On October 10, 2023, the U.S. Securities and Exchange Commission (the “Commission”) adopted significant amendments to modernize the rules for beneficial ownership reporting, which govern Schedules 13D and 13G. These amendments and Commission guidance contained in the adopting release, among other things:
- Shorten the initial and amendment filing deadlines for Schedules 13D and 13G;
- Clarify the application of the reporting requirements for certain derivative securities;
- Clarify the circumstances under which persons are deemed to form a “group” subject to reporting obligations; and
- Require that structured, machine-readable data language be used in Schedule 13D and 13G filings.
The Commission believes the amendments will provide the market with more timely information relating to significant stockholders and potential changes in corporate control, facilitate investor decision-making and reduce information asymmetry. In connection with the adopting release (available here), the Commission also provided a fact sheet (available here) that addresses the impacts and consequences of the amendments.
The amendments will have significant implications for investors who are subject to the beneficial ownership reporting rules. Investors will need to monitor their holdings and transactions closely and be prepared to file and amend their reports within the shortened deadlines.
Sections 13(d) and 13(g) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), along with Regulation 13D-G, require an investor who beneficially owns more than 5% of a covered class of equity securities to report their beneficial ownership by publicly filing either a Schedule 13D or a Schedule 13G. Regulations governing beneficial ownership reporting have existed for more than 50 years and were enacted with the intent to alert the marketplace to rapid accumulations of equity securities that might represent a shift in corporate control.
Shortened Filing Deadlines for Schedules 13D and 13G
The adopted changes shortened the initial filing deadlines for Schedules 13D and 13G, as well as the deadlines for filing amendments to those schedules.
- Schedule 13D
- Initial Filing Deadline: Shortened the deadline from 10 days to 5 business days after an investor acquires beneficial ownership exceeding 5% or an investor loses eligibility to file on Schedule 13G. (Rules 13d-1(a), (e), (f) and (g))
- Amendment Filing Deadline: Changed the deadline from “promptly” to 2 business days after a material change to the facts set forth in Schedule 13D. (Rule 13d-2(a))
- Schedule 13G
- Initial Filing Deadline:
- Qualified Institutional Investors & Exempt Investors: Shortened the deadline from 45 days after calendar year-end to 45 days after calendar quarter-end in which beneficial ownership exceeds 5%. (Rules 13d-1(b) and (d))
- Qualified Institutional Investors: Shortened the deadline from 10 days to 5 business days after the month-end in which beneficial ownership exceeds 10%. (Rule 13d-1(b))
- Passive Investors: Shortened the deadline from 10 days to 5 business days after acquiring beneficial ownership exceeding 5%. (Rule 13d-1(c))
- Amendment Filing Deadline:
- All Schedule 13G Filers: Shortened the deadline from 45 days after calendar year-end in which “any” change occurred to 45 days after calendar quarter-end in which a “material” change occurred. (Rule 13d-2(b))
- Qualified Institutional Investors: Shortened the deadline from 10 days to 5 business days after month-end in which beneficial ownership exceeded 10% or there was, as of month-end, a 5% increase or decrease in beneficial ownership. (Rule 13d-2(c))
- Passive Investors: Changed the deadline from “promptly” to 2 business days after beneficial ownership exceeds 10% or there was or a 5% increase or decrease in beneficial ownership. (Rule 13d-2(d))
In response to the administrative challenges that the shortened deadlines would put on investors, the Commission extended the filing “cut-off” time from 5:30 pm to 10:00 pm Eastern time to alleviate some of the burden. (Rule 13(a)(4) of Regulation S-T)
Limiting Amendment Triggering Events for Schedule 13G to Material Changes
Under the current rules, investors have been required to amend their Schedule 13G upon the occurrence of “any” change in the information previously reported. The amendments revise Rule 13d-2(b) to require investors to amend their Schedule 13G only if there is a “material” change to the information previously reported. There is no change, however, to the existing requirement under Rules 13d-2(c) and (d) that qualified institutional investors and passive investors amend Schedule 13G upon their beneficial ownership exceeding 10% or a 5% increase or decrease in beneficial ownership.
