cnstitute beneficial wnership fr purpses f Sectin 13(d) r 13(g). Fr example, in CSX Crpratin v. The Children s Investment Fund Management (UK) LLP et al., the District Curt ruled that hlders f cash settled equity ttal return equity swaps ( TRSs ) held by shrt cunterparties wuld be deemed t beneficially wn thse shares fr purpses f [the] Williams Act s t the extent that the [SEC], by rule, determines after disclsure requirement. 55 In CSX Crpratin, CSX cnsultatin with the prudential regulatrs and the Secretary f the Treasury, that the purchase r sale f the [SBS], r class f [SBS], prvides incidents f wnership cmparable t direct wnership f the equity security Sectin 13() f the Exchange Act and Sectin 766 f the Ddd Frank Act became effective n July 16, On March 17, 2011, the SEC reprpsed t adpt certain prvisins f Rule 13d 3 and Rule 16a 1 f the Exchange Act t clarify that persns wh purchase r sell [SBSs] will remain within the scpe f these rules t the same extent as they are nw. 52 The impetus fr the reprpsal was the SEC s cncern that Sectin 766 f the Ddd Frank Act may be interpreted t render the beneficial wnership determinatins made under Rule 13d 3 inapplicable t a persn wh Crpratin, a U.S. publicly held railrad cmpany, claimed that funds assciated with tw hedge funds, The Children s Investment Fund ( TCI ) and 3G Capital Partners Ltd., vilated Sectin 13(d) when they failed t timely disclse the frmatin f a grup, and that TCI vilated Sectin 13(d) when it acquired a significant amunt f CSX Crpratin s utstanding equity prir t launching a takever attempt f CSX Crpratin. 56 In making such determinatin that TCI was a beneficial wner f the TRSs, the District Curt nted that the definitin f beneficial wnership under Rule 13d 3(a) is very brad as is apprpriate t its bject f ensuring disclsure frm all... persns wh have the ability [even] t influence cntrl (see When des a persn maintain investment pwer ver equity securities under purchases r sells [an SBS]. 53 The reprpsal was Sectin 13 f the Exchange Act? ). 57 Mrever, the cnfirmed n June 8, 2011, and went effective n July 16, U.S. curts have als held that hlders f ther frms f derivative cntracts, in additin t SBSs, will definitin des nt cnfine itself t the mere pssessin f the legal right t vte [r direct the acquisitin r dispsitin f] securities, but lks instead t all f the facts and circumstances t identify 50 See the Ddd Frank Act, Id. at Exchange Act Release N , supra, nte 47 at Id. at See Beneficial Ownership Reprting Requirements and Security Based Swaps, SEC Release N (June 8, 2011). 55 CSX Crp. v. Childrenʹs Inv. Fund Mgmt. (UK) LLP, et al., 562 F. Supp. 2d 511, 512 (S.D.N.Y. 2008). 56 Id. at See id. at (citing Interpretive Release n Rules Applicable t Insider Reprting and Trading, Exchange Act Release N (Oct. 1, 1981)). Mrrisn & Ferster LLP 12

13 situatins in which ne has even the ability t influence vting, purchase, r sale decisins f its cunterparties by legal, ecnmic, r ther means (see When des a persn maintain vting pwer ver equity securities under Sectin 13 f the Exchange Act? ). 58 Must hlders f securities issued under Regulatin A+ reprt beneficial wnership n either Schedule 13D r Schedule 13G? Schedule 13D Filing What infrmatin must be prvided n a Schedule 13D? A beneficial wner that files n Schedule 13D must prvide specific and detailed infrmatin, as required under Rule 13d 101 under the Exchange Act ( Rule 13d 101 ). Under Schedule 13D, the fllwing items must be disclsed: N, unless the issuer cntempraneusly lists its securities n a natinal securities exchange, such that it must register thse securities under the Exchange Act. Must a brker dealer r investment adviser file a Schedule 13D r Schedule 13G? A brker dealer r investment adviser may be required t file a Schedule 13D r Schedule 13G, depending n whether the brker dealer r investment adviser is a Item 1. Security and Issuer. The filing must include the: title f the class f equity securities that is the subject f the Schedule 13D; and name and address f the issuer s principal executive ffices. Item 2. Identity and Backgrund. beneficial wner f the equity securities. 59 The SEC has nted that a registered representative f a brker dealer will [typically] nt be deemed t beneficially wn cmmn stck held in nndiscretinary custmer accunts. 