← Shareholder Primacy
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- [00:04]
A
Welcome to Shareholder Primacy from Free Float Media, a podcast about activist investing, securities law, and all the ways the financial legal worlds intersect and collide in real life. Ann Lipton and I are here again for you. Ann, of course, is a law professor at the University of Colorado who teaches and researches securities and business law. She holds up the legal end of the podcast.
- [00:26]
B
And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast.
- [00:32]
A
I try to. Anyway, how are you doing? Is it the doldrums of the academic year right now? Are you busy or what's happening?
- [00:38]
B
It's the summer with exactly the point where you start panicking over everything you need to get done before classes resume,
- [00:44]
A
everything you promised to the rest of your research collaborators. Yeah, no, I got a couple other things that are kind of cooking. But as we've signaled to our followers here these past couple weeks, in the next few weeks are going to be a little slower. I have some travel planned to go see our kids and so forth. And I hope you have something fun on the docket. So between now and Labor Day, we may book another one of these or maybe another couple if we get our crap together. But at least we have this one to work with. All right.
- [01:19]
B
Absolutely.
- [01:19]
A
Yeah. All right. So. So we do have two subjects that have come up this week. One involves some recent news unexpected in my opinion from the sec. And the other is a little more longstanding subject with a new fun, interesting development related to truth, social and insider trading.
- [01:43]
B
Yeah.
- [01:44]
A
So the recent news is basically a new SEC reg that affects, as we've been calling them, financial activists, what they need to disclose in some situations about their investors in a portfolio company. And then the long standing subject is really pertains to the intersection of this new announcement from Trump Media and this stock act which has been in place for a little while. So we'll talk about that as well. Maybe we'll talk about that one first and then we can handle the other one about the financial disclosures a little later.
- [02:27]
B
But first, but first a reminder, you can email us and yes, we do read the emails and we do get to the requests. We know we have some actually pending that we have to get to.
- [02:38]
A
Maybe we'll do a mailbag, maybe we'll do a mailbag this in the next couple of weeks if we get really lazy.
- [02:43]
B
But, but yes, if we get really lazy and nothing else happens. Which anyway, so. But you can email us at shareholder primacy. One word@free float.llc.
- [02:53]
A
all right, so let's jump into it. We saw a new announcement last week from tmtg. Is the ticker not dj? I know. Excuse me. TMTG is the company. The ticker is djt, as we all know, it's Trump Media and Technology Group. Just a routine announcement. You know, there's publicly traded company that, you know, sent out, I think an 8K, who knows. And their main business is they own Truth Social, which is the social media company that is where President Trump sends out his. His Truths, as they're called.
- [03:31]
B
His Truths.
- [03:32]
A
Yes, truths. It's his preferred social media platform. I don't think he actually.
- [03:37]
B
Yeah, I don't think he posts on other posts on other ones anymore.
- [03:39]
A
Acts or anything because I'm pretty sure somebody told them, you know, you really should try to boost.
- [03:45]
B
I don't think so.
- [03:46]
A
I had to jump.
- [03:46]
B
Yeah, like he was banned From Twitter after January 6th and then when Musk took over, his account was restored. But I don't think he's come back
- [03:54]
A
and I think, no, I don't think he's been back. Right.
- [03:56]
B
Yeah.
- [03:57]
A
So, so, so tmtg, djt, whatever you want to call it, is his main social media feed. I know, everybody knows this. Interesting. The announcement last week was it's actually kind of routine for social media companies.
- [04:11]
B
For social media companies, sure.
- [04:13]
A
Right. And they were going to sell a feed, like a, like a real time feed to like its top 10 accounts and others do this. But of course the top 10 accounts are Donald Trump's and probably nobody else. I don't know who else exactly posted. I don't read it.
- [04:34]
B
Right. No, I mean other social media companies still access to their data feeds, but in this case it's a data feed of the top 10 accounts. But as a practical matter, it's Donald Trump's account.
- [04:44]
A
Right, right. And so you'll have a little bit of advanced knowledge of what's getting posted and it can range from milliseconds to probably a few seconds, but you'll have some sort of edge. And again, you and me, even if we. And I don't have a true social account, I do not have a true social account.
- [05:06]
B
Blue Sky.
