Under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), shareholders that beneficially own more than five percent of an issuer’s outstanding publicly traded voting equity securities (“greater-than-5% shareholders”) are required to report their ownership of such equity securities with the Securities and Exchange Commission (the “SEC”) on either a short-form Schedule 13G or a longer-form Schedule 13D. As set forth in Rule 13d-1(b) and Rule 13d-1(c) under the Exchange Act, a greater-than-5% shareholder may report its beneficial ownership of equity securities on the short-form Schedule 13G if, among other requirements, the shareholder certifies that such securities were not acquired or held “with the purpose or effect of changing or influencing the control of the issuer.” The failure to satisfy this condition (and assuming an inability to qualify as an exempt investor per Rule 13d-1(d) of the Exchange Act) would require the shareholder to report its beneficial ownership on the longer-form Schedule 13D.
On February 11, 2025, the staff (the “Staff”) of the Division of Corporation Finance of the SEC issued one updated and one new Compliance and Disclosure Interpretation (“C&DI”) on Regulation 13D-G, Questions 103.11 and 103.12, respectively, which reflect a broadened view of the types of activities that would preclude a shareholder from reporting on Schedule 13G. These C&DIs signal enhanced SEC scrutiny of shareholder activism, particularly with respect to environmental, social, and governance (“ESG”) matters, and may have a chilling effect on certain shareholder activity that has traditionally been viewed as consistent with passive ownership. Public companies should consequently expect changes in investor behavior, especially during proxy season, and adjust their expectations accordingly.
Prior Guidance. Prior to these updated C&DIs, investors relied upon old C&DI Question 103.11, which stated that, generally, engagement with an issuer’s management on executive compensation and social or public interest issues (such as environmental policies), without more, would not preclude a shareholder from filing on Schedule 13G so long as such engagement was not undertaken with the purpose or effect of changing or influencing control of the issuer and the shareholder was otherwise eligible to file on Schedule 13G. Moreover, engagement on certain corporate governance topics, such as the removal of staggered boards, majority voting standards in director elections, and the elimination of poison pills, would not disqualify an otherwise eligible shareholder from filing on Schedule 13G if the discussion was being undertaken by the shareholder as part of a broad effort to promote its view of good governance practices for all of its portfolio companies rather than to facilitate a specific change in control in a particular company. By contrast, Schedule 13G was unavailable to a shareholder that engaged with the issuer’s management on matters that called for the sale of the issuer to another company, the sale of a significant amount of assets, the restructuring of the issuer, or a contested election of directors.
New Guidance. New Question 103.12 begins by reiterating the guidance in prior C&DI Question 103.11 that the subject matter of the shareholder’s engagement with the issuer’s management may be dispositive in determining whether securities were acquired or held with the purpose or effect of changing or influencing the control of the issuer, and it restates that Schedule 13G is unavailable if a shareholder engages with the issuer’s management to specifically call for the sale of the issuer or a significant amount of the issuer’s assets, the restructuring of the issuer, or the election of director nominees other than the issuer’s nominees. New Question 103.12 also states that the context in which a shareholder’s engagement with management occurs is highly relevant in determining whether a shareholder’s holding of securities has a purpose or effect of influencing control of the issuer. According to the new C&DI and consistent with prior guidance, a shareholder who merely discusses its views on a topic and how these views may influence their voting decisions, without more, would not be disqualified from relying on Rule 13d-1(b) or Rule 13d-1(c). A shareholder who goes beyond such a discussion, however, and exerts pressure on management to implement specific measures or changes to a policy may be “influencing” control over the issuer. The C&DI ends with two examples of when Schedule 13G may be unavailable to a shareholder, including:
(i) when a shareholder recommends that the issuer remove its staggered board, switch to a majority voting standard in uncontested director elections, eliminate its poison pill plan, change its executive compensation practices, or undertake specific actions on a social, environmental, or political policy and, as a means of pressuring the issuer to adopt the recommendation, explicitly or implicitly conditions its support of one or more of the issuer’s director nominees at the next director election on the issuer’s adoption of its recommendation; or
(ii) when a shareholder discusses with management its voting policy on a particular topic and how the issuer fails to meet the shareholder’s expectations on such topic, and, to apply pressure on management, states or implies during any such discussions that it will not support one or more of the issuer’s director nominees at the next director election unless management makes changes to align with the shareholder’s expectations.
