SEC Adopts Substantial Changes to Reporting Requirements for Significant Shareholders

Alert
October 16, 2023
13 minutes

On October 10, 2023, the Securities and Exchange Commission (the “SEC”) adopted substantial amendments to the reporting regime for beneficial owners of significant equity stakes in public companies.1 The amendments:

  • accelerate the filing deadlines for Schedule 13D and Schedule 13G;

  • provide a specific deadline for when amendments to Schedule 13D and some Schedule 13Gs must be filed in lieu of the current “promptly” standard;

  • require more frequent amendments to Schedule 13G filings;

  • clarify that cash-settled derivatives should be disclosed in Schedule 13Ds;

  • extend the cut-off time for Schedule 13D and Schedule 13G filings from 5:30 p.m. Eastern time to 10:00 p.m. Eastern time, making it consistent with the cut-off time for Section 16 and Form 144 filings; and

  • mandate that the body of Schedule 13Ds and Schedule 13Gs (but not any exhibits) be prepared using a structured, machine-readable data language (XML).

In a welcome change from the proposal, the SEC did not adopt amendments to rules addressing the formation of “groups” or amendments expanding the definition of “beneficial ownership” to cover some cash-settled derivatives. Instead, the Adopting Release includes guidance on the application of the current rules on those topics.

The new rules related to Schedule 13D (other than use of a structured data language) and the extension of the filing cut-off time to 10:00 p.m. Eastern time will become effective 90 days after the Adopting Release is published in the Federal Register. Investors will not be required to comply with the new filing deadlines for Schedule 13G until September 30, 2024 and will not be required to file Schedule 13Ds and Schedule 13Gs using a structured data language until December 18, 2024.2

Background

Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) and the related rules require beneficial owners of more than 5% of an Exchange Act-registered class of voting equity securities to file a Schedule 13D or Schedule 13G to publicly report such ownership.

Schedule 13D requires significant disclosure regarding, among other things, plans or proposals with respect to the issuer, transactions in securities of the issuer and agreements with respect to securities of the issuer, as well as the reporting person’s beneficial ownership of the relevant class. Schedule 13G requires substantially less disclosure, which is focused primarily on the reporting person’s beneficial ownership of the relevant class. Three classes of investors are eligible to file a Schedule 13G in lieu of the longer form Schedule 13D: Exempt Investors;3  Qualified Institutional Investors;4 and Passive Investors.5 The filing deadlines and amendment requirements for each class of Schedule 13G filers are different – with Exempt Investors receiving the most favorable treatment and Passive Investors the least.

Summary of changes to filing deadlines

The key amendments to filing deadlines are summarized below. As noted above, the new rules extend the cut-off time for Schedule 13D and Schedule 13G filings from 5:30 p.m. Eastern time to 10:00 p.m. Eastern time on the day the filing is due.

  • Schedule 13D filing deadlines.

    • Initial Filing. The deadline for filing a Schedule 13D is accelerated from 10 calendar days after the triggering event to five business days.

    • Amendments. Amendments continue to be required whenever there is a material change to the information reported. However, the new rules change the deadline for filing amendments from “promptly” (which is undefined) after the triggering event to two business days after the triggering event.

  • Schedule 13G filing deadlines and amendment triggers. The changes to filing deadlines and amendment triggers for Schedule 13G are more extensive and vary depending on the type of filer.

    • Exempt Investors.

      • Initial Filing. Exempt Investors will need to test their beneficial ownership quarterly, rather than annually, and file a Schedule 13G within 45 calendar days after the end of the quarter in which they become a greater-than-5% beneficial owner. In many cases, this will require significant shareholders of companies that IPO to file a 13G after the end of the quarter in which the IPO occurs.

        • New Rules (in effect beginning September 30, 2024): Exempt Investors are required to test if they are a greater-than-5% beneficial owner as of the last day of each calendar quarter and, if so, file a Schedule 13G within 45 days of the end of that quarter (i.e., on the same date Form 13Fs are due).

        • Current Rules (in effect through September 29, 2024): Exempt Investors must test if they are a greater-than-5% beneficial owner only on December 31 and, if so, file a Schedule 13G within 45 days (i.e., by February 14).