60 Hwever, t the extent that such a registered representative has r shares the de fact pwer t direct the vting r dispsitin f the securities in custmer accunts, the registered representative may be deemed t beneficially wn securities held by custmers in nn discretinary accunts Id. at 546 (citing Adptin f Beneficial Ownership Disclsure Requirements, 42 Fed. Reg. 12, 342, 12,344 (Mar. 3, 1977). 59 In the Matter f Harvey Katz, Exchange Act Release N. 20,893 (Apr. 25, 1984). 60 Id. 61 Id. A natural persn must prvide his r her: name; residence f business address; principal ccupatin r emplyment and the name f the principal business and address in which that emplyment is cnducted; whether r nt the persn has been cnvicted in the last five years in a criminal prceeding, including the dates, nature f cnvictin, name and lcatin f curt, penalties impsed, r ther dispsitin f the case; Mrrisn & Ferster LLP 13

14 whether r nt the persn ver the last five years was a party t a civil prceeding f a judicial r administrative bdy, and if such a prceeding resulted in a judgment, decree r final rder enjining future vilatins f, r prhibiting r mandating activities subject t, federal r state securities laws r finding any vilatin with respect t thse laws, and if s, identify and describe such prceedings and where material, prvide additinal infrmatin with respect t prir acquisitins nt previusly reprted under Sectin 13(d). Item 4: Purpse f Transactin. The filer must state the purpse(s) f the acquisitin f securities f the issuer and describe any plans r prpsals that the filer may have which wuld result in: the acquisitin by any persn f additinal securities f the issuer, r the dispsitin f the securities f the issuer; summarize the terms f the judgment; and cuntry f citizenship. Item 3: Surce and Amunt f Funds r Other Cnsideratin. A filer must: prvide the surce and the amunt f funds r ther cnsideratin used r t be used in making the purchases; disclse whether any part f the purchase price is r will be represented by funds r ther cnsideratin brrwed r therwise btained fr the purpse f acquiring, hlding, trading r vting the securities; an extrardinary crprate transactin (e.g., a merger, rerganizatin r liquidatin, invlving the issuer r any f its subsidiaries); 62 a sale r transfer f a material amunt f assets f the issuer r any f its subsidiaries; any change in the present bard f directrs r management f the issuer, including any plans r prpsals t change the number r term f directrs r t fill any existing vacancies n the bard; any ther material change in the issuer s business r crprate structure; prvide a descriptin f the transactin and the names f the parties theret; prvide a descriptin f the methd f acquisitin (if the securities were acquired ther than by purchase); and 62 See SEC v. Te, 746 F.3d 90, 99 n.10 (3d Cr. 2014) ( [a] disclsable matter under Rule 13d 101 includes a reprting persn s plan which wuld result in an extrardinary crprate transactin, such as a merger, rerganizatin r liquidatin, invlving the issuer. ). Mrrisn & Ferster LLP 14

15 changes in the issuer s charter, bylaws, r similar dcuments r ther actins which may impede the acquisitin f cntrl f the issuer by any persn; a class f securities f the issuer t be delisted frm a natinal securities exchange r t be quted in an interdealer prvide the aggregate number and percentage f the class f securities identified in Item 1, including the aggregate number and percentage f class f securities f thse that cmprise a grup within the meaning f Sectin 13(d)(3) f the Exchange Act; qutatin system f a natinal securities assciatin; describe any transactins in the class f securities reprted n that were effected a class f the issuer s equity securities becming eligible fr terminatin f registratin under Sectin 12(g)(4) f the during the past 60 days r since the mst recent filing f Schedule 13D, whichever is less, by the persns named in Item 5 65 ; Exchange Act; r any ther similar actin. The SEC has affirmed, hwever, that fr purpses f Item 4, [s]tale, generic disclsures that simply reserve the right t engage in certain crprate transactins d nt suffice when there are material changes t thse plans, including actins t take a cmpany private. 