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Legality of Investors Working Together


no_thanks
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Hi All,

 

The Pershing Square/VRX deal got me thinking again on the idea of investors working together.  What is allowed in this area? It just seems like such a good idea to get together with a few others (in my case, those with a lot more money than me :)) and get some of those overcapitalized micro/small caps to get a little more efficient cap structure. 

 

I looked into it superficially about a year ago, and thought I read that it was pretty much illegal, but if Ackman can pull off his recent move, maybe I am just not being clever enough :)

 

I am definitely not looking to getting close to anything that might be illegal, so please don't get that impression.  I just think there is a lot of opportunity out there in this area. 

 

Thanks in advance. 

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Shareholders can form a group and register with the SEC as "active" shareholders to attempt to drive change in a company.

 

Interesting idea. I imagine it shouldn't be too difficult to create some serious voting power with the purchase power of this forum, especially with those microcap or nanocap. However, how do you define a "group". Will people communicate with each other through an internet forum loosely be viewed legally as a group? Any lawyers here?

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Shareholders can form a group and register with the SEC as "active" shareholders to attempt to drive change in a company.

 

Interesting idea. I imagine it shouldn't be too difficult to create some serious voting power with the purchase power of this forum, especially with those microcap or nanocap. However, how do you define a "group". Will people communicate with each other through an internet forum loosely be viewed legally as a group? Any lawyers here?

 

I don't see how it's any different from 20 partners having a conference call or meeting at a restaurant, yet for some reason I feel the SEC or whomever may not feel the same way.

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Shareholders can form a group and register with the SEC as "active" shareholders to attempt to drive change in a company.

 

Interesting idea. I imagine it shouldn't be too difficult to create some serious voting power with the purchase power of this forum, especially with those microcap or nanocap. However, how do you define a "group". Will people communicate with each other through an internet forum loosely be viewed legally as a group? Any lawyers here?

 

I don't see how it's any different from 20 partners having a conference call or meeting at a restaurant, yet for some reason I feel the SEC or whomever may not feel the same way.

 

One thing to consider is that when you have a meeting at a restaurant there is no public record of what was said.  On an internet forum it remains there in its entirety and is searchable for anyone interested for any reason to find and read.

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My gut tells me that if you are acting as a group and collectively own more than 5% of the outstanding shares you need to make it official to avoid trouble.

 

"When two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer, the group formed thereby shall be deemed to have acquired beneficial ownership, for purposes of Sections 13(d) and(g) of the Act, as of the date of such agreement, of all equity securities of that issuer beneficially owned by any such persons."

 

http://www.law.uc.edu/sites/default/files/CCL/34ActRls/rule13d-5.html

 

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A good read on the issue:

 

Beware the Counterattack Against Activist Investors: The Group Trap

 

"courts have established that the issue of group activity is a “question of fact.”1 In the leading case of Morales v. Quintel Entertainment, Inc ., the Second Circuit parroted the statute and held that the “key inquiry” is the question of whether the members of the alleged group “agreed to act together for the purpose of acquiring, holding, voting or disposing of” their stock. There, the Second Circuit also made clear that “the agreement may be formal or informal and may be proved by direct or circumstantial evidence.” Also, “the alleged group members need not be committed to ‘acquiring, holding, voting, or disposing of equity securities’ on certain specified terms, but rather they need only have combined to further a common objective regarding one of the just-recited activities.

 

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A single purpose fund has the potential to be more efficient than multiple small activists acting as a group. After acquisition of a large stake in a company and negotiation with management, the fund could be dissolved and the shares distributed.

 

Sounds like I am obsessed with Ackman, which I am not, don't even really like him, but it does sounds like the most plausible plan would be similiar to his Target fund he did a couple of years ago?  I could see being really interested in something like that.  I originally got really interested in this idea when looking at PDRX a year or so ago.  Just a really boring, super overcapitalized company.  Something like that would be a good target. 

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Hmm this could have interesting applications with BUHF if one could find shares

 

Wow, now that's a ticker I recognize!  Have you talked to anyone who's familiar with the place?  I talked to someone who knows management and has spent a lot of time up there.  It doesn't matter how cheap the stock is, it's essentially a transfer of wealth from shareholders to homeowners, and not even that well run.

 

No annual report from them again, guess it's time to write another letter...

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You got to be careful in what you discuss with other investors:

 

"In January, according to The Wall Street Journal, the agency’s exam manager, Ashish Ward, told attendees at an annual seminar for compliance officers, “We understand common practice in the hedge fund business is to share investment ideas about companies but you want to make sure those conversations don’t go so far as to actually discuss what you are actually doing right now…that would be information that’s nonpublic,” and presumably a violation of the insider trading rules."

 

http://dealbook.nytimes.com/2014/04/23/in-allergan-bid-a-question-of-insider-trading/

 

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