By Gina Chon
Of THE WALL STREET JOURNAL
A diverse group of investors is lobbying against a proposed
change in a federal rule that would speed up the time frame for
alerting the public to the amassing of shares in a company.
Big money managers, public pension funds, union funds and
activist hedge funds are resisting the proposed change, which was
submitted to the Securities and Exchange Commission in March by
prominent corporate law firm Wachtell, Lipton, Rosen &
Katz.
Wachtell's proposal would dramatically shrink--to one day from
10 days--the time frame for an investor who crosses 5% ownership of
stock in a public company to file a report revealing the size of
the stake.
(This story and related background material will be available on
The Wall Street Journal website, WSJ.com.)
Typically, shares of a company rise when a so-called 13(D)
filing is made, as investors anticipate major change, possibly the
company's sale or break up. Wachtell contends the current system
facilitates "market manipulation and abusive tactics" by allowing
the investor to buy far more than 5% of the shares before the
public learns anything.
Wachtell maintains stockholders who sell their shares to a 13(D)
filer in the days before the filing lose out on potential profit.
Wachtell declined to publicly comment.
Those opposing the change say it could curb activism that has
benefited shareholders broadly.
Investors resisting the Wachtell proposal include big money
managers Blackrock Inc. (BLK), TlAA-CREF and T. Rowe Price Group
Inc. (TROW), public pension funds California State Teachers'
Retirement System, Florida's State Board of Administration, New
York State Common Retirement Fund and Ontario Teachers' Pension
Plan, union pension funds and activist hedge funds Jana Partners
LLC and Pershing Square Capital Management, according to SEC public
documents.
All were part of a group that met July 15 with SEC officials to
argue that 13(D) filers bear the risks of their investment and an
uncertain result of their actions, according to the SEC
documents.
The investors acknowledge that activists can build up stakes
bigger than 5% during the 10-day window, but say the ability to do
so provides financial incentive to tackle problems at
underperforming companies.
Wachtell's suggested changes would "significantly impact
market-driven incentives to address company underperformance, to
the likely detriment of all shareholders," and it "could chill
activity which helps give life to shareholder democracy," according
to a joint presentation by the group to the SEC.
The investors declined to elaborate publicly on the
presentation.
"We plan to undertake a broad review of our Regulation 13D
beneficial ownership reporting rules next year," and issues to be
considered include whether the 10-day period should be shortened,
Meredith Cross, director of the SEC's division of corporation
finance, said in a statement.
"This is a fundamental question about American corporate
governance, and the SEC should think of it in that way," said
Robert Jackson, a law professor at Columbia University. "Some of
these shareholders play a critical role in monitoring, but they
need to have a benefit to justify the monitoring. If you take away
the benefit by shortening the reporting period, you will lose the
monitoring."
Those opposing the Wachtell proposal say investors who sell in
the days just before a 13(D) filing do so voluntarily at a price
they deem appropriate to sell.
Wachtell maintains in its letter: "There is no valid
policy-based or pragmatic reason that purchasers of significant
ownership stakes in public companies should be permitted to hide
their actions from other shareholders, the investment community and
the issuer." The law firm says the reduction in the window to one
day also makes sense given improved technology.
The Wachtell letter notes that a stake built up last year by
Pershing Square in retailer J.C. Penney Co. (JCP) had grown to more
than 16% by the time Pershing made its 13(D) filing.
A person familiar with Pershing said the firm was following the
rules in its effort to effect change at the company. J.C. Penney
eventually gave Pershing board representation and has said it will
close six stores and take other streamlining actions.
Penney couldn't be immediately reached for comment.
J.C. Penney shares were trading at about $28 the day before
Pershing filed its 13(D) last October and rose more than 3% after
news of the filing. Shares hit a 52-week high of $41 in May. They
traded around $24.46 late Friday afternoon in New York Stock
Exchange composite trading, up 2.9% amid a broader market rout.
The U.S. Chamber of Commerce is studying the suggested change
and generally supports "increased disclosure," said Tom Quaadman,
an official there. He said a 10-day period may be too long in the
Internet age, but shrinking it to one day may be too short.
The 13(D) rule dates to 1968 and helped end the practice of what
was known as Saturday night specials, when a would-be acquirer
launched a surprise tender offer to acquire a company, often over
the weekend.
Since then, other takeover defenses have been established,
including the so-called poison pill created by Wachtell.
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