"In our fast-paced markets, it shouldn’t take 10 days for the public to learn about an attempt to change or influence control of a public company."

On October 11, 2023, the Securities and Exchange Commission adopted rule amendments governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934. The rule amendments generally update Regulation 13D-G to require market participants to provide more timely information on their positions, clarify requirements for derivative securities, and clarify considerations regarding acting as a group. The SEC believes that these rule amendments will better meet the needs of investors in today’s financial markets.

SEC Chairman Gary Gensler commented:

Frankly, these deadlines from half a century ago feel antiquated. In our fast-paced markets, it shouldn’t take 10 days for the public to learn about an attempt to change or influence control of a public company. I am pleased to support this adoption because it updates Schedules 13D and 13G reporting requirements for modern markets, ensures investors receive material information in a timely way, and reduces information asymmetries.

Background

Exchange Act Sections 13(d) and 13(g), along with Regulation 13D-G, require an investor who beneficially owns more than 5% of a covered class of equity securities to publicly file either a Schedule 13D or a Schedule 13G, as applicable. An investor with control intent is required to file a Schedule 13D, while “exempt investors” and investors without a control intent, such as “qualified institutional investors” and “passive investors,” may file a Schedule 13G.

Under the rules existing prior to the adoption of the rule amendments, the filing deadline for an initial Schedule 13D is 10 calendar days following the date when an investor acquires beneficial ownership of more than 5% of a covered class of equity securities or loses eligibility to file a Schedule 13G. Amendments to a Schedule 13D are currently required to be filed “promptly” following a material change.

For Schedule 13G filers, the existing deadlines for initial filings are as follows:

• For a qualified institutional investor under Rule 13d-1(b), 45 days after the calendar year-end in which beneficial ownership exceeded 5% of a covered class of equity securities or 10 days after the month-end in which beneficial ownership exceeded 10% of a covered class of equity securities;
• For a passive investor under Rule 13d-1(c), 10 days after the date at which beneficial ownership exceeded 5% of a covered class of equity securities; and
• For an exempt investor under Rule 13d-1(d), 45 days after the calendar year-end in which beneficial ownership exceeded 5% of a covered class of equity securities.

Amendments to Schedule 13Gs were generally required 45 days after the calendar year-end in which any change occurred.

Effect of the Amendments

Filing Deadlines and Disclosure of Derivative Securities

Among other things, the rule amendments:

• Shorten the deadline for initial Schedule 13D filings from 10 days to five business days;
• Require that Schedule 13D amendments be filed within two business days;
• Generally accelerate the filing deadlines for Schedule 13G beneficial ownership reports, as follows:
  • For a qualified institutional investor under Rule 13d-1(b), 45 days after the calendar quarter in which beneficial ownership exceeded 5% of a covered class of equity securities;
  • For a passive investor under Rule 13d-1(c), five business days after the date at which beneficial ownership exceeded 5% of a covered class of equity securities; and
  • For an exempt investor under Rule 13d-1(d), 45 days after the calendar quarter in which beneficial ownership exceeded 5% of a covered class of equity securities.
• Clarify the Schedule 13D disclosure requirements for derivative securities by requiring disclosure of interests in all derivative securities (including cash-settled derivative securities) that use the issuer’s equity security as a reference security; and
• Require that Schedule 13D and 13G filings be made using a structured, machine-readable data language.

The acceleration of the initial filing and amendment deadlines requires those active in the markets to make sure they have proper policies and procedures in place to avoid violating the new reporting deadlines and to ensure compliance with the new requirements.

Guidance on Group Formation

The adopting release provides guidance on the application of the existing legal standard established in Exchange Act Sections 13(d)(3) and 13(g)(3) with respect to the formation of a group. This 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 are sufficient to constitute the formation of a group. The adopting release also provides guidance 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. In a question-and-answer format in the rule release, the SEC described the following situations, among others, in which a Section 13(d) group would not be formed:

• When two or more shareholders communicate with each other regarding an issuer, including discussions relating to improvement of company performance, changes in issuer practices, submission of a non-binding shareholder proposal, a joint engagement strategy that is no control-related, or a “vote no” campaign against individual directors in contested elections;
• When two or more shareholders engage in discussions with an issuer’s management, without taking any other actions;
• When shareholders jointly make recommendations to an issuer regarding the structure and composition of the issuer’s board of directors where no discussion of individual directors occurs and no commitments are made or agreements or understandings are reached among the shareholders regarding their votes to approve or votes against management’s candidates if the issuer does not implement the shareholders’ recommendations;
• When shareholders jointly submit a non-binding shareholder proposal under Rule 14a-8 for presentation at a meeting of shareholders; and
• An announcement or communication by a shareholder of the shareholder’s intention to vote in favor of an unaffiliated activist investor’s director nominees, without more.

In contrast, the SEC noted that in its view a group would potentially be formed if a beneficial owner of a substantial block of stock that is or will be required to file a Schedule 13D intentionally communicates to other market participants 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 makes purchases as a direct result of that communication.

Extension of Time to File to 10:00 p.m.

Finally, to ease filers’ administrative burdens associated with these shortened deadlines and as is already the case with filings under Exchange Act Section 16, the rule amendments extend the filing deadlines for Schedules 13D and 13G from 5:30 p.m. to 10:00 p.m. Eastern time on the due date.

Compliance Dates

The rule amendments will become effective 90 days after publication in the Federal Register. Compliance with the revised Schedule 13G filing deadlines will be required beginning on September 30, 2024. Compliance with the structured data requirement for Schedules 13D and 13G will be required on December 18, 2024. Compliance with the other rule amendments such as the Schedule 13D filing deadline will be required upon their effectiveness.

For More Information

If you have any questions about this Alert, please contact Darrick M. Mix, Justin A. Santarosa, any of the attorneys in our Capital Markets Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.