Reporting of Certain Cash-Settled Derivative Securities
Rule 13d-3 provides standards for determining beneficial ownership of equity securities, which primarily consider whether an investor has or shares investment or voting power over a covered security. Historically, holding derivatives that entitle the holder to nothing more than economic exposure to a covered security (i.e., “cash-settled”) has not been considered sufficient to constitute beneficial ownership. While the Commission decided not to adopt proposed Rule 13d-3(e), which would have deemed holders of cash-settled derivative securities (excluding security-based swaps) as beneficial owners of the reference equity security in certain circumstances, the adopting release provides guidance on applying existing Rule 13d-3 to determine when holders of cash-settled derivative securities (other than security-based swaps) may be deemed beneficial owners. Circumstances suggesting the owner of a cash-settled derivative security (excluding security-based swaps) is the beneficial owner of reference equity securities includes if the derivative confers voting or investment power, such as through a contractual provision, if the derivative is used to divest the holder of beneficial ownership and evade reporting requirements or if the derivative grants the holder the right to acquire beneficial ownership of the reference equity security within 60 days. If such circumstances originate from an understanding in connection with a cash-settled derivative security, that could also cause the holder to be considered a beneficial owner of the reference equity securities under Rule 13d-3.
Clarifying Disclosure Regarding Derivative Securities
Additionally, the Commission amended Schedule 13D to clarify the disclosure requirements with respect to derivative securities. To remove any ambiguity regarding the scope of disclosure obligations under Item 6 of Schedule 13D, the amendments expressly require that any interests in derivative securities that reference the issuer’s equity securities, including cash-settled derivatives, must be disclosed under Item 6, along with the material terms and conditions of such instruments.
Group Formation and Related Exemptions
The Commission did not adopt the proposed amendments to Rule 13d-5 that would have removed the reference to “an agreement” between two or more persons as a requirement for forming a group. The Commission explained that because Exchange Act Sections 13(d)(3) and (g)(3) refer to “two or more persons act[ing] as a . . . group” without a reference to an agreement, the Commission had intended to codify its view that “the determination of whether two or more persons are acting as a group does not depend solely on the presence of an express agreement and that, depending on the particular facts and circumstances, concerted actions by two or more persons for the purpose of acquiring, holding or disposing of securities of an issuer are sufficient to” form a group. Given the comments received, the Commission decided to issue guidance on the legal standard for group formation rather than make the proposed amendment to Rule 13d-5. The Commission’s view is that whether two or more persons have formed a group as contemplated by Exchange Act Sections 13(d)(3) and 13(g)(3) depends on a determination of whether they acted together for the purpose of acquiring, holding or disposing of securities of an issuer and that such persons could be viewed as acting together if they are taking concerted actions in furtherance of any of these purposes. Further, the determination depends on an analysis of all the relevant facts and circumstances and not solely on the presence or absence of an express agreement, as two or more persons may take concerted action or agree informally. Accordingly, informal arrangements or coordination in furtherance of a common purpose to acquire, hold, or dispose of securities could, in the Commission’s view, be evidence of a group.
Relatedly, the adopting release also provides guidance on the application of Exchange Act Sections 13(d)(3) and 13(g)(3) to common shareholder activities, such as discussions between shareholders, recommendations to the issuer or joint submissions of non-binding shareholder proposals, that alone would likely not constitute group formation. For example, a discussion between shareholders in private or public or a group of shareholders engaging with an issuer’s management for the purpose of exchanging ideas, and not involving an intent to engage in concerted actions or other agreement with respect to the acquisition, holding, or disposition of securities, would not satisfy the acting as a group standard. Shareholders jointly submitting a non-binding shareholder proposal to an issuer pursuant to Exchange Act Rule 14a-8 for presentation at a meeting of shareholders, without more, would not constitute a group. Nor would a group be formed by communications between a shareholder and an activist investor seeking support for its proposals, without more, such as consenting or committing to a course of action. The Commission clarified that Exchange Act Sections 13(d)(3) and 13(g)(3) were intended to prevent circumvention of the disclosures required by Schedules 13D and 13G, not to prevent shareholder discourse.
Structured Data Requirements
The amendments require that all information disclosed in Schedule 13D and 13G use a structured, machine-readable data language. The Commission believes that this will improve the accessibility and usability of the information for investors, issuers and regulators, and reduce the costs and burdens of filing and processing the reports.
The amendments will become effective 90 days after publication in the Federal Register, subject to the following transition periods:
- Structured Data Requirements: Reporting persons will not be required to comply with the structured data requirements until December 18, 2024; and
- Schedule 13G Deadlines: The shortened filing deadlines for Schedule 13G filings will not apply until September 30, 2024, but note that this transition period does not apply to the shortened deadlines for Schedule 13D.
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