16 June 2019

For Activist Investors, a Wide Reporting Window

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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 Pharmaceuticals.

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back in 1968, when investors would run across the floor of the New York Stock Exchange with tickets in hand, is outdated and whether the current rule is becoming just another example of the way the markets appear rigged against the ordinary investor.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.

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