William A. Ackman seemingly
appeared out of nowhere.
It was only a month ago that David E. I. Pyott, chief executive
of Allergan, learned that Mr. Ackman’s firm, Pershing Square Capital
Management, had amassed a 9.7 percent stake in his company and become its
largest shareholder as part of a takeover effort with a rival, Valeant
Back in February, Valeant sought a meeting with Mr. Pyott about
buying his company, the maker of Botox, but later canceled the meeting before
making an offer.
Little did Mr. Pyott know that Mr. Ackman had started racing to
buy up Allergan’s stock that very month. While Mr. Ackman had bought enough
shares by early April to breach the 5 percent threshold that requires a filing
with the Securities and Exchange Commission, investors have 10 calendar days to
make such a filing — and Mr. Ackman used the window to accumulate even more
shares as quickly as he could.
Mr. Pyott wasn’t the only one blindsided. Investors were
stunned, too. How was it possible that Mr. Ackman had become Allergan’s largest
shareholder without anyone knowing?
That question, and a spate of other similar secret buying
sprees, is prompting renewed questions about whether a disclosure rule
developed back in 1968, when investors would run across the floor of the New
York Stock Exchange with tickets in hand, is outdated and whether the current
rule is becoming just another example of the way the markets appear rigged
against the ordinary investor. (I am leaving aside the discussion about the
potential for abuse when a company teams up with a hedge fund.)
“These issues are part of a growing debate as to whether there
are cases of ‘illegitimate’ imbalances of information beyond classic ‘insider
trading’ that regulators should address,” Victor I. Lewkow, a partner at Cleary
Gottlieb Steen & Hamilton, wrote in a note to his clients.
In an age of activism, corporations are acutely focused on the
rule, arguing that the 10-day period gives large investors an unfair advantage
to accumulate shares without the requisite disclosure — and, of course, that it
puts companies at a disadvantage to ward off unwanted suitors.
But there is a larger issue for everyday investors.
When activists finally disclose the investment, it often moves
the market, according to Wachtell, Lipton, Rosen & Katz, which has
campaigned for years to change the rule on behalf of its corporate clients.
“This delivers outsized returns to the activist and those they tip, while
injuring investors who are deprived of the same knowledge,” the firm said in a
memo to clients in March. (I first wrote about this issue four years ago.) “In
an era of high-frequency trading, the 10-day reporting window,” it added,
“simply makes no sense.”
Indeed, the rule, which was established by the Williams Act in 1968, seems out of step for our
modern times when transparency and disclosure have become a key tenet of our
markets. In Britain, investors must disclose stakes of more than 5 percent
within two days; in Hong Kong, it is three; in Germany, it is “immediately,”
but no later than four days.
Activist investors counter that the 10-day period allows them to
take big stakes without tipping off other investors who would invariably drive
the price higher, giving them a financial incentive to pursue investments,
which they argue is in the public good.
The question of whether activists promote the public good
remains open. Some research has suggested that activists have created long-term
value, while investors like Charlie Munger, the vice chairman of Berkshire
Hathaway, recently declared, “I don’t think it’s good for America.”
Click here for the full column by Andrew Ross
Sorkin in the New York Times DealBook.