Wachtell, Lipton, Rosen and Katz on Beneficial Ownership

As a public company CFO for a growing medical device company, I always thought of myself as being on top of our capital markets position, both for purposes of understanding our ownership base and for handling our corporate share buyback program.

Imagine my chagrin when I got a phone call with the following stylized conversation: "Hello, this is Mike from Freefall Ventures. Looking at your 13D's, I'm your largest shareholder. I have a few questions." I'm somewhat confused, as I have never heard this name among our ownership base. Opening my database, and a split screen of the NASDAQ issuer's ownership screen, I see no entry for any level of ownership by this person's firm. If he were the largest, his position would have to have been a double digit percentage, as our largest holder was a well known mutual fund.

"Excuse me for asking, but I don't see any filing for your firm. Let's go ahead with your questions, and perhaps you can enlighten me later about your position and why I see no 13D filing." Of course, Mike never does. After the conversation, a call to the NASDAQ Market Intelligence desk yields absolutely nothing but a scripted commentary about the complexity of reporting. That gave didn't give me the warm fuzzies about informational efficiency in our capital markets.

Marty Lipton's firm recently sent a letter to the Secretary of the SEC on Rulemaking Under Section 13 of the '34 Act. It clearly makes the case for updating the rules to prevent the current "market manipulation and abusive tactics" by aggressive hedge funds. The firm was excoriated by the New York Times as being supportive of entrenched managements at the expense of shareholders. This argument is either woefully naiive or aimed at currying favor with the hedge funds.

Dating back to Artuhur Levitt's time as SEC Commissioner, the idea of a "level playing field" for information was articulated. In fact, this is the same underpinning behind "informationally efficient capital markets," a concept that is taught in most MBA courses on investments and modern portfolio theory. It became one of the driving forces behind Reg FD, to the benefit of all capital market participants. As an issuer, I have a right to know who owns my equity on a timely and current basis. The issue of being entrenched or not, is a red herring. As an officer of the company, I need to be able to formulate and maintain a communications and relationship building strategy that makes efficient use of management's time. This can't be done if I don't know who my audience is. As a market participant in the company's own shares, I also have a right to know where potential demand and supply might be coming from, and current positions are a useful starting point. Again, being "entrenched" or not, is irrelevant.

Examples of abuses within the current system abound and have been discussed since 1983. In the WLRK letter, they point out Pershing Square's acquiring 4.9% of JC Penney's stock (under the reporting threshhold) through open market purchases, and subsequently acquiring a total 27% position through forward purchases, call options and total return swaps BEFORE filing a 13-D! Whatever one thought of Penney management, this is an egregious example of "hedge fund activists who have gamed the window to their own advantage." This has no place in any financial market that purports to be modern, fair, equitable, transparent and informationally efficient.

We don't need to focus on things like high frequency trading and invisbility for dark pools to maintain our capital market leadership. These kinds of practices confer no economic benefit but are redistributions of benefit between classes of market participants. The WLRK letter clearly states that the window for filing a disclosure should be shortened, as have other disclosure periods like the 8-K and insider trading periods, and that ownership be defined as to capture the ability to exert economic ownership through derivatives and synthetic positions.

This is how Mike acquired a position in my company. He made a lot of money for himself, and came and went like the wind. Other shareholders who could have sold on the upticks as positions were being built or his filing was being announced were out of luck. Let's put everyone on the same level, informational playing field--we know how to do it, and it's not at all burdensome, and there's no excuse for our waffling and regulatory inaction.