Fair Markets and Fair Disclosure: Some Thoughts on the Law and Economics of Blockholder Disclosure, and the Use and Abuse of Shareholder Power
22 Pages Posted: 30 Aug 2012 Last revised: 31 Mar 2014
Date Written: August 27, 2012
In March 2011, our law firm (Wachtell, Lipton, Rosen & Katz) formally petitioned the Securities and Exchange Commission to modernize the rules promulgated under Section 13(d) of the Securities Exchange Act of 1934. The petition sought to ensure that the reporting rules would continue to operate in a way broadly consistent with the statute’s clear purposes, and that loopholes that have arisen by changing market conditions and practices since the statute’s adoption over forty years ago could not continue to be exploited by acquirers, to the detriment of the public markets and security holders. Among other things, the petition proposed that the time to publicly disclose acquisitions of over 5% of a company’s stock be reduced from ten days to one business day, given investors’ current ability to take advantage of the ten-day reporting window to accumulate positions well above 5% prior to any public disclosure, in contravention of the clear purposes of the statute.
In their article The Law and Economics of Blockholder Disclosure, Professors Lucian A. Bebchuk and Robert J. Jackson Jr. challenge the need for any modifications to the ten-day reporting window. Bebchuk and Jackson argue that, given the purported benefits of blockholder accumulations, extensive cost-benefit analysis should be done before Section 13(d)’s reporting rules are modified.
We argue that Bebchuk and Jackson offer no sound basis for the cost-benefit analysis they suggest nor any reason to question the need for the modernization of Section 13(d)’s reporting rules proposed in the petition. Specifically, we explain that Bebchuk and Jackson’s position follows largely from an erroneous interpretation of the statute’s legislative history and that the blockholder interests for which they advocate run directly contrary to Section 13(d)’s underlying purpose – “to alert the marketplace to every large, rapid aggregation or accumulation of securities.” We also discuss how developments in market liquidity and trading – which allow massive volumes of public company shares to be traded in fractions of a second – have made the Section 13(d) reporting regime’s ten-day reporting window obsolete, allowing blockholders to contravene the purposes of the statute by accumulating vast, control-implicating positions prior to any disclosure to the market. Finally, we explain how corporate governance developments since the passage of the Williams Act offer no reason to fail to update Section 13(d)’s reporting rules. To the contrary, we note that the blockholder reporting rules in other major capital markets jurisdictions only confirm the need to modernize the Section 13(d) reporting regime to ensure that it once again fully achieves the statute’s express purposes.
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