On October 10, 2023, the Securities and Exchange Commission (SEC) adopted various amendments to Regulation 13D-G and Regulation S-T to modernize the beneficial ownership reporting requirements (the proposed rules were previously reported on here and here). Among other things, the amended rules:

• Shorten the filing deadlines for initial and amended Schedules 13D and 13G.
• Clarify the Schedule 13D disclosure requirements with respect to derivative securities.
• Extend the “cut-off” time within a given business day by which Schedules 13D and 13G must be filed.
• Require Schedules 13D and 13G be filed using a structured, machine-readable data language.

In addition, the adopting release provides guidance (in lieu of adopting amendments) regarding:

• An investor’s use of certain cash-settled derivative securities, which may result in the investor being treated as a beneficial owner^[1] of the reference “covered class.”^[2]
• Circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations.

Amended Filing Deadlines for Schedules 13D and 13G

The amendments to Rules 13d-1 and 13d-2 under Regulation 13D-G and Rules 13 and 201 of Regulation S-T shorten the filing deadlines for Schedules 13D and 13G and also extend the time frame within the business day^[3] in which filings must be made, as follows:

Although the SEC did not adopt filing deadlines as short as those originally proposed, these accelerated filing deadlines should benefit a company’s overall shareholder engagement activities, as a company will have a more timely, accurate, and up-to-date picture of its investor base throughout the year, which should result in timelier outreach to such shareholders. Further, the shorter reporting periods may deter short-term activists — by disincentivizing the accumulation of shares of an issuer at a potentially lower price than if market participants had more timely knowledge of such activity and intent — and encourage more long-term-focused activism.

The shorter reporting deadlines are also expected to result in management having earlier notice of any takeover attempt and to give a company the opportunity to react more quickly to any such attempt. As the SEC has acknowledged, there is potential for the shorter reporting deadlines to lead to increased use of low-threshold poison pills. Companies that have low-threshold poison pills — such as one designed to protect a company’s net operating losses — should review them to confirm that the amended rules and related guidance will not have any impact, such as on any definitions or specific rule references.

To the extent any insiders or founders are required to report their holdings on either Schedules 13D or 13G, companies may want to alert such filers of these amended rules so that they are prepared to comply with the updated filing deadlines.

Clarified Disclosure Requirement for Derivative Securities on Schedule 13D

The SEC adopted amendments to revise Item 6 of Schedule 13D to expressly clarify that derivative contracts, arrangements, understandings, and relationships with respect to an issuer’s securities, including cash-settled security-based swaps and other derivatives that are settled exclusively in cash, are required to be disclosed.

Guidance Regarding Cash-Settled Derivative Securities

The existing beneficial ownership rules generally do not include holders of cash-settled derivative securities since such instruments typically do not convey voting or investment power over any equity securities in the reference covered class. In lieu of proposed amendments, the SEC issued guidance on the applicability of existing Rule 13d-3 that extends its existing guidance on how security-based swaps may confer beneficial ownership of the underlying reference securities to cash-settled derivative securities.

The SEC observed that although derivative securities (other than security-based swaps) settled exclusively in cash generally are designed to represent only an economic interest (and therefore Section 13 generally would not apply to such securities), certain facts and circumstances could arise where the holder of these securities may beneficially own the underlying reference security. Specifically, a holder of a cash-settled derivative security (other than a security-based swap) could be deemed a beneficial owner if the security provides a holder with voting or investment power over the reference covered class (Rule 13d-3(a)), the security is part of a plan or scheme to evade beneficial ownership reporting requirements (Rule 13d-3(b)), or the security grants the right (regardless of its origin) to acquire beneficial ownership of an equity security within 60 days or with the purpose or effect of changing or influencing control of the issuer (Rule 13d-3(d)(1)).

Given that the SEC’s guidance on the meaning of beneficial ownership in the cash-settled derivative securities context is much narrower than the proposed rule, it is unlikely that this change will significantly increase, if at all, the number of persons subject to the reporting and liability provisions under Section 16, which applies to persons beneficially owning more than 10% of an issuer’s securities. 

Amendments and Guidance Regarding Treatment of Two or More Persons Who Act as a Group

Although the SEC proposed a number of amendments to Rule 13d-5, it determined not to make most of the substantive changes proposed. In lieu of adopting proposed amendments, the SEC issued clarifying guidance as to the application of the existing legal standard established in Sections 13(d)(3) and 13(g)(3) with respect to the formation of a group. The guidance is intended to clarify the SEC’s 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 may be sufficient to constitute the formation of a group. The adopting release also provides illustrative guidance in the form of questions and answers on the application of the current legal standard found in Sections 13(d)(3) and 13(g)(3) to certain common types of shareholder engagement activities (excerpted as Annex A). Companies should consider how this new guidance will impact the provisions of any existing or newly adopted poison pills or other documents describing a company’s defensive measures.

Of note, the SEC determined not to adopt proposed amendments to Rules 13d-5 and 13d-6 that would have broadened the definition of a group and provided exemptions allowing investors to communicate with each other, engage with issuers, and execute transactions without triggering the proposed definition of a group.

