"On Demand CLE Credit: The ABCs of Schedule 13D and Schedule 13G"

John Jenkins, Managing Editor, TheCorporateCounsel.net: Welcome to today's webcast, "The ABCs of Schedule 13D and 13G." Last October, the SEC adopted amendments to the beneficial ownership reporting rules under Section 13 of the Exchange Act. We thought that the adoption of those rules offered a great opportunity for a webcast addressing not just those changes, but also to provide a deep dive into the beneficial ownership reporting requirements under 13(d) and 13(g).

We've assembled a panel of experts with extensive experience in grappling with these reporting requirements to share their insights on these topics. Joining me are Scott Budlong, Partner at Barnes & Thornburg LLP; David Korvin, Of Counsel at Gibson, Dunn & Crutcher LLP; Jennifer Nadborny, Partner at Simpson Thacher & Bartlett LLP; and Andrew Thorpe, Partner at Gunderson Dettmer LLP. I'm going to turn things over to Andy to kick off today's program with an overview of Schedule 13D and 13G reporting requirements.

Overview of Schedule 13D and 13G Requirements

Andrew Thorpe, Partner, Gunderson Dettmer LLP: We can't have a session called "The ABCs of Schedule 13D and Schedule 13G" without going over the basics. I know the most recent SEC amendments are very advanced, but I'm going to start off with some of the basics.

Regulation 13(d) and (g) has been around since 1968. It was implemented in the '34 Act, as part of the Williams Act. It was designed to give shareholders advance notice of potential changes in control, because that was the initial stages of what they would call "hostile takeovers." They became of concern in the '60s. Schedule 13D was intended to provide more transparency around the accumulation of a large block of shares that might be the initial stage of a contest to change control of the company.

The first basic concept is, what securities are covered by 13(d) and 13(g)? I should note that the result of having triggered a 13(d) or (g) filing requirement is you have to file the Schedule 13D or 13G, which provides detailed information about who the acquiring person is, who the beneficial owner is and what they intend to do with their holdings.

Going back to what's covered, it's basically any equity voting security that's registered under Section 12 - so an exchange-listed equity security with voting rights. This might come into play when you have a dual-class structure where the listed security is the Class A low vote security that is registered under Section 12 of The Exchange Act, and therefore, acquisitions of 5% or more of that class requires reporting under 13(d) and (g).

The acquisition of 5% beneficial ownership is what triggers the filing requirement, but that doesn't answer the question, what is beneficial ownership? Beneficial ownership is not an economic test which comes into play more in the Section 16 filing when a person has a pecuniary interest or an economic interest in the shares. Beneficial ownership applies to two elements. One is, do you have voting power? Do you get to make the decision on how to vote the shares? The second consideration is, do you have dispositive power? Do you have the decision-making authority to sell the shares?

These two elements can be basically individual or shared. If there's a group of people or you're in a fund that has multiple decision-makers, or it's a corporate structure where there's a subsidiary and a parent, those all are implicated about whether you have direct or indirect beneficial ownership. When you're doing the analysis, you sometimes have to go up the chain to understand who has a 13(d) or (g) filing obligation. It's basically everybody who has or shares voting power or investment power. It's not just the securities you own currently. It's the securities that you have a right to acquire within a 60-day period of the analysis.

Now that I know what beneficial ownership is, how do I calculate whether I've exceeded the 5% threshold? The numerator is the securities that the beneficial holder owns and the shares that the beneficial owner has the right to acquire within 60 days. That's what I would call a fully diluted calculation. The numerator is fully diluted with respect to the holder in the target. The denominator is the outstanding shares of the class, plus the number of shares that the holder has the right to acquire. The denominator is diluted only with respect to the person that you're analyzing. Sometimes there's issues where a lot of investors care about, what does the fully diluted capital structure look like? Schedule 13D is not fully diluted. It's diluted only with respect to the reporting person.

There's this theory we're going to discuss later called "groups," which is when one or more beneficial owners agrees to act together, or one or more persons agrees to act together, with respect to holding or voting the shares. You have to count the individual ownership of each person of that group to determine whether that group has a filing obligation as well. That's been the subject of a number of questions and there have been interpretations over the years. The SEC, most recently in October of last year, added more interpretive guidance for determining whether or not you have a group.

Schedule 13D, as I said, is the long-form disclosure schedule. It's intrusive and tries to get at what the shareholder intends to do with respect to changing or influencing the control of the issuer and requires disclosure about when you acquired the shares and the sources of financing for the shares.