      • Amendments. At the end of each calendar quarter, rather than only at the end of each calendar year, Exempt Investors will need to consider if amendments are required, in which case they would be due 45 calendar days after the end of that quarter. However, the new rules make clear that amendments are only required for material changes.6

        • New Rules (in effect beginning September 30, 2024): Amendments will be triggered by any material change in the information reported in the Schedule 13G and would be due 45 calendar days after the end of the quarter in which the triggering event occurred.

        • Current Rules (in effect through September 29, 2024): Amendments are only due annually 45 calendar days after year-end (i.e., by February 14), reporting changes that occurred during the previous year. Unlike the new rules, the plain text of the current rules state that amendments are required for “any” changes rather than only “material” changes.

  • Qualified Institutional Investors.

    • Initial Filing. As under the current rules, the filing deadlines for Qualified Institutional Investors vary depending on whether the investor is a greater-than-10% beneficial owner.

      • Greater-than-5% and up-to-10% beneficial owner. The new rules and the current rules are the same as for Exempt Investors.

        • As a result, once the new rules come into effect, all Qualified Institutional Investors will need to consider on a quarterly basis if they have become greater-than-5% beneficial owners and, if so, file a Schedule 13G accordingly.

      • Greater-than-10% beneficial owner. More onerous filing requirements apply to Qualified Institutional Investors that are greater-than-10% beneficial owners.

        • New Rules (in effect beginning September 30, 2024): The Schedule 13G is due five business days after a month end at which the 10% threshold is first exceeded.

        • Current Rules (in effect through September 29, 2024): The Schedule 13G is due 10 calendar days after a month end at which the 10% threshold is first exceeded.

    • Amendments. As under the current rules, the amendment requirements for Qualified Institutional Investors vary depending on whether the investor is a greater-than-10% beneficial owner.

      • All Qualified Institutional Investors. All Qualified Institutional Investors are subject to the same current and new amendment requirements as Exempt Investors.

        • As a result, once the new rules come into effect, all Qualified Institutional Investors will need to consider on a quarterly basis if there has been any material change that requires an amendment.

      • Greater-than-10% beneficial owner. In addition to the amendment requirements that apply to all Qualified Institutional Investors, more onerous requirements apply to greater-than-10% beneficial owners.

        • New Rules (in effect beginning September 30, 2024): An amendment is due (i) five business days after a month end at which the 10% threshold is first exceeded and, thereafter, (ii) five business days after any month end at which there is a 5% increase or decrease in beneficial ownership.

        • Current Rules (in effect through September 29, 2024): An amendment is due (i) 10 calendar days after a month end at which the 10% threshold is first exceeded and, thereafter, (ii) 10 calendar days after any month end at which there is a 5% increase or decrease in beneficial ownership.

  • Passive Investors

    • Initial Filing. The new rules accelerate the filing deadlines to remain consistent with those for Schedule 13D filers. However, the new rules do not come into effect for Passive Investors until September 30, 2024 (unlike for Schedule 13D filers, for whom the new rules will come into effect 90 days after the Adopting Release is published in the Federal Register).

      • New Rules (in effect beginning September 30, 2024): The deadline for filing a Schedule 13G as a Passive Investor is accelerated from 10 calendar days after the triggering event to five business days.

      • Current Rules (in effect through September 29, 2024): The deadline for filing a Schedule 13G as a Passive Investor remains 10 calendar days after the triggering event.

    • Amendments. As under the current rules, the amendment requirements for Passive Investors vary depending on whether the investor is a greater-than-10% beneficial owner.

      • All Passive Investors. All Passive Investors are subject to the same current and new amendment requirements as Exempt Investors.

        • As a result, once the new rules come into effect, all Passive Investors will need to consider on a quarterly basis if there has been any material change that requires an amendment.

      • Greater-than-10% beneficial owner. In addition to the amendment requirements that apply to all Passive Investors, more onerous requirements apply to greater-than-10% beneficial owners.

        • New Rules (in effect beginning September 30, 2024): An amendment is due (i) two business days after the 10% threshold is first exceeded and, thereafter, (ii) two business days after any 5% increase or decrease in beneficial ownership.

