In the 2003 romcom How to Lose a Guy in 10 Days Kate Hudson and Matthew McConaughey fought over the romantic mischief that can occur in just under two weeks. For chief executives, 10 days are no laughing matter. US securities law since 1968 has allowed investment funds to wait this long to disclose an active stake in a company of more than five per cent. Boards and corporate law firms worry that permitting this length of time for a “13D” filing is an anachronism in modern capital markets.
The new chair of the US Securities and Exchange Commission seems to agree. In a recent speech, Gary Gensler said SEC staff would investigate updating disclosure timing and noted his “doubts” about the current requirements. The rules both about timing and the substance of stake formation should keep up with the times. Still, the SEC must remain wary about maintaining the right balance between the interests of companies and activist funds who, in their best moments, hold boards accountable.
Nearly a decade ago, Bill Ackman led a group of investors who accumulated a quarter of JC Penney stock before disclosing their arrival on the shareholder register. Companies prefer earlier disclosure, the better to deploy defensive measures and force predators to pay a premium for control.
At one end of the spectrum, advocates for reform want the reporting deadline to shrink to a day, followed by a two day moratorium on further share purchases. That seems overly generous to the target company but allows some wriggle room for activists in the form of non-share purchases. Activists use swaps and options to create equity-like exposure without any reporting requirements. Look at collapsed Archegos Capital, where the fund’s stock positions were obscured by derivative trades.
Expect the SEC to modernise reporting requirements to match the state of finance today. Tussles between activists and the companies they seek to change should, after all, be more about strategic direction than technicalities.
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