There's also an abbreviated disclosure document called a Schedule 13G. Schedule 13G is much less intrusive than a 13D. The SEC and Congress basically implemented 13(g) for certain classes of shareholders that are not considered to be a threat or they don't have the purpose or intent to influence or change control of the issuer. However, they still have acquired a 5% block, and therefore, it's useful for shareholders to know who the large holders of the shares are in the makeup of the large holders as well.

Schedule 13G has three categories of shareholders that can rely on it. The first is called qualified institutional investors. These are your investment advisors, your broker-dealers, mutual funds and those who acquire securities in the ordinary course of business. To qualify as an institutional investor, you have to certify that you acquired the shares in the ordinary course of business, there is no purpose or effect of changing or influencing the control of the investor and you're one of the qualified institutional investors that's referenced in the rule - mutual funds, investment advisors, broker-dealers, banks, etc.

The next category of investor is a passive investor. Passive investors are not qualified institutional investors, but they are investors that own a small, non-controlling interest of securities and that do not have the purpose or effect of changing or influencing control of the issuer. These passive investors hold over 5%, but then again, they don't have the purpose of changing or influencing control.

The last category of investor that can rely on 13(g) is the exempt investor. They own more than 5% of the total outstanding shares or the beneficial ownership, but they didn't acquire the shares when they were listed on the exchange and registered under 12(g). Remember, 13(d) only applies to the acquisition of shares that are registered under Section 12 of the Exchange Act. In my world, this applies mainly to pre-IPO investors. Basically, an exempt investor, a pre-IPO investor or a founder might own more than 5% of the total outstanding shares at the IPO, and therefore they still have to report on the Schedule 13G. They're not subject to the 13(d) unless they acquire more than 2% of shares during the course of any rolling 12-month period.

The SEC has this position that directors and officers always act with the intent to influence and control the issuer. Therefore, other than the fact that they're exempt investors, they wouldn't otherwise be eligible to rely on Schedule 13G. Therefore, if one of those persons acquires more than 2% during a 12-month period, they have to amend their 13G into a 13D. That's something to watch out for. If it's an officer or director and they've acquired more than 2%, they do have to amend their filing.

Now, how is this all enforced in the courts? The courts have implied a private right of action for Section 13(d) of the Exchange Act. The idea is if there's a violation of 13(d), there's not a lot of time. If the company is being taken over, a shareholder will need to seek injunctive relief to stop the transaction if there's been a violation of Section 13(d).

It's a high bar to get injunctive relief on a 13(d), but it has happened. Examples of the type of injunctive relief a court will impose are sterilization of voting or limiting further acquisitions of securities by the shareholder who violated the rule, or rescission or divestment. Those are some of the tools that an issuer or shareholder would have to protect against a violation of 13(d). Then, of course, the SEC does have enforcement authority and will go after companies that violate the rule.

Those are the basics. I'll turn it over to David to discuss the SEC's most recent amendment.

Amendments to Schedule 13D and 13G Filing Deadlines

David Korvin, Of Counsel, Gibson, Dunn & Crutcher LLP: I'm going to go through the SEC's recent beneficial ownership reporting amendments. With respect to these amendments, there are five key takeaways. Takeaway No. 1 is that the filing deadlines for initial and amended Schedule 13D and 13G filings have been accelerated. However, some solace can be taken from the fact that the accelerated timeframes in the proposing release were even further accelerated.

Let's start off with the change in deadlines for Schedule 13D filings, which go into effect in less than two weeks on February 5, 2024. Prior to the final amendments, entities that did not qualify for short-form Schedule 13G filings, or that had lost their eligibility to file on a Schedule 13G, had 10 calendar days to file an initial Schedule 13D filing upon a triggering event such as acquiring more than 5% beneficial ownership or for passive investors, a change in control intent. The final amendments decrease the timeframe for filing after a triggering event from 10 calendar days to five business days, which is a bit of an apples to oranges comparison. If we do a more apples-to-apples comparison, the timeframe for initial filings will accelerate from 10 calendar days to about seven calendar days.

With respect to amendments for Schedule 13D filings, the prior standard was that an amendment had to be filed promptly, which was not defined, after there was a material change to the information within the filing. Now, the filing timeframe had been clearly defined, as amendments to the Schedule 13D filings, must be filed within two days of a material change to the information within the filing. The rules continued to indicate that a material change includes, but is not limited to, a 1% change in beneficial ownership interest.

