In the Proposing Release, the Commission proposed to amend Rule 13d-5 to track the statutory text of sections 13(d)(3) and (g)(3) and specify that two or more persons who \u201cact as\u201d a group for purposes of acquiring, holding, or disposing of securities are treated as a group.481<\/sup><\/a> Specifically, the Commission proposed to redesignate Rule 13d-5(b)(1) as Rule 13d-5(b)(1)(i) and revise it to, among other things, remove the reference to an agreement between two or more persons and instead indicate that when two or more persons act as a group under section 13(d)(3), the group will be deemed to have acquired beneficial ownership of all of the equity securities of a covered class beneficially owned by each of the group\u2019s members as of the date on which the group is formed. The Commission also proposed new Rule 13d-5(b)(2)(i), which would contain nearly identical language to proposed Rule 13d-5(b)(1)(i), with conforming changes to address circumstances in which two or more persons act as a group under section 13(g)(3) and the group is deemed to become the beneficial owner of all of the equity securities of a covered class beneficially owned by each of the group\u2019s members as of the date on which the group is formed.<\/p>\n\n\n\n The Commission proposed these amendments, among other things, to (1) make clear that \u201cthe determination [under sections 13(d)(3) and 13(g)(3)] as to whether two or more persons are acting as a group does not depend solely on the presence of an express agreement and that, depending on the particular facts and circumstances, concerted actions by two or more persons for the purpose of acquiring, holding or disposing of securities of an issuer are sufficient to constitute the formation of a group,\u201d and (2) eliminate any potential for Rule 13d-5(b)(1) to be misconstrued as the definition of a group and consequently used as a basis to narrow the application of sections 13(d)(3) and 13(g)(3).482<\/sup><\/a><\/p>\n\n\n\n In addition, the Commission proposed to amend Rule 13d-5 to include new paragraph (b)(1)(ii). The proposed paragraph would provide that a person who shares information about an upcoming Schedule 13D filing such person is or will be required to make with respect to a covered class, to the extent this information is not yet public and was communicated with the purpose of causing others to make purchases of securities of the same covered class, and a person who subsequently purchases securities of that class based on this information, will have formed a group within the meaning of section 13(d)(3).<\/p>\n\n\n\n Commenters expressed a wide range of views on proposed Rule 13d-5(b)(1)(i) and (b)(2)(i).483<\/sup><\/a> A number of commenters supported the amendments.484<\/sup><\/a> One supporting commenter expressed the view that the proposed amendments would ensure that the terms of sections 13(d) and (g) will be applied as originally intended.485<\/sup><\/a> Another commenter observed that the proposed amendments appear designed to simply adhere to the underlying statutory language in the Exchange Act.486<\/sup><\/a> One commenter stated that it supported the proposed amendments and observed that, under the proposed amendments, compliance with the group formation rules would not depend on whether an express or implied agreement exists among the parties that are acting together.487<\/sup><\/a> One commenter asserted that the proposed amendments \u201ccould prevent sophisticated investors from skirting reporting requirements when coordinating accumulations of significant stakes\u201d which could \u201chelp[] ensure retail investors have fair insight.\u201d488<\/sup><\/a><\/p>\n\n\n\n Several commenters expressed views rejecting criticism that the proposed amendments would interfere with shareholder activism or collaboration.489<\/sup><\/a> One of these commenters disagreed with the contention by other commenters that such amendments would prevent the build-up of ownership stakes and chill shareholder communications.490<\/sup><\/a> Another commenter disagreed with concerns that the proposal \u201cwould put mainstream institutional investors at risk of being deemed part of a group simply because they take a meeting with an activist or management and indicate that they may be inclined to vote in favor of their proposed course of action.