Ethan A. Klingsberg is a partner in the New York office of Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Klingsberg, Steven J. Kaiser, and Elizabeth Bieber. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.
A settlement on July 12, 2016 by the DOJ with ValueAct for violations of the HSR Act’s notification requirements and an interpretation of the Exchange Act’s beneficial ownership reporting rules posted by the SEC staff on July 14, 2016 combine to provide new guidance that will have an immediate impact on shareholder activism and engagement.
These developments at the DOJ and SEC matter because, as explained in our earlier post, the effectiveness of hedge fund activism is directly related to the extent to which the funds may engage in “under the radar” accumulations of equity positions. At the heart of these new developments is a struggle by these two governmental agencies to determine where to draw the line between active vs. passive investing, albeit under rules using different language and against backdrops of different statutory regimes, for purposes of determining when a shareholder’s level of engagement is “active” enough that the investment ceases to qualify for a passivity exemption from the requirement to make an HSR Act notification or a filing of a Statement of Beneficial Ownership on Schedule 13D (especially in the case of those activist hedge funds that purport to qualify for the exemption under Rule 13d-1(b) that permits delayed filings on Schedule 13G, see the chart contained in the complete publication of our prior post). As explained in greater detail in our prior post where we analyze the nuances of the investment thresholds for HSR Act notifications and Schedule 13D filings, these requirements to make an HSR notification and file a Schedule 13D, especially when combined with each other, can impede meaningfully the ability of an activist shareholder to buy under the radar in many scenarios.