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Securities Regulation and Corporate Governance > Posts > Another SEC Sweep? – More Enforcement Actions for Failure to Update 13D Disclosures – This Time In Connection With Going Private Transactions
Another SEC Sweep? – More Enforcement Actions for Failure to Update 13D Disclosures – This Time In Connection With Going Private Transactions

Last Friday, the SEC announced that it had settled a string of 21C administrative proceedings brought against eight officers, directors, and shareholders of public companies for their failure to report plans and actions leading up to planned going private transactions. The SEC press release can be found here. In doing so, the SEC sent another strong reminder to those that beneficially own more than 5% of the equity securities of a public company to keep their 13D disclosures current.  

The respondents included a lottery equipment holding company, the owners of a living trust, and the CEO of a Chinese technical services firm. According to the SEC, the respondents in each of these cases failed to report various plans and activities with respect to the anticipated going private transactions, including when the parties: (i) determined the form of the going private transaction; (ii) obtained waivers from preferred shareholders; (iii) assisted in arriving at shareholder vote projections; (iv) informed management of their plans to take the company private; and (v) recruited shareholders to execute on the proposals. In one case the respondents were charged for failure to report owning securities in the company that was going private.  In another case, the respondents reported their transactions months or years later. The proceedings resulted in cease-and-desist orders as well as the imposition of civil monetary penalties ranging from $15,000 to $75,000 per respondent.  

Generally, under Section 13(d), any person who acquires beneficial ownership of more than 5% of a registered class of equity securities must disclose certain information about the acquisition within ten calendar days. Item 4 of Schedule 13D requires that filers also “describe any plans or proposals which the reporting person may have which relate to or would result in . . . an extraordinary corporate transaction, such as a merger, reorganization or liquidation” or a going private transaction (emphasis added). Further, under Section13d-2(a), holders must file amendments to their 13D disclosures “promptly” if there are any material changes to the information disclosed in the schedule.

In its press release announcing the settlements, the SEC emphasized that amendments to beneficial ownership reports cannot be evaded by using boilerplate disclosure language. Andrew J. Ceresney, the Director of the Division of Enforcement, noted that, “stale generic disclosures that simply reserve the right to engage in certain corporate transactions do not suffice when there are material changes to those plans, including actions to take the company private.”

            It is not uncommon for 13D reports to include under Item 4 a laundry list of activities and conduct that the reporting persons may seek to engage in after the filing is made. Some filers may include such disclosure in the hopes that it will provide support for delayed disclosure of events that might otherwise trigger a 13D amendment obligation later on.  But this latest string of settlements sends a strong message to the contrary, marking yet another step in Chair Mary Jo White’s campaign to remedy perceived “broken windows”.  Coming quickly on the heels of the SEC’s prior actions that were brought against 34 companies and individuals late last year for various Section 16 and 13(d) reporting violations, this most recent  sweep reiterates the risks associated with delayed or incomplete 13D disclosures.     

According to the latest SEC enforcement statistics from the first few months of 2015, it is clear that the Commission has no intention of slowing down the pace at which it brings cases to enforce the 13D rules that require disclosure of current beneficial ownership information.  For more on SEC Enforcement trends going into 2015, click here.

While some may seek cold comfort in the fact that the respondents involved in these proceedings were of relatively modest size and means, all reporting persons should take notice that the SEC is actively looking to bring cases in this area. Specifically, all 13D reporting persons should come away with the following key points from these cases:

  • Schedule 13D not only requires the disclosure of actual historical transactions, but plans or proposals that could reasonably result in future transactions, including going private transactions. The SEC is taking a more aggressive position than it has historically on exactly what type of activities will trigger the “plan or proposal” reporting obligation, so filers must carefully consider the need to disclose their plans as soon as they begin to crystalize and as they begin to implement their plans.
  • Generic, boilerplate disclosures seeking to reserve the right to engage in a variety of conduct in the future may not suffice, especially when there are material changes to facts, including plans or proposals previously disclosed or alluded to in a prior 13D report.
  • Filing 13D amendments late or after the fact, may not preclude liability for violations as the SEC has demonstrated an equal willingness to pursue both late filers and those that don’t file at all. And given that there is no scienter element to a Section 13(d) violation, a filer may be found liable even absent the intent to commit any fraudulent disclosure.

Accordingly, filers will want to confer with their counsel to ensure that they are timely filing all Schedule 13D reports (including amendments thereto) as soon as the filer takes any noteworthy steps in a direction that could render previous disclosures stale.

Thanks to Lauren Traina (OC corporate associate) for all her insights and efforts in helping to draft this post.

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