\u201d491<\/sup><\/a> This commenter further stated that it did not view the proposal as propounding a definition of \u201cgroup\u201d that would consider a \u201cregular passive institutional investor\u201d as a member of a group with an activist simply because it met with an activist, heard its proposed plans, and signaled it would likely use its voting power to support the activist\u2019s proposed campaign.492<\/sup><\/a> One commenter stated a similar view, asserting that nothing in the proposal would limit the ability of investors to engage with company management.493<\/sup><\/a><\/p>\n\n\n\n In addition, although the IAC did not make a recommendation with respect to the proposed amendments to Rule 13d-5 \u201cbecause of a lack of consensus on the effects of the proposed definition of a \u2018group\u2019 and how that would impact shareholder communication,\u201d the IAC stated that it \u201cagree[d] with the SEC\u2019s description of existing case-law regarding the definition of \u2018group\u2019\u201d and \u201cwould support the inclusion of such description in any final rulemaking regarding Schedule 13D reporting to highlight to market participants the scope of such case law when considering the applicability of the \u2018group\u2019 rules.\u201d494<\/sup><\/a><\/p>\n\n\n\n Numerous commenters opposed the proposed amendments, largely because, in their view, the proposed amendments would eliminate a requirement that there be some form of \u201cagreement\u201d among members of a group.495<\/sup><\/a> Some opposing commenters expressed the view that the proposal\u2014particularly the removal of some form of an \u201cagreement\u201d\u2014would exceed the Commission\u2019s authority under the Exchange Act or raise concerns under the APA or the U.S. Constitution.496<\/sup><\/a> One commenter asserted that eliminating the \u201cagreement\u201d requirement in determining whether a group has been formed would contravene the plain meaning of the statutory text, disregard the legislative history, and depart from \u201clong-established\u201d judicial precedent.497<\/sup><\/a> The same commenter asserted that the initial adoption of Rule 13d-5, with what the commenter described as its express requirement for an agreement to exist in order to establish group status, simply reflected the Commission\u2019s affirmation of established judicial precedent, not an unwarranted departure from the statutory language.498<\/sup><\/a> A number of commenters expressed similar points of view, and, among other things, used canons of construction or statutory analysis to assert that persons can only \u201cact as\u201d a group under section 13(d)(3) if an agreement exists among the group members.499<\/sup><\/a> Another commenter suggested the absence of the term \u201cagreement\u201d from section 13(d)(3) did not restrict the Commission\u2019s capacity to use the term \u201cagree\u201d in Rule 13d-5(b) because administrative rulemakings commonly include language not present in a statute in order to implement congressional intent.500<\/sup><\/a><\/p>\n\n\n\n Some opposing commenters expressed concern that the proposed amendments would introduce a standard that was overly broad and that could chill or eliminate shareholder communications with other shareholders, issuers\u2019 management and\/or other parties.501<\/sup><\/a> One commenter expressed the view that the proposal could deter investors from engaging in \u201csocially valuable activism\u201d and noted that to the extent that the proposed rules resulted in restraints on shareholder communications, that may lead to claims that the proposed rules burden investors\u2019 First Amendment rights.502<\/sup><\/a> The commenter also stated that the Commission \u201cshould take care to minimize any burdens on investors\u2019 expression.\u201d503<\/sup><\/a> Other commenters anticipated that under the proposed amendments, ordinary course business transactions or conversations, without more, could result in a finding of group formation.504<\/sup><\/a> One commenter raised the concern that the proposed rule would produce disruptive collateral consequences, including in relation to ownership reporting under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 Act as it is uncertain whether being deemed a member of a group would deprive an investor of relying on the \u201cpassive investor\u201d exemption from the antitrust notification requirements under that statute.505<\/sup><\/a> A number of commenters also asserted that the proposed amendments would prompt litigation over whether communications between parties resulted in group formation.506<\/sup><\/a> Some commenters expressed the view that the resulting