Know Your SEC Reporting Positions:
SEC Gives Interpretive Advice and Guidance on Sections 13(D) and 13(G) of the Securities Exchange Act of 1934, as Amended

Corporate & Finance Alert

November 3, 2009
The staff of the Division of Corporation Finance of the Securities and Exchange Commission ("SEC") on September 14, 2009 published its compliance and disclosure interpretations ("CDIs") comprising the Division's interpretations of Securities Exchange Act of 1934, as amended ("Exchange Act") Sections 13(d) and 13(g), Regulation 13D-G beneficial ownership reporting and related Schedules 13D and 13G. These CDIs replaced interpretations issued by the Division in the July 1997 Manual of Publicly Available Telephone Interpretations.

The CDIs address a broad range of issues in connection with Schedules 13D and 13G. These issues include events that trigger a filing, group formation, stock option plan issues, American Depositary Receipts ("ADRs"), mergers, eligibility to use Schedule 13G, switching from Schedule 13D to 13G and vice versa, filing of amendments to Schedules 13D and 13G, determination of beneficial ownership, acquisition of securities, exemption of certain acquisitions and other matters. Many of the positions in the CDIs memorialize positions of the staff set forth in no-action letters and conversations with attorneys over the years. The CDIs do not contain any guidance on the treatment of securities for cash-settled derivatives such as the swaps issues raised in CSX Corp. v. The Children's Investment Fund Management by the United States District Court for the Southern District of New York.

Here are some examples of the significant CDIs issued by the SEC staff (taken directly from the CDIs):

A. Schedule 13G - Registered Securities

Question: A security holder owns over five percent of a class of an issuer's equity securities. The issuer's Form 10 registering this class of securities under Section 12(g) of the Exchange Act just became effective. If the security holder has not added any securities to its holdings since the effective date of the Form 10, may the security holder report its beneficial ownership on Schedule 13G pursuant to Rule 13d-1(d)?

Answer: Yes. The security holder is eligible to file a Schedule 13G pursuant to Rule 13d-1(d) since the security holder has not "acquired" any securities of a class registered under Section 12 of the Exchange Act.

B. Section 13(d) - Stock Option Plan and Shares Outstanding

Question: Should shares that an issuer repurchased to fund a stock option plan be included in the number of shares outstanding for purposes of Section 13(d) of the Exchange Act?

Answer: No. Shares that an issuer repurchased do not count as outstanding shares, even if the issuer did not retire the shares or account for them as treasury stock. Section 13(d)(4) of the Exchange Act excludes shares "held by or for the account of the issuer or a subsidiary of the issuer" from the class of outstanding shares.

C. Section 13(d) - Actions of a Group

Question: A group comprised of a limited partnership and two general partners owned more than five percent of the outstanding equity securities of a non-public company and held the securities with the purpose or effect of influencing control of the issuer. The company subsequently registered the class of securities under Section 12(g) of the Exchange Act, and the group filed beneficial ownership reports on Schedule 13G pursuant to Rule 13d-1(d). If the group later adds a new member that owns more than two percent of the same class of equity securities, would the group be required to report its holdings on Schedule 13D?

Answer: Yes. By adding a new member that beneficially owns more than two percent of the class of equity securities registered under Section 12, the group effectively acquired those securities. The group and all of its members would be required to report their holdings on Schedule 13D since they would not qualify for the exemption set forth under Section 13(d)(6)(B) of the Exchange Act, would no longer meet the requirements of Rule 13d-1(d) and would not be eligible to file a Schedule 13G pursuant to Rules 13d-1(b) and 13d-1(c).

D. American Depositary Receipts (ADRs)

Question: If an investor owns more than five percent of the outstanding American Depositary Receipts, or ADRs, of an issuer, but those ADRs represent five percent or less of the outstanding class of Section 12 registered equity securities of the issuer that the ADRs represent, is the investor required to report its beneficial ownership of the ADRs on a Schedule 13D or Schedule 13G?

Answer: No. ADRs, which are exempt from registration under the Exchange Act pursuant to Exchange Act Rules 12a-8 and 12g3-2(c), are not considered a separate class of equity securities for purposes of calculating beneficial ownership of securities.

