Thread,
Some SECisms on Beneficial ownership a little long but worth considering:
"Beneficial Ownership"
In relevant part, Rule 13d-3 under the Securities Exchange Act of 1934 provides that:
(a) ... a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares:
(1) Voting power which includes the power to vote, or to direct the voting of, such security; and/or
(2) Investment power which includes the power to dispose, or to direct the disposition of, such security.
(b) Any person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement, or device with the purpose or effect of divesting such person of beneficial ownership of a security or preventing the vesting of such beneficial ownership as part of a plan or scheme to evade the reporting requirements of Section 13(d) or 13(g) of the Act shall be deemed for purposes of such sections to be the beneficial owner of such security.
(c) All securities of the same class beneficially owned by a person, regardless of the form which such beneficial ownership takes, shall be aggregated in calculating the number of shares beneficially owned by such person.
*141 (d) Notwithstanding the provisions of paragraphs (a) and (c) of this rule:
(1)(i) A person shall be deemed to be the beneficial owner of a security, subject to the provisions of paragraph (b) of this rule, if that person has the right to acquire beneficial ownership of such security ... within sixty days, including but not limited to any right to acquire: (A) through the exercise of any option, warrant or right; (B) through the conversion of a security; (C) pursuant to the power to revoke a trust, discretionary account, or similar arrangement; or (D) pursuant to the automatic termination of a trust, discretionary account or similar arrangement ....
Please note that under Rule 13d-3, the same security may be beneficially owned by more than one person. For example, if you hold shares as trustee or custodian for the benefit of your minor child, both you and your child would be deemed the beneficial owner of such shares. Please furnish sufficient details to cross-reference such overlapping ownership. If you report ownership of certain securities and yet expressly disclaim that you in fact own such securities beneficially, such disclaimer will be noted in the proxy statement.
Also, note that the Rules for reporting ownership of, and transactions in, securities of the Company on the SEC's Form 3, Form 4 and Form 5 may differ in some respects from Rule 13d-3.
A similar Rule provides that any person who, "directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement, or device with the purpose or effect" of divesting himself or herself of beneficial ownership as part of a plan or scheme to evade the reporting requirements of Sections 13(d) or (g) shall nonetheless be deemed a beneficial owner. Rule 13d-3(b). See the comment above, as to "purpose or effect."
If a registrant has convertible securities outstanding, there may be added complications in reporting beneficial ownership. If, for example, a convertible preferred stock is outstanding which is immediately convertible, and a director owns 100 shares, and if each share is convertible into three shares of common, then what will be reported in the proxy statement is that such director is the owner of both 100 shares of convertible preferred and 300 shares of common. Thus, he or she may appear to be the owner of a total of 400 shares, when, of course, he or she only owns 100. See Rule 13d-3(d)(1)(ii).
All securities of the same class beneficially owned by a person "regardless of the form which such beneficial ownership takes" are to be aggregated in calculating the number owned by such person. Thus, if a director owned 1,000 shares of X Co. common stock directly, and had, as the trustee of a trust, the power to vote or dispose of 500 additional shares of X Co. common stock held by the trust, he or she is, for proxy disclosure purposes, deemed to be the beneficial owner of 1,500 shares. See Rule 13d-3(c).
Given that there are a variety of circumstances under which unissued shares may be reported as, in fact, "beneficially owned" and in which the same shares may be reported to be owned by more than one person, it is essential that presentation of directors' and officers' beneficial ownership of shares be clearly set forth, with accompanying footnotes or additional columns for the table where appropriate.
*335 I. Schedules 13D and 13G Generally
Schedules 13D and 13G are the most frequently filed forms under the "Williams Act" and related sections of the 1934 Act (Sections 13(d)-(g) and 14(d)-(f)), because one of these Schedules must be filed, and updated as appropriate, by every beneficial owner of more that 5% of any registered class of voting equity securities. The operative regulatory text governing Schedules 13D and 13G is set forth in Sections 13(d) and (g) of the 1934 Act and in the SEC's Regulations 13D-G (Rules 13d-1 through 13d-7).
Purpose. Schedule 13D is primarily intended to provide stockholders of an issuer and the marketplace in general with material information about actual and potential changes in voting control of the issuer. With certain exceptions, the Schedule must be filed within ten days after an acquisition that brings a stockholder above the 5% ownership threshold, and must be amended promptly after any material change in the facts disclosed. It calls for extensive information as to the identity and background of the acquiror, the purpose and funding of the acquisition and *336 the acquiror's plans, agreements and understandings regarding the issuer.
