SEC Staff Publishes New C&DIs on Types of Shareholder Engagement Could Cause Loss of Schedule 13G Eligibility

Today, the Staff in the Division of Corporation Finance at the Securities and Exchange Commission published one new and one revised Compliance and Disclosure Interpretation (C&DI) under Regulation 13D-G. The C&DIs address circumstances in which a greater-than-5% shareholder’s engagement with an issuer’s management could cause the shareholder to be deemed to hold the subject securities with a “purpose or effect of changing or influencing control of the issuer” and, therefore, lose eligibility to report its beneficial ownership on Schedule 13G and require it to report on the more disclosure-intensive Schedule 13D. Although the extent to which the C&DIs are expected to result in a change in practice by filers is unclear, institutional investors may wish to review their approach to interactions with companies in which they have reportable investments.

The new C&DI (Question 103.12) reads as follows:

Question: Shareholders filing a Schedule 13G in reliance on Rule 13d1(b) or Rule 13d-1(c) must certify that the subject securities were not acquired and are not held “for the purpose of or with the effect of changing or influencing the control of the issuer.” Under what circumstances would a shareholder’s engagement with an issuer’s management on a particular topic cause the shareholder to hold the subject securities with a disqualifying “purpose or effect of changing or influencing control of the issuer” and, pursuant to Rule 13d-1(e), lose its eligibility to report on Schedule 13G?

Answer: The determination of whether a shareholder acquired or is holding the subject securities with a purpose or effect of “changing or influencing” control of the issuer is based on all the relevant facts and circumstances and will be informed by the meaning of “control” as defined in Exchange Act Rule 12b-2.

The subject matter of the shareholder’s engagement with the issuer’s management may be dispositive in making this determination. For example, Schedule 13G would be unavailable if a shareholder engages with the issuer’s management to specifically call for the sale of the issuer or a significant amount of the issuer’s assets, the restructuring of the issuer, or the election of director nominees other than the issuer’s nominees.

In addition to the subject matter of the engagement, the context in which the engagement occurs is also highly relevant in determining whether the shareholder is holding the subject securities with a disqualifying purpose or effect of “influencing” control of the issuer. Generally, a shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more, would not be disqualified from reporting on a Schedule 13G. A shareholder who goes beyond such a discussion, however, and exerts pressure on management to implement specific measures or changes to a policy may be “influencing” control over the issuer. For example, Schedule 13G may be unavailable to a shareholder who:

• • recommends that the issuer remove its staggered board, switch to a majority voting standard in uncontested director elections, eliminate its poison pill plan, change its executive compensation practices, or undertake specific actions on a social, environmental, or political policy and, as a means of pressuring the issuer to adopt the recommendation, explicitly or implicitly conditions its support of one or more of the issuer’s director nominees at the next director election on the issuer’s adoption of its recommendation; or
  • discusses with management its voting policy on a particular topic and how the issuer fails to meet the shareholder’s expectations on such topic, and, to apply pressure on management, states or implies during any such discussions that it will not support one or more of the issuer’s director nominees at the next director election unless management makes changes to align with the shareholder’s expectations.

The revised C&DI (Question 103.11), which is reproduced below and marked to show changes, relates to the relationship between an exemption from the Hart-Scott-Rodino Act’s notification and waiting period provisions and eligibility to report beneficial ownership on Schedule 13G. Language from this C&DI that Schedule 13G filers have long relied on has been removed. Language on the same subject matter has been added to the new C&DI excerpted above, albeit with potentially significant changes. [1]

Question 103.11

Question: The Hart-Scott-Rodino (“HSR”) Act provides an exemption from the HSR Act’s notification and waiting period provisions if, among other things, the acquisition of securities was made “solely for the purpose of investment,” with the acquiror having “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” 15 U.S.C. 18a(c)(9); 16 C.F.R. 801.1(i)(1). Does the fact that a shareholder is disqualified from relying on this HSR Act exemption due to its efforts to influence management of the issuer on a particular topic, by itself, disqualify the shareholder from initially reporting, or continuing to report, beneficial ownership on Schedule 13G?

Answer: No. The inability to rely on the HSR Act exemption alone would not preclude a shareholder from filing on Schedule 13G in lieu of the Schedule 13D otherwise required. Instead, eligibility to report on Schedule 13G in reliance on Rule 13d-1(b) or Rule 13d-1(c) will depend, among other things, on whether the shareholder acquired or is holding the subject securities with the purpose or effect of changing or influencing control of the issuer. This determination is based upon all the relevant facts and circumstances; and will be informed by the meaning of “control” as defined in Exchange Act Rule 12b-2.

1 See also Premerger Notification; Reporting and Waiting Period Requirements (Advance Notice of Proposed Rulemaking), 85 Fed. Reg. 77042 (Dec. 1, 2020).(go back)