The Timing of Schedule 13D

In the field of corporate law, timing is everything. Perhaps in no area is this more the case than in disclosure—specifically, the disclosure obligations of the Securities and Exchange Act of 1934. Implemented by a phalanx of SEC rules, the Act carefully prescribes how and when an investor must make public its equity position in a company. As every introductory corporate lawyer quickly comes to know, Section 13(d) of the Act requires that any person who acquires beneficial ownership of five percent or more of an issuer’s stock file a public statement announcing such ownership “within ten days.” This congressional attempt to “ensure that shareholders [are] promptly alerted to possible change[s] in company management and corporate control” often stands at the forefront shareholder activism battles.

Despite the provision’s undeniable significance, its meaning remains uncertain. Judges and commentators cannot agree whether the statute mandates filing within ten business days or ten calendar days. While a seemingly trivial distinction, by last count the timeliness of almost fifty percent of Schedule 13D filings hinged on just this issue. And yet, there is no settled answer to a simple question: when must a Schedule 13D be filed?

For their own part, investors who want to determine which timeline to follow are likely to come up empty. In public releases, the SEC has vacillated between the business day and calendar day approaches. Confusion is not limited to the agency. At least three courts, three treatises, and four law review articles have opted for the business-day approach, while other law review articles, treatises, and many law firms encourage their clients to adopt the calendar-day approach. The dissonance has ensnared sophisticated non-lawyers, too.

This confusion has generated problems both practical and fundamental. To avoid penalties for untimely disclosures, 13D filers must understand the burden that the securities laws impose. And to remain faithful to Congress’s intent in passing 13(d), a more rigorous analysis of the statute’s text remains warranted. In this regard, existing commentary has failed. Not only is it entirely perfunctory—never explaining why the calendar-day approach or business-day approach is preferable in light of the statute’s silence on the point—it is also deeply at odds with itself.

This post is an attempt to fill the breach. It will not only explain what Schedule 13D requires, but why.

A Consistent Rule

A proper interpretation of 13(d) must begin with the statute itself. This Part canvases the text of the SEC’s rules and its governing statute, the statutory history of the Williams Act, and the prudential concerns which underlie the disclosure requirements more generally. I conclude that all of these factors favor the calendar-day approach.

Text

In 1968, faced with “a gap in the federal securities laws” that allowed “shifts of corporate control to occur without adequate disclosure of information to investors,” Congress passed the Williams Act. As part of the Act, Congress developed a number of new disclosure obligations that were intended to ensure that “shareholders confronted by a tender offer” would be “informed about the intentions and qualifications of the” party making the offer. In particular, the Williams Act mandates that any person who acquires the beneficial ownership of more than five percent of a class of registered securities file a statement containing certain information “within ten days.” The Act does not define whether “ten days” means ten calendar days—as might be expected in ordinary parlance—or ten business days, a more specialized meaning that might be preferable in a statute dealing with public markets (which operate on business days) and corporate entities (which, as one author has noted, act on business day timelines).

To understand which of these competing approaches is correct, it is useful to begin with the statute’s text. As is well known, the meaning of an ambiguous statutory term is often clarified by evaluating how that same term is used in analogous statutory provisions. Usually called the “canon of consistent usage,” the presumption that identical terms within the same legal text have identical meanings is a staple of textualist statutory interpretation.

Applying that method here, the best reading of the statute is that “day” means “calendar day.” Section 78 of title 15—the section of the U.S. Code in which the securities disclosure obligations are codified—makes frequent use of the term “day” in reference to the various regulatory filing obligations that may befall investors. Across these sections, the phrase “business day” is employed eight times, while the phrase “calendar day” appears just twice. This suggests that when Congress intends to utilize a business-day approach, it does so by saying as much. Other standard interpretive canons makes this point clear enough: (i) the rule against surplusage implies that the unadorned “day” cannot mean “business day;” and (ii) the canon of meaningful variation suggests that Congress’s decision to specify “business day” means a “day” standing alone is an ordinary “calendar day.”

