ON SEPT. 3, 2008, the SEC announced a cease-and-desist order settlement with Kirk Kerkorian regarding certain Schedule 13D violations.1 Specifically, the SEC cited Mr. Kerkorian for failing to disclose his plan to sell 28 million shares (approximately 5%) of General Motors Corp. (“GM”) common stock in November 2006 as required by Item 4(a) of Schedule 13D. In addition, the SEC found that Mr. Kerkorian’s “boilerplate” statement in his 13D amendment that he might purchase additional shares in the future to be misleading and violative of Rule 12b-20. This case highlights problematic Schedule 13D disclosure issues confronting investors who consider selling down, or adding to, their position.
Kerkorian’s Investment in GM
By the fall of 2005, as a result of open market purchases and a tender offer, Mr. Kerkorian beneficially owned 56 million shares or 9.9% of GM common stock.
In February 2006, GM appointed Jerome York, a Kerkorian advisor, to the GM board. Mr. York recommended that GM explore an alliance with Nissan and Renault. However, after a preliminary study, the GM board determined in October 2006 not to pursue an alliance. Mr. York resigned from the GM board on Oct. 6, 2006.
On Nov. 16, 2006 Mr. Kerkorian and his advisors met and discussed the GM investment. A key advisor forecasted that GM’s stock price would fall after the second quarter of 2007. Based on this forecast, selling half of the GM stake was discussed. On Nov. 20, 2006, Mr. Kerkorian contacted a broker-dealer and offered to sell 28 million shares of GM stock. The broker-dealer was willing to purchase the shares, but only at a significant discount to the current market price. Mr. Kerkorian was not willing to sell at that price at that time. However, he did ask for a bid on 14 million shares. The new bid was higher and the sale of 14 million shares was executed on Nov. 20, 2006.
An amended Schedule 13D was filed on Nov. 22, 2006 disclosing the sale of 14 million shares. However, it did not disclose any plan to sell 28 million shares or that Mr. Kerkorian had proposed a sale of 28 million shares. Rather, the amended Item 4 disclosure stated that Mr. Kerkorian “may determine, based on market and general economic conditions, the business affairs and financial condition of General Motors, the market price of its shares and other factors deemed relevant by the Filing Persons, to acquire or dispose of additional shares.”
On Nov. 28, 2006 Mr. Kerkorian sold an additional 14 million shares of GM stock to a different broker-dealer. This additional sale reduced Mr. Kerkorian’s GM holdings to 4.95%. On Nov. 30, 2006 Mr. Kerkorian sold his remaining 28 million shares of GM common stock.
Schedule 13D and Rule 12b-20 Require Disclosure of Plans to Dispose of Securities
Item 4(a) of Schedule 13D requires the beneficial owner of more than 5% of a Section 12 registered equity security to “describe any plans or proposals which the reporting persons may have which relate to or would result in …[t]he acquisition by any person of additional securities of the issuer, or the disposition of securities of the issuer….” Overlaying the specific Schedule 13D line item requirements is Rule 12b-20, which requires filers to disclose all material information.2 In addition, Section 13(d)(2) requires a prompt amendment to Schedule 13D when any material change occurs in the reporting person’s plans.
The SEC found that Mr. Kerkorian had formed a plan to dispose of 28 million shares of GM common stock on Nov. 20, 2006 and failed to disclose that plan in the amended Schedule 13D filed on Nov. 22, 2006.
The violation turns on whether Mr. Kerkorian had a disclosable plan to sell 28 million shares of GM stock. “Plan” is not defined in Section 13(d) or any related SEC rule. However, the Second Circuit has applied the following standard to analyze whether an Item 4 “plan” is disclosable:
Disclosure is to be made of all definite plans and there is no requirement to make predictions, for example, of future behavior; or to disclose tentative plans; or inchoate plans. It is sufficient to merely identify those matters not fully determined. Thus, unless a course of action is decided upon or intended, it need not be disclosed as a plan or proposal under Item 4. (citations omitted).
