Summary
On October 10, 2023, the Securities and Exchange Commission (SEC) adopted amendments to the rules governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (Exchange Act) that accelerate filing deadlines for both initial filings of, and amendments to, Schedules 13D and Schedules 13G. The SEC also provided guidance to help clarify the circumstances under which two or more persons form a single “group” for the purposes of beneficial ownership reporting. The amendments will become effective 90 days after publication of the adopting release in the Federal Register.
The Upshot
- The new rules shorten the deadline to file an initial Schedule 13D from 10 calendar days to five business days after acquiring more than 5% beneficial ownership, with amendments required within two business days after a triggering event.
- The rules also accelerate the deadline for Schedule 13G filings, with deadlines varying depending on the type of filer.
- The amendments clarify disclosure requirements for derivative securities and provide guidance on the legal standard for determining whether a group has been formed for beneficial ownership purposes.
The Bottom Line
Filers must pay close attention to these new reporting deadlines and evaluate their reporting procedures to ensure timely filings in light of accelerated filing deadlines.
Generally, the SEC’s amendments shorten the deadline to report on Schedule 13D and 13G filings. However, the new rules also extend the cut-off time by which a filing must be received by the SEC to be considered filed for that day from 5:30 p.m. to 10:00 p.m. Eastern Time. The amendments further provide that Schedule 13D and 13G filings must be made using structured, machine readable data language. The SEC’s release announcing these amendments also includes guidance on the applicability of existing beneficial ownership rules to the use of cash-settled derivatives and group formation.
Schedule 13D Deadline
The current deadline to file an initial Schedule 13D is 10 calendar days after a person acquires beneficial ownership of 5% or more of a covered class of securities. The amended rules accelerate the deadline for initial Schedule 13D filings to within five business days after acquiring beneficial ownership of 5% or more of a covered class. For filers who previously reported on Schedule 13G but subsequently become ineligible, the new deadline to file an initial Schedule 13D is five business days following the event that caused ineligibility.
The previous deadline for filing an amendment to Schedule 13D was “promptly” after a material change in the facts reported on the previous Schedule 13D. The amendments provide a clearer deadline for Schedule 13D amendment filings, requiring an amendment to be filed within two business days after the date of a material change in previously reported information.
Schedule 13G Deadline
The timing for Schedule 13G filings differs based on whether the filer is a Qualified Institutional Investor (QII), Exempt Investor, or Passive Investor.
QIIs are beneficial owners that have acquired 5% or more of a covered class in the ordinary course of business, including brokers, investment companies, insurance companies, banks, and other types of filers described in Rule 13d-1(b). Exempt Investors are beneficial owners of more than 5% of a covered class who have not acquired beneficial ownership through means subject to Section 13(d), such as those who acquire securities before an issuer registers under the Exchange Act.
Previously, the deadline for QIIs and Exempt Investors to file initial Schedule 13G filings was 45 calendar days after calendar year-end in which beneficial ownership exceeds 5% and 10 calendar days after month-end in which beneficial ownership exceeds 10%. The amended deadlines for QIIs and Exempt Investors require filing 45 calendar days after calendar quarter-end in which beneficial ownership exceeds 5%, and five business days after month-end in which beneficial ownership exceeds 10%.
Passive Investors are beneficial owners of more than 5% but less than 20% of a covered class of securities who certify that their securities are not acquired or held for the purpose of influencing control over the issuer. For Passive Investors, the deadline to file an initial Schedule 13G is shortened from within ten (10) calendar days to five (5) business days after acquiring beneficial ownership of more than 5% of a covered class of securities.
Schedule 13G amendments were previously required for all filers within forty-five (45) days after calendar year-end in which any change occurred. With the new rules, the deadline for Schedule 13G amendments is 45 days after calendar quarter-end in which a material change occurs. Further, for QIIs, the deadline to file a Schedule 13G amendment is accelerated from 10 calendar days to five business days after month-end in which their beneficial ownership exceeds 10% or increases or decreases by more than 5%. For Passive Investors, the Schedule 13G amendment deadline has changed from “promptly” to within two (2) business days after exceeding 10% beneficial ownership or increasing or decreasing beneficial ownership by at least 5%.