The regulations that the SEC has promulgated to execute Section 13(d) follow a similar pattern. Across regulation 13d-G, the SEC rule that governs investors’ disclosure obligations, the term “day” is preceded by the term “business” on three occasions, but is not preceded by the term “calendar” at all. Using the line of interpretive logic laid out above, the SEC’s semantic choices are telling: when the agency wants to describe a “business day,” it utilizes those words specifically. Thus, even though the agency is on record as adopting both the business-day and calendar-day approaches, the text of its own rules makes clear that only the latter interpretation is correct.

Congress and the SEC’s specificity in this regard is well justified. As one court has recognized, the meaning of a “day” as “commonly understood” is “twenty-four hour periods”—that is, a calendar day. And, unless the statute or rule insists otherwise, the longstanding rule is that an otherwise ambiguous word in a legal text will be given its plain meaning. Thus, a straightforward reading of the statutory text makes clear that “day” means “calendar day.”

History and Purpose

Even if one were to find the text of the governing law too terse, the legislative history of the Williams Act makes clear that the Act contemplates prompt disclosure. This again suggests that the ambiguous term “days” should be read in its shorter varietal—i.e., calendar, not business.

First, the Williams Act was “designed to require full and fair disclosure” of investors’ substantial equity positions so that the investing public could accurately discern the market price of a company that might soon experience a change of control. In that way, the Williams Act’s drafters were principally concerned with ensuring short-term transparency in the securities markets. Without information being made public quickly, the Williams Act’s sponsors realized that takeover bids or shifts in corporate control could occur in secret. Thus, the 10-day timeline was conceived to alert the marketplace to rapid accumulations of shares as fast as practicably possible.

The Williams Act also mandates that every Schedule 13(D) be amended “promptly” in the event of a material change in the investor’s equity position—for example, an increase or decrease of 1% of the investor’s holdings. Here again, the Act’s framers emphasized that the speed of disclosure was paramount. In keeping with congressional intent, the SEC has noted that “promptly” means that an investor must amend its disclosure as soon as “reasonably practicable.” Courts have likewise consistently held that a “prompt” amendment is one made in less than ten calendar days.

The Williams Act’s focus on quick investor disclosure was reinforced most recently in 2010, with the passage of the Dodd-Frank Act. The Act gave the SEC the power to shorten the ten-day disclosure timeline if necessary. The Act did not, however, give the SEC the corollary power to lengthen the disclosure period. As Dodd-Frank’s sponsors well realized, the disclosure obligations of the Williams Act were designed to ensure that the marketplace received information in a sufficiently fast manner. The calendar-day approach, not the business-day approach, best serves this “legislative plan.”

Prudential Concerns

Finally, as has been catalogued in a long-running debate elsewhere, there are significant prudential reasons to favor the calendar-day approach. These reasons dovetail with the statutory and regulatory text, as well as with the Williams Act’s history, and should therefore garner more weight than might more legally-unmoored policy considerations.

First, a calendar-day approach forces investors to disclose their positions sooner, rather than later. As an example, under the business-day approach an investor who reaches the 5% threshold on May 25, 2019 would have to disclose their position by June 10, 2019—a full seventeen days after the original acquisition. In light of the Williams Act’s preference for “prompt” disclosure that “alerts” the marketplace, the shorter, calendar-day approach to calculating Section 13d’s timeline should be favored.

Second, changes in technology have rendered even the 10-day timeline outdated. In an age of high/hyper frequency trading, an investor can acquire significantly more than 5% of a company’s assets before the ten-day disclosure window is met. One way to add teeth to Section 13(d)—remember, roughly fifty percent of filers hover around the ten-day window—is to make clear that the Rule requires filing within ten calendar days.

Such a reform offers several advantages. First, it does not require the SEC to promulgate any new rules through the burdensome notice-and-comment process. The agency can, on the weight of the authority discussed, make the point quite easily in an adjudicative hearing or an interpretive rule. Second, the shorter timeline accords with the Williams Act’s text and purpose. And third, the calendar-day approach is more receptive to the realities of modern finance, both given investors’ capacity to easily acquire an entity’s shares and the fact that after-hours trading renders the business-day approach superficial.

Conclusion

In the hyper-litigated world of corporate law disclosures, clarity is necessary. Fortunately, the text of the Williams Act and the SEC’s rules, the history of the Williams Act, and the prudential considerations that justify the disclosure rules all point in the same direction: the calendar-day approach is here to stay. The discord between courts, the SEC, practitioners, and investors should soon come to its end.

The complete paper is available here.