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This recent Debevoise alert discusses the SEC’s continued focus on 13D amendments filed by private equity sponsors during take-privates. Item 4 of Schedule 13D includes the purpose of the acquisition of securities, and the Schedule 13D must be amended within two business days for any subsequent material change. The SEC often issues comment letters questioning the timing of a 13D amendment, often after comparing 13Ds to the “Background of the Merger” disclosure in the proxy statement. There’s some uncertainty as to how definite the plan or proposal must be before an amendment is triggered, and these SEC comment letters provide some helpful guidance on when a Schedule 13D should be updated. While the alert says the decision to amend depends on context and no single factor is determinative, it lists these examples of actions that the SEC believed triggered a duty to amend:

– working with lawyers and other shareholders to submit a proposal to the issuer’s board;
– deciding on a specific transaction structure;
– securing waivers from other shareholders to assist in an eventual transaction;
– discussing a third-party valuation report with officers and directors of the issuer;
– receiving information about issuer board meetings discussing matters relevant to the transaction;
– drafting an offer letter to the issuer with a “placeholder” offer price per share and providing such draft to outside counsel for review; and
– submitting an offer letter to the issuer.

Another question that often comes up is when a “group” is formed. Group members that are not 5% holders become subject to Section 13(d) reporting requirements based on the group’s total beneficial ownership, and existing filers are required to amend their filing to disclose the existence of the group. Since formation of a group will trigger prompt disclosure, sponsors should work closely with counsel when engaging in discussions in connection with a potential take-private transaction to avoid triggering group formation earlier than intended. The memo also reminds sponsors that making material arrangements like offer letters, lock-up agreements, voting and support agreements, and rollover agreements will trigger a Schedule 13D amendment.

When the SEC engages by issuing a comment letter or commencing a cease-and-desist proceeding or enforcement action, it may end up delaying the target’s stockholder meeting to approve the take-private transaction and/or result in civil monetary penalties, so getting this right is key. This memo and others like it are posted in our “Schedule 13D & 13G” Practice Area.

– Meredith Ervine