What Happened

On March 1, 2024, the Securities and Exchange Commission (the SEC) announced that it had instituted and settled an enforcement action against investment adviser HG Vora Capital Management LLC (HG Vora) for its failure to make timely ownership disclosures on Schedule 13D. Without admitting or denying the SEC’s primary findings, HG Vora agreed to pay a $950,000 civil money penalty to settle the matter.

The Bottom Line

The SEC alleged that HG Vora—which had initially filed a Schedule 13G disclosing its passive intentions and its ownership of 5.6% of the outstanding common stock of Ryder System, Inc. (Ryder)—failed to comply with its obligation to update that submission by filing a Schedule 13D following the formation of a “control” purpose within the required time. SEC enforcement actions relating to Schedule 13G and Schedule 13D are rare and thus the settlement merits attention, particularly from investors that act in areas between passive investments and investments involving a control intent. At the same time, it is not entirely clear from the SEC order exactly when HG Vora’s control intent arose and/or what steps were minimally sufficient to demonstrate that intent.

The Full Story

Background

Rule 13d-1, promulgated under Section 13(d) of the Securities and Exchange Act of 1934 (as amended, the Exchange Act), requires an investor who obtains beneficial ownership of more than 5% of a class of voting equity securities registered under Section 12(b) or 12(g) thereof (equity securities) to file certain reports with the SEC. As in effect in 2021-2022, Rule 13d-1 generally required such an investor to file a detailed Schedule 13D within 10 calendar days reporting such ownership unless the investor was eligible to file on Schedule 13G instead.¹

Schedule 13G is a short-form beneficial ownership report available to passive investors who hold more than 5% and (for certain types of passive investors) less than 20% of a class of equity securities, and who can certify under Item 10 of Schedule 13G that these securities were not acquired and are not held for the purpose or effect of changing or influencing the control of the issuer of the securities and were not acquired and are not held in connection with or as a participant in any transaction having that purpose or effect. In addition, if the intent of an investor who filed a Schedule 13G switches from passive to having a control purpose, then (1) the investor must file a Schedule 13D within 10 calendar days of such change and (2) during the period between the formation of a control purpose and the filing of that Schedule 13D, the investor is obligated to refrain from voting the relevant issuer’s equity securities and from acquiring beneficial ownership of additional equity securities.²

The SEC has generally avoided providing detailed guidance on what constitutes a control purpose. Instead, a determination as to whether an investor is engaged in activity with the purpose or effect of changing or influencing control of an issuer is ordinarily based on the specific facts and circumstances of such activity.³ In the settlement with HG Vora, the SEC pointed to the definition of “control” in Rule 12b-2 promulgated under the Exchange Act, which provides that control means the “possession . . . of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.” Several federal courts have also applied this definition in evaluating whether an investor had a control purpose and have approached the issue of identifying whether a control purpose exists on a facts and circumstances basis.⁴

The SEC Enforcement Case

HG Vora filed a Schedule 13G on February 14, 2022, relying on Rule 13d-1(b) under the Exchange Act, reporting beneficial ownership of 5.6% of Ryder’s equity securities as of December 31, 2021. HG Vora describes its investment approach as focused on event-driven and value-oriented strategies.

The SEC enforcement action notes that, from January 2022 through the middle of April, HG Vora purchased an additional 2,050,000 shares of common stock, giving it a total ownership of 5,050,000 shares, or approximately 9.9% of the outstanding shares of Ryder common stock. HG Vora also increased its economic exposure to Ryder in an amount equal to approximately 0.9% of the shares outstanding by entering into cash-settled swap agreements with third-party financial institutions between April 27 and May 12, 2022.

According to the SEC enforcement action, between November 2021 and May 12, 2022, HG Vora engaged in a series of discussions and actions involving its interest in Ryder, including:

• In November 2021, holding discussions with a private equity firm regarding HG Vora’s investment thesis, valuation models and the potential for the private equity firm to provide asset-backed financing and a potential acquisition of Ryder by the private equity firm;
• Between February and April 2022, initially holding discussions with another, larger private-equity firm regarding the potential for the firm to provide asset-backed financing to Ryder and later holding discussions regarding the potential for an acquisition of Ryder by the private-equity firm;
• On April 26, 2022, first considering making its own acquisition bid for Ryder, with financing to be provided by a private equity firm and, later that day, beginning to draft an offer letter to Ryder with a placeholder offer price;
• On April 27, 2022, contacting outside counsel to advise on its Schedule 13D; and
• On May 12, 2022, meeting with Ryder management for the first time to discuss whether management would be receptive to an acquisition bid.

