In December 2008, the U.S. Securities and Exchange Commission (SEC) amended its rules governing the disclosure of acquisitions of U.S. registered voting equity securities above certain thresholds in order to allow qualifying foreign institutional investors to make disclosures concerning passive positions using short-form Schedule 13G instead of the more demanding Schedule 13D.
At the same time, the SEC exempted qualifying foreign institutions holding passive positions from the filing requirements and potential short-swing profit recovery imposed on holders of more than 10 per cent of a class of U.S. registered equity securities.
Schedules 13D and 13G
When an entity acquires more than 5 per cent of a class of voting equity securities registered under Section 12 of the Securities Exchange Act, it must file a Schedule 13D within 10 days of the acquisition unless it qualifies to utilise Schedule 13G. Two types of owners can qualify to file a Schedule 13G: qualified institutional investors (QIIs) and other holders of passive interests (passive investors).
QIIs were confined historically to specified U.S. institutional investors unless a similar foreign entity went to the trouble and expense of obtaining its own exemption. Now, a foreign entity may file as a QII as long as it certifies that it is subject to a regulatory regime that is “substantially comparable” to a similar U.S. institutional investor and undertakes to provide the SEC (upon request) with the information that would be required in a Schedule 13D filing.
Benefits of Filing as a QII
Even before the December 2008 amendments, any person (or entity) could qualify as a passive investor if it certified that it did not acquire the securities with the “purpose … of changing or inf luencing control” of the issuer and maintained holdings of no more than 20 per cent of the applicable class. A passive investor must file within 10 days of an acquisition that pushes it past the 5 per cent threshold and make “prompt” amendments upon increasing its ownership past 10 per cent and for subsequent increases or decreases that change its position by 5 per cent.
By contrast, although still subject to the “passivity” requirement, a QII filing on Schedule 13G is not subject to the 20 per cent limitation and can file initially up to 45 days after the end of a year in which its year-end holding exceeds 5 per cent. Additionally, upon increasing its ownership past 10 per cent and for any subsequent increases or decreases that change its position by 5 per cent, a passive QII can file up to 10 days past the end of the month in which the filing threshold is reached.
Both kinds of Schedule 13G filers must also update their filings to show year-end changes.
Section 16 Short-Swing Profit Exemption
Offshore passive QIIs now also enjoy an exemption from the rigorous transactional reporting requirements imposed under Section 16(a) of the Securities Exchange Act that otherwise apply when a person holds more than 10 per cent of a class of equity securities registered under Section 12 of the Act. This carries with it an exemption from potential “short-swing” profit recovery imposed by Section 16(b) upon 10 per cent owners for purchases and sales (or sales and purchases) within six months. By contrast, passive Schedule 13G filers that are not QIIs remain subject to the Section 16 regime.