Before I dive into Schedule 13G filing considerations, does anyone have initial thoughts or are dealing with these Schedule 13D timing considerations?

Jennifer Nadborny, Partner, Simpson Thacher & Bartlett LLP: It's interesting because there was a lot of public demand for the shortening of this timeline. This was, in large part, what was driving the amendments to 13D and 13G over time. People had felt like the 10 calendar days was just too long of a period to allow people to accumulate additional positions before having to notify the public that they own stock.

The SEC entertained a lot of different ideas as far as what timeline was appropriate and, as David mentioned, moved to a five business-day standard. It is shorter, but I don't feel like that is a huge overhaul of how we view the obligation to file a 13D, and similarly on the 13G side. It is a change, but I don't think it is something that is transformative on the legal side of preparing these documents.

I wouldn't say universally, but in many cases, people are preparing to build these positions. As part of that preparation process, the 13D draft is something built into the timeline that people can prepare. As far as being an overhaul or not, this part of the rules ultimately ended up being a modification but not something that was earth-shattering for people filing these 13Ds.

Korvin: Let's transition to the new filing deadlines for Schedule 13G filings, which in contrast to the deadlines for the Schedule 13D filings, don't go into effect until September 30, 2024. As Andrew discussed earlier, there are three categories of short-form 13G filers: institutional investors, such as Vanguard or BlackRock; exempt investors, such as your IPO investors; and passive investors, which are entities that acquire between 5% and 20%, but do not have control intent.

Institutional and exempt investors used to have quite the lead time for their initial Schedule 13G filings, where the 13G was not due until 45 calendar days after the year-end in which beneficial ownerships exceeded 5%. Now the initial Schedule 13G for institutional and passive investors will be due 45 calendar days after quarter-end in which beneficial ownership exceeds 5%. A quick example showing this difference - under the prior rule, if an institutional investor acquires 5% beneficial ownership interest on March 15, 2025, the investor would have had until February 14, 2026, to file the initial Schedule 13G filing. Under the amendments, the institutional investor would now need to file by May 15, 2025, which is 45 days after the first quarter ends.

For passive investors, the change in deadlines for an initial Schedule 13G filing are consistent with the changes to the deadlines for the Schedule 13D filings. The timeframe to file upon a triggering event, has decreased from 10 calendar days to five business days.

Each of the three types of Schedule 13G filers is currently required to file an annual amendment within 45 days after a year-end if there has been any change to the disclosure in the current filing. Historically, this has been read quite literally, with almost any change in disclosure within the filing, other than a change in ownership percentage due solely to a change in a company's outstanding share total, requiring an amendment. The amendments will now cause each Schedule 13G filer to file an amendment at the end of the quarter if there is a material change in the disclosure within the filing during the quarter.

An important takeaway from the amendments is that they're bringing in the concept of material change as a filing trigger for Schedule 13G filings, which was previously only a trigger for Schedule 13D filings. Additionally, institutional and passive investors must file Schedule 13G amendments to short-form 13G when they acquire 10% beneficial ownership and thereafter upon a 5% increase or decrease in beneficial ownership. For institutional investors, the timeline has been truncated from 10 calendar days after month-end upon a triggering event to five business days after month-end. For passive investors, the relevant filing timeframe is now two business days.

Takeaway No. 2 is that effective February 5, 2024, the cutoff time to file both Schedule 13Ds and Schedule 13Gs will be extended from 5:30 p.m. Eastern to 10 p.m. Eastern, which is consistent with the cutoff time for Section 16(d) filings. If you file a 13D or 13G after 5:30 p.m. Eastern, you will still get same-day treatment for the filing.

Takeaway No. 3 is effective December 18, 2024, the SEC will require the use of a structured machine-readable data language often referred to as XBRL for Schedule 13D and 13G filings; however, exhibits to these filings will not be required to be data tagged.

Takeaway No. 4, which Scott will get into more detail later is that Item 6 of Schedule 13D currently requires beneficial owners to describe any contracts, arrangements, understandings or relationships they have with respect to any securities of the issuer; however, the amendments clarify that the disclosure required by Item 6 is intended to include a description of all derivative securities held by the filer that use a covered security as a reference security, including cash-settled security-based swaps and other derivatives that are settled exclusively in cash.

Takeaway No. 5 is that the amendments to the beneficial ownership rules clarify that group member acquisitions are imputed once a group has been formed, but this excludes intra-group transfers of securities.