The SEC did adopt certain proposed amendments to Rule 13d-5, which include:

• Imputing acquisitions made by any group member of equity securities of a covered class to the group at any time after the group has been formed.
• Excluding from acquisitions of beneficial ownership any intragroup transfers of equity securities of a covered class.
• Making other technical and organizational changes.

Data Requirements for Schedules 13D and 13G

As proposed, the amendments will require that all disclosures, including quantitative disclosures, textual narratives, and identification checkboxes, on Schedules 13D and 13G use a structured, machine-readable data language, similar to formatting already used for certain EDGAR filings, such as Section 16 beneficial ownership reports on Forms 3, 4, and 5. Only the exhibits to Schedules 13D and 13G will remain unstructured.

Effective Date and Extended Compliance Deadlines

The amendments will become effective 90 days after publication in the Federal Register. Although the SEC originally did not propose any transition periods, in response to concerns from commenters, the amendments provide for extended compliance periods for the Schedule 13G filing deadlines and structured data requirement.

Compliance with the revised Schedule 13G filing deadlines will be required beginning on September 30, 2024. The SEC noted as an example that a Schedule 13G filer would be required to file an amendment within 45 days after September 30, 2024, if, as of the end of the day on that date, there were any material changes in the information the filer previously reported on Schedule 13G. Compliance with the structured data requirement for Schedules 13D and 13G will be mandatory on December 18, 2024, although filers may begin to voluntarily comply with the structured data requirement on December 18, 2023. Compliance with the other rule amendments will be required upon their effectiveness.

ANNEX A

SEC Guidance on the Application of the Legal Standard in Section 13(d)(3) and 13(g)(3) to Certain Common Types of Shareholder Engagement Activities 

Question: Is a group formed when two or more shareholders communicate with each other regarding an issuer or its securities (including discussions that relate to improvement of the long-term performance of the issuer, changes in issuer practices, submissions or solicitations in support of a non-binding shareholder proposal, a joint engagement strategy (that is not control-related), or a “vote no” campaign against individual directors in uncontested elections) without taking any other actions?

Response: No. In our view, a discussion whether held in private, such as a meeting between two parties, or in a public forum, such as a conference that involves an independent and free exchange of ideas and views among shareholders, alone and without more, would not be sufficient to satisfy the “act as a . . . group” standard in Sections 13(d)(3) and 13(g)(3). Sections 13(d)(3) and 13(g)(3) were intended to prevent circumvention of the disclosures required by Schedules 13D and 13G, not to complicate shareholders’ ability to independently and freely express their views and ideas to one another. The policy objectives ordinarily served by Schedule 13D or Schedule 13G filings would not be advanced by requiring disclosure that reports this or similar types of shareholder communications. Thus, an exchange of views and any other type of dialogue in oral or written form not involving an intent to engage in concerted actions or other agreement with respect to the acquisition, holding, or disposition of securities, standing alone, would not constitute an “act” undertaken for the purpose of “holding” securities of the issuer under Section 13(d)(3) or 13(g)(3).

Question: Is a group formed when two or more shareholders engage in discussions with an issuer’s management, without taking any other actions?

Response: No. For the same reasons described above, we do not believe that two or more shareholders “act as a . . . group” for the purpose of “holding” a covered class within the meaning of those terms as they appear in Section 13(d)(3) or 13(g)(3) if they simply engage in a similar exchange of ideas and views, alone and without more, with an issuer’s management.

Question: Is a group formed when shareholders jointly make recommendations to an issuer regarding the structure and composition of the issuer’s board of directors where (1) no discussion of individual directors or board expansion occurs and (2) no commitments are made, or agreements or understandings are reached, among the shareholders regarding the potential withholding of their votes to approve, or voting against, management’s director candidates if the issuer does not take steps to implement the shareholders’ recommended actions?

Response: No. Where recommendations are made in the context of a discussion that does not involve an attempt to convince the board to take specific actions through a change in the existing board membership or bind the board to take action, we do not believe that the shareholders “act as a . . . group” for the purpose of “holding” securities of the covered class within the meaning of those terms as they appear in Sections 13(d)(3) or 13(g)(3). Rather, we view this engagement as the type of independent and free exchange of ideas between shareholders and issuers’ management that does not implicate the policy concerns addressed by Section 13(d) or Section 13(g).

Question: Is a group formed if shareholders jointly submit a non-binding shareholder proposal to an issuer pursuant to Exchange Act Rule 14a-8 for presentation at a meeting of shareholders?

Response: No. The Rule 14a-8 shareholder proposal submission process is simply another means through which shareholders can express their views to an issuer’s management and board and other shareholders. For purposes of group formation, we do not believe shareholders engaging in a free and independent exchange of thoughts about a potential shareholder proposal, jointly submitting, or jointly presenting, a non-binding proposal to an issuer in accordance with Rule 14a-8 (or other means) should be treated differently from, for example, shareholders jointly meeting with an issuer’s management without other indicia of group formation. Accordingly, where the proposal is non-binding, we do not believe that the shareholders “act as a . . . group” for the purpose of “holding” securities of the covered class within the meaning of those terms as they appear in Section 13(d)(3) or 13(g)(3). Assuming that the joint conduct has been limited to the creation, submission, and/or presentation of a non-binding proposal, those statutory provisions would not result in the shareholders being treated as a group, and the shareholders’ beneficial ownership would not be aggregated for purposes of determining whether the five percent threshold under Section 13(d)(1) or 13(g)(1) had been crossed.

