Lucian Bebchuk, Professor of Law, Economics, and Finance at Harvard Law School and Robert J. Jackson, Jr., Associate Professor of Law at Columbia Law School have published a
paper urging caution and concluding that the SEC should not proceed with a recently proposed tightening of blockholder reporting. While not opposing some re-examination of the blockholder reporting regulatory regime, Bebchuk and Jackson explain that changes should be examined in the larger context of the beneficial role that outside blockholders play in American corporate governance and the broad set of rules that apply to such blockholders.
Believing that the current system under which acquisitions of large blocks of stock are reported to the SEC and the marketplace, the Watchell Lipton law firm asked the SEC in a
petition for rulemaking to "modernize" these rules. In their petition, Watchell Lipton explains that
the current narrow definition of "beneficial ownership" and the ten-day reporting lag after which one must report ownership under Section 13(d) of the Securities Exchange Act of 1934 may currently facilitate market manipulation and abusive tactics. The firm worries market transparency and investor confidence are undermined because aggressive investors are intentionally structuring their acquisition strategies to exploit these gaps in the current 13(d) reporting regime, to their own profit, and to the detriment of the larger market.
In their paper,
The Law and Economics of Blockholder Disclosure, Bebchuk and Jackson analyze five compelling reasons why the SEC should not adopt new rules that tighten restrictions on outside blockholders:
- There is significant empirical evidence indicating that the accumulation and holding of outside blocks in public companies benefits shareholders by making incumbent directors and managers more accountable and thereby reducing agency costs and managerial slack.
- Tightening the rules applicable to outside blockholders can be expected to reduce the returns to blockholders and thereby reduce the incidence and size of outside blocks - and, thus, blockholders’ investments in monitoring and engagement, which in turn may result in increased agency costs and managerial slack.
- There is currently no empirical evidence to support the Petition’s assertion that changes in trading technologies and practices have recently led to a significant increase in pre-disclosure accumulations of ownership stakes by outside blockholders.
- Since the passage of Section 13, changes in state law—including the introduction of poison pills with low-ownership triggers that impede outside blockholders that are not seeking control - have tilted the playing field against such blockholders.
- A tightening of the rules cannot be justified on the grounds that such tightening is needed to protect investors from the possibility that outside blockholders will capture a control premium at other shareholders’ expense.
Bebchuk and Jackson have submitted their findings to the SEC in hopes that the agency will not act hastily to what may be seen by some as "technical" rule tightening. Rather, the professors are urging the Commission to pursue a comprehensive examination of the rules governing outside blockholders considering the empirical questions raised by their analysis, including:
- Study of the magnitude of the benefits conferred on shareholders by blockholders and the factors that determine those benefits;
- An assessment of the effects of the existing disclosure requirements, and the expected effects of tightening or relaxing those requirements;
- Study of how pre-disclosure blockholder accumulations have changed—if at all—since the passage of the Williams Act; and
- Analysis of the how the evolution of state-law rules impeding blockholders, such as the authorization of low-level poison pills, affects the incidence and size of blocks—and blockholders’ activities.
The Dodd-Frank Act gives the SEC the statutory authority to shorten the 10-day filing period for initial filings of Schedule 13D. Because the legislation specifically mentions the 10-day window under 13(d), Congress appears to consider it an issue and it has laid the legislative groundwork for reform in this area. The SEC is currently studying its options, and Chairman Mary Schapiro testified in December of 2011 that any changes would be preceded by a concept release, rather than an outright rule proposal.