In a guest post on Active Investing, Phil Goldstein notes the importance of the Second Circuit’s CSX opinion is not about swap contracts. See Blog Post on CSX Decision
More important is that it reduces the fear that mere communication between like-minded shareowners generates the need to form a 13d group. Merely alleging “concerted action” is not enough. Instead, applying the statute literally requires that coordinated purchases must be alleged (and proven). According to the decision:
As we have noted, the statute and the implementing rule are both concerned with groups formed for the purpose of acquiring shares of an issuer. See 15 U.S.C. § 78m(d)(3); 17 C.F.R. § 240.13d-5(b)(1).
Whether a group exists under section 13(d)(3) “turns on ‘whether there is sufficient direct or circumstantial evidence to support the inference of a formal or informal understanding between [members] for the purpose of acquiring, holding, or disposing of securities.’” CSX I, 562 F. Supp. 2d at 552 (quoting Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 286F.3d 613, 617 (2d Cir. 2002).
Although the District Court found the existence of a group “with respect to CSX securities,” the Court did not explicitly find a group formed for the purpose of acquiring CSX securities. Even if many of the parties’ “activities” were the result of group action, two or more entities do not become a group within the meaning of section 13(d)(3) unless they “act as a . . . group for the purpose of acquiring . . . securities of an issuer.” 15 U.S.C. § 78m(d)(3). (my emphasis)
According to Goldstein, “the bottom line is that general allegations of shareholders acting “in concert” are no longer sufficient to survive a motion to dismiss IMO. There must be a specific allegation that their purchases were coordinated.”
According to Judge Winter’s concurrence, the district court’s finding of a group also suffers from a second error in finding that “the parties activities from at least as early as February 13, 2007, were products of concerted action.” Id. Rule 13d-5(b)(1) applies only to groups formed “for the purpose of acquiring, holding, voting or disposing” of “securities” of the target firm. (my emphasis) The Rule does not encompass all “concerted action” with an aim to change a target firm’s policies even while retaining an option to wage a proxy fight or engage in some other control transaction at a later time. Indeed, the Rule does not encompass “concerted action” with a change of control aim that does not involve one or more of the specified acts.
Thus, two large stockholders that independently acquired their positions can discuss their investment and the company with each other and possible actions they might take separately or together to enhance shareholder value but the existence of such discussions alone is insufficient to support a finding of the formation of a 13d group. In almost all cases such shareholders independently determine how they will vote their shares so there is no reason to form a group for voting them. Unless they actually agree to do something together that suggests a voting agreement, e.g. to fund a proxy solicitation, there is no group.
This court case is a very positive, especially for retail shareowners who will soon be relying more and more on social networking tools now in development that will make “concerted action” by widely dispersed shareowners much more feasible. Shareowner forums aren’t developing exactly as anticipated by former SEC Chairman Christopher Cox, but they are coming and this ruling takes out some of the fear that developers have had in bringing such tools online. Democratic rights have been reaffirmed; we can gather in the new online town squares, speaking our minds about corporate governance reforms that are needed, without violating the law.