Recent administrative proceedings on the part of the Securities and Exchange Commission (SEC) serve as a cautionary note for Schedule 13D filers with respect to the breadth of their duty to amend their filings when there are material changes or developments in the information previously reported. Overall, these cases suggest that caution is warranted for filers of Schedule 13D when planning a going private transaction that involves registered securities. Indeed, these recent enforcement proceedings indicate that the preliminary preparation of a transaction with respect to company’s registered securities may trigger a requirement to amend Schedule 13D to disclose publicly the plans or intentions.

In Canada, the early warning system differs from the Section 13(d) regime. Still, it requires that filers of early warning reports disclose the purpose of the offeror and any joint actors in effecting the transaction as well as any future intention to acquire ownership of, or control over, additional securities of the reporting issuer. Further, filers must amend their early warning reports where there is a change in a material fact in a report filed previously. Despite the differences between the Canadian and U.S. regimes, the recent SEC cases underscore the importance of ensuring the timely disclosure of changes in material facts published in Canadian early warning reports.

On March 13, 2015, the SEC announced that it had settled charges against eight officers, directors or major shareholders for failing to update their stock ownership disclosures to reflect material changes, including steps to take the companies private. At issue in these administrative proceedings is the application of the reporting requirements enacted under Section 13(d) of the Securities and Exchange Act of 1934 in the context of going private transactions.

In a nutshell, Section 13(d) mandates the filing of a Schedule 13D by any person or group who acquires beneficial ownership of more than 5% of any class of registered securities in a public company. Schedule 13D requires disclosure namely of: (1) the identity of the acquirer; (2) a description of the purpose(s) of the acquisition of the securities of the issuer. Specifically, item 4 of Schedule 13D requires that the filer describes any plans or proposals which relate to or would result namely in an extraordinary corporate transaction such as a merger, a reorganization, a liquidation or a going private transaction; (3) the interest of each beneficial owner, including those acting together as a group. A filer must promptly update its Schedule 13D filing where there is a material change in the information disclosed, including the acquisition or disposition of 1% or more of the class of securities that are the subject of the filing.

In the settlements announced, the SEC emphasized that qualitative disclosures providing narrative response to line item requirements of Rule 13d-101, such as item 4, are subject to material change. Thus, “generic disclosure that indicates the beneficial owner is reserving the right to engage in any of the kinds of transactions enumerated [above] must be amended when a plan with respect to a disclosable matter has been formulated”. Most notably, the SEC added that “depending on the facts and circumstances, however, an amendment also may be required before a plan has been formulated” if there is a material change in the fact disclosed in the prior filing.

In these cases, the SEC found that respondents breached Section 13(d) by failing to update their ownership disclosures to reflect material changes, including steps to take the companies private. Specifically, according to the SEC, the respondents took steps to advance undisclosed plans to effect going private transactions. For instance, some respondents determined the form of the going private transaction, obtained waivers from preferred shareholders, and assisted with shareholder vote projections. Others had informed company management of their intention to privatize the company and formed a consortium of shareholders to participate in the going private transaction. In these circumstances, the SEC was of view that respondents had taken a series of significant steps that, when viewed together, resulted in a material change from the disclosures made previously in their Schedule 13D filings.

For a PDF version of this post, see Legal Trends Spring 2015