Reopening the Loophole? Beneficial Ownership Under Section 13(D) of the 1934 Securities Act after Rosenberg V. XM Ventures
Christopher Scott Maravilla
affiliation not provided to SSRN
August 2, 2008
Charleston Law Review, Vol. 3
The Williams Act of 1968 amended the Securities and Exchange Act of 1934 in order to provide the public with greater notice of those acquiring ownership of a corporation's equity securities which could signal a change in corporate control. Prior to the amendment, shareholders owning less than 10 percent of a corporation's equity securities did not have to publicly disclose their interests. This resulted in shareholders colluding with each other to effect changes in corporate governance unbeknownst to potential investors and the public. The Williams Act amended section 13(d) of the 1934 Securities Act so that those entering into a group, in order to pool their shares, would be deemed to become the beneficial owner, directly or indirectly, of every other member of the group's shares at the time they agreed to form the group and act in concert. The group then would be required to file a Schedule 13D with the Securities and Exchange Commission thereby providing greater transparency.
The Third Circuit held in Rosenberg v. XM Ventures that beneficial ownership at the time the group is formed is an essential element of constituting a group under section 13(d). The Court stated that it was "Congress' intent that an individual must be a beneficial owner of an issuer's securities prior to becoming a member of a section 13(d) group." In other words, in order to constitute a section 13(d) group, the shares must be beneficially owned by the members of the group at the time they enter into an agreement to act in concert (beneficial ownership is defined as who has the actual ability to vote the shares, or the power to dispose of a block of securities, not who is the owner of record). This article argues that one of the implications of the holding in Rosenberg is that there is now a potential loophole in the law in which shareholders may again collude with one another to effect stealth changes in corporate control. At the time the group enters into an agreement to further a common objective, so long as the members are not beneficial owners of more than 5 percent of the corporation's equity securities, they do not have to publicly file with the SEC. Subsequently, the group could then acquire beneficial ownership in the corporation's equity securities, still not be required to file under 13(d) and act to effect a corporate takeover.
Accepted Paper Series
Date posted: August 5, 2008
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