Merits of Bill Aimed at Activist Hedge Funds Debated

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By Che Odom

March 21 — A group of Democratic senators has introduced a bill that would give companies more advance warning when activist investors buy a substantial number of shares in the issuer.

According to a news release announcing the bill, the Brokaw Act (S. 2720), introduced March 17 by Sens. Tammy Baldwin (D-Wis.) and Jeff Merkley (D-Ore.) and co-sponsored by Sens. Bernie Sanders (D-Vt.) and Elizabeth Warren (D-Mass.), would give investors that acquire a 5 percent stake in an equity security two business days, instead of 10 days, to publicly report the holdings. The bill also would require the disclosure of significant “short” positions.

Although the bill's chances of passing are slim, some observers lauded its introduction, saying its enactment would be a good step in the right direction. Others, however, say it would provide yet another insulation for corporations.

The bill specifically targets the “covert collusion of activist ‘wolf packs,'” according to corporate attorney David A. Katz, a New York-based partner at Wachtell, Lipton, Rosen & Katz.

If enacted, the proposal would create greater “transparency and less of an opportunity for mischief,” Katz told Bloomberg BNA in an e-mail March 21.

Section 13(d)

The Brokaw Act would amend the beneficial-ownership reporting requirements under Section 13(d) of the 1934 Securities Exchange Act, which requires public company stockholders reaching a certain stock-ownership level to disclose that ownership and provide background information in filings with the Securities and Exchange Commission.

The section was originally enacted July 29, 1968, and significantly amended in the 1970s to lower the stock ownership reporting level from 10 percent to 5 percent of equity securities in an issuer.

Both common stock and certain types of preferred stock are counted as equity securities.

This is not the first push to amend the beneficial-ownership disclosure rules. The nonprofit Government Accountability Project and other organizations called on Congress to make similar changes last year . Also, Wachtell Lipton submitted a pending rulemaking petition with the SEC in March 2011, asking for an earlier reporting deadline .

Should Go Further?

The Brokaw Act should go further by requiring a cooling-off period in which activists who have acquired a 5 percent stake are prevented from purchasing more shares until after they have made a disclosure, Katz said.

However, Denver-based corporate attorney Thomas R. Stephens, partner at Bartlit Beck Herman Palenchar & Scott LLP, is not convinced the changes are needed.

With poison pills, staggered boards, control of the director-election machinery and similar tools, “issuers already have ample ways to protect themselves,” Stephens told Bloomberg BNA March 21.

Proposals like the Brokaw Act are backed by what Stephens called the “usual suspects” of law firms and companies “that want further insulation from shareholders.”

“Essentially these efforts are an attempt to tilt the regime Congress developed almost 50 years ago away from what Congress originally sought to achieve, which was to avoid ‘tipping the balance of regulation either in favor of management or in favor of the person making the takeover bid,' ” Stephens said.

Paper Mill Sold

The Brokaw Act is named for a small Wisconsin town that went bankrupt after activist hedge fund Starboard Value acquired a significant position in Wausau Paper Corp., which led to rising share prices and scuttling of a transaction, according to the lawmakers' news release.

Wausau shareholders voted in January to approve an acquisition by Sweden-based SCA Group, and the Wausau mill was closed after more than a century in operation.

The senators sponsoring the bill said that Starboard Value forced out Wausau's executives and demanded share buybacks at the expense of the company’s long-term future.

“What happened in Wisconsin is one example of a larger problem that demands action,” the lawmakers' news release said. “Activist hedge funds are a key proponent of the short-termism trend that has captivated Wall Street.”

Attempts to reach Starboard Value for comment were unsuccessful.

Hedge Funds and the Market

A senior attorney with an activist hedge fund told Bloomberg BNA in an interview March 21 that lawmakers, in a rush to “score political points,” should not overlook the positive role activists have in the economy.

“Activists test management and boards, pushing for good governance practices, which creates stronger, more well-run companies that operate with shareholder interests in mind,” said the attorney, who asked to remain unnamed to avoid attention to his hedge fund. “That helps retirement funds.”

However, Katz said the market is not served by fund managers who manipulate it to extract short-term gains to the detriment of investors generally.

Katz's law firm released a client memo March 18 that said that just as greater transparency is required of public companies, directors and officers, “the same policy concerns demand greater transparency with respect to the acquisition of equity securities of public companies by third parties.”

To contact the reporter on this story: Che Odom in Washington at

To contact the editor responsible for this story: Yin Wilczek at

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