Tag: Schedule 13D


Insider Trading and Tender Offers

Christopher E. Austin and Victor Lewkow are partners focusing on public and private merger and acquisition transactions at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum.

Valeant’s hostile bid for Allergan was one of 2014’s most discussed takeover battles. The situation, which ultimately resulted in the acquisition of Allergan by Actavis plc, included a novel structure that involved a “partnership” between Valeant and the investment fund Pershing Square. In particular, a Pershing Square-controlled entity having a small minority interest owned by Valeant, acquired shares and options to acquire shares constituting more than nine percent of Allergan’s common stock. Such purchases were made by Pershing Square with Valeant’s consent and with full knowledge of Valeant’s intentions to announce a proposal to acquire Allergan. Pershing Square and Valeant then filed a Schedule 13D and Pershing Square then supported Valeant’s proposed acquisition. Ultimately Pershing Square made a very substantial profit on its investment when Allergan was sold to Actavis.

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The Product Market Effects of Hedge Fund Activism

Praveen Kumar is Professor of Finance at the University of Houston. This post is based on an article authored by Professor Kumar and Hadiye Aslan, Assistant Professor of Finance at Georgia State University, available here. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), 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.

Whether intervention by activist investors, such as hedge funds, is beneficial or detrimental to the shareholders of target firms remains controversial. Proponents marshal considerable empirical evidence that hedge fund activism (HFA) is associated with significant medium-to-long-run improvements in targets’ cost and investment efficiency, profitability, productivity, and shareholder returns. Opponents, however, insist that HFA forces management to take myopic decisions that weaken firms in the longer run. The debate rages in academia, media, and has already featured in the 2016 presidential campaign.

Despite this intense interest, however, the research on the effects HFA has typically focused only on its impact on the performance of target firms. But targets of HFA do not exist in vacuum; they have industry competitors, suppliers, and customers. It is by now well known that HFA has a broad scope that often—simultaneously or sequentially—touches on virtually every major aspect of company management, including changes in product market strategy, negotiation tactics with suppliers and customers, and knowledge-based technical advice of production organization. In particular, HFA that improves target’s cost efficiency and product differentiation, and generally redesigns its competitive strategy, should have a significant impact on the target’s competitors (or rival firms). This prediction follows from basic principles of strategic interaction among firms in oligopolistic interaction. Indeed, the received theory of industrial organization provides the effects of cost improvements and product differentiation on rivals’ equilibrium profits and market shares.

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13(d) Reporting Inadequacies in an Era of Speed and Innovation

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on a Wachtell Lipton publication by Mr. Katz and Laura A. McIntosh. The complete publication, including footnotes, is available here. 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.

The Securities and Exchange Commission and other market regulators confront a challenging issue: How to effectively monitor and regulate activity in an environment that is both fast-moving and highly complex? The principles and architecture of the Securities Exchange Act of 1934 were created for a much simpler financial world—an analog world—and they struggle to describe and contain the digital world of today. The lightning speed of information flow and trading, the constant innovations in financial products, and the increasing sophistication of active market participants each pose enormous challenges for the SEC; together, even more so. The ongoing controversy over Section 13(d) reporting exemplifies the many challenges facing the SEC in this regard.

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Prices and Informed Trading

Vyacheslav Fos is Assistant Professor of Finance at Boston College. This post is based on an article by Professor Fos and Pierre Collin-Dufresne, Professor of Finance at the Swiss Finance Institute. Related research from the Program on Corporate Governance includes Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang; and The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

In our paper, Do Prices Reveal the Presence of Informed Trading?, forthcoming in the Journal of Finance, we study how empirical measures of stock illiquidity and of adverse selection respond to informed trading by activist shareholders.

An extensive body of theory suggests that stock illiquidity, as measured by the bid-ask spread and by the price impact of trades, should be increasing in the information asymmetry between market participants. An extensive empirical literature employing these illiquidity measures thus assumes that they capture information asymmetry. But, do these empirical measures of adverse selection actually increase with information asymmetry? To test this question one would ideally separate informed from uninformed trades ex-ante and measure their relative impact on price changes. However, since we generally do not know the traders’ information sets, this is hard to do in practice.

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SEC Broadens Focus on and Requirements for 13D Amendment Disclosure

Philip Richter is co-head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Richter, Steven Epstein, Abigail Pickering Bomba, and Gail Weinstein. Related research from the Program on Corporate Governance about blockholder disclosure 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.