increase in uncertainty that would be caused by the proposed amendments also would result in additional legal exposure under Exchange Act section 16 for persons alleged to have formed a group.507<\/sup><\/a><\/p>\n\n\n\n Opposing commenters also criticized the proposed amendments as inconsistent with those Federal court opinions that have addressed the standard for group formation.508<\/sup><\/a> One commenter asserted that courts have recognized an \u201cagreement\u201d as being a necessary element of group formation based on the need for a \u201cworkable compromise\u201d between the regulatory objective of having a statute\u2019s policies implemented, on one hand, and the market\u2019s need for clear rules, on the other hand.509<\/sup><\/a> Another commenter expressed concern that the proposed amendments would, in its view, dispense \u201cwith more than 40 years of practice and court decisions\u201d and replace them \u201cwith a vague, circular rule . . . impossibly burdensome to market participants.\u201d510<\/sup><\/a> One commenter noted that Federal courts \u201chave consistently held that the existence of an agreement is necessary to establish the existence of a \u2018group\u2019 under Section 13(d).\u201d511<\/sup><\/a> Other commenters expressed the view that the existing standards in Rule 13d-5(b) have worked well for decades or are not in need of reform.512<\/sup><\/a> Notwithstanding these and other similar criticisms,513<\/sup><\/a> we note that multiple opposing commenters recognized that, even today, the determination of whether or not a group exists is ultimately dependent upon the facts and circumstances.514<\/sup><\/a><\/p>\n\n\n\n A number of commenters offered suggestions on how the Commission should proceed with respect to the proposed amendments.515<\/sup><\/a> Some commenters expressed the view that the Commission should set forth more specific parameters of what joint conduct or communications may result in group formation.516<\/sup><\/a> A few commenters offered alternative language to be used in any revision the Commission may ultimately adopt.517<\/sup><\/a> One commenter encouraged the Commission to consider exempting QIIs from any new \u201cgroup formation\u201d provisions so long as QIIs act consistently with the requirements of Rule 13d-1(b).518<\/sup><\/a> One commenter suggested that the Commission adopt the equivalent of an exemption from section 16 for any groups formed pursuant to the proposed amendments.519<\/sup><\/a> Another commenter suggested that the proposed amendments should not be adopted unless a safe harbor is created for securities dealing activities.520<\/sup><\/a> One commenter recommended no change to the proposal but expressed the view that the proposed rules would not interfere with shareholder rights to engage in, among other things, shareholder activism on ESG issues, collaboration on shareholder proposals under 17 CFR 240.14a-8 (\u201cRule 14a-8\u201d), and \u201cvote no\u201d initiatives and any concerns regarding the filing obligations of such investor groups could be clarified by the Commission in an explanatory statement issued with any final rule.521<\/sup><\/a> Another commenter stated the Commission should consider whether the public dissemination of information on message boards or through media interviews, and, by extension, social media platforms, could result in group formation.522<\/sup><\/a><\/p>\n\n\n\n A number of commenters recommended no change be made to current Rule 13d-5(b)(1),523<\/sup><\/a> which, according to some of these commenters, would result in retention of the \u201cagreement\u201d standard. One commenter made reference to existing Rule 13d-5(b) and advocated for the Commission to retain what it referred to as the \u201ccurrent \u2018group\u2019 definition,\u201d including the requirement that there be an agreement to act as a group, because the current provision does not: (1) chill shareholder engagement; (2) create the challenge to determine whether a group has been formed or if an exemption applies; or (3) make activist campaigns more difficult to pursue.524<\/sup><\/a><\/p>\n\n\n\n Commenters also expressed differing views on proposed Rule 13d-5(b)(1)(ii). Some commenters expressly supported the proposal.525<\/sup><\/a> One commenter stated that because information about a planned Schedule 13D filing is clearly material to investors, it makes sense to deem tippers and tippees to be acting as a group even without an explicit agreement.526<\/sup><\/a> Another commenter, while expressing the view that modifications should be made to the Commission\u2019s overall proposed amendments relating to group formation, stated that the \u201cdefinition of who should constitute a \u2018group\u2019 under the proposal . . . should only apply to the sharing of material nonpublic information related to not yet disclosed large positions instead of efforts to improve the long-term corporate governance of companies.