63 As nted in SEC staff guidance, [a] plan r prpsal, as thse terms are used in Item 4, is nt deemed t exist nly upn executin f a frmal agreement r cmmencement f a tender ffer, slicitatin r similar prvide a statement n whether any ther persn is knwn t have the right t receive r the pwer t direct the receipt f dividends frm, r the prceeds frm the sale f, the securities. If the interest relates t mre than 5% f the class, the persn shuld be identified; and include the date n which the reprting persn ceased t be the beneficial wner f mre than 5% f the class f securities, as applicable. transactin. 64 Item 6: Cntracts, Arrangements, Item 5: Interest in Securities f the Issuer. A filer must: Understandings, r Relatinships with Respect t Securities f the Issuer. The filer must describe any cntracts, 63 See U.S. Securities and Exchange Cmmissin, Crprate Insiders Charged fr Failing t Update Disclsures Invlving Ging Private Transactins, Press Release, Mar. 13, 2015, available at 47.html#.VRA6u_nF98E. 64 See SEC Questins and Answers f General Applicability, Questin N (citing In the Matter f Tracinda Crpratin, Exchange Act Release N (Sept. 3, 2008)). arrangements, understandings, r 65 The instructins fr Schedule 13D state that Item 5 shall include the fllwing infrmatin: (1) the identity f the persn cvered by Item 5(c) wh effected the transactin; (2) the date f the transactin; (3) the amunt f securities invlved; (4) the price per share r unit; and (5) where and hw the transactin was effected. See Rule 13d 101. Mrrisn & Ferster LLP 15

16 relatinships (legal r therwise) amng the persns prvided in Item 2 and between thse persns and any persn with respect t any securities f the issuer. Item 7: Material t be Filed as Exhibits. A filer must prvide: Schedule 13G Filing Wh may file n a frm Schedule 13G? Persns that fall within Sectin 13(d) s exemptins, namely passive investrs, qualified institutinal investrs r exempt investrs, may file n a frm cpies f written agreements relating t filing f jint acquisitin statements as required by Rule 13d 1(k); cpies f all written agreements, cntracts, arrangements, understandings, plans, r prpsals related t: Schedule 13G. What infrmatin must be prvided n a Schedule 13G? Rule 13d 102 under the Exchange Act specifies the elements that must be included fr a Schedule 13G filing t be deemed cmplete, including a cver page and the fllwing Items : brrwing f funds t finance the acquisitin (per Item 3); Cver Page. The filer must prvide a cver page that includes general infrmatin abut acquisitin f issuer cntrl, liquidatin, sale f assets, merger, r change in business r crprate structure, r any ther matter (per Item 4); and transfer r vting f the securities, finder s fees, jint ventures, ptins, puts, calls, guarantees, f lans, guarantees against lss r f prfit, r the giving r withhlding f any prxy (per Item 6). Signature. The SEC requires that all Schedule 13D filers attest that after reasnable inquiry and t the best f [his r her] knwledge and belief, [the filer] certif[ies] that infrmatin set frth in the Schedule 13D is true, cmplete and crrect. the filer (inter alia, name f reprting persns, citizenship r place f rganizatin, whether the shares beneficially wned are held by a grup, classificatin f reprting persn (e.g., brker dealer, bank, investment cmpany, etc.) and specify which rule is being relied upn t file a Schedule 13G (i.e., Rules 13d 1(b); 13d 1(c); r 13d 1(d)). Items. Schedule 13G requires the fllwing items t be prvided: Item 1(a). Name f the issuer. Item 1(b). Address f the issuer. Items 2(a) (e). Name, address r principal business ffice (r, if nne, residence), citizenship, title f class f securities, and CUSIP number f the securities. Mrrisn & Ferster LLP 16

