New SEC guidance requiring certain investors filing Schedule 13D disclosures to identify the parties backing their campaigns is prompting concern among activist hedge funds and their advisers, according to a report by Bloomberg.
The guidance focuses on so-called sidecar vehicles — special purpose entities that allow investors to finance individual activist campaigns. Investors may be briefed in advance on an activist manager’s strategy and the company being targeted, while the vehicle enables them to participate without being directly identified with the campaign.
The issue is particularly relevant for smaller activist managers, which often use such structures to raise capital for specific situations or temporarily expand their assets under management.
Sebastian Alsheimer, head of shareholder engagement and activism defence at law firm Cleary Gottlieb Steen & Hamilton, said the SEC’s position represented a significant development for Schedule 13D reporting.
The impact is likely to be greatest on smaller funds that depend more heavily on campaign-specific vehicles than larger, established activist firms, he said.
The guidance also recalls the dispute between medical device maker Masimo and Politan Capital Management. Masimo amended its bylaws during the activist campaign to require investors seeking to nominate directors to disclose their financial backers.
Politan successfully challenged the provision in court, after which Masimo withdrew it from its charter.
The SEC’s latest position could nevertheless give companies greater leverage in future activist contests, according to lawyers advising both companies and hedge funds.
One activist manager said the greater concern was not necessarily the SEC disclosure requirement itself, but the possibility that companies could use the guidance to justify adopting bylaws requiring dissident shareholders seeking board seats to reveal their sources of financing.
Such measures could discourage some proxy contests and make it easier for incumbent boards to defend themselves against activist challenges, the manager said, requesting anonymity to speak candidly.
