On March 14, 2015, the SEC charged eight officers, directors or major shareholders for failing to update their Schedule 13D beneficial ownership reports to reflect material changes in connection with going private transactions. According to the SEC, each person charged “took steps to advance undisclosed plans to effect going private transactions” without timely amending the required ownership reports.
Generally, a Schedule 13D must be filed when a person or group directly or indirectly acquires more than 5% of a reporting company’s voting securities. Schedule 13D requires disclosure of, among other things, the purpose of the acquisition, including any plans to cause an extraordinary corporate transaction such as a merger, reorganization or going private transaction. Material changes to the Schedule 13D disclosures, including the shareholder’s plans to cause an extraordinary corporate transaction, must be reported promptly through an amendment to the Schedule 13D.
In those cases, the charged persons engaged in a number of activities in anticipation of a going private transaction. These steps included obtaining waivers from preferred shareholders, determining the form of the going private transaction, assisting with shareholder vote projections, informing company management of the intention to privatize the company and forming a consortium of shareholders to participate in the transaction. Despite these actions, the shareholders did not amend their Schedule 13D filings to report the changes in their plans until months later.
Some of the charged persons were also found to have violated Section 16(a) of the Securities Exchange Act of 1934 by failing to disclose transactions on Form 4 within the two-day window. In one case, transactions went unreported until years later. Each of the charged persons consented to the entry of a Cease-and-Desist Order and agreed to pay a fine to the SEC.
These recent orders underscore the importance of careful planning in connection with the consideration of any going private transaction, with close attention to when disclosure is required. These cases also highlight that commonly-used generic disclosures in a Schedule 13D about future plans that reserve the right to engage in future transactions will not suffice when the Schedule 13D filer changes its plans.