A number of citizens’ groups in the US have called on Congress to change disclosure rules regarding the accumulation of stakes above 5 percent in companies. They are seeking the rule change to prevent activist hedge funds from privately building up large holdings in a company and then launching campaigns to take board seats and change management strategies.
The groups, including Citizens for Responsibility and Ethics in Washington, the Government Accountability Project and the New Rules for Global Finance Coalition, sent a letter to the House and the Senate asking lawmakers to reduce from 10 days to just 24 hours the period investors have before disclosing that they have crossed the 5 percent ownership threshold.
The current law, passed in 1968, is now out of step with the era of the internet and high-frequency trading, the lobby groups say. After years of lobbying the SEC to change the disclosure requirements, the groups say they decided to take the matter to Congress in the hope of faster action.
‘The Wall Street Journal has documented that during this 10-day window, activist hedge funds are tipping each other regarding their plans, while ordinary investors and targeted companies are left in the dark,’ the groups say in the letter to Congress. ‘Loopholes in federal securities laws are allowing activist investors to secretly buy large stakes in companies before initiating hostile takeovers, depriving the market of material information and significantly disadvantaging ordinary investors.’
The groups say the rule giving investors 10 days to disclose an increase in holdings that exceeds 5 percent is more lenient than in other countries. They point out that Australia gives investors two business days to make such a disclosure and the UK allows three days to disclose stakes exceeding 3 percent. Hong Kong allows three days, they add, while in Germany ‘it is ‘immediately’ but in no event later than four days.’
The letter singles out activist investor Bill Ackman, saying his hedge fund Pershing Square Capital Management teamed up with Valeant Pharmaceuticals ‘to engineer an approach designed to do an end-run around securities laws intended specifically to prevent secret accumulations of stock’. It says Pershing and Valeant used the 10-day window to go from owning less than 5 percent of Allergan, their takeover target, to almost 10 percent.
