July 22, 2009
SEC Charges Investment Advisor for Buying Votes with Section 13(d) Violations
b>Buying Votes with Section 13(d) Violations
Yesterday, as noted in this press release,
the SEC charged – and settled – Section 13(d) violations with an
investment adviser – Perry Corp. – for failing to disclose that it had
purchased substantial stock in a M&A target, King Pharma.
Perry purchased the shares in order to vote them in favor of a merger
from which Perry stood to profit. Here’s the cease-and-desist order, under which Perry agreed to pay $150,000.
The
SEC was able to bring charges because the Mylan shares were not
acquired by Perry in the “ordinary course of its business,” which is
one of the requirements of Rule 13d-1(b)(1). However, I was a little
surprised that the SEC didn’t shoot Perry down by finding that it
either (i) did not acquire the shares in the ordinary course or
(ii) was not “passive” (since “passive” is also a requirement of the
rule). Instead, the SEC focused exclusively on the “ordinary course”
requirement of the rule. So I wonder why the SEC didn’t use “not
passive” as the hook and avoided the seemingly circuitous path to “not
in the ordinary course”? I would think the SEC could have made its case
by stating that Perry was not passive – and therefore could not be
acting in the ordinary course. Let me know what you think.
By the way, the SEC’s charges unfortunately didn’t
address concerns regarding Perry’s strategy. In an effort to lock in
the merger premium it would receive on its holdings of King Pharma
shares, Perry purchased a substantial block of the acquiror’s shares
(Mylan) that it intended to vote in favor of the merger while
contemporaneously entering into hedging transactions that minimized its
economic exposure to a decline in the value of those Mylan shares.
In
essence, Perry intended to vote its Mylan shares in favor of a
transaction that was not in the economic interests of other Mylan
shareholders because it had a more substantial economic interest in the
merger being consummated as a result of its holdings in King Pharma.
Similar issues arose in connection with AXA’s acquisition of MONY.
Although this issue has received considerable attention in the US
and the UK, no clear solution has been found. Rather, the focus has
been on enhanced disclosure obligations. The SEC’s charges solely
relate to Perry’s failure to file a Schedule 13D with respect to its
acquisition of more than 5% of Mylan’s shares with the intent of
influencing the direction or management of Mylan. Hopefully,
manipulation of the voting process will be
examined as part of the SEC’s plan to rethink the proxy plumbing this
Fall. We have resources on share lending, overvoting, empty voting, etc. in our “Share Lending” Practice Area.