Photo by Ryan Smith
Photo by Ryan Smith

On July 14, the SEC Staff published a new Compliance and Disclosure Interpretation clarifying when an investor who may not be entirely passive may nonetheless remain eligible to file a beneficial ownership report on Schedule 13G rather than Schedule 13D.  Anyone who has tried to dance on the head of that pin will be relieved, particularly given the far greater disclosure burdens associated with the latter filing.

All other things being equal, the rules specify that a shareholder may file on the less burdensome Schedule 13G only if it acquired or is holding the subject equity securities with neither the purpose nor effect of changing or influencing control of the issuer.  However, the rules are not clear as to whether some actions (or an intent to engage in those actions) may make the 13G unavailable.

The issue is further complicated by the fact that an exemption from the notification and waiting period provisions of the Hart-Scott-Rodino Act may only be available if the acquisition of the target’s securities was made “solely for the purpose of investment,” with “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.”  Given the similar wording of the two regulatory schemes, some have taken the position that the unavailability of the HSR exemption mandates the use of 13D rather than 13G.

The new CDI answers the second question quite clearly: a determination that the HSR Act exemption is not available does not control eligibility for the 13G.  Rather, the only issue vis-à-vis intent is whether the filer’s investment has the purpose or effect of changing or influencing control of the issuer.

This mantra is repeated in some helpful examples of when a filer may use Schedule 13G:

  • “[E]ngagement with an issuer’s management on executive compensation and social or public interest issues (such as environmental policies), without more, would not preclude a shareholder from filing on Schedule 13G so long as such engagement is not undertaken with the purpose or effect of changing or influencing control of the issuer.”
  • “Engagement on corporate governance topics, such as removal of staggered boards, majority voting standards in director elections, and elimination of poison pill plans, without more, generally would not disqualify an otherwise eligible shareholder from filing on Schedule 13G if the discussion is being undertaken by the shareholder as part of a broad effort to promote its view of good corporate governance practices for all of its portfolio companies, rather than to facilitate a specific change in control in a particular company.”

However, other changes may render the 13G unavailable: “Schedule 13G would be unavailable if a shareholder engages with the issuer’s management on matters that specifically call for the sale of the issuer to another company, the sale of a significant amount of the issuer’s assets, the restructuring of the issuer, or a contested election of directors.”

In other words, the requirements are not black and white, and a facts-and-circumstances test must continue to be applied in determining 13G eligibility.  However, the CDI provides some helpful – and welcome – clarification in an area that has been murky for a long time.