\u201d527<\/sup><\/a><\/p>\n\n\n\n Other commenters opposed the proposal.528<\/sup><\/a> One commenter analyzed the proposed rule text and observed that linking \u201cindirectly discloses\u201d to the \u201cwith the purpose of causing\u201d clause appears intended to establish a presumption, for all practical purposes, that an acquisition by \u201csuch other person\u201d was \u201cbased on such information.\u201d529<\/sup><\/a> Another commenter similarly expressed the view that such a rule would be unfair given that an adviser may also have independently determined to acquire or even continue to hold the same securities and disclosure of the imminent Schedule 13D may have been outside of the adviser\u2019s control and without his or her input or expression of approval.530<\/sup><\/a> Another commenter similarly asserted that the proposed rule would place those who receive information from a blockholder at risk of inadvertently becoming subject to group reporting obligations in circumstances that were \u201cnever intended to be covered by Section 13.\u201d531<\/sup><\/a><\/p>\n\n\n\n Some commenters provided recommendations to revise the proposal.532<\/sup><\/a> One commenter suggested the Commission alternatively \u201cimpose a prohibition on tipping by an activist as soon as it reaches the 5 percent disclosure threshold until it files a Schedule 13D.\u201d533<\/sup><\/a> One commenter recommended that the Commission address concerns that the proposal could result in a passive institutional investor becoming a member of a group with an activist simply because it met with the activist, heard its proposed plans, and signaled that it would likely use its voting power to support the activist\u2019s proposed campaign by revising proposed Rule 13d-5(b)(1)(ii) to include its suggested alternative text.534<\/sup><\/a> One commenter, who neither clearly supported nor opposed the proposal, stated that it would be \u201cdeeply troubled if the Commission were to invent a new, extremely difficult to establish element to insider trading law, such as a requirement that the recipient of the tip have an intention of coordinating with the tipper or make its purchases in reliance on the non-public information that the tipper provided.\u201d535<\/sup><\/a> A commenter objected to the concept of \u201cindirect\u201d disclosure within proposed Rule 13d-5(b)(1)(ii) on grounds that the term \u201cindirect\u201d is \u201cintrinsically ill-defined\u201d and could create a presumption that certain transactions in the ordinary course of a market-making business were executed \u201cbased on such [indirect] information.\u201d536<\/sup><\/a> Another commenter similarly suggested that the rule, if adopted, should only apply to situations where an express or implied intent by parties exists to form a group.537<\/sup><\/a><\/p>\n\n\n\n Commenters also expressed observations concerning the collateral consequences to an investor that received information about an impending Schedule 13D filing. One commenter implicitly asked the Commission to consider that once the tippee has the information, \u201c[t]his quasi-lock-up period not only discourages other shareholders from meeting with the activist but also, effectively, removes the liquidity these other shareholders may provide to the market in that issuer.\u201d538<\/sup><\/a> Another commenter suggested the rule should clarify for how long a recipient of information that a Schedule 13D filing would be forthcoming must remain \u201cfrozen\u201d from making further purchases, particularly if such filing does not get filed in the near term.539<\/sup><\/a><\/p>\n\n\n\n As noted above, we are not adopting proposed Rule 13d-5(b)(1)(i) and (ii) and (b)(2)(i). The Commission\u2019s stated objectives were to (1) align the text of Rule 13d-5(b) with the statutory provisions that it serves to implement while clarifying and affirming its application and operation and (2) provide clarity on whether a group is formed if a person shares information about an upcoming Schedule 13D filing that the person is or will be required to make.540<\/sup><\/a> The proposed amendments were not intended to change how the Commission views what is meant by \u201cact as a group\u201d for purposes of sections 13(d)(3) and 13(g)(3). They were intended to codify through a rule amendment our views that \u201cthe determination of whether two or more persons are acting as a group does not depend solely on the presence of an express agreement and that, depending on the particular facts and circumstances, concerted actions by two or more persons for the purpose of acquiring, holding or disposing of securities of an issuer are sufficient to constitute the formation of a group.