- [05:07]
A
Yeah, right. No, and I got all that. I just, I never got around opening a true social account. Normal people like you and me would not notice this, but high speed traders that like depend on this kind of news stuff would love this stuff. So they'll make some quick trades before the posts are public. So what, what do we, what do we make of this announcement? What do we, what do we think other than, other than a money grab, other than, you know, I don't know what they're going to charge for the feed, which is probably what was reported
- [05:39]
B
was they were asking $100,000 per subscription,
- [05:43]
A
but that's probably an annual number, I'm going to guess.
- [05:47]
B
I'm not actually sure it was reported in the FT and like. But the feeling is that a lot of traders are going to feel like they all have to get it because you can't have one person get it because they can beat you. So now they all have to buy it and it could be a substantial boost for tmtg.
- [06:02]
A
What do we think of this, guys?
- [06:04]
B
This is an insider trading problem. And I'm going to start with a caveat, which is that like whenever I want, like this is, this was made in a bottle for someone like Matt Levine to comment on. But like he mentioned it, but he hasn't really gotten into it. And I kind of feel like we're recording this Monday morning and I'm just waiting for him to come out with a column. And quite frankly, if it comes out before this drops, you could just read. But anyway, this is. So this is insider trading and I want to be clear. So to understand that, you kind of have to understand the legal framework. And we'll start with there is interestingly nothing in the federal securities statutes that explicitly prohibits insider trading. There is no prohibition on insider trading in the statutes. The law just doesn't say anything about it. What we have is section 10B which prohibits fraud. Section 10B of the exchange act just says don't commit fraud. And over time courts have come to hold that insider trading is fraudulent and therefore it violates 10B. So the question then, if you talking about whether this trade is legal or illegal, you have to ask, is it fraudulent and who is being defrauded?
- [07:21]
A
Okay.
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B
And there's one rule. I mean, this is a complex area, so I'm only giving what needs to be said. But one of the rules is it's if you receive information from someone and they expect you to keep that information private and only use it for particular purposes, if you receive it in confidence, then it's fraudulent for you to use it for personal gain. And personal gain can mean trading and it can also mean selling it to someone else, like tipping in exchange for money. So like the classic case, the case that kind of set the standard is this is actually a case lawyer works for a white shoe firm. One of the clients of the firm is planning to make an offer to merge with A target company, the target isn't the client, the acquirer is the client. But obviously, as soon as it's public news that the acquirer is going to pay a premium for the target, the target stock price is going to go up.
- [08:10]
A
You're going to work. Right, Exactly.
- [08:12]
B
Right, exactly. So the lawyer learns of the merger and. And trades in the target's company stock. And the Supreme Court held that's fraudulent because the lawyer got his information from his firm and from the client. And when he got this information, there was a sort of implicit or explicit understanding that he'd only use it for the client and he'd keep it in confidence. So if he takes it for personal gain to profit from trading, he deceived his client, he deceived his firm, and he committed fraud.
- [08:37]
A
And it would have been the same if he had traded himself or if he had tipped somebody else about was
- [08:42]
B
either way, okay, and they had trade. And except in that case, the person who traded they are also legally committing fraud. Anyone down the chain, which is going to matter. So anyway, if it's fraud, then the SEC can sue you civilly and you can even be prosecuted criminally by the Justice Department. But the weird thing about this theory is it's a fraud. Who is being defrauded? The person who's being defrauded is the source of the information, the corporate client. Because the corporate client gave you that information in confidence and you betrayed that confidence. That's the fraud. But it also means that if the corporate client were to give you permission and say, oh, no, it's completely fine. I don't care. Go ahead, trade. God bless. Then there's no fraud because.
- [09:23]
A
Right. Even if it was confidential information, if the source of the information authorized use of it for whatever purpose or for a specific purpose, and that person uses it for that purpose, there's no 10B violation.
- [09:39]
B
Exactly. That's. That's how it works. But of course, that, you know, usually doesn't happen. Clients don't go to law firms and say, I'm doing a merger. Usually does not happen.
- [09:49]
A
No.
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B
Okay.
- [09:49]
A
All right, so what happened? So I think this is a good time to ask in the context of Trump Media.
