February 2016
don’t count for HSR purposes. Furthermore,
HSR is a prospective obligation; if a filing
is required, it needs to be made – and the
waiting period must be observed – prior to
making the reportable acquisition.
The general question about whether you’re
passive or active for 13D or 13G filings is very
similar to the determination of whether you’re
eligible for the investment-only exemption
under HSR. But it’s not identical, and that’s a
conversation we have all the time with people
who are evaluating, should I do an HSR filing
or shouldn’t I? It’s very similar but there are
very nuanced differences in terms of what
they’re looking for. The HSR guidance on the
investment-only exemption is very focused
on behaviour that would be inconsistent with
an intent to acquire solely for the purpose
of investment, such as seeking board seats
or proposing actions requiring shareholder
approval.
However, the FTC’s leadership has reiterated
that they intend to view the exemption
narrowly, so the contemplation of such actions
may be enough to make the exemption
unavailable.
As a result of recent actions in this area by the
governmental agencies, there’s been growth
in being more conservative about HSR analysis
than there was before.
The way that HSR is
being interpreted is evolving, including some
actions where the five-member committee
that oversees HSR enforcement at the FTC
decided three-to-two to go after people – the
two dissenters were very vehement in their
disagreement with that – but it shows you how
close the call is, even among the governing
officials in the FTC and DOJ.
At the end of the day, that three-to-two edge
makes you more conservative than it was
before, because that carries the day, three wins
over two.
HL: And, does the 5% threshold for 13D filings
apply across the whole capital structure?
2
EK: In general, yes, but again there are
exceptions to everything. It’s more of a
complicated question, but for the most part
the assumption is yes, it will flow up to the
management level because they’re the ones
that are exercising that type of investment and
voting discretion. And that’s how it’s tested in
our rules, so it will flow up across the whole
capital structure, with some exceptions.
HL: And, what happens if companies have
multiple different share classes? Is the
effective threshold then much lower as a
percentage of the total issued capital?
EK: It depends.
It’s really a factual question of
analysing the capital structure itself and how
it’s determined. For the most part, a simple
example in the United States involves a public
company that has a class A and a class B stock.
Even if they’re not exchangeable into each
other, the starting point is to test it on a classby-class basis, so you have to cross a threshold
on either class A or class B. Depending on
similarities between the classes that may not
be the ultimate outcome.
Where it becomes more complex is that
frequently the one class, which is usually a
super-voting class, will be exchangeable into
the other class.
That exchange right gives you
exposure to not just the class you hold, but to
the class that you can exchange into under the
United States rules. So as a result of that you
have to analyse both of them and you may be
crossing thresholds in one with the other or
both at the same time.
HL: Are shorts within the same firm nettedoff against longs for filing purposes?
EK: No, they’re not netted. US determination
for a beneficial ownership is based on your
long exposure, not short exposure.
You may
have to disclose your short exposure as part
of a filing, but it’s not netted, meaning, if you
own five, and you’re short one, it’s not netted
at four, and therefore you don’t have to report.
If you’re long five, you have to report that.
HL: And if companies are doing share buybacks, how quickly does the share count get
updated?
EK: In the United States, the rules are that it
has to be updated on a quarterly basis, so if
you’re a US reporting company (and not as a
foreign private issuer, where reporting is less
frequent), you have three quarterly 10-Qs and
one annual 10-K as your four quarterly reports,
with one of them being an annual report.
A company is required to disclose in those
reports what their share count is and what
buy-backs they have done. Companies may
disclose it earlier through various filings, such
as 8-Ks in the United States, but they’re not
required to. So in terms of absolutely knowing
what the share count is at any given time,
without asking the company or having the
company disclose it in some other manner, the
only way you will know is by watching those
quarterly or annual reports to see it.
HL: And in the United Kingdom?
JM: Well, the rules are pretty similar in that
respect; companies need to publish data as
to the number of their shares in issue and in
what class, though here in the UK that needs
to happen at the end of each month and not
quarterly.
It is from those figures that activists
will work out whether they have a reportable
position under the Disclosure and Transparency
Rules; for regulated firms disclosure would
normally start at 5%, as it does in the United
States. It’s also worth remembering that where
the issuer is subject to a UK takeover offer (or
is the offeror of such an offer which includes
paper consideration (excepting most kinds of
debt securities)), there is a second reporting
regime under the UK Takeover Code where the
threshold is much lower, at 1%. THFJ
.