Watchdogs Call for Shorter Window for Activist Disclosures

Groups say loopholes in securities laws allow activist investors to secretly buy large stakes in companies before initiating hostile takeovers.
Katie Kuehner-HebertApril 17, 2015

Several watchdog groups are petitioning Congress to shorten the time period for activist investors to disclose their purchase of large stakes in corporations — something the Dodd-Frank Act calls for but the Obama Administration has been slow to act upon.

Citizens for Responsibility and Ethics in Washington, the Government Accountability Project, and New Rules for Global Finance were slated to send a letter Wednesday to the financial services committees of both the House of Representatives and the Senate, calling on them to intervene, the Wall Street Journal reported.

“Loopholes in federal securities laws are allowing activist investors to secretly buy large stakes in companies before initiating hostile takeovers, depriving the market of material information and significantly disadvantaging ordinary investors,” the groups wrote in the letter.

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“Over the past several years, lawyers and scholars have petitioned the Securities and Exchange Commission to address the situation to no avail. As a result, we urge Congress to step in with a legislative solution.”

The group cited a recent example of how the current ten-day reporting window enabled Bill Ackman and his hedge fund, Pershing Square Capital Management, to partner with Valeant Pharmaceuticals to engineer an approach “designed to do an end-run around securities laws intended specifically to prevent secret accumulations of stock.”

“They used the ten-day window between the acquisition and required disclosure of a five percent stake in a company to go from owning just under five percent to nearly ten percent of their target, Allergan,” the group wrote. “Only after that period did Valeant disclose its intention to make an offer for the company. Once Pershing Square’s ownership interest became public, Allergan’s share price increased. Eventually, Mr. Ackman profited by $2.6 billion.”

In the letter, the three watchdog groups said “the reporting window should be reduced from ten days to one; a “cooling-off period” of two business days following the public filing on an initial Schedule 13D should be adopted, during which acquirers would be prohibited from acquiring additional beneficial ownership; and the definition of ‘beneficial ownership’ should be modernized to prevent activists from acquiring control using stealth techniques and derivative instruments to evade the reporting requirements.”

Because the SEC has not acted, “Congress should hold hearings on this issue and draft legislation codifying these changes into the law,” they said in the letter.

The WSJ wrote that activists and other large investors in 2011 sent a letter to the SEC arguing that such changes “would significantly impact market-driven incentives to address company underperformance, to the likely detriment of all shareholders.”

“They point to other corporate defenses, such as so-called poison pills that can block shareholders from acquiring significant stakes, as reasons they need the ability to buy without having to immediately disclose their stakes,” the WSJ wrote.

Changing disclosure rules would be like “peeling an onion,” where each layer exposes another set of complications, Michele Anderson, SEC’s head of merger and acquisition reviews, said at a conference last month, according to the WSJ.

“Whatever we do end up doing will be very comprehensive,” Anderson said.

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