IN-DEPTH: Activists need all the 13D time they can get
This article was first published on Insightia’s Activism module. For more information about the product, click here.
A U.S. Securities and Exchange Commission (SEC) proposal to shorten the deadline for activist investors to disclose their new investments and require more disclosure on swaps and activist “groups,” is popular with management teams looking for activists on their shareholder roster. Activist investors, however, and the institutional investors who count on them to keep management accountable are up in arms.
If approved, a decision is expected by end of year, the proposals for the “Modernization of Beneficial Ownership Reporting” would cut the deadline for an initial 13D holding filing from the current 10 calendar days from when the activist crossed the 5% holding level to five or fewer days.
To figure out how much of a burden a truncated deadline might put on activists, Insightia reviewed initial 13D filings going back to January 2021 to determine the average time between the “event date,” when an activist crossed the 5% holding level, and the disclosure date. It turns out that while many activists are already filing their 13Ds within five days of the “event,” some of the best known and most feared activists habitually wait until the 10th day, or even longer.
Since January 1, 2021, it took all active shareholders 7.1 days on average between the “event date” filing date. But it took dedicated activists, for whom waging proxy fights is central to their investment strategy, 7.8 days on average to file the 13D after they crossed the threshold.
Many 13D filings actually appear more than 10 calendar days after the event. Of the 96 initial 13Ds reviewed by Insightia, 21% were released on the 11th day or later. For pure-play dedicated activists that percentage jumps to 23%. The reason is that while the rule states that filings must be made within 10 days, any filing made over the weekend, or late on a Friday evening, will be posted the following Monday.
Pensions and endowments who have filed letters arguing against the proposal on the SEC’s comment page note that activists gain much of their leverage, and potential profit from the amount of stock they can buy before the rest of the market can respond, or management can raise barriers such as poison pills. Being forced to disclose their hand five days earlier would make activism unprofitable for many hedge funds, they warn, leading to less shareholder engagement in general.
“By requiring managers to disclose those positions pre-maturely the SEC would be simply giving entrenched management teams an advantage to resist constructive measures from engaged shareholders,” wrote Marcus Frampton, chief investment officer of the $80 billion Alaska Permanent Fund Corporation in a comment letter to the SEC.
Dedicated activist Starboard Value was one of the biggest laggards. Since the start of 2021, Starboard’s six initial 13Ds were made public 10.5 days after the event date on average. Starboard’s initial 13D filing at GoDaddy in December was made public 13 days after the activist crossed the 5% holding mark. The event was December 14, while the filing was made public on the 27th, a Monday.
Other leading activists also took as much time as they could legally get to disclose their new activist holdings. Carl Icahn took 10 days on average to file his 13Ds over the same period, while Ancora Advisors and Third Point took 9.3 days on average.
It’s unclear whether the timing was made deliberately to give management a post weekend surprise. But in some cases, the activist used the delay to substantially increase its holdings. At Huntsman, Starboard pushed its stake from 5% to 8.5% in the delay period, including substantial purchases on the 27th, a full 12 days after the event date.
Swaps and groups
Another and possibly even sorer point with activists is a proposal to redefine “deemed” beneficial ownership to include securities underlying derivatives, such as swaps, in cases where the investor aims to “change or influence the control” of a public company.
Activist investors like Carl Icahn and Elliott Management have long used swaps as a means to build a substantial position in a target company without alerting the market to their presence. The question of whether a swap position, which bears no voting rights, should be disclosed as part of an activist position, is already being debated in the courts.
“A swap isn’t an economic interest, so on its face you shouldn’t have to disclose your contractual swap position at all based on what the law says,” said Chris David, a partner at law firm Kleinberg Kaplan, though some activists already voluntarily disclose such holdings in their 13Ds “out of abundance of caution” due to recent legal cases.
The third leg of the reform package would expand the definition of what constitutes an activist shareholder “group” to include, among other things, “tipper-tippee” relationships where investors shares non-public information about an upcoming 13D filing. While the scope of the proposal remains unclear, Allison Thacker, chief investment officer of Rice University’s endowment fund, worries that even the possibility of such litigation “will force unreasonable restraints on investors’ speech, and will further restrain and hamper shareholder engagement.”
An example of how all three proposals touch activism is Sachem Head Capital Management’s recently disclosed 4.95% stake in Software maker Anaplan. Sachem Head’s initial 13D filing was made on the 12th calendar day following the event. The subsequent campaign was part of a group effort with fellow activist Corvex Management. And in its filing Sachem Head disclosed that of the 7.3 million shares it controlled, just over a million were common stock underlying swaps which the activist “may be deemed to beneficially own upon satisfaction of certain conditions.”
Owned or not, Anaplan opted to sell itself to private equity firm Thoma Bravo, at a 45% premium to its pre-deal stock price rather than face a threatened proxy fight with the activists.
Marcus Frampton at Alaska Permanent Fund Corporation fears that the proposed rule changes will mean fewer such windfalls for often long-suffering shareholders of underperforming companies.
“Rules like these proposed rules, I believe, will on the margin encourage less active management of equities and less constructive engagement with entrenched management teams,” he stated in his letter, warning, “even pure passive investors should care that acceleration of this trend will make US markets less dynamic and US companies less competitive globally.”