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SEC Charges Investors With Violating Beneficial Ownership Reporting Requirements

The Securities and Exchange Commission (SEC) recently commenced eight cease-and-desist actions against investors and public company insiders alleging violations of Section 13(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), for failing to promptly amend their Schedule 13D filings (generally referred to as “beneficial ownership reports”) to report proposals for going private transactions. Ancillary to the going private-related charges, the SEC also found that some of the respondents violated Exchange Act Sections 13(d) and 16(a) by failing to timely report information about stock transactions. Simultaneously, the SEC and respondents settled all of the actions for approximately $260,000 in the aggregate.

These actions signal the SEC’s continued focus on compliance with the reporting requirements under Exchange Act Sections 13(d) and 16(a). Public companies and their insiders and investors that are required to file a Schedule 13D should carefully consider these enforcement actions in connection with going private transactions or other actions that are required to be disclosed pursuant to Item 4 of Schedule 13D.


Although the SEC enforcement actions announced in March 2015 involved a variety of reporting obligations under Exchange Act Sections 13(d) and 16(a), this client alert focuses on Item 4 of Schedule 13D. The aspects of the enforcement actions related to the late filings of Schedule 13D and Form 4 to report changes in beneficial ownership appear to be ancillary to the Item 4 issues and do not add any further detail or insight beyond what we reported in our September 2014 client alert on SEC enforcement actions involving violations of the SEC’s stock ownership reporting requirements.

Section 13(d) generally requires a person or group that beneficially owns more than 5% of a class of equity securities that is registered under Exchange Act Section 12 to publicly file with the SEC a long-form Schedule 13D or short-form Schedule 13G. Pursuant to Exchange Act Rule 13d-1, an initial Schedule 13D is due within 10 days of the triggering acquisition. 

Item 4 of Schedule 13D requires in relevant part that the reporting person(s) must describe any plans or proposals that the reporting person(s) may have which “relate to or would result in … [c]ausing a class of securities of the issuer to be delisted from a national securities exchange or to cease to be authorized to be quoted in an inter-dealer quotation system of a registered national securities association.” Other plans or proposals that are required to be disclosed under Item 4 include (1) the acquisition or disposition of the issuer’s securities, (2) an extraordinary corporate transaction (for example, merger, reorganization or liquidation) involving the issuer or its subsidiaries, (3) a sale or transfer of material assets of the issuer or its subsidiaries, (4) changes in the issuer’s board of directors or management, (5) material changes in the issuer’s capitalization or dividend policy, (6) changes to the issuer’s governing documents that could prevent or delay a change of control and (7) other similar actions or changes. 

Pursuant to Exchange Act Rule 13d-2, a reporting person is required to file a Schedule 13D amendment promptly after the occurrence of any material change in the facts set forth in the Schedule 13D. Therefore, a reporting person must promptly amend its previously filed Schedule 13D when there has been a material change to any of the reporting person’s plans or proposals in the areas enumerated above. Neither Section 13(d) nor the rules applicable to that section define what “promptly” means for purposes of Rule 13d-2. Courts that have addressed the meaning of “promptly” under Rule 13d-2 have reached differing conclusions on its meaning ranging between five and ten days. The SEC has indicated that the standard for promptness is flexible but that, depending on the facts, an amendment could be required as early as the first business day after the material change.

Parties Sanctioned for Not Promptly Amending Schedule 13D to Report Possible Going Private Transactions

The recently announced eight enforcement actions and settlements involved three separate going private transactions subject to Exchange Act Rule 13e-3 and five distinct sets of shareholders that were required to amend a Schedule 13D in connection with such transactions. 

First transaction. The first transaction involved a company that beneficially owned a substantial majority of the outstanding shares of an issuer. By July 2013, this beneficial owner had submitted a “concept paper” to the issuer (presumably regarding a going private transaction, though this is not entirely clear from the SEC order) and informed the issuer of its intention to take the issuer private. In the SEC’s view, these actions constituted “serious discussions” regarding, and “significant steps” toward, a going private transaction, and required the filing of an amendment to Schedule 13D by as early as July 2013, which amendment was not made until March 2014. In addition, before filing its Schedule 13D amendment in March 2014, the beneficial owner also took what the SEC described as “additional, significant steps to further the going private transaction.” These additional steps included deciding on (1) a reincorporation merger followed by a reverse stock split to take out small shareholders and (2) using a written consent in lieu of a shareholder meeting to approve such transactions. 

The beneficial owner agreed to a cease-and-desist order and paid a $75,000 civil penalty.

Second transaction. The second transaction involved three groupings of beneficial owners of an issuer’s common stock that comprised a total of six beneficial owners. Each grouping beneficially owned more than 10% of the issuer’s outstanding common stock and was represented on the issuer’s board of directors (or had observer rights). Together, these beneficial owners controlled the vast majority of the voting power of the issuer’s common stock. Also, each of these groupings had previously filed a Schedule 13D with respect to the issuer’s common stock, but none had amended those filings in over four to five years. 

According to the SEC, these beneficial owners began to discuss a possible going private transaction for the issuer as early as 2011, and several of the beneficial owners took other steps in the furtherance of such a transaction in January 2014 (such as informing management of their support for a going private transaction and securing certain waivers that would assist in any such transaction). The SEC concluded that each of these six beneficial owners had materially changed his, her or its respective Item 4 intention by January 2014 at the latest and had therefore violated Section 13(d) by delaying the filing of a Schedule 13D amendment for a period that ranged from three to five months.

Each of the beneficial owners agreed to a cease-and-desist order. The three groupings of beneficial owners agreed to civil penalties of $75,000, $63,750 and $15,000, respectively. 