With that, I pass it off to Scott for more implications of the recent guidance.

Amendments and Guidance on Derivative Securities

Scott Budlong, Partner, Barnes & Thornburg LLP: I'm going to talk about two topics on which the SEC has provided guidance rather than adopting proposed rules. One is the question of when holding a cash-settled equity derivative might give you beneficial ownership of the related shares. The other is group formation.

An equity derivative is an instrument whose value is based on price movements in the underlying securities, and those securities are known as "reference shares." When an equity derivative is cash-settled, no shares are exchanged when the contract expires, just cash. One example is a security-based swap ("SBS"). That's where the parties agree to exchange cash flows based on the value of the reference shares over the life of the contract. The classic example is an equity total return swap ("TRS"). Something other than an SBS can also be a cash-settled equity derivative. An example would be a cash-settled option or forward contract.

I note this SBS vs. non-SBS distinction within the universe of cash-settled equity derivatives because if you read the guidance, you'll see that it's talking only about the possible beneficial ownership implications of cash-settled equity derivatives other than SBS. We'll see in a minute that that's not so important, but briefly, what's going on with that?

The SEC had proposed a new Rule 13d-3(e). That would have said that the holder of a cash-settled equity derivative other than an SBS, would have deemed beneficial ownership of the reference shares if the holder had control intent toward the issuer of the reference shares. There were various conceptual and practical issues with that proposed rule and that's why the SEC didn't adopt it.

But the reason the rule proposal excluded SBS is that there's a separate rulemaking process underway, outside of Section 13, which is meant to elicit lots of disclosure from SBS holders on a new Schedule 10B. The SEC thought that its proposed rule therefore didn't need to cover SBS, since doing so would have overlapped with Schedule 10B. And because the proposed rule for that reason was focused only on how a non-SBS cash-settled equity derivative could give you beneficial ownership of reference shares, that's what the guidance is about as well.

All of that said, the guidance in the October release is closely based on prior guidance that does relate to SBS. That earlier guidance appears in the SEC's Rule 13d-3 re-adopting release from 2011. So when you read this new guidance about beneficial ownership in the non-SBS context, you're basically reading the same thing the SEC has already said about beneficial ownership in the SBS context.

Together, both sets of guidance center on using existing Rule 13d-3 principles to assess when the holder of a cash-settled equity derivative might have beneficial ownership of reference shares. There are three of those principles.

Rule 13d-3(a) is the basic one, equating beneficial ownership to the possession of voting and/or investment power. Rule 13d-3(a) says a derivative holder would have beneficial ownership of reference shares if it had the ability to vote those shares or direct their voting, or to dispose of them or direct their disposition. Normally, this way of having beneficial ownership shouldn't be an issue with a cash-settled equity derivative, because the contract terms simply aren't going to confer voting or investment power on the holder with regard to any reference securities. I think that's generally the market's understanding.

A possible caution there would be if the counterparty has purchased reference shares as a hedge and there appears to be some wink-and-nod understanding with the holder that goes beyond the terms of the contract itself. For example, an understanding that the counterparty will vote its hedge shares as the derivative holder instructs; or will amend the contract at the end to provide for physical settlement rather than cash; or will sell the hedge shares directly to the derivative holder rather than in the market when it comes time to unwind the hedge. But absent an outside-the-four corners arrangement like that, the traditional understanding is that holding a cash-settled equity derivative does not make you the beneficial owner of reference shares under Rule 13d-3(a) voting and investment power principles.

Then there's Rule 13d-3(b). It says the derivative holder would have deemed beneficial ownership of reference shares if it entered into the derivative with the purpose or effect of preventing the vesting of beneficial ownership as part of a "plan or scheme to evade" Section 13 reporting. I'd say this should rarely be a real-life concern. The one case where a court did invoke Rule 13d-3(b) in this context was in 2008 in CSX Corp. v. The Children's Investment Fund. In that case, a hedge fund had equity TRSs spread among a number of counterparties, and the trial court saw that as part of a plan or scheme to evade reporting. But the facts of CSX were pretty specific. It was a control contest with lots of atmospherics, including allegations of undisclosed group membership. And the district court's Rule 13d-3(b) analysis was strongly criticized in dicta at the appellate stage. I think it's fair to say that over time, CSX has come to be seen as something of a scheme-to-evade outlier.