- [09:58]
B
Yeah.
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A
The information that, the information that we're talking about here are the shit that comes out of Donald Trump's head.
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B
Yes.
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A
Which could. Go ahead. I'm sorry.
- [10:09]
B
No, no, no. I mean, go ahead.
- [10:11]
A
Oh. So. So the first, the first question that comes up is this. The nature of the information is not, you know, corporate secrets here. It's government policy.
- [10:22]
B
Exactly.
- [10:23]
A
It's, we're going to, we're going to do. We're going to do this tariff or we're going to, you know, bomb the. Another strait of Hormuz or so. I mean, there's things that Donald Trump does that clearly move markets.
- [10:36]
B
Yes.
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A
And so it seems that this. And he communicates those things largely or in some part over truth social.
- [10:48]
B
Yes, exactly. Right. So here's the issue. So now we have to take what I gave. Like the actual case that I gave you was like traditional corporate stuff. How does that apply to government? So we could start like with the abstract. Like, what if a government employee, just random government employee, finds out there's going to be a proposed regulation, there's going to be a military action. Covid's coming down the pike. That was an issue.
- [11:13]
A
Oh, yeah, sure. Of course.
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B
And trades on it. Is it the same rule? And under the legal principles I just described, the source gave it to you for a confidential reason to use for your work, say, and you used it for personal gain. That's considered fraud. And everybody kind of. So that would seem to apply to the government just as much to a corporate entity anyway. But in 2012, there was concern that what if it didn't? What if the same legal principles wouldn't apply to government as they would to a private company?
- [11:43]
A
Oh, because this is also case law. So what if the case law doesn't? There was no statute up until then that. Right, right about. For corporate.
- [11:51]
B
Exactly.
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A
But.
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B
Right. So. So just in case there was any doubt that the same principles wouldn't apply to government, just to make sure Congress passed this law, and it's called the Stock act, which stands for Stop Trading on Congressional Knowledge Act. And the act says explicitly, just in case there was any doubt, the same rules apply. So whatever the law is in the corporate context, for someone taking from like corporate employers or private employers, the same rule applies to government employees. So if it is, you know, if you got it for a particular purpose and you trade on it, that is a fraud on the source of the information. And a government employee is committing a fraud on the US Government if they use confidential government information for their own personal gain. And the act even says which employees are covered by this act, it names them. And it's basically all federal employees, including. And it says this very explicitly, the president and the vice president. It says that explicitly in the statute right there. So government officials are not allowed to trade on confidential government information and they aren't allowed to sell it
- [12:54]
A
or tip. Okay. So I think we're starting to understand
- [12:57]
B
a little bit the exact same rules as they would apply in the government context. You say, therefore, Donald Trump is not allowed as president to tip people in exchange for money. And so the question is, is that what Trump Media is proposing? And I think it is.
- [13:16]
A
Well, we'll take that apart in a second, but let me just confirm what the Stock act does, just to make sure we have a grounding here first. And I've, you know, I don't follow it as closely as you do, but I've always thought of the Stock act in the context of Congress. Okay, because that's in the title.
- [13:34]
B
Because in the title, because they wanted it to have a cute little acronym,
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A
of course, but Stop Trading on Government Knowledge. We read about, we read about, you know, Nancy Pelosi's husband or something. I mean, there's other Congress people who have been more in the news. But importantly, this is everybody, including president, vice president, named.
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B
It says president, vice president, statute. It's all the executive branch employees, it's the judicial employees. They're all there. It also has other things about disclosing your trades.
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A
And the nature of it is not to set forth some sort of new definition of insider trading. It doesn't say, here's the timing, here's the statute of limit. Nothing like that. All. It's just that to the extent that there exists law, and for our purposes, we mean case law on insider trading, however defined in that case law, it applies to all those people.
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B
People.
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A
So as that, as, as that law evolves and becomes stricter or looser or whatever, it just applies. So it applies equally to all these government employees, including Donald Trump, principal shareholder.
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B
Exactly.
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A
Of Truth of Trump Media and Technology Group.
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B
That's exactly.
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A
All right, so, so is this, how do we make of this? Is, is he violating the Stock Act?
