The Activist Investor Blog
The Activist Investor Blog
Investors, Talk Amongst Yourselves
We get this question all the time:
“What can we talk to other investors about?”
The answer is:
“Just about anything you want, subject to a few straightforward limitations.”
This situation comes up in a few different circumstances:
❖One investor wants to see if others have similar opinions about a given portfolio company
❖The investor seeks to assess the potential support for a director nominee or annual meeting resolution
❖A shareholder asks other shareholders to vote for a nominee or resolution.
Yet, investors worry about what kinds of communications are legal and illegal. So, here we put you at ease - securities laws and corporate bylaws generally allow almost all kinds of communications among investors.
Two Kinds of Limits
First, SEC regulation and poison pill bylaws specify what constitutes a “group” of investors, including how investor communication becomes group action. Second, one SEC regulation applies to a particular kind of communication, the solicitation of proxies.
Schedule 13D: A group can exist in SEC regulations, and in poison pill terms. The SEC regulates how one or more investors disclose an investment position. Investors should be familiar with Schedule 13D - you file it whenever you have an “active intent” at a portfolio company, and your position exceeds 5% of the outstanding shares. A group of investors whose combined holdings also exceed 5%, and who together have that “active intent”, must also file Schedule 13D.
In this situation, the SEC interprets “active intent” pretty narrowly. Investors need to plan and coordinate BoD elections or takeover plans. If they do that without filing a Schedule 13D disclosing those plans, then the SEC would likely claim the shareholders violated the Schedule 13D regulations.
Poison pills: Corporate shareholder rights plans or poison pills also prescribe what constitutes a “group”. Recall that investors trigger a poison pill in two ways: both crossing a shareholding threshold (typically 15% of outstanding shares) and acting in ways that the poison pill prohibits. The latter condition has opened up considerably in recent years, so that a wide range of actions qualify. Mere discussion of an investment, though, probably doesn’t.
Proxy solicitation: Finally, the SEC regulates this specific type of communication. Unlike the preceding limits, it applies to an investment as small as a single share. But, it applies in a narrow situation, generally when an investor seeks to elect a nominee to the BoD.
What can investors discuss, then?
All manner of interesting subjects. One investor can ask another:
❖What do you think of the most recent results?
❖What do you think of the current strategy?
❖What do you think of the CEO’s performance?
❖Do you plan to attend the annual meeting?
❖How do you plan to vote at the annual meeting?
❖Will you vote for our shareholder resolution?
On this last point, resolutions don’t require the proposer to solicit proxies, since the company includes it in the proxy materials. So, investors can aggressively campaign for these resolutions, free from the proxy solicitation regulations.
Another way to think about this: outside of a proxy solicitation, shareholders can discuss anything if together they don’t exceed 5% of the outstanding shares. That way, they don’t trigger Schedule 13D reporting obligations, or a poison pill.
Questions and subjects that investors should avoid
❖Do you want to share expenses to elect our BoD nominees?
❖We’d like you to vote for our BoD nominees (not exactly the same as soliciting proxies, but close enough)
❖Do you want to meet with the BoD to see if we can replace the CEO?
Investors can, and should, feel free to discuss just about anything else.
Tuesday, May 8, 2012