Finally, we have Rule 13d-3(d). It says the holder of a cash-settled equity derivative would have beneficial ownership of reference shares if the derivative conveyed the right to acquire the reference shares within the next 60 days (or at any time if the holder had control intent toward the issuer). Again, this should not usually be an issue in the typical situation where even if the holder does have control intent, the derivative-precisely because it's cash-settled-doesn't give the holder a right to acquire securities. That's why the SEC felt the need for Rule 13d-3(e), which would've hinged on control intent alone without any reference to an acquisition right.

To sum up, I'd say the release doesn't really introduce any new beneficial ownership concepts relating to cash-settled equity derivatives. It's more a reminder that the existing Rule 13d-3 analytical framework continues to govern.

Guidance on Schedule 13D "Groups"

Budlong: Let's shift gears to group formation. I assume we're all familiar with the idea of a group, which is that if multiple investors act together for the purpose of acquiring, holding, voting or disposing of an issuer's Section 12- registered shares, those investors have formed a group. If those investors, in the aggregate, have more than 5% beneficial ownership of that class of shares, the group has a reporting obligation.

That sounds simple enough, but when you look more closely, you realize there may be some ambiguity about exactly what evidences a group being formed. That ambiguity is what the SEC saw itself as trying to rectify with a proposed rule amendment.

To put the guidance in context, it's useful to understand some background about that rule proposal. If we start with the statute, Section 13(d)3 says that when multiple persons "act as a group" for the purpose of acquiring, holding or disposing of an issuer's shares, that group is deemed a "person." The statute there is doing a technical job by deeming a group to be a person, because Section 13 reporting applies to any person with more than 5% beneficial ownership. But in terms of what actually evidences a group's creation, the statute just leaves us with that bare, "act as a group" language.

That brings us to Rule 13d-5, which has been around since 1977. It says that when two or more persons "agree to act together" for the relevant purpose, then the group formed thereby is deemed to have "acquired" beneficial ownership of the shares beneficially owned by its members. This rule, too, is doing a technical job by stating that formation of a group equals an acquisition, because Section 13(d) reporting generally hinges on someone making an acquisition to exceed 5%. But with its words "agree to act together," Rule 13d-5 also seems to be suggesting that reaching an agreement is a necessary predicate to group formation. It seems like the rule is giving us, as the statute arguably does not, a clear legal standard to evaluate whether a group has been formed.

Many federal court opinions over the decades have run with that idea, to say that, "Yes, indeed, evidence of an agreement among investors - formal or informal, implicit or explicit, but an agreement - is needed before you can say those investors are a group." The investment community has internalized that view, as well. It may not be easy to say exactly when an agreement has been reached, but at least it's clear that you need to have one to create a group, has been the traditional thinking.

The SEC, for reasons that many found a bit mysterious, was troubled by people's embrace of that understanding. It proposed to amend Rule 13d-5 to delete its reference to an "agreement" and replace it with the simple statutory "act as a group" formulation. The purpose of that amendment proposal was to remove any implication that an agreement is the sole gateway to group status. Reaching an agreement is one way to form a group, the SEC said, but you can have a group without one.

That set off alarm bells in the marketplace and the proposal got a lot of pushback during the comment period. The worry was that the SEC appeared to be suggesting that investors could unwittingly or unintentionally form a group - that merely acting the same way, such as trading similarly, expressing similar views to management, or discussing shared views about an issuer - could be enough to turn investors into a group. Commenters said if that's what your proposed amendment means, which it sure seems to, adopting it will chill shareholders' willingness to speak with issuers and with each other. And, the decades of judicial precedent we've been relying on will go out the window.

When it issued its guidance in lieu of amending Rule 13d-5, the SEC effectively said, "No, that's not what we meant." The introduction to the guidance does repeat the assertion that the statutory language controls. But it also says it's not the SEC's view that a group can be formed without some type of agreement, arrangement, understanding or concerted action between investors. Instead, to conclude a group has been formed, "the evidence must show, at a minimum, indicia, such as an informal arrangement or coordination in furtherance of a common purpose" - those are the SEC's words. The introduction to the guidance then adds that if two or more persons have taken similar actions, that fact alone is not conclusive that they've formed a group.

With that background, we can look at the substance of the guidance quickly. It's in Q&A format. It's generally helpful and it seems intended to alleviate the chilling concerns I just mentioned.