- [14:56]
B
I think so. Because, I mean, as you say, Trump and his sons, they have a majority interest in Trump Media. And Trump, as you said, uses Truth Social to make a lot of official statements about the Iran war, about tariffs, about who's gonna be investigating which ones are cooperating with investigations. And because these are presidential announcements, they move markets. If he announces talks with Iran are going well, stock prices go up. If he announces new tariffs, stock prices go, go down. And that's exactly why institutional investors want to pay money to access the feed. And the company's announcement was really clear. I mean, it wasn't like they were being shy about this. The press release says we are selling the feed because the our posts move markets and institutional investors are going to want access.
- [15:41]
A
Oh, that was actually what the.
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B
It's in the press release.
- [15:44]
A
Oh, wow.
- [15:45]
B
So as a practical matter, this is traders paying the President of the United States States to get an advance peek on what he's going to say so that they can trade. This is the President of the US Taking government information and selling it.
- [15:59]
A
Okay.
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B
That's exactly what the stock app prohibits.
- [16:02]
A
Is this. There's one little nuance here about the nature of the information. I mean, these. Up until he started selling the feed, which I think is live now, I'm guessing people concerned.
- [16:16]
B
No, I think it just starts in August. Like they're taking, they've got, they're signing, they're taking orders.
- [16:20]
A
Okay, great. You know, normally he'd just be doing this and this wouldn't be confidential because the whole, I mean the whole. The public is seeing it. But is this within the definitions of confidential or proprietor information in the case law? Is that, are these posts that kind of information?
- [16:42]
B
Well, it's not the post. The posts are public. The confidential information is what is the President going to post in the future? That is what's confidential. And they're getting that in enough time to trade on it. That's the point. And that information, what is the President going to post? That is confidential government information. Because let's be clear. If his posts were about personal matters, you know, my son's getting married or I'm redecorating Mar a Lago. He can sell that information if he wants to. He's free to sell that information, but no one want to buy it because it's not material, it's not tradable.
- [17:20]
A
Right?
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B
Yeah, exactly. The only reason that these post move markets is because they are presidential information. They are pronouncements of government policy. They are pronouncements of government status. They're pronouncements even in the insight of the President. This is information that is generated by him in his capacity as president. So it belongs to the US Government. It's not his personal or.
- [17:43]
A
And indirectly the US people. This is.
- [17:45]
B
And indirectly the people. So if we analogize to a corporation, which literally the act tells us to do, it would be like a CEO of a corporation selling advance access to the fact that he's going to announce he's contemplating a merger. That might be information that the CEO generated. Like in his head, he's contemplating a merger. It's about his thought process. But it's about his thought process as the CEO of a company.
- [18:07]
A
Right. Corporate policy where he, where he owes a duty and in corporate life, there's a specific duty of loyalty that that CEO owes. In the government context, it sounds like the Stock act has basically created that duty of loyalty about confidential information related to what the President thinks and says.
- [18:29]
B
Exactly. That's exactly what it does. I mean, the press release, the Trump media's press release is really outrageous. It says explicitly, and I'm quoting now, that they're selling this to. And this is the, quote, monetized proprietary assets. These are not Trump Media's proprietary assets.
- [18:45]
A
No, no, no, no.
- [18:46]
B
No government assets.
- [18:48]
A
Right. This belongs to you and me. All right, so there's this. How material. I mean, is this material or does it really matter? So, you know, look, for better, for worse, we don't really talk about it here because we try not to talk too much about social or civic affairs, but you can't, not sometimes. Like today. You know, the. The Trump family has made billions with a B off of the presidency in ways that we can debate are good or bad. I personally think it's not great. It's a bad look. But anyway. And they've said, the Trump media, his company said there's no conflict, and he is, he's denying any involvement. He says, I don't really manage these investments anyway, which is not credible. I mean, what's, what's, what's the broader reason why this is going to be important?
- [19:37]
B
Yeah. Okay. So one of the interesting things about insider trading law, and this is actually why the law itself is fairly convoluted, is there's a lot of disagreement about the policy. Like, why do we even prohibit insider trading?
- [19:47]
A
Oh, yeah, there's a. There's a whole. I'm sorry to interrupt. There's a whole thread, a whole rich thread that in financial literature, that insider trading should not be illegal.
