United States: SEC Adopts Changes To Schedule 13D And Schedule 13G

On October 10, 2023, the U.S. Securities and Exchange Commission (the "SEC") adopted final rules amending (the "Amendments") Schedules 13D and 13G of the Securities Exchange Act of 1934 (the "Exchange Act") to modernize its reporting rules and ultimately to speed up the rate at which beneficial ownership information is made available to the public.

Changes Made by the Amendments

Among other things, the amendments (1) shorten the deadline for initial Schedule 13D filings from 10 days to 5 business days, (2) require that Schedule 13D amendments be filed within 2 business days, (3) generally accelerate the filing deadlines for Schedule 13G beneficial ownership reports (the filing deadlines differ based on the type of filer) and (4) extend the filing time for Schedules 13D and 13G to 10:00 p.m. Eastern Time. A chart of the changes made to Schedules 13D and 13G by the Amendments is provided below.

The Amendments also require that Schedule 13D and 13G filings be made using a structured, machine-readable data language.

Further, the SEC's adopting release provides guidance regarding the current legal standard governing when two or more persons may be considered a group for the purposes of determining whether the beneficial ownership threshold has been met, as well as how, under the current beneficial ownership reporting rules, an investor's use of certain cash-settled derivative securities may result in the person being treated as a beneficial owner of the class of the reference equity securities. A discussion of the group concept is provided below.

Effective and Compliance Dates

The amendments will become effective 90 days after the adopting release is published 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 will be required upon their effectiveness.

Refresher on Sections 13(d) and 13(g) and Regulation 13D-G

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 must file Schedule 13D, while "Exempt Investors" and investors without a control intent, such as "Qualified Institutional Investors" and "Passive Investors," file Schedule 13G.

The term "Exempt Investor" refers to persons holding beneficial ownership of more than 5% of a covered class, but who have not made an acquisition of beneficial ownership subject to Section 13(d). For example, persons who acquire all of their securities prior to the issuer registering the subject securities under the Exchange Act are not subject to Section 13(d). In addition, persons who acquire no more than 2% of a covered class within a 12-month period are exempted from Section 13(d) by Section 13(d)(6)(B). In both cases, however, those persons are subject to Section 13(g).

The terms "Qualified Institutional Investors" or "QII" refer to a broker or dealer registered under Section 15 of the Exchange Act, a bank as defined in Section 3(a)(6) of the Exchange Act, an insurance company as defined in Section 3(a)(19) of the Exchange Act, an investment company registered under Section 8 of the Investment Company Act of 1940, a person registered as an investment adviser under Section 203 of the Investment Advisers Act of 1940, a parent holding company or control person (if certain conditions are met), an employee benefit plan or pension fund that is subject to the provisions of the Employee Retirement Income Security Act of 1974, a savings association as defined in Section 3(b) of the Federal Deposit Insurance Act, a church plan that is excluded from the definition of an investment company under Section 3(c)(14) of the Investment Company Act of 1940, non-U.S. institutions that are the functional equivalent of any of the institutions identified above, so long as the non-U.S. institution is subject to a regulatory scheme that is substantially comparable to the regulatory scheme applicable to the equivalent U.S. institution, and related holding companies and groups. In addition, to qualify to report on Schedule 13G in lieu of Schedule 13D, a QII must have acquired securities in the covered class in the ordinary course of business and not with the purpose nor with the effect of changing or influencing the control of the issuer, nor in connection with or as a participant in any transaction having such purpose or effect.

The term "Passive Investors" refers to beneficial owners of more than 5% but less than 20% of a covered class who can certify under Item 10 of Schedule 13G that the subject securities were not acquired and are not held for the purpose or effect of changing or influencing the control of the issuer of such securities and were not acquired in connection with or as a participant in any transaction having such purpose or effect.

SEC Guidance on Formation of Schedule 13D Groups

In the adopting release, the SEC stated 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. However, the SEC then stated that Sections 13(d)(3) and 13(g)(3) of the Exchange Act were intended to prevent circumvention of the disclosures required by Schedules 13D and 13G, not to complicate shareholders' abilities to independently and freely express their views and ideas to one another. The SEC also provided several examples of the ways in which shareholders are permitted to communicate without forming a group, with some caveats when such activities could cross over into group formation:

• A group is not 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. This is true regardless of whether the discussion is in oral or written form, or is held in private meeting, 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.
• A group is not formed when two or more shareholders engage in discussions with an issuer's management, without taking any other actions. Accordingly, shareholders may engage in a similar exchange of ideas and views with an issuer's management.
• A group is not 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. Such discussions may 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.
• A group is not 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. In the SEC's view, 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. The joint conduct should be limited to the creation, submission, and/or presentation of a non-binding proposal, and the non-binding proposal may not contain "springing conditions" such as an arrangement, understanding, or agreement among the shareholders to vote against director candidates nominated by the issuer's management or other management proposals if the non-binding proposal is not included in the issuer's proxy statement or, if passed, not acted upon favorably by the issuer's board.
• A group is not formed when there are conversations, emails, phone contacts, and 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. Examples of the type of consents or commitments that might give rise to a group could include the granting of irrevocable proxies or the execution of written consents or voting agreements that demonstrate that the parties had an arrangement to act in concert. Also, activities that extend beyond these types of communications, which include joint or coordinated publication of soliciting materials with an activist investor might be indicative of group formation, depending upon the facts and circumstances.
• A group is not formed when a shareholder announces or communicates the shareholder's intention to vote in favor of an unaffiliated activist investor's director nominees, without more. Accordingly, shareholders, whether institutional or otherwise, are 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.

However, the SEC did indicate one type of shareholder communication that is problematic, and suggests the formation of a group. Namely, 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, then the parties are likely subject to regulation as a group.

Key Consideration

Haste can make for mistakes. Accordingly, reporting persons should begin now to implement processes and procedures that will allow them to gather needed information to quickly and timely prepare Schedule 13D and Schedule 13G filings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.