Tuesday, March 8, 2011

Wachtell Lipton Files Petition with the SEC to Change Section 13(d) Rules

Corporate law firm Wachtell Lipton announced yesterday that it filed a petition with the SEC seeking to change Section 13(d) rules of the Securities Exchange Act of 1934. Under current law, an investor who has accumulated in excess of 5% of a public company's outstanding stock has within 10 days to file a Schedule 13D with the SEC. The SEC requires that investors include "any [registered] equity security" acquired "directly or indirectly" in the calculation of beneficial ownership. Activist investors have been using the 10-day window as a time to gain additional shares above the 5% threshold before the Board can recognize, and therefore act on, such acquisitions. Additionally, the focus on defining beneficial ownership as including only "any [registered] equity security" has led to the emergence of "stealth acquisitions" and cash-settled swaps. These trends have resulted in greater momentum for shareholder activism.

Several law firms are seeking to change that. Earlier this year, Fried Frank sent a memo to its clients describing a reloadable poison pill that would essentially bar activist investors from accumulating over 5% within the current 10-day window and would expand the definition of beneficial ownership to include cash-settled swaps. Near the end of the memo, the firm mentions, "If the SEC amends the 13d rules to close the ten-day purchasing window and to include derivatives within its definition of ownership, then this rights plan would no longer be necessary". Now Wachtell Lipton is pushing for such an amendment.

Wachtell Lipton's petition is particularly weighty in that it is aimed directly at changing the language of the Securities and Exchange Act of 1934 Section 13(d)--a cornerstone of legal stipulations regarding activism. Specifically, the firm is proposing that the SEC "moderniz[e]" Schedule 13(d) by:
  1. Requiring 5% beneficial ownership disclosure within one day;
  2. Adopting "a 'cooling-off period' between the acquisition of 5% beneficial ownership until two business days after the initial Schedule 13D filing is made during which acquirers would be prohibited from acquiring additional beneficial ownership"; and
  3. Adopting a "broad definition" of beneficial ownership "encompassing ownership of any derivative instrument which includes the opportunity, directly or indirectly, to profit or share in any profit derived from any increase in the value of the subject security".
Wachtell Lipton believes that its proposed "modernization" of Section 13(d) will enable regulators and investors "to keep pace with market realities and abuses [from] maneuvers by activist investors both in the U.S. and abroad". The law firm further argues that activists' "maneuvers" have been "contrary to the purposes of the Williams Act".

Many shareholder activists take exception to such pointed criticisms and target law firms, like Wachtell Lipton, for their own "maneuvers". More than three years ago, Carl Icahn launched United Shareholders of America in order to roll back decades of some of the more corporate-friendly legislation, as well as to empower shareholders through new laws. Just recently, in regards to the Fried Frank poison pill, Bill Ackman of Pershing Square stated, "In order for us to do what we do, we have to buy a big enough stake to justify the time and the energy and the money that we're going to spend to try to help make the company more valuable".

Since the SEC has been empowered with new authorities under Dodd-Frank, the Wachtell Lipton case marks a noteworthy instance of firms petitioning the regulator for corporate change. In this instance, in a sense, activism has moved away from the boardroom and towards the SEC.

- For Section 13 of the Securities and Exchange Act of 1934, click here.

Read our previous blog post "SEC Eyes Faster Disclosure for Activist Funds"

Posted by David Schatz