Clarification on Cash-Settled Derivative Securities
The SEC did not adopt the proposed amendment to Rule 13d-3 to deem those holding cash-settled derivatives (other than security-based swaps (SBS)) with a control purpose to be beneficial owners of the underlying securities. Rather, the SEC provided guidance on the circumstances in which holders of non-SBS cash-settled derivatives could be beneficial owners of the underlying securities.
The guidance states that holders of non-SBS cash-settled derivatives may be considered beneficial owners of the underlying securities if the facts and circumstances indicate that the holder has voting or investment power over the underlying securities. Additionally, holders can beneficially own underlying securities if they acquired non-SBS cash-settled derivatives with the purpose or effect of divesting beneficial ownership over the underlying securities or evading the Exchange Act’s reporting requirements. The holders of non-SBS cash-settled derivatives may also be considered beneficial owners if such derivatives grant the right to acquire the underlying securities within 60 days or the holder acquires the right to gain beneficial ownership of the underlying securities with a control purpose, regardless of when such right is exercisable. This guidance largely follows the existing standard for determining beneficial ownership relating to security-based swaps.
The amendments further provide clarification that interests in any derivative securities relating to a covered class must be disclosed on Item 6 of Schedule 13D.
Guidance on Group Formation
Rule 13d-5(b)(1) states that a group is formed for beneficial ownership reporting purposes when two or more persons agree to act together for the purpose of acquiring, holding, voting, or disposing of securities. Proposed amendments governing the formation of a group sought to remove the reference to an “agreement” from this rule. However, the SEC decided to not adopt this proposed amendment and instead provided guidance on how a group may form for beneficial ownership reporting purposes under the existing rule.
The new guidance reiterates that the determination of whether two or more persons are acting as a group does not depend on an express agreement. Depending on the facts and circumstances, two or more persons can form a group if they take “concerted actions” to acquire, hold, or dispose of securities. The SEC further stipulated that, in order to prove the formation of a group, evidence must show at least “an indicia of common purpose” to acquire, hold, or dispose of securities. This may include an informal arrangement or coordination between two or more persons to acquire, hold, or dispose of securities.
Additionally, in response to some of the concerns raised by commenters, the SEC provided guidance in a question-and-answer format on the application of the current legal standard found in Section 13(d)(3) and 13(g)(3) to certain common types of shareholder engagement activities. Through the Q&As, the SEC provided the following examples of shareholder engagement activities that do not result in the formation of a group:
- two or more shareholders communicate with each other regarding the 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;
- two or more shareholders engage in discussions with an issuer’s management without taking any other actions;
- shareholders jointly make recommendations to an issuer regarding the structure and composition of the issuer’s board of directors where the shareholders do not discuss either individual directors or board expansion and do not make any commitment, agreement, or understanding regarding voting for the management’s director candidates if the issuer does not take steps to implement the shareholders’ jointly recommended actions, provided that the discussion does not involve an attempt to convince the board of the issuer to take specific actions through a change in the existing board membership or bind the board to take action;
- shareholders jointly submit a non-binding shareholder proposal to an issuer pursuant to Rule 14a-8 for presentation at a meeting of shareholders;
- a communication between a shareholder and an activist investor seeking support for its proposals to an issuer’s board or management, without more such as the shareholder consenting or committing to a course of action; or
- a shareholder announces or advises others (including the issuer) of how the shareholder intends to vote and why, including an announcement or communication by a shareholder of the shareholder’s intention to vote in favor of an unaffiliated activist investor’s director nominees.
The SEC’s guidance makes clear that these types of communications, alone and without more, do not implicate the policy objectives served by Schedule 13D or Schedule 13G filings. Instead, “an independent and free exchange of views and ideas among shareholders, alone and without more” will not be sufficient to form a group, provided there is no intent to engage in concerted actions or other agreement with respect to the securities.
In contrast, the SEC’s Q&A guidance also provides that a group may be formed by a shareholder intentionally communicating to others the non-public information that the shareholder will be making a Schedule 13D filing with the purpose of causing others to make purchases in the same covered class, if the other market participants in fact make purchases in the same covered class as a direct result of the tip. The purchases may be deemed to have been undertaken by a “group” consisting of the shareholder and the purchasers of the securities for the purpose of “acquiring” the securities as specified under Section 13(d)(3). In that circumstance, each group member individually bears a reporting obligation arising under Rule 13d-1(k)(2).
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