Millstein Governance Forum: debating disclosure of equity ownership
Institutional investors now own nearly 75 percent of US public companies versus about 50 percent in 1950 and are much less committed to actively monitoring the companies in their portfolios. Citing this, some corporate governance experts are arguing against proposals to expedite disclosure of equity positions and ban certain derivatives that they say would dissuade activist shareholders from the critical role they now play.
That was one of the provocative issues discussed during the first panel of the 2013 Millstein Governance Forum, held on June 24 at Columbia Law School in New York, the new home of the Millstein Center for Global Markets and Corporate Ownership.
Animating the panel, ‘Do changing patterns of ownership require rethinking corporate governance standards and norms,’ was controversy around two sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act for which rule-making is pending and which opponents say would severely constrain activist shareholders from keeping a vigilant eye on management practices and stewardship.
One section would allow the SEC to reduce the window for 13(d) filings when an owner reaches the threshold of a 5 percent stake in a company from the current 10 days to as little as two days. The second section would require reporting of security-based swaps still in force when the law is enacted to either the SEC or a registered security-based swap data repository within 30 days of the final rule’s issuance or another period determined by the SEC.
Panelists also weighed the merits of a petition sent to the SEC two years ago by Wachtell, Lipton, Rosen & Katz, seeking to tighten the 13(d) reporting window, arguing ‘market manipulation and abusive tactics’ by ‘aggressive investors [who] intentionally structure their acquisition strategies to exploits gaps in the current reporting regime.’
‘When 73 percent of equity ownership is by intermediaries, you could argue there needs to be more regulation of relationships between them, and their beneficiaries,’ said Adam Emmerich, a partner at Wachtell on the panel.
At a time when investor cash flow follows how well a stock is performing against its peers rather than actual shareholder returns, ‘intermediaries have little incentive to be pro-active,’ said panelist Ronald Gilson, the Marc and Eva Stern professor of law and business at Columbia Law School. ‘They’re better off selling off an equity when they think things are going badly than pursuing a pro-active [path of monitoring management’s business strategy and stewardship].’
To justify lags in reporting substantial ownership, Paul Hilal, a partner at Pershing Square Capital Management explained how costly extended proxy fights are and why activist investors need the latitude to add to their stakes after crossing the 5 percent mark before other investors are alerted and start driving up a stock’s price.
Pershing Square’s 6-month battle, after incrementally amassing a 12 percent stake in Canadian Pacific Railroad, to get seven directors it nominated elected to the board cost over $20 million but resulted in the company’s value spiking from $7 billion to $23 billion less than two years after Pershing bought its first shares, creating value for all shareholders, said Hilal.
‘For us to be able to continue expensive time-consuming proxy fights, we need to make profits,’ which reducing disclosure periods would disrupt, he said. The two kinds of possible beneficiaries of shortened disclosure periods are market participants and board members who can use them to remain entrenched, he added.
Where activist shareholders seek toehold stakes in companies and propose changes to strategy and board composition, ‘the wisdom of a proxy fight will be determined by institutional investors who will vote against an activist if that makes sense to them,' said Gilson.
However short the reporting window is, accumulating investors will mostly manage to whatever the new standard is and stay just below the ownership threshold required for disclosure, Robert Kueppers, managing partner at Deloitte’s Center for Corporate Governance, predicted.