        • Current Rules (in effect through September 29, 2024): An amendment is due (i) “promptly” when the 10% threshold is first exceeded and, thereafter, (ii) “promptly” after any 5% increase or decrease in beneficial ownership.

Guidance regarding “groups”

In a welcome change from the proposing release, the SEC did not adopt its proposed amendments regarding when a group is deemed to be formed or its proposed safe harbors related to group formation. Instead, the SEC has left the existing standards for group formation in place and included guidance on the application of those standards in the Adopting Release. Key aspects of that guidance are summarized below.

  • Guiding principles.

    • A common objective is needed to form a group. The Adopting Release makes clear that “to determine that a group has been formed under Section 13(d)(3) or 13(g)(3), the evidence must show, at a minimum, indicia, such as an informal arrangement or coordination in furtherance, of a common purpose to acquire, hold, or dispose of securities of an issuer. If two or more persons took similar actions, that fact is not conclusive in and of itself that a group has been formed.”7 That is an important clarification of language in the SEC’s proposal that indicated that the SEC might take a broader view.

    • An express agreement is not necessary to form a group. The SEC reiterated its position that assessing if a “group” has been formed “depends on an analysis of all the relevant facts and circumstances and not solely on the presence or absence of an express agreement, as two or more persons may take concerted action or agree informally.”8 The SEC also noted that circumstantial evidence may demonstrate the existence of a group.9

  • Specific Applications. The SEC provided several specific examples of circumstances that would and would not result in the creation of a group. That guidance is intended to “help to address the Commission’s goals of preserving shareholder communications and engagement with issuers that are undertaken without the purpose or effect of changing or influencing control.”10 Key aspects of those examples are summarized below.11

    • Control intent matters. The SEC’s guidance indicates that a group is more likely to be formed if the parties have a control intent. For example, the SEC indicates that shareholders communicating about a “joint engagement strategy (that is not control related)” [emphasis added] will not in and of itself create a group. That implies that joint engagement strategies that are control-related may be deemed to result in the formation of a group. Similarly, the SEC makes clear that jointly proposing a non-binding shareholder proposal does not in and of itself result in the creation of a group – implying that jointly proposing a binding shareholder proposal may result in the creation of a group. Additionally, the SEC states that discussions of board structure and composition with an issuer would not result in the creation of a group if they are “in the context of a discussion that does 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,” implying that shareholders having similar discussions with respect to changes in existing board membership may be deemed to form a group.12

    • Exchanges of views with other shareholders and issuers about matters that do not relate to control are by themselves unlikely to result in the formation of a group. The SEC gives a number of examples of communications that, by themselves, will not result in the formation of a group. These include:

      • discussions related to improvement of long-term performance of an issuer and issuer practices;

      • discussions related to jointly proposing and soliciting support for non-binding shareholder proposals;

      • joint discussions with management;

      • communications between a shareholder and an activist investor where the activist seeks support; and

      • publicly or privately communicating an intention to vote in favor of an unaffiliated activist’s director nominees.

    • Engagement beyond an exchange of views may result in the creation of a group. The SEC also indicates that engagement beyond an exchange of views may in some contexts result in the formation of a group. For example, it notes that “consenting or committing to a course of action” proposed by an activist investor may result in the formation of group. Similarly, many of the other examples the SEC provides of situations that will not result in the creation of a group are subject to a caveat that the communications represent an exchange of ideas “alone and without more.”

    • Advance notice of Schedule 13D filings can result in the formation of a group. The SEC states that a person who privately gives advance notice of a Schedule 13D filing to another market participant with the purpose of causing the other market participant to make purchases of the relevant security may be deemed to have formed a group with such other market participant that purchases such security as a result of such notice.13

The SEC also issued guidance as to whether persons that enter into cash-settled derivatives may be treated as having formed a group with their counterparty. That guidance is discussed below.