The guidance presents a handful of scenarios in which the SEC says that, "without more," it wouldn't see a risk of group formation. The scenarios basically relate to communications. One example is where two shareholders communicate with each other about an issuer, including discussions about improving long-term performance, changes to the issuer's practices or a joint engagement strategy if it's not control-related, in each case without taking any other action. Similarly, the guidance says the SEC generally wouldn't see evidence of group formation where shareholders engage in discussions with management without taking any other action. For example, the guidance says there shouldn't be group risk if two shareholders make joint recommendations to management about board structure or board composition, as long as the discussion with management doesn't relate to individual directors or expanding the board, and as long as the shareholders don't have any understanding about how they'll vote their shares if the issuer ignores their recommendations.

The guidance also says there shouldn't be group risk where a shareholder communicates with an activist about the activist's proposals, as long as the shareholder doesn't make any commitment to a particular course of action; or where a shareholder merely announces its intention to vote in favor of an activist's board nominees.

On the flip side, the guidance does mention one pattern of behavior that the SEC says could create a group. That is where Investor A has acquired a substantial block of shares and will be filing a Schedule 13D, but the public doesn't know about that acquisition or the upcoming filing. If Investor A tells Investor B that the 13D is in the works with the purpose of causing Investor B to purchase shares, and Investor B does purchase shares as a result of that communication, the SEC says you've probably got a group comprised of A and B. This type of pre-13D tipping - some academics and others have called it "wolf packing" - would have been addressed by a proposed rule. Now there's guidance that essentially tracks what the rule would have said had it been adopted.

Recurring Beneficial Ownership Reporting Issues

Nadborny: We've been through a lot of overview and information about technical amendments. What I would say about this area of the law is that it has some very technical components, but also a lot of judgment that needs to be applied. In many cases, you're dealing with one or more shareholders or a shareholder and an issuer, and there's a lot of navigating through this environment that can be complicated.

As we walk through some of the high-level issues that we face on a day-to-day basis as we do this work, one thing that I would recommend is that when working with a client or if you're in-house, understand the nature of what type of investor you are because as David mentioned, there are different rules applicable to different types of investors. You can get weighed down with all the different deadlines and types of triggers. You need to understand, are you an institutional investor or is this holder an institutional investor? Should we expect that a 13G would have already been filed if they're over 5%, or are you someone who can make a passive certification? You're going to have different deadlines for your initial filings and sometimes different content to your filings depending on what type of investor you're working with.

The rules don't apply equally to every type of holding or to every type of acquisition. Understanding at the outset what your parameters are for that type of investor is going to be helpful in navigating and educating clients about when they might have filings due. In a lot of cases, investors care about visibility. When will people know that I own this stock or what do I need to tell people? Do I need to tell them about my intention? Those are going to be different for different types of investors.

The rules are there for anyone to read, but what are the types of issues that we face when interpreting these rules and helping clients work through them? The first is the calculation of beneficial ownership. We previewed before that the denominator can differ depending on whether you own securities that present a right to acquire shares such as stock options, warrants or it can be convertible notes, and how that can impact our calculation.

One other place where we see people getting tripped up is in a dual-class structure. In a dual-class structure, investors are looking at their economic percentage or their voting percentage, but 13d-3 presents a calculation that in dual-class structures often represents neither economics nor voting power. It is just a calculation in a vacuum, based on the outstanding shares of the registered class. It's important that if you see a dual-class structure that you understand the type of securities owned, is it the registered class or is it something convertible into the registered class?

The impact of that size, in many cases in dual-class companies that are doing an initial public offering, of the registered class initially may be small and in some cases may only represent the size of the initial offering because the pre-IPO owners may all own a different class of stock. In the course of perhaps buying a very small percentage of a company, you have to be aware to do this 5% calculation using the 13d-3 calculation that was outlined earlier starting only with the size of the registered class and then anything that would be outstanding if you were to exercise a convertible instrument.

The idea of beneficial ownership calculations also comes into play. Cash-settled instruments do not necessarily represent beneficial ownership, save for a couple of very specific circumstances. Some instruments might have the opportunity to physically settle or cash settle, and you have to look at the instrument and the terms of the instrument to determine what you have a right to acquire and when and whether there's conditionality to your acquisition of that stock.

Make sure you're not looking at things just on the surface, but also the underlying facts, including not just what you hold, but also the capital structure of the company, to do what we call 13d-3 math and not necessarily asking the business team, how much of the company do you own? In my experience, this 13d-3 math is very technical and not widely understood. A lot of our job is educating people about the different denominator we'll have to use.

Thorpe: It just results in different percentages. The intuitive thing is, "All that matters is the total amount of voting I have in the company," and that's not what you get when you do the math.

