First, Hillary Clinton broke Bill Ackman by targeting Valeant Pharmaceuticals. Now, here Democratic cohorts are coming for the rest of the activist investors.
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Yesterday, Tammy Baldwin and Jeffrey Merkey, two senators, put forth a bill (The Brokaw Act) to shorten the disclosure window and block wolfpack activism. Democratic President hopeful Bernie Sanders and Elizabeth Warren are sponsoring the bill.
Baldwin says:
“We cannot allow our economy to be hijacked by a small group of investors who seek only to enrich themselves at the expense of workers, taxpayers and communities. This legislation updates Depression-era rules to address the financial abuses being carried out by activist hedge funds who promote short-term gains at the expense of long-term growth.”
Merkey piggybacks, noting:
“We should measure the success of our economy not by the profits of hedge funds, but by whether working Americans can find good jobs that provide a solid foundation for their families. Hollowing out longstanding companies so that a small group of the wealthy and well-connected can reap a short-term profit is not the path to a strong and sustainable economy for our nation. It’s time to take on this rigged system and stop the short-term game playing that sells our workers, businesses and economy short.”
The crux of the bill includes shortening the number of days that activist investors have to reveal their 5% plus stakes — currently within 10 days via a form 13D with the SEC. The bill wants to shorten that to just two days.
The whole idea of shortening the window is to prevent other funds from piggybacking, i.e. as the scenario goes, a large fund is about to go activist on a company and make its disclosure to the SEC, but tips off other funds so they can profit from the initial price pop. The bill will also undo the whole idea of wolfpack activism — which is when funds that own over 5% collectively (but less than 5% individually) “team up” but don’t have to disclose their holdings.
The talk of disclosure reform is nothing new and been going on for years. But, of all things, the Wausau Paper story was the final straw. Starboard Value took on Wausau in 2011 and got the company to close a paper mill in Brokaw, Wis. (hence the bill’s name). About a 100 jobs were lost and the local economy tanked.
Here are some highlights from The Brokaw Act, summarized:
Transparency
There are too many loose associations of “wolf packs” and the “tipping” allies with current rules. Remove these opportunities for riskless gains by shortening the 10-day disclosure window to 2 days.
Wolf Packs
Activists’ collective stake in a company may be well above 5 percent, but individually, they stay below the threshold to avoid disclosure. This reform identifies these funds as a single group to require disclosure.
Net Shorts No More
Derivatives can be used to create a “net short” that allows the activist to profit by secretly voting against the company’s interests. Derivatives and other synthetic instruments don’t require disclosures despite the fact that they can have substantial impacts on stock prices. the price of the security and its issuer. This can allow funds to secretly bet against a company they are invested in.
