Corp Fin has posted two new CDIs regarding filing of Schedules 13D and 13G under Exchange Act Sections 13(d) and 13(g) and related Rule 13d-1. The new CDIs address issues related to determining, for purposes of eligibility to file a Schedule 13G, whether the shareholder acquired the securities with the purpose or effect of changing or influencing control of the issuer. One of the CDIs suggests that, in the context of Schedule 13G eligibility, the process of shareholder engagement with management might be trickier to navigate than perhaps originally contemplated.
Revised Question 103.11 tells us to focus on the Exchange Act, not the Hart-Scott-Rodino Act—or at least, not just the HSR Act. The HSR Act provides an exemption from notification where the acquiror of the securities had “no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” Corp Fin indicates that disqualification from reliance on that exemption based on the acquiror’s efforts to influence management on a particular topic, is not, by itself, enough to disqualify the shareholder from reporting on Schedule 13G. Rather, “eligibility to report on Schedule 13G in reliance on Rule 13d-1(b) or Rule 13d-1(c) will depend, among other things, on whether the shareholder acquired or is holding the subject securities with the purpose or effect of changing or influencing control of the issuer. This determination is based upon all the relevant facts and circumstances and will be informed by the meaning of ‘control’ as defined in Exchange Act Rule 12b-2.” The prior version of this CDI included a high-level discussion of how the subject matter and context of the shareholder’s discussions with the issuer’s management affect the determination of “changing or influencing control.” That discussion, with substantial revisions, is now included in new question 103.12.
New Question 103.12 outlines the circumstances under which a shareholder’s engagement with an issuer’s management on a particular topic would cause the shareholder to hold the subject securities with a disqualifying “purpose or effect of changing or influencing control of the issuer” and, pursuant to Rule 13d-1(e), lose its eligibility to report on Schedule 13G. As noted above, Corp Fin here reiterates that the determination of whether the securities were acquired or held “for the purpose of or with the effect of changing or influencing the control of the issuer” is elicited from “all the relevant facts and circumstances and will be informed by the meaning of ‘control’ as defined in Exchange Act Rule 12b-2.” In contrast to the now-deleted discussion in former Question 103.11, this discussion appears to provide a more nuanced—and potentially more consequential—analysis of conduct that could be deemed to be “influencing” control of the issuer, such as a shareholder who “exerts pressure on management to implement specific measures or changes to a policy” by expressly stating or implying that the shareholder will not support the issuer’s nominee for director unless the suggested measures or changes are adopted. The CDI provides:
“The subject matter of the shareholder’s engagement with the issuer’s management may be dispositive in making this determination. For example, Schedule 13G would be unavailable if a shareholder engages with the issuer’s management to specifically call for the sale of the issuer or a significant amount of the issuer’s assets, the restructuring of the issuer, or the election of director nominees other than the issuer’s nominees.
“In addition to the subject matter of the engagement, the context in which the engagement occurs is also highly relevant in determining whether the shareholder is holding the subject securities with a disqualifying purpose or effect of ‘influencing’ control of the issuer. Generally, a shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more, would not be disqualified from reporting on a Schedule 13G. A shareholder who goes beyond such a discussion, however, and exerts pressure on management to implement specific measures or changes to a policy may be ‘influencing’ control over the issuer. For example, Schedule 13G may be unavailable to a shareholder who:
- “recommends that the issuer remove its staggered board, switch to a majority voting standard in uncontested director elections, eliminate its poison pill plan, change its executive compensation practices, or undertake specific actions on a social, environmental, or political policy and, as a means of pressuring the issuer to adopt the recommendation, explicitly or implicitly conditions its support of one or more of the issuer’s director nominees at the next director election on the issuer’s adoption of its recommendation; or
- “discusses with management its voting policy on a particular topic and how the issuer fails to meet the shareholder’s expectations on such topic, and, to apply pressure on management, states or implies during any such discussions that it will not support one or more of the issuer’s director nominees at the next director election unless management makes changes to align with the shareholder’s expectations.”
