The SEC’s long-expected proposal to amend the Section 13(d) rules would expand the circumstances under which an investor could be deemed a ten percent owner. The determination of ten percent owner status in these circumstances would depend on “facts and circumstances” analyses, potentially creating additional opportunities for the plaintiffs’ bar to pursue aggressive claims and making it difficult for defendants to prevail on a motion to dismiss.
Cash-Settled Derivative Securities. Currently, a derivative security which provides for settlement in cash does not represent beneficial ownership of the “reference security,” and therefore the underlying securities are not counted in determining the holder’s status as a ten percent owner. The proposed amendments would attribute beneficial ownership to the holder if the holder holds the derivative security with the purpose or effect of changing or influencing control of the issuer, or as a participant in a transaction having a control purpose or effect.
The proposed rule contains two formulae for determining the number of securities the holder of a cash-settled derivative security would be deemed to own, both of which require the holder to calculate the “delta” for the derivative security, defined as the difference in the amount by which the value of the derivative security changes as compared to the amount by which the value of the reference security changes.
The rule would not apply to “security based swaps” as defined by Section 3(a)(68) of the Exchange Act, which the SEC may not treat as representing beneficial ownership absent consultation with the prudential regulators and the Secretary of the Treasury.
Section 13(d) Groups. Rule 13d-5 provides that a group is formed when two or more persons “agree to act together” for the purpose of “acquiring, holding, voting or disposing of” an issuer’s securities.” This language has led some courts (and others) to conclude that formation of a group requires an “agreement” among its members, when in fact, the SEC says, the rule was intended only to indicate that formation of a group involves an “acquisition,” triggering a filing obligation. In fact, the SEC said, a group may be found to exist even in the absence of an agreement, based on the statutory language indicating that a group is formed when two or more persons “act as a partnership . . . or other group” for the purpose of “acquiring, holding, or disposing of securities.” The SEC proposes to “clarify” the broader definition of a group by eliminating the reference to an agreement in Rule 13d-5 and providing instead that a group acquires securities when two or more persons “act as a group under section 13(d)(3).”
A proposed exemption from “group” status would be available to investors who engage in “concerted actions . . ., including engagement with one another or the issuer or acquiring, holding, voting or disposing of the issuer’s equity securities,” so long as “communications among or between such persons are not undertaken with the purpose or the effect of changing or influencing control of the issuer.” The exemption is designed to accommodate “institutional investors or shareholder proponents [who] may wish to communicate and consult with one another regarding an issuer’s performance or certain corporate policy matters.”
Separately, the proposed changes would expand the group concept by deeming a group to be formed when a person who plans to file a Schedule 13D discloses the upcoming filing to another investor for the purpose of causing that investor to acquire securities of the same class, and that investor does in fact acquire securities of the same class.
-Alan Dye, Section16.net February 23, 2022