As noted in the Cooley Alert from Brad Goldberg, Beth Sasfai, Reid Hooper and Michael Mencher that I blogged about yesterday, Corp Fin issued guidance last week that some thought could alter the nature of shareholder engagement going forward. As noted in this brief news article, BlackRock has cancelled all scheduled shareholder engagements with companies – the article says “temporarily” and that is all we have to go on so far in terms of timing.
Let’s flush this out. Last week, Corp Fin issued one new – and one revised – Regulation 13D-G CDI. CDI 103.11 was revised to indicate that shareholder engagement of a 5% shareholder with a company’s management could result in the shareholder being deemed to hold its securities with a “purpose or effect of changing or influencing control of the issuer” – the meaning of “control” as defined in Exchange Act Rule 12b-2. As a result, the shareholder could lose eligibility to report on a Schedule 13G, and instead be required to report on a Schedule 13D.
New CDI 103.12 states:
Question: Shareholders filing a Schedule 13G in reliance on Rule 13d-1(b) or Rule 13d-1(c) must certify that the subject securities were not acquired and are not held “for the purpose of or with the effect of changing or influencing the control of the issuer.” Under what circumstances would a shareholder’s engagement with an issuer’s management on a particular topic cause the shareholder to hold the subject securities with a disqualifying “purpose or effect of changing or influencing control of the issuer” and, pursuant to Rule 13d-1(e), lose its eligibility to report on Schedule 13G?
Answer: The determination of whether a shareholder acquired or is holding the subject securities with a purpose or effect of “changing or influencing” control of the issuer is based on all the relevant facts and circumstances and will be informed by the meaning of “control” as defined in Exchange Act Rule 12b-2.
The subject matter of the shareholder’s engagement with the issuer’s management may be dispositive in making this determination. For example, Schedule 13G would be 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.
In addition to the subject matter of the engagement, the context in which the engagement occurs is also highly relevant in determining whether the shareholder is holding the subject securities with a disqualifying purpose or effect of “influencing” control of the issuer. Generally, a shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more, would not be disqualified from reporting on a Schedule 13G. 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. For example, Schedule 13G may be unavailable to a shareholder who:
- 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
- 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. [Feb. 11, 2025]
This Cooley Alert from Brad Goldberg, Beth Sasfai, Reid Hooper and Michael Mencher contain these takeaways about the CDIs (also see Cooley’s Cydney Posner’s recent blog for more gloss):
1. Investors who have historically reported their beneficial ownership on Schedule 13G as QIIs and passive investors will now need to closely consider this new guidance in determining whether their engagement tactics with companies on certain topics historically perceived as ordinary course engagement topics may now cause them to be viewed as holding their securities with a “purpose or effect of changing or influencing control of the issuer,” and, therefore, trigger a loss of eligibility to report beneficial ownership on Schedule 13G. If so, such investors are required to report beneficial ownership on Schedule 13D within five business days of losing eligibility to report on Schedule 13G.
2. The examples set forth in C&DI 103.12 reflect very common practices in investment stewardship engagement on the part of institutional investors that historically have relied on Rule 13d-1(b). C&DI 103.12 does provide that Schedule 13G eligibility generally would remain available for an investor whose engagement discussions merely cover such investor’s “views on a particular topic and how its views may inform its voting decisions, without more.”
However, the distinction between such purely informative discussions and engagement that “pressures” management to adopt practices consistent with an investor’s views will likely be extremely difficult to define in practice.
3. Investors for whom Schedule 13G eligibility is a priority should carefully evaluate the ability to continue company-specific engagement. Such evaluations may result in investors abandoning certain historical engagement tactics in favor of publicly available policies describing their positions and company disclosures when making voting determinations.
Authored by
Broc Romanek