Question: Would a conversation, email, phone contact, or meetings between a shareholder and an activist investor that is seeking support for its proposals to an issuer’s board or management, without more, such as consenting or committing to a course of action, constitute such coordination as would result in the shareholder and activist being deemed to form a group?

Response: No. Communications such as the types described, alone and without more, would not be sufficient to satisfy the “act as a . . . group” standard in Sections 13(d)(3) and 13(g)(3) as they are merely the exchange of views among shareholders about the issuer. This view is consistent with the Commission’s previous statement that a shareholder who is a passive recipient of proxy soliciting activities, without more, would not be deemed a member of a group with persons conducting the solicitation. Activities that extend beyond these types of communications, which include joint or coordinated publication of soliciting materials with an activist investor might, however, be indicative of group formation, depending upon the facts and circumstances.

Question: Would an announcement or a communication by a shareholder of the shareholder’s intention to vote in favor of an unaffiliated activist investor’s director nominees, without more, constitute coordination sufficient to find that the shareholder and the activist investor formed a group?

Response: No. We do not view a shareholder’s independently-determined act of exercising its voting rights, and any announcements or communications regarding its voting decision, without more, as indicia of group formation. This view is consistent with our general approach towards the exercise of the right of suffrage by a shareholder in other areas of the Federal securities laws. Shareholders, whether institutional or otherwise, are thus not engaging in conduct at risk of being deemed to give rise to group formation as a result of simply independently announcing or advising others—including the issuer—how they intend to vote and the reasons why.

Question: If a beneficial owner of a substantial block of a covered class that is or will be required to file a Schedule 13D intentionally communicates to other market participants (including investors) that such a filing will be made (to the extent this information is not yet public) with the purpose of causing such persons to make purchases in the same covered class, and one or more of the other market participants make purchases in the same covered class as a direct result of that communication, would the blockholder and any of those market participants that made purchases potentially become subject to regulation as a group?

Response: Yes. To the extent the information was shared by the blockholder with the purpose of causing others to make purchases in the same covered class and the purchases were made as a direct result of the blockholder’s information, these activities raise the possibility that all of these beneficial owners are “act[ing] as” a “group for the purpose of acquiring” securities of the covered class within the meaning of Section 13(d)(3). Such purchases may implicate the need for public disclosure underlying Section 13(d)(3) and these purchases could potentially be deemed as having been undertaken by a “group” for the purpose of “acquiring” securities as specified under Section 13(d)(3). Given that a Schedule 13D filing may affect the market for and the price of an issuer’s securities, non-public information that a person will make a Schedule 13D filing in the near future can be material. By privately sharing this material information in advance of the public filing deadline, the blockholder may incentivize the market participants who received the information to acquire shares before the filing is made. Such arrangements also raise investor protection concerns regarding perceived unfairness and trust in markets. The final determination as to whether a group is formed between the blockholder and the other market participants will ultimately depend upon the facts and circumstances, including (1) whether the purpose of the blockholder’s communication with the other market participants was to cause them to purchase the securities and (2) whether the market participants’ purchases were made as a direct result of the information shared by the blockholder.

[1] Generally, a “beneficial owner” of a security includes “any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (1) [v]oting power which includes the power to vote, or to direct the voting of, such security; and/or, (2) [i]nvestment power which includes the power to dispose, or to direct the disposition of, such security.”

[2] A “covered class” is a class of equity securities described in Section 13(d)(1) and Rule 13d-1(i) and generally means, with limited exceptions, a voting class of equity securities registered under Section 12.

[3] “Business day” previously was not defined in Section 13(d) or 13(g) or any rule of Regulation 13D-G. The SEC amended Rule 13d-1(i) to define “business day” as any day, other than Saturday, Sunday, or a federal holiday, from 12:00 a.m. to 11:59 p.m. Eastern Time.

[4] “Qualified Institutional Investors” (QIIs) are the institutional investors qualified to report on Schedule 13G, in lieu of Schedule 13D and in reliance upon Rule 13d-1(b), including, among others, a registered broker or dealer, an insurance company, a registered investment company, and a registered investment adviser.

[5] “Exempt Investors” are persons holding beneficial ownership of more than 5% of a covered class at the end of the calendar year, but who have not made an acquisition of beneficial ownership subject to Section 13(d).

[6] “Passive Investors” are beneficial owners of more than 5% but less than 20% of a covered class who can certify under Item 10 of Schedule 13G that they did not acquire and do not hold the subject securities for the purpose or effect of changing or influencing the control of the issuer of such securities and that they did not acquire the securities in connection with or as a participant in any transaction having such purpose or effect.