E. Section 13(d) - Merger

Question: In a merger where security holders of the target company will receive consideration in the form of the acquiring company's Section 12 registered equity securities in a registered stock-for-stock exchange, may a target security holder that receives greater than five percent of the class in the share exchange rely upon Section 13(d)(6)(A) to avoid having to file a beneficial ownership report?

Answer: No. The target security holder must report beneficial ownership of those securities on Schedule 13D or, if eligible, on Schedule 13G under Rules 13d-1(b) or 13d-1(c). Section 13(d)(6)(A) provides an exemption from the application of Section 13(d) only in relation to those securities that an issuer acquires through a registered stock-for-stock exchange, such as in a merger where the shares of the target company will be merged out of existence.

F. Time for Filing Section 13D or 13G

Question: If a security holder acquires more than 10 percent of a class of equity securities before the registration of that class under Section 12 of the Exchange Act, is it required to file a Schedule 13D when the issuer registers the class of securities under Section 12? If the security holder is not required to file a Schedule 13D, when must it file a Schedule 13G?

Answer: The security holder is not required to file a Schedule 13D upon registration of the class of securities under Section 12. See Section 13(d), which requires a filing of Schedule 13D only upon the "acquisition" of equity securities of a class registered under Section 12. However, the security holder must file a Schedule 13G pursuant to Rule 13d-1(d) within 45 days after the end of the calendar year in which the Exchange Act registration becomes effective. Note that the provisions of Rule 13d-1(b)(2), which require certain beneficial owners of greater than 10 percent of a class of equity securities registered under Section 12 to file a Schedule 13G within 10 days after the end of a designated month, are limited to the institutional investors listed in Rule 13d-1(b)(1), and do not apply to beneficial owners that file a Schedule 13G pursuant to Rule 13d-1(d).

G. Rule 13d-1(c) - Non-Control Certification

Question: One of the requirements for eligibility to file a Schedule 13G pursuant to Rule 13d-1(c) is that a reporting person must not have "acquired the securities with any purpose, or with the effect of, changing or influencing the control of the issuer." See Rule 13d-1(c)(1). Item 10 of Schedule 13G requires that reporting persons relying on Rule 13d-1(c) certify to this requirement. May an officer or director that beneficially owns more than five percent of a voting class of the issuer's equity securities registered under Section 12 of the Exchange Act rely on Rule 13d-1(c) to file on Schedule 13G?

Answer: The role of officers or directors will most likely eliminate their eligibility to file on Schedule 13G pursuant to Rule 13d-1(c). Notwithstanding any specific control intent, the fact that officers and directors have the ability to directly or indirectly influence the management and policies of an issuer will generally render officers and directors unable to certify to the requirements of Rule 13d-1(c)(1).

H. Time to File Schedule 13D

Question: Rule 13d-1(a) states that a Schedule 13D must be filed within 10 days after the acquisition of more than five percent of a class of equity securities registered under Section 12 of the Exchange Act. Is the Schedule 13D due 10 days after the trade date or the settlement date of a securities transaction that creates the reporting obligation?

Answer: The Schedule 13D beneficial ownership report must be filed within 10 days of the trade date of the securities transaction. Although under contract law the date on which the ownership of the shares is transferred may be the settlement date, an investor may, at a minimum, exercise investment power over the securities that were acquired through the trade as of the trade date. For purposes of calculating the 10-day time period, the trade date counts as day number one.

I. Activities of a Group

Question: A group comprised of three entities filed a Schedule 13G pursuant to Rules 13d-1(c) and 13d-1(k)(1). One of the group members transfers its securities (constituting six percent of the issuer's class of equity securities registered under Section 12 of the Exchange Act) to its parent as a dividend. The parent has not agreed to act together with the other group members for the purpose of acquiring, holding, voting or disposing of equity securities of the issuer. What beneficial ownership reports must the parent and the group file after the subsidiary transfers the securities to its parent?

Answer: The parent must file an amended Schedule 13G 45 days after the end of the calendar year in which the subsidiary transfers the securities. See Rule 13d-2(b). Because the parent already was the indirect beneficial owner of the securities owned by the subsidiary before the transfer, the parent does not "acquire" the securities within the meaning of Section 13(d)(1) as a result of the transfer and, therefore, does not incur an obligation to file a Schedule 13D. The group is required to amend its Schedule 13G to reflect the reduction in the amount beneficially owned and the departure of the subsidiary from the group.