The SEC recently announced settlements of charges against insiders relating to three different going private transactions. The settlement orders (the “Orders”) reflect a general increased focus by the SEC on insiders’ compliance with Schedule 13D amendment requirements in connection with going private transactions (and possibly other extraordinary transactions), as well as possibly expanded requirements for disclosure of steps taken during the preliminary stage of consideration of a transaction. The charges were against eight directors, officers or major stockholders for their respective failures to file timely amendments to their Schedule 13D filings to disclose their plans to take the companies private. The charges were based on steps these parties had taken in furtherance of the going private transactions, but that had only been disclosed months (or in some cases years) afterward in the proxy statements or Schedule 13E-3 statements relating to the transactions. READ MORE »

SEC Enforcement Actions for Failure to Update 13D Disclosures

The following post comes to us from James Moloney, partner and co-chair of the Securities Regulation and Corporate Governance Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn publication by Mr. Moloney and Andrew Fabens, with assistance from Lauren Traina.

On Friday, March 13, 2015, the SEC announced that it had settled a string of 21C administrative proceedings brought against eight officers, directors, and shareholders of public companies for their failure to report plans and actions leading up to planned going private transactions. The SEC press release can be found here. In doing so, the SEC sent another strong reminder to those that beneficially own more than 5% of the equity securities of a public company to keep their 13D disclosures current.

The respondents included a lottery equipment holding company, the owners of a living trust, and the CEO of a Chinese technical services firm. According to the SEC, the respondents in each of these cases failed to report various plans and activities with respect to the anticipated going private transactions, including when the parties: (i) determined the form of the going private transaction; (ii) obtained waivers from preferred shareholders; (iii) assisted in arriving at shareholder vote projections; (iv) informed management of their plans to take the company private; and (v) recruited shareholders to execute on the proposals. In one case the respondents were charged for failure to report owning securities in the company that was going private. In another case, the respondents reported their transactions months or years later. The proceedings resulted in cease-and-desist orders as well as the imposition of civil monetary penalties ranging from $15,000 to $75,000 per respondent.

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Keeping It Private—Tough Disclosure Issues in Take-Private Transactions

Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf and Norbert B. Knapke II.

One of the tougher issues buyers face when engaging in preliminary discussions regarding a potential going-private transaction is whether and when an amendment to required SEC stock ownership disclosures needs to be filed as steps are taken to advance the transaction. Recent settlements between the SEC and officers, directors and major shareholders for failure to update their stock ownership disclosures to reflect material changes—including steps to take a company private—illustrate the importance of careful consideration of these issues when pursuing a going-private transaction.

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SEC Charges Schedule 13D Filers for Untimely Disclosure

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions, corporate governance, and complex securities transactions. This post is based on a Wachtell Lipton memorandum by Mr. Katz and Alison Z. Preiss.

The Securities and Exchange Commission announced last week that it had charged eight directors, officers and major stockholders for failing to timely disclose steps taken to take their respective companies private in their beneficial ownership reports on Schedule 13D. The orders issued by the SEC indicate the SEC staff became aware of the violations in the course of their review of proxy and Schedule 13E-3 transaction statements, which described the steps taken in the required disclosures regarding the background of the transactions. The orders note that emails and other contemporaneous communications clearly indicate the steps taken that had not been properly disclosed. The orders issued by the SEC (to which the offending parties consented) resulted in cease-and-desist orders and payment of civil penalties.

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Heightened Activist Attacks on Boards of Directors

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. The following post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal; the full article, including footnotes, is available here.

This has been called “the heyday of hedge fund activism,” and it is certainly true that today boards of directors must constantly be vigilant to the many and varied ways in which activist investors can approach a target. Commencing a proxy fight long has been an activist tactic, but it is now being used in a different way. Some hedge funds are engaging in proxy fights in order to exercise direct influence or control over the board’s decision-making as opposed to clearing the way for a takeover of the target company or seeking a stock buyback. In some cases, multiple hedge funds acting in parallel purchase enough target shares to hold a voting bloc adequate to elect their director nominees to the board. A recent Delaware case addressed a situation in which a board resisted a threat from hedge funds acting together in this manner. The court determined that a shareholder rights plan, or poison pill, could, in certain circumstances, be an appropriate response. As a general matter, boards of directors facing activist share accumulations and threats of board takeovers can take comfort in this latest affirmation of the respect accorded to an independent board’s informed business judgment.

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Schedule 13D Ten-Day Window and Other Issues: Will the Pershing Square/Valeant Accumulation of a 9.7% Stake in Allergan Lead to Regulatory Action?

Victor Lewkow is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Lewkow and Christopher Austin that was issued on April 24, 2014.

As widely reported, a vehicle formed by Pershing Square and Valeant Pharmaceuticals acquired just under 5% of Allergan’s shares after Allergan apparently rebuffed confidential efforts by Valeant to get Allergan to negotiate a potential acquisition. The Pershing Square/Valeant vehicle then crossed the 5% threshold and nearly doubled its stake (to 9.7%) over the next ten days, at which point it made the required Schedule 13D disclosures regarding the accumulation and Valeant’s plans to publicly propose an acquisition of Allergan. The acquisition program has raised a number of questions.

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