The First Ten Days of an Activist Campaign

Should the current reporting window for 5% equity stakes be closed?

Whenever a hedge fund activist like Bill Ackman, David Einhorn or Dan Loeb picks a company to attack, he quietly amasses 5% of the target’s stock and isn’t required to notify management or the marketplace of his substantial stake or mutinous intentions for 10 days.

During that 10-day period, the activist usually accumulates even more shares (either alone or in combination with other hedge funds) and is able to do so stealthily without moving the stock price of the target company. At the end of that period, activists are required to file Schedule 13Ds with the SEC revealing their stock positions and strategic objectives.

Because activists like Ackman, Einhorn and Loeb have enjoyed phenomenal success in badgering public company boards of directors into making management or business changes that resulted in improved profit margins and stock prices, their 13D filings are welcomed by market professionals and precipitate immediate spikes in the prices of the target company stocks.

While clearly playing into the hands of hedge fund activists, however, the 10-day reporting delay deprives target companies of the opportunity to muster preemptive support against activist campaigns from other large shareholders.

The 10-day window dates from 1968 when Congress passed the Williams Act in an effort to strike a balance between incentivizing shareholder activists to discipline incumbent managements and giving target managements adequate warning of hostile attacks on their governance structure or business operations.

Clearly, the additional shares acquired by activists during the reporting window increase the potential profitability of their campaigns while at the same time achieving the equity footholds they deem necessary to be taken seriously by their target companies and other shareholders. Hedge fund activists say that being able to increase their equity positions before filing 13Ds is critical to their decision to pressure underperforming companies in the first place.

The 2010 Dodd-Frank Act contains an amendment permitting the SEC to shorten the 10-day reporting window. Wachtell, Lipton, a prominent Wall Street law firm that specializes in defending companies against activists, petitioned the SEC late last year to close the window on the grounds that activists no longer need 10 days to accumulate their desired amount of shares and prepare their 13Ds and, to boot, they are taking financial advantage of public shareholders who unwittingly sell target company stock during the reporting windows. To give target companies and the marketplace time to react to incipient activist campaigns, Wachtell, Lipton proposed that activists be required to file their 13Ds within one day after crossing the 5% threshold and be prohibited from acquiring additional target company stock for two days following their 13D filings.

Harvard Law Professor Lucian Bebchuk, an authority on corporate governance, strongly disagrees with Wachtell, Lipton’s petition. In a recent article in Dealbook, Professor Bebchuk argued that closing the 10-day window would reduce the profitability of activist campaigns and discourage activists from “providing a check on entrenched but inefficient management.” He claims that, since activists do not typically seek control of their targets, their influence over corporate managements is not the result of their ownership stakes but their success in persuading other shareholders to support strategic changes in the target companies. Professor Bebchuk doesn’t think the current reporting regime should be altered unless and until the SEC can produce concrete evidence that its costs outweigh its benefits to society.

An issue that would moot the need for that nebulous SEC research – raised by a reporter named Matt Levine in a recent issue of Dealbreaker — is whether activists should be precluded from trading altogether once their intentions are formed and they have the wherewithal to mount activist campaigns. A prominent dissident like Bill Ackman, for example, can now expect his 13Ds to trigger price increases in target company stocks. That’s beginning to sound like ‘material, non-public information’ for securities law purposes. Perverse as it may seem to treat an activist’s own intentions as MNPI, his objective is to directly influence the target company in such a way as to pump up the price of its stock and, in that regard, he is no longer an ordinary shareholder and has arguably taken on the role of an insider.

If a prominent hedge fund activist like Bill Ackman can now expect his 13Ds to trigger price increases in target company stocks, that’s beginning to sound like ‘material, non-public information’

Any modification of the current reporting regime would have to reconcile the Williams Act (as amended by Dodd-Frank) with the evolving law of insider trading and provide precise guidance for activists. In my view, an activist campaign – which is by definition intended to be a market-moving event — becomes MNPI when the activist makes up his mind to go forward with it and acquires 5% of the target company stock. Although I would argue that an activist’s decision to mount a campaign occurs well before he acquires that much target stock, it certainly does not post-date his first stock purchase thereafter. If that 5%-plus purchase occurs within the current 10-day window, then the activist should have to file his 13D on or before the same business day.

  • Dissident

    I agree with Professor Bebchuck. The problem with treating mere purchases of a stock by an outsider along with an intent to take activist measures as inside information is that it would deter the very activism that often benefits the vast majority of stockholders in the target company. In other words, not allowing activist investors to disproportionately benefit from their activism vis-a-vis passive investors would destroy the widely acknowledged benfits of activist investing to all investors in the name of protecting investors. Lipton’s proposal is one Orwell would appreciate.

    • Stephen Bornstein

      That’s where Matt Levine of Dealbreaker came out. I, on the other hand, think activists no longer need the full 10 days to achieve their ends. Narrowing the reporting window would also blunt concerns about cheating selling shareholders and disadvantaging target managements.