Behold the Power of the 13D

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 13D

Under the Securities Exchange Act of 1934 (Amendment No. –)*

(Name of Issuer)

………………………………………………………………………………………………….

(Title of Class of Securities)

………………………………………………………………………………………………….

(CUSIP Number)

………………………………………………………………………………………………….

(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)

………………………………………………………………………………………………….

I plan to do a lot of posts about activist investing this year.

Frankly, in keeping with my blog’s recent theme, that the emperors have no clothes, I’ve decided to spend some time and space here highlighting certain key proxy battles that I think exemplify what I want to see in this market.  If greed, waste, indebtedness and largess got us into the mess we face, then I believe the way out would have to involve a wake-up call rooted in responsibility, efficiency, and fairness.

Well, nothing makes an irresponsible or gluttonous board member wake up faster than a 13D filing…

What is a 13D filing?

A 13D filing, or Schedule 13D, is basically a notification submitted to the SEC by a person or entity that acquires at least 5% ownership of any company’s common stock.

How is a 13D different from a 13G filing?

The short, oversimplified answer is that 13G filings are typically made by passive investors like mutual funds, who are just disclosing their investments as a matter of course.  The 13D filing is more often used to express the intentions of someone who has bought a large stake and intends to use it to have at least a dialogue with management.  In this regard, the 13D is more like a warning shot fired across the bow.

How do you read a 13D filing?

There are 7 sections of a typical 13D filing, but some are more interesting or important to read than others.

1.  Security and Issuer:  The first pages of the filing will have details on which company it pertains to and which of the company’s specific securities, usually these filing will pertain to company’s common stock.

2.  Identity and Background:  You’ll find information about the person or people doing the filing, and some information about their personal and business backgrounds.

3.  Source and Amount of Funds or Other Considerations:  If there is a financial action, like a merger or takeover, being taken or proposed in connection with the filing, investors will look at this section to learn where the money is or will come from.

4.  Purpose of Transaction:  Now we get down to business…the “Why“.  The person or entity making the investment of the company will explain why in this section.  It may be something as innocuous as seeking an opportunity to discuss ideas with management or as avaricious as forcing the board to put the company up for sale and everything in between.  The majority of proxy battles, even the most acrimonious, begin with simple filings that state in this section that the investment is being made because the acquirer believes the company’s shares are undervalued.

5.  Interest in Securities of the Issuer:  You’ll get a recap of the prior section here with very standard language.

6.  Contracts, Arrangements, Understandings or Relationships with Respect to the Securities of the Issuer:  In this section, you be made aware of the buyer’s relationship or lack thereof with the company whose securities he is purchasing.  For example, if the filer is a former executive, current board member, or even rival company official, this information will be disclosed here.

7.  Materials to Be Filed as Exhibits:  This is where the more cantankerous filer will include his love letter to the company’s management.  I usually skip to this section, and at times, it may seem a bit like turning right to the gossip page of the newspaper, depending on the filer.  Sometimes, this section will include a letter from the acquiring party with in-depth explanations or what he in not pleased with at the company and what he expects to be done about these items.  Other times, this letter will basically say “Prepare to be Boarded“.

Why should shareholders concern themselves with activist investors and proxy struggles?

As a stockholder, the issues being discussed and voted on in any proxy have a direct effect on how the company will be run or managed.  If you plan to be an investor, even a long-term one, you must at all times be aware of who is calling the shots.  You may have a dissident slate of directors get elected who want nothing more than to authorize a huge one-time dividend, pay out all cash, then sell off whatever’s left of the company; not all activists are good for long-term investors.

Why should traders pay any attention to activism?

If you’re going to be long or short a company’s stock, be sure to understand the calendar and who else is trading along with you.  This may be important if for example, you have decided that a company’s shares are overvalued and have begun to short the stock.  You may become very frustrated if you learn after he fact that an activist shareholder has publicly stated, in a 13D filing, that he intends to purchase additional stock to bring his ownership percentage up to a certain threshold.  This type of buying can hurt your play, regardless of whether or not your analysis is sound.  There are also specific events like record dates and annual shareholder meetings that may impact the trading and pricing of a stock during certain periods of time that you’ll want to be aware of.

Hopefully, this guide to 13D’s has been helpful for those who wish to understand what these filings are and how they work.  In the future, I will discuss many other issues related to shareholder activism, from the main causes for proxy battles, to voting and nominating laws, to stories and biographies about the great activists themselves.

Feel free to send in any questions on the subject you’d like answered.  If I don’t know the answer, I can probably find it!

See also:

Why Activist Shareholders are Gaining Support (Dealscape)

Golden Age for Activist Investors?  ‘Bout Time! (The Reformed Broker)

In Depth: Activist Investors (FT)