\u201d541<\/sup><\/a> Several commenters generally shared our view that the formation of a group does not depend on the presence of an express agreement.542<\/sup><\/a> However, some commenters raised objections to the proposal based on their view that the amendments could result in a group being formed for purposes of sections 13(d)(3) and 13(g)(3) absent some evidence of agreement, arrangement, understanding, or concerted action. That was not the Commission\u2019s intent. Upon consideration of the comments received, we believe that the better approach is not to adopt the proposed amendment to Rule 13d-5 but instead to provide guidance as to the application of the existing legal standard established in sections 13(d)(3) and 13(g)(3) with respect to the formation of a group.543<\/sup><\/a><\/p>\n\n\n\n i. Background of the Regulatory Framework<\/em><\/p>\n\n\n\n Sections 13(d)(3) and 13(g)(3) are identical, and each of these provisions provides that \u201c[w]hen two or more persons act as a . . . group for the purpose of acquiring, holding, or disposing of securities of an issuer, such . . . group shall be deemed a \u2018person.\u2019\u201d As the Commission noted in the Proposing Release, Congress enacted these provisions based on two practical considerations.544<\/sup><\/a> First, sections 13(d)(1) and 13(g)(1), by their terms, apply to, and impose filing obligations upon, a single \u201cperson.\u201d545<\/sup><\/a> Second, Congress recognized the need to protect against the evasion of disclosure requirements by persons who collectively sought to change or influence control of an issuer yet who each acquired and held an amount of beneficial ownership at or just below the reporting threshold.546<\/sup><\/a><\/p>\n\n\n\n Congress sought to address this problem of coordinated circumvention by deeming two or more persons to be one person for purposes of sections 13(d) and 13(g). Based on the statutory treatment of two or more persons as if they were a single person when they \u201cact as\u201d a group for at least one of the three purposes specified in the statutory provisions (i.e.<\/em>, acquiring, holding, or disposing of securities of an issuer), the beneficial ownership collectively held by the group members is imputed to the group. If the aggregate amount of beneficial ownership exceeds five percent of a covered class, the group may be required to file a beneficial ownership report. The determination of which statutory provision (i.e.<\/em>, section 13(d)(3) or 13(g)(3)) applies to a group depends on whether a non-exempt acquisition of beneficial ownership has been made that can be imputed to the group and, when on its own or added to any other beneficial ownership held by the group, results in the group\u2019s beneficial ownership exceeding five percent of the covered class. If such an acquisition occurs, the group is subject to regulation under section 13(d).547<\/sup><\/a> If no such acquisition attributable to the group has occurred, but the collective amount of beneficial ownership held by the group members exceeds five percent of a covered class at the end of a calendar year under current rules548<\/sup><\/a> (or at the end of a calendar quarter based on the amendments to Rule 13d-1 we are adopting in this release), the group is subject to section 13(g).<\/p>\n\n\n\n ii. Guidance<\/em><\/p>\n\n\n\n Neither the statute nor our rules provide a definition of a \u201cgroup.