| |||||||||||||||||||||||
| |||||||||||||||||||||||
A New York Times item Tuesday explored the loopholes investors use to get around disclosure requirements including swaps with investment banks, which buy shares on their behalf but never transfer ownership, enabling investors to buy up shares and "strip out" voting power.
The article illustrates the case of how Jana Partners and Sandell Asset Management amassed a 21% stake in CNet Networks Inc. without the company even knowing it.
As Deal contributors Gary W. Kubek and Jennifer A. Spiegel of Debevoise & Plimpton LLP warned back in 2006, that closer regulatory scrutiny of the role of hedge funds in affecting M&A transactions means activists need to be diligent about their reporting and disclosure obligations. And consequences of inadequate disclosure can be severe. "Hedge funds would be well advised to develop a clear understanding of HSR -- especially the limits of any exemptions -- and how it may affect their investment activities," they wrote. The SEC is looking at loopholes, but at the same time they're also looking for a new M&A guy, which is another part of the problem. Stay tuned to Dealscape for more. - Carolyn Murphy See Kubek and Spiegel's 2006 column See item from The New York Times See earlier Dealscape post on CNet's poison pill Trimming the hedges by Gary W. Kubek and Jennifer A. Spiegel Updated 02:11 PM EST, May-25-2006 Because regulators are more closely scrutinizing the influence of hedge funds in M&A transactions, it is especially important that activist managers be mindful of their reporting and disclosure obligations in order to avoid potentially stiff penalties. Any person, including a hedge fund, that acquires beneficial ownership of more than 5% of an issuer's SEC-registered equity securities must make a Section 13 filing with the SEC under the Securities Exchange Act of 1934. Determining whether to file a 13G, for "passive" investors (one owning less than 20% of an issuer's securities and having no intention of influencing control of the issuer), or a 13D, for "active" investors (one seeking to influence management), is the first important decision. Because the law is still evolving, it is not always obvious whether certain activities, including supporting various shareholder proposals, require the filing of a 13D or permit the use of a 13G. Assuming a fund required to file a 13D or 13G has done so, it must still ensure its disclosure is adequate. The consequences of insufficient disclosure could be severe. Section 13(d) is the pivot point for various remedies under the Williams Act, and either the SEC or shareholders could bring an action requiring corrective disclosure, which could require a hedge fund to divulge details that might ultimately undermine its strategy. Once a hedge fund takes care of its 13Ds and 13Gs, its job may not be done. Acquiring more than $56 million of voting securities may also trigger filing obligations under the Hart-Scott-Rodino Act. If an acquisition meets or exceeds certain thresholds, and no exemption is available, then a fund cannot consummate the purchase unless it has filed a form with the Federal Trade Commission and the Department of Justice and observed the HSR's waiting period of up to 30 days. There is no per se exemption from HSR for hedge funds. The FTC emphasized this last fall when settling with a hedge fund manager who had failed to secure premerger clearance: "This significant penalty should put hedge funds, their managers and securities traders on notice that they are not exempt from filing pre-merger notification forms when required to do so." As a result, hedge funds would be well advised to develop a clear understanding of HSR -- especially the limits of any exemptions -- and how it may affect their investment activities. The most relevant exemption for hedge funds is the passive investment intent exemption: a person acquiring an issuer's voting securities "solely for the purpose of investment" may acquire and hold up to 10% of such issuer's outstanding voting securities without filing, even if the acquisition exceeds the monetary threshold. However, the FTC interprets this exemption very narrowly. An acquisition is "solely for the purpose of investment" only if the acquirer and its ultimate parent have "no intention of participating in the formulation, determination or direction of the basic business decisions of the issuer." Among the activities the FTC views as inconsistent with passive investment intent are: (1) nominating a candidate for the board of directors; (2) proposing corporate action requiring shareholder approval; (3) soliciting proxies; or (4) having a controlling shareholder, director, officer or employee simultaneously serving as an officer or director of the issuer. These activities were unusual for a hedge fund 10 years ago but are no longer outside the scope of many hedge funds' investment mandates. The FTC does not consider the exemption available if the range of alternatives the fund is considering includes any activity inconsistent with passive investment, even if the fund has not yet decided to pursue such activity. Accordingly, a fund taking multiple toehold positions, a subset of which it hopes to develop into control positions, needs to consider carefully whether it may rely on the investment purpose exemption. If a hedge fund has a purely passive investment intent at the time it purchases securities but later changes its mind and develops an intention to influence control of the issuer, it does not have to file immediately but would have to file and observe the waiting period before it bought even a single additional share. In addition, such a change-of-investment-heart may raise doubt about the fund's original investment intent. In examining all the facts relevant to determining the credibility of the original claim of investment intent, the FTC may focus on the timing of the purported change of intent, which can be troubling in the fast-paced world of hedge funds. A hedge fund's filing and disclosure obligations cannot be delegated to support staff, who may not be aware of a fund's strategic decisions or the role a purchase plays in its overall strategy. Instead, these filings can require difficult judgment calls, which may require the involvement of senior management. Disclosure standards may be expected to evolve as both regulators and shareholders scrutinize the role of hedge funds. For better or worse, hedge funds will need to approach these obligations with more deliberate detail and sensitivity to the role they play in M&A transactions. Gary W. Kubek is a partner and Jennifer A. Spiegel is counsel in the New York office of Debevoise & Plimpton LLP. A longer version of this article was originally published in the winter 2006 issue of the Debevoise & Plimpton Private Equity Report. Categories Deal Video
    Community
 Elsewhere on The Deal.comDealwatch
The Deal MagazineCorporate Dealmaker
The Deal VideoCategories
Blog roll
Archives
| |||||||||||||||||||||||
|
|
|
|
|