Schedule 13G is designed to provide information about significant ownership interests in publicly-owned issuers, rather than changes in control, both to investors and to the Congress and other governmental authorities. The Schedule must be filed by every over 5% beneficial owner of a registered class of voting securities that falls into one of three classes of investors - i.e., exempt investors (for example, investors who held their positions at the time the Williams Act was adopted and have not significantly increased their position since then); certain institutional investors who purchased in the ordinary course of business without affecting control; and the new class of passive investors described below - and calls for information as to the stockholder's identity and the size of his holdings. In important amendments adopted in January 1998, the SEC now permits the use of Schedule 13G by all investors beneficially owning less than 20% of the outstanding class of securities, provided such investors have not acquired or held the securities to influence control of the issuer. With the amendments, the SEC believes that Schedule 13G will become the primary reporting document for *337 beneficial ownership, since a majority of investors will now file Schedule 13G in lieu of Schedule 13D. Release No. 34-39538, January 12, 1998 (CCH Fed. Sec. L. Reg. 86,002).
II. "Beneficial Ownership" for purposes of the Schedules.
Schedules 13D and 13G relate only to voting equity securities (herein "stock" or "shares") which are registered under Section 12 of the 1934 Act, or issued by registered closed-end investment companies or by insurance companies whose shares are exempted from Section 12 registration by Section 12(g)(2)(G). See, Section 13(d)(1) and Rule 13d-1(d).
Under Rule 13d-3, a "person" is the "beneficial owner" of stock if he has or shares voting or investment power over the stock - i.e., the power to vote or dispose of the stock, or to direct such voting or disposition - "directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise . . . ." The legal right to vote a stock, in itself, does not bestow "beneficial ownership" if in fact other persons have the voting power - e.g., brokers or other mere nominees (see Rule 13d-3(d)(2)) or the management proxy committee for an annual meeting.
*338 Economic benefit from the stock is immaterial in determining beneficial ownership for this purpose. Thus, the test is quite different from that which has historically been applicable to Forms 3 and 4, and the short- swing profits recapture, under Section 16 of the 1934 Act. It should be noted, however, that the SEC adopted the Section 13(d) concept of beneficial ownership in determining who is a "ten-percent beneficial owner" of a class of registered equity securities, and thus an "insider" for Section 16 purposes. See Release No. 34-28869 (February 8, 1991).
Divestiture or other avoidance of beneficial ownership through the use of proxies, trust or other devices, "as part of a plan or scheme to evade the reporting requirements," will be ineffective. Rule 13d-3(b).
Since voting or investment power includes shared power, two or more persons may each beneficially own the same stock - e.g., joint owners or co- fiduciaries.
In determining the number of shares and the percentage of the class which are beneficially owned by a person, all shares beneficially owned in whatever form
IV. Reporting Obligations under Forms 3, 4 and 5
A. Reports. Initial statements of beneficial ownership of equity securities are filed on Form 3. Statements of changes in beneficial ownership are filed on Form 4. Under the 1991 Amendments (as revised under the 1996 Amendments), a Form 5 is required to be filed on an annual basis -- reporting certain small acquisitions not required to be reported on Form 4, certain Section 16(b) exempt transactions, and all transactions required to have been reported during the last fiscal year on Forms 3, 4 or 5 but not so reported. Three copies of Forms 3, 4 and 5 are filed with the SEC, one copy with any national securities exchange on which the security is listed, and, in a new requirement promulgated under the 1991 Amendments, one copy with the issuer. Although not stated in the SEC's rules, the NASD requires Form 3's, 4's and 5's for companies traded over the NASDAQ system to be filed with the NASD.
B. Failure to File. Failure to file Section 16(a) reports (or to make timely filings) can have a number of negative consequences. First, the SEC has become increasingly aggressive in recent years in instituting injunctive actions against persons who fail to file or who file late. See Article IX below and Romeo at 9-11. In addition, the two-year statute of limitations for *397 recovery of short-swing profits under Section 16(b) is tolled until the reports required under Section 16(a) are filed. See Romeo at 12. Finally, far from disguising Section 16(b) violations, conversations with plaintiffs' lawyers active in Section 16(b) cases indicate that a late filing may be seen by them as a red flag signalling a 16(b) violation. Corporate Counsel (March- April 1981, at p. 4).
C. Form 3. A person who becomes an officer or director of a company with an equity security registered under Section 12, who becomes the beneficial owner of more than 10% of any class of equity securities registered under Section 12 (as determined by voting or investment control over the securities), who is an officer, director or 10% shareholder at the time of Section 12 registration, and certain trusts, trustees, beneficiaries and settlors required to be report under Rule 16a-8, are required to file an initial report on Form 3. An officer or director must file a Form 3 even though he or she beneficially owns no securities of the company. Release 18114, Question 29. Reports cover ownership of any class of equity security of the issuer, including equity securities not registered under Section 12. On the other hand, beneficial ownership of more than 10% of a class of equity security not registered under Section 12 does not in and of itself require the filing of a Form 3.
