SEC's Division of Corporation Finance Issues New C&DI on Ability to File Schedule 13G After Disqualification from HSR Act's Investment-Only Exemption | Practical Law

SEC's Division of Corporation Finance Issues New C&DI on Ability to File Schedule 13G After Disqualification from HSR Act's Investment-Only Exemption | Practical Law

The SEC's Division of Corporation Finance issued a new compliance and disclosure interpretation (C&DI) on the effect that a shareholder's disqualification from the Hart-Scott-Rodino Act's (HSR Act) investment-only exemption would have on that shareholder's ability to initially report, or continue to report, its beneficial ownership in an issuer on Schedule 13G.

SEC's Division of Corporation Finance Issues New C&DI on Ability to File Schedule 13G After Disqualification from HSR Act's Investment-Only Exemption

by Practical Law Corporate & Securities
Published on 15 Jul 2016 • USA (National/Federal)
The SEC's Division of Corporation Finance issued a new compliance and disclosure interpretation (C&DI) on the effect that a shareholder's disqualification from the Hart-Scott-Rodino Act's (HSR Act) investment-only exemption would have on that shareholder's ability to initially report, or continue to report, its beneficial ownership in an issuer on Schedule 13G.
On July 14, 2016, the SEC's Division of Corporation Finance issued a new compliance and disclosure interpretation (C&DI) on the effect that a shareholder's disqualification from the Hart-Scott-Rodino Act's (HSR Act) investment-only exemption would have on that shareholder's ability to initially report, or continue to report, its beneficial ownership in an issuer on Schedule 13G (rather than the long-form Schedule 13D). New Question 103.11 of the Regulation 13D-G Beneficial Ownership Reporting C&DIs clarifies that a shareholder's disqualification from this HSR Act exemption due to its efforts to influence management of the issuer on a particular topic, by itself, does not disqualify the shareholder from filing on Schedule 13G.
Under the SEC's more forgiving standard, eligibility to use Schedule 13G under Rule 13d-1(b) or 13d-1(c) depends, among other things, on whether the shareholder acquired or is holding equity securities with the purpose or effect of changing or influencing control of the issuer. This determination is based on all of the relevant facts and circumstances. The subject matter of the shareholder's discussions with the issuer's management may be dispositive in making the determination, while the context in which the discussions occur is also highly relevant.
To illustrate this, the new C&DI sets out the following examples:
  • Engagement with an issuer's management on executive compensation and social or public interest issues (such as environmental policies), without more, generally would not disqualify an otherwise eligible shareholder from filing on Schedule 13G, provided the engagement is not undertaken with the purpose or effect of changing or influencing control of the issuer.
  • Engagement with an issuer's management 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.
  • By contrast, Schedule 13G would be unavailable if a shareholder engages with an 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.
The SEC's guidance comes as the Antitrust Division of the Department of Justice (DOJ) has taken an increasingly strong stance on its enforcement of HSR Act filing against shareholder activists. Two days before the SEC issued the C&DI, the DOJ announced a settlement and record fine with activist investor ValueAct Capital for ValueAct's failure to comply with HSR Act filing requirements related to its purchase of shares in Halliburton Company and Baker Hughes Inc. For more information about the settlement, see Legal Update, DOJ Fines ValueAct $11 million for HSR Violation. The nearly contemporaneous timing of the two announcements highlights that the standard for relying on the HSR investment-only exemption is different from the standard for being able to file a Schedule 13G rather than a Schedule 13D.
To learn more about filing beneficial ownership reports, see Practice Notes, Section 13(d) Beneficial Ownership Reporting and Filing Schedule 13D and 13G Reports.