17 Item 3. Specify whether the Schedule 13G is being filed under Rule 13d 1(b) (the institutinal investr exemptin) r Rule 13d 2(b) r (c) (making an amendment t an already filed Schedule 13G). Item 4. Infrmatin regarding the aggregate number and percentage f the class f securities f the issuer identified in Item 1 (i.e., the number f shares ver which the persn has sle r shared vting r investment pwer). classificatin f the relevant subsidiary. Item 8. If the Schedule 13D has been filed by a grup under Rule 13d 1(b)(1)(ii)(J), Item 8 shuld include an exhibit that prvides the identity and Item 3 classificatin f each member f the grup. Item 9. The filer may furnish as an exhibit a ntice f disslutin f a grup, stating the date f the disslutin and that all future filings with respect t transactins in the Item 5. Disclsure as t whether the Schedule 13G is being filed t reprt that the reprting persn has as f the date theref ceased t be the beneficial wner f mre than 5% f the class f securities. security reprted n Schedule 13G will be filed individually. Item 10. A persn that files a Schedule 13G based n either Rule 13d 1(b) r Rule 13d 1(c) must certify that the securities that are the Item 6. Disclsure f whether any ther persn is knwn t have the right t receive r the pwer t direct the receipt f dividends frm, r the prceeds frm the sale f, the subject f the Schedule 13G were acquired and held in the rdinary curse f business and were nt acquired and nt held fr the purpse f r with the effect f changing r securities. If the interest relates t influencing the cntrl f the issuer f mre than 5% f the class, the persn must be identified. Item 7. Disclsure as t whether a parent hlding cmpany r cntrl persn has filed the Schedule 13D under Rule 13d 1(b)(1)(ii)(G). This item shuld include an exhibit stating the identity and the Item 3 the securities (r any transactin having that purpse r effect). A filer that files based n Rule 13d 1(b)(1)(ii)(J), r if filed by a grup under Rule 13d 1(b)(1)(ii)(K) that cntains at least ne nn U.S. institutin member eligible t file under Rule 13d 1(b)(1)(ii)(J), must Mrrisn & Ferster LLP 17

18 certify that the freign regulatry scheme f the nn U.S. institutinal member is substantially cmparable t the regulatry scheme applicable t the functinally equivalent U.S. institutin(s). When must a beneficial wner that has previusly filed a Schedule 13G instead file a Schedule 13D? A persn that has previusly filed a Schedule 13G t reprt beneficial wnership f at least 5% f a class f equity securities, r is required t reprt n Schedule 13G but has nt yet filed with the schedule, must instead file a Schedule 13D within 10 days, and Amendments and Changes t a Schedule 13D r 13G Filing When may a beneficial wner that has filed a Schedule 13D instead file a Schedule 13G? Any persn wh has filed a Schedule 13D under paragraphs (e), (f), r (g) f Rule 13d 1 may file a Schedule 13G where the persn qualifies under Rule 13d 1(b) r (c). In accrdance with Rule 13d 1(h), any persn wh has filed a Schedule 13D may instead reprt its beneficial wnership n Schedule 13G as lng as the shares are n lnger held with cntrl intent. 66 Any hlder wh intends t switch t a Schedule 13G must meet the necessary requirements f Rule 13d 1(b) shall cntinue t be required t file a Schedule 13D, if the persn: has acquired r hlds the securities with a purpse r effect f changing r influencing cntrl f the issuer, r in cnnectin with r as a participant in any transactin having that purpse r effect; and is at that time the beneficial wner f mre than 5% f a class f equity securities. 67 When must a Schedule 13D r Schedule 13G be amended? Where a material change ccurs in the facts set frth in a Schedule 13D r Schedule 13G filed under Rule 13d 1, r (c). Where a security hlder was nt riginally including, but nt limited t, any material increase r eligible t file a Schedule 13G and instead filed a Schedule 13D t reprt beneficial wnership, but later files a final amendment n Schedule 13D t reprt that its beneficial wnership f a particular class f securities fell belw 5%, then the security hlder may qualify t file a Schedule 13G if its beneficial wnership f the securities again increases abve the 5% threshld. decrease in the percentage f the class beneficially wned, the persn r persns wh were required t file the statement must prmptly file with the SEC an amendment disclsing such a change. 68 Fr example, an acquisitin r dispsitin f beneficial wnership f securities in an amunt equal t 1% r mre f the class f securities shall be deemed material. 69 Hwever, acquisitins r dispsitins f securities that cnstitute 66 See Rule 13d 1. See als C&DI, Questin See Rule 13d See Rule 13d 2(a). 69 Id. Mrrisn & Ferster LLP 18