\u201d The appropriate legal standard for determining whether a group is formed is found in sections 13(d)(3) and 13(g)(3). While some may view the language of Rule 13d-5(b) as providing a definition of \u201cgroup,\u201d we reiterate that neither the current rule nor its predecessor549<\/sup><\/a> was designed or adopted by the Commission to serve as a substitute for the legal standard expressly stated in sections 13(d)(3) and 13(g)(3) for determining when two or more persons form a group.550<\/sup><\/a><\/p>\n\n\n\n Whether two or more persons have formed a group as contemplated by sections 13(d)(3) and 13(g)(3) depends on a determination of whether they acted together for the purpose of \u201cacquiring,\u201d \u201cholding,\u201d or \u201cdisposing of\u201d securities of an issuer.551<\/sup><\/a> Such persons could be viewed as acting together if they are taking concerted actions in furtherance of any of these purposes.552<\/sup><\/a> The determination depends on an analysis of all the relevant facts and circumstances and not solely on the presence or absence of an express agreement, as two or more persons may take concerted action or agree informally.553<\/sup><\/a> This approach is consistent with the statutory language of sections 13(d)(3) and 13(g)(3) and with the purpose of these statutory provisions.554<\/sup><\/a> It also is consistent with views previously expressed by courts and the Commission, which have determined that groups were established by activities that fell short of an express agreement.555<\/sup><\/a> Indeed, the Commission recognizes that for a finder of fact, including the Commission itself, to determine that a group has been formed under section 13(d)(3) or 13(g)(3), the evidence must show, at a minimum, indicia, such as an informal arrangement or coordination in furtherance, of a common purpose to acquire, hold, or dispose of securities of an issuer. If two or more persons took similar actions, that fact is not conclusive in and of itself that a group has been formed.556<\/sup><\/a> We therefore disagree with the comments raising constitutional concerns, as well as the comments concerning the scope of our authority under the Exchange Act and the APA. We note, however, that those comments were directed at the proposed amendment to Rule 13d-5 and the belief that the contemplated rule change meant the Commission was taking a position that a group could be formed without some type of an agreement, arrangement, understanding, or concerted action. As explained above, this is not the Commission\u2019s view, and we are not adopting the proposed amendment to Rule 13d-5. Further, the commenters\u2019 concerns are not implicated by the guidance we provide here.<\/p>\n\n\n\n Relatedly, we recognize the concern expressed by some commenters that the Commission\u2019s proposal to amend Rule 13d-5 could chill shareholder engagement, with, some commenters asserted, shareholders unable to communicate freely with each other or with the issuer\u2019s management without forming a group. In response to some of the concerns raised by commenters, we provide guidance below on the application of the current legal standard found in section 13(d)(3) and 13(g)(3) to certain common types of shareholder engagement activities.557<\/sup><\/a><\/p>\n\n\n\n C1 Guidance Q & A<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" a. Proposed Amendments In the Proposing Release, the Commission proposed to amend Rule 13d-5 to track the statutory text of sections 13(d)(3) and (g)(3) and specify that two or more persons who \u201cact as\u201d a group for purposes of acquiring, holding, or disposing of securities are treated as a group.481 Specifically, the Commission proposed to redesignate … Continue reading “C1. Proposed Rule 13d-5(b)(1)(i), (b)(2)(i), and (b)(1)(ii)”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"parent":0,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"footnotes":""},"class_list":["post-167","page","type-page","status-publish","hentry"],"_links":{"self":[{"href":"https:\/\/www.schedule13d.com\/index.php\/wp-json\/wp\/v2\/pages\/167","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.schedule13d.com\/index.php\/wp-json\/wp\/v2\/pages"}],"about":[{"href":"https:\/\/www.schedule13d.com\/index.php\/wp-json\/wp\/v2\/types\/page"}],"author":[{"embeddable":true,"href":"https:\/\/www.schedule13d.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.schedule13d.com\/index.php\/wp-json\/wp\/v2\/comments?post=167"}],"version-history":[{"count":4,"href":"https:\/\/www.schedule13d.com\/index.php\/wp-json\/wp\/v2\/pages\/167\/revisions"}],"predecessor-version":[{"id":183,"href":"https:\/\/www.schedule13d.com\/index.php\/wp-json\/wp\/v2\/pages\/167\/revisions\/183"}],"wp:attachment":[{"href":"https:\/\/www.schedule13d.com\/index.php\/wp-json\/wp\/v2\/media?parent=167"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}b. Comments Received<\/strong><\/h3>\n\n\n\n
c. Commission Guidance<\/strong><\/h3>\n\n\n\n