Calls and emails have started to arrive as investors plan activist situations, for current projects or for annual meetings in 2016. With even more activist managers at work, these days portfolio managers field several inquiries each week.

If you’re a PM stuck with a poor performer, you’d like to take the call. You’d love to see positive changes there. You’re inclined to at least listen, and maybe support the investor’s plan. If you’re the activist investor, you’d like the PM to take the call as you round up support for your thesis and proposed changes.

As all this transpires, how do these shareholders avoid forming a dreaded “group”? Here, we suggest what to do, and not to do, to help comply with the SEC regulations that apply to these kinds of discussions.

The Law and Regulations

Federal law and SEC regulations that interpret the law prescribe how groups of shareholders can talk with each other. More specifically, they prescribe when and how shareholders must disclose those talks.

Of course, any number of shareholders, representing any number of shares, can work together. No law in the US prohibits talking or collaborating.

In some situations these relationships trigger an SEC reporting obligation. The obligation, to file a Form 13D, applies to any single activist investor with over 5% of the outstanding shares of the company, or any group of activist investors that together owns over 5%.

PMs typically wish to avoid becoming a part of that group. No one wants a mere phone call to lead to the need for an SEC filing, with the elaborate disclosure and need to update it frequently. What kinds of discussions and actions can a PM undertake without doing that? What should a PM avoid?

Some Suggestions

We’ll leave it to securities lawyers to cite the specific legal and regulatory language that defines what constitutes a group and what actions create the obligation. And, none of this matters if the activist investor’s and your shares combined add up to less than 5% of the outstanding shares in the company.

Based on our non-lawyer understanding of that language, we suggest what conversations and actions might and might not lead to joining an activist investor’s group.

You probably form a group if you:

1. ❖share the expenses of an activist project
   

2. ❖agree in advance of a proxy solicitation to allow the activist investor to vote your shares
   

3. ❖contact other shareholders to encourage them to support the activist investor
   

4. ❖join the activist investor in a meeting or call with the company.
   

You probably don’t form a group if you:

1. ❖express to and discuss with the activist investor (or other investors) your opinions about the company, including negative and critical views about the BoD and executives
   

2. ❖convey to other shareholders how you intend to vote or how you actually voted, say in an open letter to the company or a news release.
   

3. ❖suggest possible independent BoD candidates that are not employees of a PM’s fund or firm
   

4. ❖designate the activist investor as your proxy to vote at a shareholder meeting, as the result of a proxy solicitation.
   

A word about proxy solicitation, then. The act of granting an activist investor your proxy, or of an activist investor soliciting your proxy, does not by itself form a group. Asking a shareholder to vote for your BoD candidates, or voting for an activist investor’s BoD candidates, does not mean you’ve decided to work together in the kind of group that the law and regulation have in mind.

Of course, we’re not attorneys, and no one should mistake these suggestions as legal advice. Proceed accordingly, and discuss any questions with your counsel.