Nadborny: Exactly. Similarly, it doesn't count high vote stock in that calculation either. One interesting attribute of dual-class companies in particular is that depending on what type of securities law analysis you're doing, you may look at what I call 13d-3 math. You may look at voting power for things like affiliate status. The percentages you calculate depending on the context you're using may differ. Again, understanding your client and understanding whether they are a 13G or 13D filer will help them understand when their disclosure is going to be hitting the market and then what the content of that disclosure might be.

Another issue that we hit in many cases is just real technical attributes of these rules. We don't have time on this high-level webcast to go through all of those technical details, but there are a lot of questions that come up that aren't necessarily dealt with in the rules. Things like, what happens if I am at 5% at the end of the year or when the new rules go into effect at the end of a quarter, but after quarter-end, I sell down below 5%. Do I still owe a filing? What should that filing say? What numbers should be in the filing? That's another example of some technical things that happen.

There are a lot of beneficial ownership calculation issues that can trip you up - for example, holding stock past a record date for an annual meeting and then disposing of it. It's one pitfall, but it's been litigated that you do technically maintain voting power over those shares, and so you may remain the beneficial owner for some period of time until you vote the shares. What happens if an issuer is taken private during the year? Do I owe an exit filing? It can depend on the timing of the deregistration of the issuer under The Exchange Act.

There are a lot of technical aspects to the 13(d) and 13(g) rules, and so we recommend checking with counsel often. If you are counsel, do your best to educate your clients about some of these speed bumps so that they reach out to you to ask these questions before they do an acquisition or disposition, particularly on the acquisition side. It was mentioned briefly earlier that an acquisition could flip you from what was a pre-IPO 13G into a 13D.

If you are a group with other holders, that can have knock-on effect for other group members as well. Understanding if you're a group, that's one of the areas where there's a lot of judgment applied as far as what types of agreements you might have or the fact that the agreement has to relate to the securities, you might have an agreement relating to something else related to the issuer. Those types of matters aren't necessarily just going to impact you as a holder, it could impact other holders as well. It's important to understand the potential ramifications on a global basis. That's not necessarily related to the amendments per se, but they are related to just the 13(d) and (g) practice as a whole.

Budlong: Jennifer, you just prompted a thought when you mentioned it's important to think about beneficial ownership calculations in advance of making an acquisition. One topic that it's sometimes, in my experience, helpful to educate the client about in advance is if they're buying some shares in a PIPE, let's say. They're buying shares of the registered class, which they know is going to count toward their beneficial ownership. But say the deal also has some warrants, for example, that state they are immediately exercisable at the holder's option. That also gives you beneficial ownership of however many shares underlie the warrants. When you feed that into your percentage beneficial ownership calculation, you maybe not only hit 5% but also 10%, which would kick you into the realm of Section 16.

Sometimes the client says, "Does that mean I can't take the warrants?" The answer may be No, that's not what it means, if you can figure out how to put a beneficial ownership blocker clause in the warrants that says you're not allowed to exercise and the company won't respect a purported exercise, to the extent exercising would put you over whatever percentage beneficial ownership threshold the blocker clause specifies. That can be a good thing to keep in mind, just from a pre-investment planning perspective.

Nadborny: That's a great point. For us, one thing is just having that opportunity in advance of the investment to raise those points because some things are unavoidable, and then there are some things you can do at the outset, whether it's putting in a blocker, it's structuring something differently or just being cognizant of the repercussions for reporting purposes.

As far as structuring, there are knock-on effects of this beneficial ownership definition that you also should be aware of. For example, many companies have debt instruments with change of control provisions, which will key off of 13d-3 beneficial ownership. Understand, particularly if you're pairing up with someone else as part of M&A, how that would be interpreted under things like change of control provisions.

For many IPO companies, there is an acknowledgment of a group concept as well, as far as controlled company status. If the issuer's relying on controlled company status because there's a group of founding shareholders who've agreed to vote together, then when you're going to prepare your filings, you want to be cognizant of that and not taking the view you're not a group for some reason, because you have the issuer taking an alternative view. Just be aware of the environment. It's not just a matter of getting the particular filing on schedule, the beneficial ownership determination has far more widely applicable consequences than just the filing.

With the couple minutes we have left, we're going to talk about the implications of the amendments. I know the rules themselves are complicated, but what do these amendments mean for us going forward?