On May 13, 2022, HG Vora sent a letter proposing to acquire all of the outstanding shares of common stock of Ryder and filed a Schedule 13D disclosing, among other things, that its ownership had increased to 9.9%, that it had entered into swap agreements providing an additional 0.9% economic exposure, and that it sent the offer letter sent to Ryder’s management team. Ultimately, the HG Vora offer gained no traction with Ryder or its shareholders. By the end of 2022, HG Vora had retreated to a passive posture and, as permitted by the rules, filed a Schedule 13G so indicating.

In the SEC’s March 1, 2024 settlement, it determined that by “no later than April 26, 2022,” HG Vora had a control purpose with respect to Ryder, and it was no longer eligible to file Schedule 13G. As a result, the SEC’s view is that HG Vora was required to file a Schedule 13D within 10 calendar days—that is, no later than May 6, 2022. Because its Schedule 13D was not filed until May 13, 2022, the SEC found that HG Vora failed to timely disclose its control purpose under Item 4 and the other information required by Schedule 13D. As noted above, HG Vora agreed to pay to a civil penalty of $950,000 to settle the SEC actions.

Take-Aways

The SEC enforcement action highlights the risks investors face in evaluating whether they have a control purpose, particularly (though not only) as it relates to an investor that previously filed a Schedule 13G and whose intentions have evolved over time. While one might be tempted to conclude that the mere act of considering “making its own acquisition bid for Ryder” and creating a first draft of an offer letter—the only discrete events occurring on April 26—constituted the change of investment intent, it is clear that the SEC was concerned about more than just these discrete acts and that the SEC also viewed earlier trigger dates as being plausible. When an investment firm is considering actions that could conceivably be viewed as potentially involving “control” over an issuer, it is advisable to consult with experienced deal counsel as early as possible.

¹ The regulations relating to Schedule 13D and Schedule 13G were amended in 2023 in the Beneficial Ownership Modernization Release. Certain provisions of that release went into effect on February 5, 2024, and the remainder will take effect later in 2024. Amendments to the deadline for filing a Schedule 13D have taken effect and the time to file has been reduced from 10 calendar days to 5 business days.

² Currently, the rule requires investors to file an initial beneficial ownership report on Schedule 13D within five business days of triggering a filing obligation. The same five business day deadline applies to changes from Schedule 13G to Schedule 13D.

³ Modernization of Beneficial Ownership Reporting, Release No. 34-98704 (Oct. 10, 2023) (Beneficial Ownership Modernization Release). The SEC has previously stated that most solicitations in support of a proposal calling for a change of control of the company (e.g., a proposal to seek a buyer for the company or a contested election of directors or a sale of a significant amount of assets or a restructuring of a corporation) would have a control purpose. See Amendments to Beneficial Ownership Reporting Requirements, Release No. 34-39538 (Jan. 12, 1998).

⁴ See, e.g., Chromalloy American Corp. v. Sun Chemical Corp., 611 F.2d 240 (8^thCir. 1979); Dan River, Inc. v. Unitex Ltd., 624 F.2d 1216 (4^thCir. 1980); S.E.C. v. Amster & Co., 762 F. Supp. 604 (S.D.N.Y. 1991). In a case where the defendant, Elon Musk, had, among other things, intentionally deleted the Item 10 control purpose certification in a Schedule 13G filed with respect to Musk’s holdings in Twitter, the court held that the plaintiff had adequately plead scienter as to defendant’s control purpose to survive a motion to dismiss. See Oklahoma Firefighters Pension & Ret. Sys. v. Musk, No. 22-CV-03026 (ALC), 2023 WL 6393865 (S.D.N.Y. Sept. 29, 2023).