The Activist Investor Blog
The Activist Investor Blog
What (and When) Does an Investor Need to Disclose About a Portfolio Company?
Lately we’ve received a number of questions about disclosure obligations:
❖When does an investor need to disclose its holdings in a company?
❖How many shares triggers disclosure?
❖What forms do I file?
❖How do derivatives affect disclosure?
These questions became a little more urgent after Bill Ackman’s Pershing Square Capital Management disclosed its holdings in J.C. Penney and Fortune Brands. In October 2010 Pershing Square disclosed holdings of 17% in JCP and 11% in FO, in a neat trick of managing disclosure and trading. It built its position from under the basic reporting threshold of 5% of outstanding shares to the considerable percentages that it now owns within a 10-day filing deadline. This of course surprised management, and renewed calls for how investors disclose their holdings.
Anyway, here’s how various regulations require investor disclosure, and how these disclosures (or other obligations) multiply with increases in holdings:
ownership
5%
10%
15%
15% (5-20%)
$66 million
disclosure (or other obligation)
Schedules 13D and 13G
short-swing profits
state business combination laws
poison pill
Hart-Scott-Rodino Act
Note that the only “disclosure” item occurs at 5% (more on that in a moment). The other obligations pertain more to various filings, limits on merger activity, or trading limits, rather than to what an investor needs to reveal publicly about their equity position.
We provide detail on each of these requirements in the guide on our Legislative and Regulatory webpage.
Most activist investors will need to worry only about the 5% and 10% thresholds. At 5%, you need to disclose either a passive (Schedule 13G) or active intent (Schedule 13D). Now, “passive” and “active” are a little subjective. An abundantly cautious PM would file a Schedule 13D for an investment in which he or she merely plans to talk to management. Others may file it only for intent to nominate director candidates or submit resolutions for the annual meeting agenda. Suffice it to say, if you have any doubt, consult your securities attorney.
To answer the other questions from above: investors need to file either Schedule 13D or 13G within 10 days of owning at least 5% of the common shares outstanding of a company. At least for now, derivatives that create an “economic interest” in the company don’t count toward the 5%.
At the 10% threshold, a fund must pay short-swing profits. In brief, this means that a fund must relinquish any gains from trading a 10%-or-greater position within a six-month period. Again, consult a securities attorney for more definitive advice.
The other thresholds most likely won’t concern most typical activist investors, at least those that don’t seek to acquire entire companies. The state business combination laws (most notably Delaware Section 203) and Hart-Scott-Rodino Act filing make it difficult for hostile or unsolicited acquisitions, but don’t really limit what an activist investor can do, even in consulting with other investors.
The poison pill threshold, which varies by company but is commonly (but not always) 15%, originally had the same goal as state business combination laws: create an obstacle for a hostile bidder. It has since evolved into a limit on what any one investor can own. We’ll comment in more detail on how poison pills operate to do this in our next posting.
Tuesday, February 8, 2011