J. Switching from Schedule 13D to Schedule 13G

Question: Can a security holder that has reported its beneficial ownership on Schedule 13D switch to reporting on a Schedule 13G?

Answer: Only a security holder who was initially eligible to report its beneficial ownership on a Schedule 13G and was later required to file a Schedule 13D may switch to reporting on a Schedule 13G. See Rule 13d-1(h), which states that any person who has filed a Schedule 13D may again report its beneficial ownership on Schedule 13G so long as the shares are no longer held with control intent. A security holder who intends to switch to a Schedule 13G must meet the eligibility requirements of Rules 13d-1(b) or (c). In this case, the Schedule 13G may operate as an amendment of the Schedule 13D under Rule 13d-2(a). If the security holder was not originally eligible to file a Schedule 13G, instead files a Schedule 13D to report its beneficial ownership and later files a final amendment on Schedule 13D to report that its beneficial ownership of the class of securities fell to five percent or below, then the security holder may thereafter qualify to file a Schedule 13G if the security holder's beneficial ownership of the securities again increases to above five percent.

K. Reporting Shares Sold Short

Question: When a Schedule 13D or 13G reporting person sells the subject securities short, does the reporting person's beneficial ownership change?

Answer: No. Short sales normally will not change a reporting person's Rule 13d-3 beneficial ownership since such sales do not change the amount of shares over which the person has "voting or investment power." However, short sales may trigger a requirement to amend the Schedule 13D pursuant to Rule 13d-2 unless all applicable changes in the facts previously set forth in the reporting person's Schedule 13D are not material.

L. Amendments to Schedule 13G

Question: Are all Schedule 13G filers required to file an annual amendment to the Schedule within 45 days after the end of the calendar year to report any changes in the information previously disclosed, or is this obligation limited to institutional investors who file on Schedule 13G pursuant to Rule 13d-1(b)?

Answer: All Schedule 13G filers must file an annual amendment to report any changes in the information previously disclosed. The Schedule 13G does not need to be amended if there has been no change to the information disclosed in the Schedule or if the only change is to the percentage of securities owned by the filing person resulting solely from a change in the aggregate number of the issuer's securities outstanding.

M. Failure to File Amendments

Question: What steps should a security holder take if it failed to file required amendments to a Schedule 13D in a timely manner?

Answer: Rule 13d-2(a) requires that a security holder amend its Schedule 13D promptly when "any material changes occur in the facts set forth in the Schedule 13D." If a security holder has failed to timely file any required Schedule 13D amendments, the security holder should immediately amend its Schedule 13D to disclose the required information. If the security holder failed to file multiple amendments to the Schedule 13D when required, it may disclose that information by filing multiple amendments or filing one combined amendment. Regardless of the approach taken, the security holder must ensure that the filings contain the information that it should have disclosed in each required amendment, including the dates and details of each event that necessitated a required amendment. Any of these steps taken by the security holder in these situations will not necessarily affect the determination of liability under the federal securities laws for the failure to promptly file a required amendment to a Schedule 13D.

N. Convertible Notes

Question: A security holder owns variable-rate convertible notes. The number of common shares into which the notes are convertible within the next 60 days varies daily with the price of the underlying common stock. Does the holder of the convertible notes have the obligation to promptly amend the Schedule 13D pursuant to Rule 13d-2(a) whenever a change in the conversion rate would result in a one percent or more change in ownership of the underlying common shares?

Answer: Yes. Under Rule 13d-3(d), the right to acquire additional securities through changes in the amount of securities deemed beneficially owned based on a conversion rate is viewed in the same manner as the initial receipt of the right to acquire securities upon conversion that first triggered a filing obligation under Rule 13d-1(a).

This client alert was prepared by the Gibbons Corporate Department. Please also contact Frank Cannone, Cheryl Gorman, Lawrence Goldman, Jim Petrucci or Lawrence Cohen if you have any questions on Section 13(d) or 13(g), or Schedules 13D-G, issues.