In March, a group of Democratic senators introduced legislation, currently sitting with the Committee on Banking, Housing and Urban Affairs, to tame the purported disclosure skullduggery of activist investors through:
- Shortening the Schedule 13D disclosure trigger period to 2 (from 10) calendar days;
- Expanding the definition of a “group” to include any person who is “otherwise coordinating the actions of the persons…” – which as a practical matter will force significant introspection by activists who frequently share ideas and strategies on whether they would constitute a wider group subject to Schedule 13D obligations; and
- Requiring 2 day disclosure of short derivative positions affecting 5% or more of a company’s stock.
The legislation’s authors dubbed it the Brokaw Act for the small Wisconsin town that was home to paper mill operated by Wassau Paper, which endured a four year tussle with activist of Jeff Smith of Starboard Value LP. Smith recently settled a threatened full-slate director proxy contest with Yahoo! and has been active in numerous Silicon Valley public companies. Wassau ended up being sold and Brokaw’s paper mill was shutdown, resulting in the loss of 90%+ of the town’s jobs. However, Wassau was subject to an intense corporate policy debate – sheet paper vs. tissue paper. And Smith committed capital for four years in that debate until an exit was arrived – hardly the form of balance sheet activist short termism (often in the form of massive debt issuances followed by stock buybacks or special dividends) that seems most corrosive to long term business success.
Activists are loathe to accept a shortened Schedule 13D disclosure period: They often argue that when their interest in a given company becomes public, it immediate pushes the stock price higher – and so shortening the period in which they can amass a block of stock robs them of an ability to buy stock without tipping their hand to the wider market and disrupting prices. This timing challenge also has interplay for HSR anti-trust clearance for acquiring material positions (i.e. more than $78.3 million in 2016). Activists in the past have used a combination of derivatives and open market purchases to accumulate significant stakes within the 10 day current Schedule 13D window – shortening it to 2 days will materially impact that ability.
Activists also will be reluctant to become part of groups that are very loosely ‘coordinating’. If one activist calls up another and suggest embarking on a campaign – where each pick up 3% of stock – that would presumably then force a Schedule 13D obligation – significantly curtailing the period of time in which activists could wait for their investment to become public. The word “coordinating” surely will quickly become subject to judicial scrutiny and interpretation.
What the three prongs of the Brokaw Act do provide are clear direction on items that either have been hotly debated already – or are have been tightened by various courts but not uniformly and explicitly tackled by the SEC. For a few years now, companies have routinely adopted bylaws provisions that require a stockholder who nominates directors or makes a proposal to disclose derivative positions (which would include shorts). In addition, various federal courts have staked positions on whether derivatives constitute reportable positions under Schedule 13D (they increasingly do), as well as what affiliates constitute a “group.”
The Brokaw Act is authored by two Democratic senators from Wisconsin and Oregon – and co-sponsored by Sen. Bernie Sanders and Sen. Elizabeth Warren. However, the shortening of the Schedule 13D timeframe has been a favorite topic for the traditional business establishment – and it is far from clear that the central tenets of the Brokaw Act will provoke partisan vitriol. The progress of the legislation undoubted will be subject to activist lobbying and the gyrations of a wildly unusual election cycle. It would not be crazy, however, that a rare coalition of liberal and conservative Congress members could push the bill through. At the very least, it should make the SEC pay attention and move forward with this topic, as it was encouraged to do under Dodd-Frank but thus far for which it has been either unwilling or unable to definitively act.