Korvin: Before we get into the final section, one other thing that I've seen come up quite often is that investors in the private companies in SPAC acquisition don't get exempt investors status. A lot of times the investors think they do because they treat their investment like its an IPO, but the triggers are a lot quicker for a SPAC acquisition than they are for an IPO. Just something to keep in mind, even though I know SPACs aren't as popular as they were a couple of years ago.

Thorpe: Certainly not after a couple days ago, when the SEC adopted the rules.

Implications of the Amendments and Guidance for Activism and Hostile M&A

Korvin: As discussed, the amendments to the beneficial ownership reporting rules shorten the deadlines for all Schedule 13D and 13G filings. For Schedule 13G filings, they also increase the cadence of periodic reports from an annual basis to a quarterly basis. With respect to these quarterly filings, security holders are going to have to start mapping out a process to help ensure that they have all the information necessary to determine whether a material change occurred during the quarter that would require an amended 13G filing.

Something to keep in mind here is that security holders now will need to make a materiality determination each quarter. Though the rules indicate that a 1% ownership change is a material change, the SEC has not provided further examples of what constitutes a material change other than to say that acquisitions or dispositions of less than 1% may be material depending on the facts and circumstances. Hopefully the SEC will provide further guidance on what constitutes a material change, but potential areas to consider include changes to relevant agreements such as the underlying transaction agreement or a voting agreement.

A question I have for the group is, with respect to the new cadence of Schedule 13G filings from an annual to a quarterly occurrence, do you guys have any other planning considerations that you've been discussing with clients or otherwise?

Thorpe: I work with a lot of venture-backed companies. Many times, depending on how big the fund is, they might have a public company or securities compliance specialist on their team, but in many cases, they rely on in-house counsel to do the filing. Same with the founders. It's important to communicate ahead of time that this is not something we can do at the last minute and have the calendars in place so they understand what their filing deadlines are. It's on outside counsel to also take stock of that and make sure it's not coming up at the last minute.

Nadborny: I agree with that. My experience in working with clients, some who have a lot of filings each year, is that generally someone works on it but they have a day job. That's not their primary responsibility, these 13Gs. Now with it being on a quarterly basis, clients with more than one or two filings need to do some of that work to identify the team that's going to be working on gathering the information, reviewing the information. It is quite a process.

One of the things that was particularly troubling to me when the proposed rules came out was that it was originally proposed that on a monthly basis we would have to evaluate amendments and also file within a couple of days at the end of the month. One of the changes I was happy to see in the final rules was the giving us the 45 days to get this information together because for all of us that do this as a large part of our job, it is a big undertaking in January and early February to reach out to all our clients and collect all of this information. Now that it'll be done on a more frequent basis, getting people accustomed to that, with the expectation that you'll be reaching out and gathering that information, is more important than ever given the changes to the rules.

Korvin: From a business perspective or an activist perspective, another point to keep in mind here is that the reduction from 10 calendar days to five business days for an initial Schedule 13D filing will shave down the period that activists have to purchase equity securities. It's unclear how much commentators think that the stock price will increase because there's less time between crossing 5% and disclosing your ownership. Has anyone been having any additional discussions regarding acquisition strategies?

Nadborny: For people who are trying to build their position, that's always been part of the planning process, but again, it's education because just understanding that if they have a particular target for the amount of stock that they'll own, they do need to do it more quickly to accumulate your position before you have that public disclosure. That is just a matter of education so that people are not operating under stale assumptions.

Korvin: On the guidance that Scott discussed, one of the key takeaways here is that the SEC will be looking closely at synthetic alternatives to actual equity ownership of a reportable class, which is something to think of when purchases are structured. Even though the SEC didn't make huge changes to group formation or the rules regarding group formation, this is another SEC priority and something to keep in mind when parties are interacting in making an acquisition or contemplating an acquisition.

Thorpe: Corp Fin has a program to review 13Ds. They don't have the staff to handle every filing. They definitely will do one-offs because it's reviewed by the Office of Mergers and Acquisitions, not typically Disclosure Operations, which is looking at 10-Ks and 10-Qs. It'll be interesting to see how the SEC is looking at compliance with these new rules. Many times, they give a year for issuers or reporting persons to figure it out. They're not going to go after "gotchas." Then, they'll issue guidance based on their first-year experience. It'll be interesting to see what approach the SEC takes with regard to implementation of the beneficial ownership amendments and guidance.

Jenkins: We've covered a lot of ground for this very informative webcast. Thanks again to our panelists and everyone joining us today. This concludes today's webcast.