Pre-Disclosure Accumulations By Activist Investors: Evidence & Policy

Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by SSRN

Lucian A. Bebchuk

Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Alon Brav

Duke University – Fuqua School of Business

Robert J. Jackson Jr.

Columbia Law School

Wei Jiang

Columbia Business School – Finance and Economics

April 2013

Journal of Corporation Law, Vol. 39, No. 1, pp. 1-34, Fall 2013

Columbia Business School Research Paper No. 13-33


The SEC is currently considering a rulemaking petition requesting that the Commission shorten the ten-day window, established by Section 13(d) of the Williams Act, within which investors must publicly disclose purchases of a 5% or greater stake in public companies. In this Article, we provide the first systematic empirical evidence on these disclosures and find that several of the petition’s factual premises are not consistent with the evidence.

Our analysis is based on about 2,000 filings by activist hedge funds during the period of 1994-2007. We find that the data are inconsistent with the petition’s key claim that changes in market practices and technologies have operated over time to increase the magnitude of pre-disclosure accumulations, making existing rules “obsolete” and therefore requiring the petition’s proposed “modernization.” The median stake that these investors disclose in their 13(d) filings has remained stable throughout the 17-year period that we study, and regression analysis does not identify a trend over time of changes in the stake disclosed by investors. We also find that:

* A substantial majority of 13(d) filings are actually made by investors other than activist hedge funds, and these investors often use a substantial amount of the 10-day window before disclosing their stake.

* A significant proportion of poison pills have low thresholds of 15% or less, so that management can use 13(d) disclosures to adopt low-trigger pills to prevent any further stock accumulations by activists — a fact that any tightening of the SEC’s rules in this area should take into account.

* Even when activists wait the full ten days to disclose their stakes, their purchases seem to be disproportionately concentrated on the day they cross the threshold and the following day; thus, the practical difference in pre-disclosure accumulations between the existing regime and the rules in jurisdictions with shorter disclosure windows is likely much smaller than the petition assumes.

* About 10% of 13(d) filings seem to be made after the 10-day window has expired; the SEC may therefore want to consider tightening the enforcement of existing rules before examining the proposed acceleration of the deadline.

Our analysis provides new empirical evidence that should inform the SEC’s consideration of this subject — and a foundation on which subsequent empirical and policy analysis can build.

Pre-Disclosure Accumulations By Activist Investors: Evidence & Policy – Introduction

The Securities and Exchange Commission is currently considering revising the rules governing blockholder disclosure. A rulemaking petition recently submitted to the Commission by the senior partners of a prominent law firm urges the Commission to accelerate the timing of the disclosure of 5% stock accumulations in public companies. While the Commission’s rules have long required public-company investors to disclose their ownership within ten days of crossing the 5% threshold, the Petition proposes to shorten this period to one day.

The Commission subsequently announced a rulemaking project in this area, and members of the Commission’s staff have signaled that the staff is examining the subject. Former SEC Chairman Mary Schapiro, acknowledging the “controversy” surrounding these important rules, has indicated that the Commission is actively considering whether to adopt the changes proposed in the Petition, and the SEC staff have recently signaled that responding to the Petition is part of the Commission’s regulatory agenda.

Notably, the Petition offers no systematic evidence on stock accumulations. Instead, the Petition repeatedly refers to several anecdotes concerning recent cases in which activist hedge funds purchased large amounts of stock (or securities convertible to stock) prior to disclosure. The Petition argues that these anecdotes underscore a new, more general phenomenon of secret stock accumulations made possible by changes in trading technologies that demand immediate changes in the disclosure rules. Recent developments in market practices, the Petition contends, render the existing rules under Section 13(d) of the Securities Exchange Act of 1934, which governs blockholder disclosure, obsolete. And an article published by senior attorneys at the firm that filed the Petition similarly asserts that these developments are widely understood by market participants—but offers no evidence in support of this understanding.

In two separate comment letters filed with the SEC, the four of us cautioned that the Petition does not rest on systematic empirical examination of the publicly available data, and that such empirical investigation is called for before any changes to the existing rules are seriously considered. In a subsequent article, two of us stressed the need for such an empirical examination and discussed the empirical issues such an examination should seek to address.

Pre-Disclosure Accumulations

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