1. A Form 3 must be filed within 10 days after a person becomes an officer, director, 10% share-holder or other reporting person.
2. In the case of a filing triggered by Section 12 registration, the Commission for many years did not object (despite language in Section 16(a) itself apparently requiring filing at the time of registration) to the filing of a Form 3 within 10 days after Section 12 registration. Following what had become the staff's practice in recent years, the instructions on Form 3 now require a *398 reporting person of an issuer that is registering securities for the first time under Section 12 to file Form 3 no later than the effective date of the registration.
D. Form 4. Officers, directors, 10% beneficial owners and other reporting persons must report most changes in beneficial ownership occurring after the filing of a Form 3, together with exercises or conversions of a derivative security whether or not exempt from Section 16(b). The 1996 Amendments continue the former practice of permitting insiders to voluntarily report on Form 4 all transactions reportable on Form 5 so as to avoid the problem of inadvertently forgetting to file year-end reports. Two transactions which had previously been filed on the next due Form 4 or Form 5, are now assigned to one of the Forms: small transactions (Form 5) and option exercises (Form 4). The report on Form 4 must be filed with (and generally received by) the SEC within 10 days following the end of the calendar month in which a transaction occurs.
1. Exemptions. Not required to be reported on Form 4 are transactions exempt by operation of any rule under Section 16(b) (except for exercises or conversions of derivative securities which are filed on Form 4 whether or not exempt from Section 16(b)) and certain small acquisitions.
2. Changes in Beneficial Ownership Prior to Becoming an Officer or Director. Changes in beneficial ownership of an officer or director in the six months prior to the first change required to be reported on Form 4 after he or she became subject to Section 16 are not required to be reported on that Form 4 or new Form 5 and are not subject to Section 16, unless the officer or director became subject to Section 16 solely as the result of the issuer registering securities under Section 12. For example, a person (not then an insider) who is elected a director of an issuer with an *399 outstanding class of registered securities, need not report changes in beneficial ownership of equity securities of the issuer that occurred prior to his or her election. Under old Rule 16a-1(d), such changes had been required to be reported and, arguably, were subject to Section 16(b).
3. The definition of "beneficial ownership" for determining which shares need to be reported for purposes of Sections 13(d) and 13(g) is different from the definition for purposes of reporting changes in beneficial ownership under Section 16; however, the definition and analysis of "beneficial ownership" for purposes of determining who is required to report as a 10% beneficial owner is identical. It also generally includes securities held through trusteeships or partnerships and includes securities the person has the right to acquire within 60 days (e.g., by exercising options, warrants or rights). Also, a person who owns less than 5% may be deemed to be part of a "group" which owns more than 5% if such person acts in concert with others.
4. In January 1, 1998, the SEC adopted amendments to the beneficial ownership reporting requirement rules contained in Regulation 13D - G. The amendments allow passive investors to elect to file the shorter Schedule 13G within 10 days of an *576 acquisition, in lieu of the Schedule 13D, provided that the investor (1) has beneficially acquired more than 5% but no more than 20% of a class of a public company's securities, and (2) has not acquired or held the securities for the purpose of, and does not have the effect of, changing or influencing the control of the issuer. See SEC Rel. No. 34-39538.
(D) In the case of a Holder which is a partnership or corporation, with respect to shares of Class A Common Stock beneficial ownership of which was acquired pursuant to the Distribution or thereafter pursuant to a dividend paid in shares of Class A Common Stock or a split, subdivision or combination of shares of Class A Common Stock, or with respect to shares of Class A Common Stock beneficial ownership of which was acquired upon conversion of Convertible Subordinated Debentures or Preferred Stock or thereafter pursuant to such a dividend, split, subdivision or combination in respect of shares acquired by such conversion, 'Permitted Transferee' means (1) in the case of such shares acquired pursuant to the Distribution and such shares issued in respect thereof, any partner of such partnership, or stockholder of such corporation, receiving such shares pro rata to his interest in such partnership or stock ownership in such corporation on the Distribution Record Date pursuant to a liquidating distribution or a dividend, (2) in the case of such shares acquired upon conversion and shares issued in respect thereof, any partner of such partnership, or stockholder of such corporation, receiving such shares pro rata to his interest in such partnership or stock ownership in such corporation on the date of such conversion pursuant to a liquidating distribution or a dividend or (3) in either case any Permitted Transferee of any partner or stockholder to the extent that he is a Permitted Transferee pursuant to the foregoing clauses (1) or (2), as the case may be, determined under paragraph 5.1(i)(A) above.
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