Cash-Settled Derivatives

The SEC did not adopt proposed expansions to the definition of beneficial ownership that would have treated some holders of cash-settled derivatives as beneficial owners of the referenced securities. Instead, the SEC included guidance in the Adopting Release addressing cash-settled derivatives (other than security-based swaps). The guidance is based on prior guidance the SEC has issued regarding beneficial ownership of securities underlying securities-based swaps. It provides that a holder of such a cash-settled derivative could be treated as the beneficial owner of the referenced securities if:

  • the derivative provides the holder with voting or investment power over the referenced securities through a contractual term or otherwise;

  • the acquisition of the derivative is part of a plan or scheme to evade the reporting requirements of Section 13(d) or Section 13(g); or

  • the derivative (or a related understanding) grants the holder the right to acquire the referenced securities either within 60 days or, if the derivative (or such understanding) was entered into with the purpose or effect of changing control of the issuer or in connection with a transaction having that purpose effect, at any point in the future.

Additionally, the SEC did not adopt a proposed exclusion from the definition of group for parties to certain derivative transactions. Instead, the SEC stated that “a bilateral transaction, negotiated at arm’s length and entered into solely for commercial purposes, as described, would not by itself introduce facts sufficient to find that a group exists.”14 However, consistent with other guidance regarding groups included in the Adopting Release, the SEC does note a group may be deemed formed if the counterparties to the derivative contract entered into the agreement with the purpose or effect of changing control of the issuer.15

Finally, the SEC amended Item 6 of Schedule 13D to clarify that disclosure is required regarding any derivative securities that reference the relevant issuer’s equity securities.

* * *

If you would like to follow up regarding any of the matters covered by this Alert, please contact your usual Ropes & Gray attorney.

  1. Release Nos. 33-11253; 34-98704 (October. 10, 2023) (the “Adopting Release”), available at: https://www.sec.gov/files/rules/final/2023/33-11253.pdf.
  2. Schedule 13D and Schedule 13G filers will be able to begin voluntarily complying with the structure data requirements on December 18, 2023.
  3. Investors who beneficially own more than 5% of the relevant class but have not made an acquisition that is captured by Section 13(d). Common examples include pre-IPO investors and persons who exceed the 5% threshold due solely to a share repurchase. An investor who acquired or holds the securities with a control purpose may qualify as an Exempt Investor. See Exchange Act Section 13(d)(6); Exchange Act Rule 13d-1(d).
  4. Regulated institutions of a type listed in Rule 13d-1(b) (e.g., banks, registered investment companies, investment advisers and broker-dealers and certain employee benefit plans) who acquired and hold the securities 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.” See Exchange Act Rule 13d-1(b).
  5. Investors (other than institutions filing under Rule 13d-1(b)) who beneficially own less than 20% of the relevant class and did not acquire and do not hold “the securities with any purpose, or with the effect, of changing or influencing the control of the issuer, or in connection with or as a participant in any transaction having that purpose or effect.” See Exchange Act Rule 13d-1(c).
  6. The Adopting Release indicates that for purposes of determining if a Schedule 13G amendment is required “[a]n acquisition or disposition of beneficial ownership of securities in an amount equal to one percent or more of the class of securities” will be deemed material (as is the case with respect to determining if Schedule 13D amendments are required). Adopting Release at 94.
  7. Adopting Release at 132 – 133.
  8. Adopting Release at 131 – 132.
  9. Adopting Release at n. 555.
  10. Adopting Release at 150.
  11. The full text of these examples begins on page 133 of the Adopting Release.
  12. The proposing release included a safe harbor from “group” status that would have provided that persons would not be deemed to form a group if communications between them “are not undertaken with the purpose or the effect of changing or influencing control of the issuer, and are not made in connection with or as a participant in any transaction having such purpose or effect” and such persons “are not directly or indirectly obligated” to take actions in concert. Proposed Rule 13d-6(c). While that safe harbor was not adopted, the SEC’s guidance appears to be informed by similar policy considerations.
  13. The SEC’s proposal would have amended Rule 13d-5 to make express that a group can be formed by these sorts of communications. Proposed Rule 13d-5(b)(1)(ii). While that proposal was not adopted, the guidance included in the Adopting Release is aimed at addressing the same type of behavior.
  14. Adopting Release at 152.
  15. Id. The SEC notes that will continue to be the case despite hedging by derivative counterparties “if the counterparty acts on its own initiative and not at the direction of the investor or otherwise on its behalf.” Id.