Williams Act, The Background
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The Securities and Exchange Commission (the “Commission”) is considering implementing a petition submitted by Wachtell, Lipton, Rosen, and Katz. The petition advocates for tightening of the rules under the Williams Act and, in particular, the reduction of the period in which, a shareholder with 5% or more holding in a public company should disclose his information. The petition argues for decreasing the time period from the current 10 days to one day, notes Lucian Bebchuk and Robert J. Jackson, Jr. The petition can be viewed on Harvard Law School’s blog.
Many would argue that the implementation of this petition would promote transparency in publicly traded companies as well as fully, achieve the goals of the Williams Act. Nonetheless, the writer believes that this may not be necessary, and the consequences could be skewed in favor of the incumbent investors. Outsiders using public information are not typically required to disclose their purchases for the sake of transparency, and hence, the Williams Act created a limited exception to this principle the report notes.
The rulemaking if enacted will reverse a decision made by Congress allowing shareholders to cross the 5% limit without prior disclosure. For this reason, the Commission should do thorough assessments on the rulemaking before abruptly, rushing to impose it on investors. Furthermore, it is also important to investigate why Congress, intentionally and consciously chose not to impose the limit.
Wachtell’s Views Critiqued
“We believe that the current narrow definition of beneficial ownership and the ten-day reporting lag after the Section 13(d) ownership reporting threshold is crossed to facilitate market manipulation and abusive tactics,” Wachtell et al, note in the rulemaking petition on SEC section 13(d). The petition further claims that all investors disclose their information, and there is no reason why some outside investors should hide theirs.
The petition goes on to highlight a case where a company adopted a strategy initiated by outsiders, and uses this as a basis to impose the 5% limit. However, Bebchuk and Jackson, Jr. mention that even outside shareholders with less than 5% holding initiate key strategies for companies that go on to be implemented, and no such case has led to a takeover. He also says that there is no proof that the case which Wachtell refers to leads to a loss in control for the internal shareholders.
Wachtell also argued that the technological advancements and the change in trading patterns have increased the frequency of pre-disclosure accumulations beyond 5%. The writer discredits this argument citing lack of empirical evidence. The only available evidence of frequent pre-disclosure accumulations happened back in the 1980s, and there is no proof to show that the same is happening now.
Nonetheless, there has been a number of investors who seek to change the operations whenever they purchase a significant holding in a company. Most of them are activist investors, and Carl Icahn is a notable name. Icahn and Bill Ackman had been in a tussle over $4.5 million case where the latter won. Icahn, on the other hand, bought 7.6% ownership at Chesapeake Energy Corporation (NYSE:CHK), and immediately proposed for a change in management, proposing to replace four directors.
Additionally, the recent push for declassification of boards puts incumbent board members at a higher risk of hostile takeovers through proxies. However, this can be valuable checks and balances for board members and managers. Indeed, if the risk of losing control never existed, then most directors and managers would be reluctant to perform.
Therefore, before the commission goes on to enact the rulemaking; it should provide evidence to avoid a potential catastrophe to Blockholder disclosure, the writers note, emphasizing the need for more empirical evidence on the matter. It appears that tightening the rules will do more harm than good.