Azurite Corp. Ltd. v. Amster & Co., 52 F.3d 15 (2d Cir. 1995). In finding that Mr. Kerkorian had a plan to dispose of 28 million shares on Nov. 20, 2007, the SEC points to a series of actions, beginning with the Nov. 16 discussion whether to sell half (28 million shares) of the GM position; the Nov. 20 solicitation of a broker dealer to buy 28 million shares; the sale of 14 million shares on Nov. 20; and the sale of an additional 14 million shares on Nov. 28, 2006.
Unfortunately, the SEC does not include any substantive analysis regarding its “plan” conclusion. In addition, it is unclear what, if any, arguments were advanced by Mr. Kerkorian. The amount of shares to be sold, 28 million shares, was significant from a Section 13(d) perspective because it would allow Mr. Kerkorian to reduce his holding below 5% and exit the Schedule 13D reporting scheme.
Regardless, the decision is consistent with two similar SEC administrative cases which focus on objective evidence of a plan: In re Kass, Release No. 34-31046 (Aug. 17, 1992) and In re Payson, Release No. 34-50589 (Oct. 26, 2004). In Kass the Commission found that Mr. Kass had formed the intent to sell his group’s stock to a third party as of Sept. 6, 1990. The plan to sell was manifested by receipt of a proposed stock purchase agreement on Sept. 5, 1990, following extensive discussions and negotiations which had begun in June of 1990. Based on the finding that Mr. Kass had formed the intent to sell the stock by no later than Sept. 6, 1990, the SEC held that the amended 13Ds filed Sept. 6, 1990, and Sept. 14, 1990, were false and misleading and violated Section 13(d), Rule 13d-1 Rule 13d-2 and Rule 12b-20 due to (1) the omission of the intent to sell the Group’s stock and (2) the erroneous affirmative statement that the Group “had no present intention to do so.”
Similarly, in Payson the SEC found that Dr. Payson had a plan to sell his Oxford stock in December 2000. It was noted that Dr. Payson began considering the sale of his Oxford stock holdings in August 2000. In December, Dr. Payson transferred his membership interests in various trusts and entities that controlled his Oxford stock holdings, resigned from both management and trustee positions in those entities, appointed new managers and trustees, and executed stock trading plans. All these actions were part of his plan to allow the sale of up to 1.1% of the Oxford shares he owned during the next open trading window. Dr. Payson’s financial advisor tried to sell up to 1 million shares during the open trading window but was limited by market conditions to 590,000 shares. Based on the finding that Dr. Payson had formed the intent to sell a portion of his Oxford stock by December 2000, the SEC held that the 13D filed on Dec. 15, 2000 and the amended 13D filed on Dec. 29, 2000, violated Section 13(d), Rule 13d-1 and Rule 13d-2 by inaccurately and incompletely describing his plan to sell during the next open-trading window for Oxford corporate insiders. Therefore, in both Payson and Kass, the SEC used on objective evidence standard to determine whether there was an Item 4(a) plan to dispose of stock. It appears that the SEC applied the same “plan” standard to Mr. Kerkorian. The SEC also found that the amended Schedule 13D that Mr. Kerkorian’s filed on Nov. 22, 2006, was materially misleading because it stated that he might purchase or sell more GM stock, when there was only a remote possibility that he would buy any GM stock at that time. The SEC found the disclosure to have violated Rule 12b-20, cited above.
The line between a tentative plan, or a desire, and a plan which is required to be disclosed, is fine indeed. Mr. Kerkorian would no doubt have argued that he desired to sell 28 million shares, but only at the right price, and that if he could not get the price he sought, then he would not have sold. And that had he held and the price dropped precipitously, that he might then have bought. One wonders what earlier disclosure he should have made in addition to the fact that he had sold 14 million shares: that he desired to sell 14 million more at a price he was satisfied to take, but that there was no assurance that in fact he would sell? Will there be a similar finding when an activist is in a consistent buying mode, hitting bids to add to a position? An action taken, with hindsight, should not inevitably lead to the conclusion that there was a disclosable plan to take that action far in advance of taking it. But activists must take note of this SEC action and pay careful attention when considering selling down, or adding to, a position.