In addition to new Question 103.12 described above, revised Question 103.11 reaffirms that a shareholder’s inability to rely on the Hart-Scott-Rodino Act’s exemption from notification and waiting period requirements for an acquisition made “solely for the purpose of investment” would not affect a shareholder’s ability to report on Schedule 13G. Instead, eligibility to report on Schedule 13G in reliance on Rule 13d-1(b) or Rule 13d-1(c) depends, among other things, on whether the shareholder acquired or is holding the subject securities with the purpose or effect of changing or influencing control of the issuer. The revised C&DI reminds investors that such determination necessarily entails a factual analysis of the shareholder’s actions and intentions in relation to “control” as defined under Exchange Act Rule 12b-2. Most significantly, the revised C&DI no longer includes the prior guidance that engagement with a company on executive compensation, environmental, social, or other public interest issues, or on corporate governance topics unrelated to a specific change of control, without more, would generally not cause a loss of Schedule 13G eligibility.
Key Takeaways for Public Companies. As a result of this updated guidance, public companies should expect reduced engagement from greater-than-5% shareholders, including fewer shareholder-initiated discussions, increased use of passivity disclaimers, and a reluctance to discuss or explain both forthcoming and past voting decisions, particularly with respect to topics such as director elections and executive compensation. This will likely make it more difficult for companies to anticipate how shareholders plan to vote on proposals, which may lead to unexpected opposition to director nominees, lower say-on-pay support than anticipated, increased abstentions, and fewer opportunities to correct misunderstandings before votes are cast. Public companies should consequently take extra care to describe their governance and executive compensation programs in their proxy statements in a persuasively favorable manner so as to reduce reliance on direct shareholder outreach during the proxy solicitation period. They should also be prepared to take greater initiative in reaching out to their investors, including both their greater-than-5% shareholders and those who hold less than 5% of their equity securities, in order to affirmatively make their case with respect to compensation and governance matters, including how their practices compare against peers and the voting policies of the particular shareholder (if any) and the proxy advisory firms. In addition, public companies should take care to give appropriate weight to any feedback from their smaller shareholders, who are not subject to the beneficial ownership reporting regime, given that their voices may be louder in comparison to those of the greater-than-5% shareholders after the issuance of this guidance. Moreover, investors may be more open to engaging in dialogue with companies in the “off-season”, well before the lead up to the annual meeting of shareholders, so companies should consider initiating discussions earlier in the year in order to potentially receive more candid and constructive feedback from shareholders.
Following the SEC’s amendments adopted in 2024 to Schedules 13D and 13G (including to accelerate filing deadlines), the SEC appeared to take the topic of beneficial ownership reporting more seriously than before, with a particular focus on Schedule 13D, leading to several enforcement actions in the fall of 2024 and Staff comment letters focused on the timing of Schedule 13D filings. It is possible that the current leadership of the SEC will likewise take an aggressive enforcement approach following the guidance issued by the Staff in February 2025. While there is no express private right of action for violations of Section 13(d) of the Exchange Act, the SEC has the authority to levy sanctions for violations of Section 13(d), including civil monetary penalties ranging from approximately $11,000 to $1.18 million (inflation adjusted), the disgorgement of unjust enrichment, and injunctive relief. Additionally, issuers have been known to alert the Staff to perceived violations of beneficial ownership reporting obligations by investors. While this has more commonly occurred in the context of a proxy contest or attempted coercive change-in-control transaction, institutional investors may be fearful of a similar result where engagement on a particular ESG topic is later characterized by a public company—and the SEC—as an effort to exert pressure on management to implement specific measures or changes, and in particular where dialogue with a company is followed by a vote against one or more directors at the annual meeting.
