The Securities and Exchange Commission voted Tuesday to adopt new rules that will require activist investors to disclose more quickly when they’ve made an aggressive play to buy up a target company’s shares or certain derivatives based on those shares.
The rule will require investors who have intentions to take over a company to disclose within five business days if they have acquired 5% or more interest in a company, down from 10 calendar days.
The SEC simultaneously issued guidance that clarifies that derivatives which provide investors with significant economic interest in a company, or which have certain conversion features, will count toward the 5% calculation.
The change was aimed to protect investors who would otherwise be unaware that an activist investor is building up a significant position in a company, which could greatly affect the value of their stock holdings.
The importance of these rules was underscored by Elon Musk’s takeover of Twitter last year, when he failed to report on time that he, as an activist investor with takeover intentions, acquired more than 5% of Twitter’s shares. Musk has since renamed the company X.
By failing to report those purchases on time, Musk was able to accumulate a greater share of the company at a lower price, as news of his intentions would have sent the stock surging. It also may have cost investors who were unlucky enough to sell their shares during that time.
The SEC sued Musk last week, with the intention of forcing him to appear in federal court to provide testimony related to “an ongoing investigation” of potential securities laws violations related to the Twitter deal. The new rules would not affect the Musk investigation and will only apply to future transactions.
“The SEC has already taken Mr. Musk’s testimony multiple times in this misguided investigation,” Musk’s private lawyer Alex Spiro said last week, in emailed comments to MarketWatch. “Enough is enough.”
SEC Chairman Gary Gensler said last year that he was worried about “information asymmetry” between activist and ordinary investors in these sorts of situations.
“Investors currently can withhold market-moving information from other shareholders for 10 days after crossing the 5% threshold,” Gensler said last February. “The filing of Schedule 13D can have a material impact on a company’s share price, so it is important that shareholders get that information sooner.”
The final rule was somewhat watered down from that which was proposed last year, which would have given investors just five calendar days, rather than five business days, to report 5% interest in a company. It also abandoned a rule that would have more strictly defined which derivatives count toward the 5% calculation.
Claudia Assis contributed
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