Second Circuit Holds that Investor’s Delegation of Investment Discretion to Investment Adviser Does Not Create a 13(d) Group
Recently, the Second Circuit affirmed the district court’s holding in Rubenstein v. International Value Advisers that an investor does not form a 13(d) group with an investment adviser by entering into an investment management agreement that gives the adviser discretionary authority over the investor’s account. The facts of the case are described in my blog about the district court’s decision, so I won’t repeat them here, but the gist of the plaintiff’s argument was that the owner of a managed account and the manager of the account are a group because their agreement relates to transactions in securities. As a consequence, the plaintiff alleged, if the investment adviser becomes a ten percent owner by purchasing a company’s securities for multiple clients, all of the clients become ten percent owners. The plaintiff also alleged that, even if a group were not formed by entering into an investment advisory agreement, the adviser’s filing of a 13D reporting beneficial ownership of more than 10% of an issuer puts the adviser’s clients on notice that they are part of a control group, resulting in “silent acquiescence” in targeting that issuer.
The court rejected the plaintiff’s arguments in no uncertain terms, noting that it was “unmoved by Rubenstein’s arguments . . ., which are based either on a misunderstanding of certain regulatory exemptions or on erroneous legal positions.” Here is the court’s own summary of its holdings:
We hold that an investment management agreement delegating discretionary investment authority to an investment advisor is not an agreement to trade in the securities of an issuer and, therefore, is not a standalone basis for membership in an insider group. Moreover, we hold that such an investment advisor’s client does not become an insider group member simply because the advisor has filed a Schedule 13D or deputized a director on an issuer’s board. Consequently, clients who have not entered an issuer-specific trading agreement are not liable for disgorgement of short-swing profits solely by virtue of their investment advisor’s insider status.
The plaintiff’s theories of groupness were a stretch, but it’s good to see a clear decision rejecting those theories and establishing that an agreement may give rise to a group only if it relates to the securities of an identified issuer.
-Alan Dye, Section16.net May 21, 2020
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