Third transaction. The final transaction involved an issuer’s chairman and chief executive officer (CEO). The CEO was also a major shareholder of the issuer, having filed an initial Schedule 13D in 2011 reporting his beneficial ownership of the issuer’s outstanding shares 19 months after he incurred the filing obligation.

As early as October 2012, the CEO began to consider a possible going private transaction for the issuer. By November 2012, the CEO had met with two other substantial shareholders of the issuer to discuss a possible going private transaction. According to the issuer’s amended proxy statement filed in February 2014 in connection with the going private transaction, the CEO also apparently studied the “feasibility of a going private transaction and [learned] about the successful completion of going private transactions involving a number of U.S.-listed China-based issuers” and “began to seriously consider a going private transaction.” The SEC concluded that, by November 2012, the CEO’s “intentions for purposes of Item 4 of Schedule 13D had materially changed” and the CEO “had taken steps in pursuit of a going private transaction.” As a result, the SEC alleged that the CEO’s amended Schedule 13D was filed almost one year late.

The CEO agreed to a cease-and-desist order and paid a $30,000 civil penalty.

Practical Considerations

Do not rely on generic disclosures in response to Item 4 of Schedule 13D when faced with material changes. In each of the recent enforcement actions, the SEC took pains to cite to its prior decision in In the Matter of Tracinda Corp. and to reiterate that “generic disclosure that indicates the beneficial owner is reserving the right to engage in any of the kinds of transactions enumerated in Item 4(a)-(j) of Exchange Act Rule 13d-101 must be amended when a plan with respect to a disclosable matter has been formulated.”

Disclosure not specifically required by Item 4 may be more harmful than helpful. In several of the cease-and-desist orders, the SEC highlighted the fact that the reporting persons had previously disclosed in Item 4 that they “did not have any present plans or proposals that relate to or would result in any of the actions required to be described in Item 4 of Schedule 13D” (which is required disclosure in a Schedule 13D to the extent that a reporting person had no plans or proposals of the sort described in Item 4), but then added that they had “no present intention of” formulating any such “plans or proposals” (which appears to be beyond the scope of required Schedule 13D disclosure). The result of these additional, non-mandatory statements in Schedule 13Ds may have been that the reporting persons were required to amend their Schedule 13Ds to report that they might formulate such plans or proposals and thereafter to report other material changes as the plan is formulated. The SEC warned in the orders that “[d]epending on the facts and circumstances … an amendment also may be required before a plan has been formulated because the obligation to revise arises … promptly after a ‘material change occurs in the facts set forth in the’ Schedule 13D” (emphasis added).

Intention will be viewed with the benefit of 20/20 hindsight. It is possible, if not likely, that if the respondents in the recent enforcement actions had considered a going private transaction and decided not to proceed, the SEC would not have brought the cease-and-desist actions against them. The decision not to proceed tends to negate the imputation of the existence of a plan and, conversely, the decision to proceed tends to reinforce the imputation of such a plan. Therefore, in terms of assessing whether a Schedule 13D filing is required or advisable, it is important to take into account (1) whether any steps had been taken towards a transaction, regardless of how minimal, and how the absence of a filing disclosing such steps might appear with 20/20 hindsight and (2) the likelihood that the proposed transaction will proceed. The line between “plans or proposals” that are required to be disclosed under Item 4 of Schedule 13D and something which is not quite a plan or proposal and is not required to be disclosed remains very difficult to discern in real time.

Reporting persons should be cautious in their communications with the issuer about transactions potentially subject to disclosure in Item 4. A proxy solicitation or information statement concerning a going private transaction subject to Rule 13e-3 will necessarily contain extensive information about the discussions and meetings leading up to the going private transaction. Persons subject to reporting on Schedule 13D involved in transactions subject to Rule 13e-3 should be particularly circumspect about communicating their views early in the board’s process as that communication may be deemed to be an event that triggers an amendment requirement. However, there is nothing about the eight actions described above that is necessarily applicable only to transactions covered by Rule 13e-3. Therefore, all reporting persons involved in discussions with the issuer concerning a transaction of the type described in Item 4 of Schedule 13D – even if they are not participants in the transaction – should exercise caution in their communications concerning the transaction.

The SEC continues to focus on Schedule 13D compliance. The enforcement actions drive home the point that the SEC will be watching Schedule 13D filings to make sure any and all amendments are made promptly when there is a material change that occurs in the facts set forth in the Schedule 13D, regardless of the reason for the amendment.

Copyright © 2022, Hunton Andrews Kurth LLP. All Rights Reserved.National Law Review, Volume V, Number 86

About this Author

Eric R. Markus, Corporate, Securities Attorney, Andrews Kurth, Law firm

Eric R. Markus is a partner in the firm's Corporate/Securities practice. Eric has a broad practice that encompasses complex corporate transactions, mergers and acquisitions, securities law compliance and debtor and creditor representations in bankruptcy proceedings.

The matters on which he has counseled clients include:

  • Private and public M&A transactions, including domestic and international targets
  • Complex securities regulatory matters concerning Sections 13 and 16 of the Securities Exchange Act of 1934
  • Negotiation and documentation of joint...
G. Michael O'Leary, Corporate Securities Attorney, Andrews Kurth, Law firm

Mike is a member of the Policy Committee and co-chair of the Corporate/Securities practice.

Mike has an extensive corporate securities and mergers and acquisitions practice with particular emphasis on representation of issuers and underwriters in public and private offerings of equity and debt securities; representation of buyers, sellers and special committees in mergers and acquisitions (domestic and foreign) and of private equity firms investments in energy and energy infrastructure; redemptions and exchanges of corporate debt; negotiating complex partnerships and joint ventures...