- [19:57]
B
Exactly. But not completely. There's one. Like, that's the thing. There are a lot of people who argue that it shouldn't be, that we should.
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A
It adds information to the market. There's also.
- [20:06]
B
Exactly. It makes prices more efficient. It's better for, you know, there are all kinds of reasons to not prohibit as much as we do. But where. I believe, and I haven't, like, you know, read every single person, but where there's a core of. Where there's agreement on what we should prohibit, that core is when there's a risk that the insider with the information will stop doing what they were hired to do because they can make so much money on the trading instead. So here's, here's. Imagine a CEO. CEO is supposed to run the company profitably. You want him to increase stock prices, and maybe you pay him to increase stock prices. But if he can insider trade, he makes money whether stock prices go up or down. What? He makes money on his volatility. So if he thinks prices are going to go down, he'll short the stock. And if he thinks prices are going
- [20:53]
A
to go up, he'll buy something and he'll then behave and discover, disclose stuff in ways that will. Well, this creates. This is everything is agency problems.
- [21:03]
B
Exactly. Exactly. He won't be focused on running the company well, he'll be focused on running the company volatilely so that he can get the trades in. He'll delay disclosure so he can get a trade in. He'll make disclosures specifically to move the stock. So the fact that he's insider trading causes this divergence in what he's supposed to do versus what he's actually doing. And that's exactly the problem with the Trump Media thing. Because this feed the Trump Media is selling, it's only valuable, it's only worth paying for if Trump posts information that moves markets. If he doesn't post, no one pays for the feed. If he posts less, people pay less for the feed. So now Trump is incentivized to post things that move markets, regardless of whether that benefits the American people. He's got an incentive to disclose negotiations with Iran or disclose negotiations with other countries or corporations or whatever, not because it's good for America, but because it'll
- [21:59]
A
move markets because it's gonna help his trader customers.
- [22:02]
B
Exactly. And his whole thing about, like, well, I have no idea what my investments are doing, which, as you say, is not credible. But even if you believe it, it doesn't matter. All he has to know is that someone's paying for this feed, which obviously he does, and that gives him the incentive to make the feed as material as possible.
- [22:18]
A
All right, now here's a question. We're gonna have to a couple more minutes, and then we have to move on. That's fine. You know, let's. Is this, Is this actionable? I mean, is, Is the, Is the fraud that. This is a 10B case, right? Is this actionable? I mean, we, we think. I know what you think, and I think I think that too, about that this is fraud, this is insider trading, and that Trump Media should be brought before some judge to account for, for this. And they would defend themselves and say, no, no, no, it's this, that or the other thing. What, What. How would that look? What would, what would. What Would the case start to look like.
- [22:57]
B
Okay, right. So we're going to talk about what, what kind of case it would be. But you're right, there's. They have a defense. There really is. There is a flaw in the theory that I've just laid out. And I will tell you the catch.
- [23:07]
A
Okay, go ahead.
- [23:08]
B
As I said, the securities laws don't prohibit insider trading. They prohibit fraud. They prohibit deception, fooling someone, tricking someone. And the theory is insider trading is fraudulent. It's deceptive, because this employee or whoever, they received the information for a purpose and they secretly took it for profit. The fraud is pretending loyalty to whoever the source of the information is and then betraying them by illicitly using the information for personal gain. So in this case, the theory of fraud would be. Trump has this information that is government information and he's using it for personal gain. But he announced he's doing it publicly. We all know
- [23:48]
A
not the actual truths, but his policy, his program of charging was fully disclosed.
- [23:56]
B
So what he would say, what he will say should a court get hold
- [24:00]
A
of this, is secretly.
- [24:02]
B
He didn't secretly do anything. He announced it right there for everyone to hear. I am taking this government asset and I am selling it for personal gain. So you might say the government is wronged. You might say there's some other statute that would apply. I have no idea. But it's hard to call it fraud, because who's deceived everyone. Everyone knows he plans to do this. There was a press release. There are headlines in the Wall Street Journal.
- [24:27]
A
There's an old saying in. I can't remember who it is, possibly apocryphal, is that the real problem isn't what is the COVID No, it wasn't the COVID up. The real problem with what happens isn't what's illegal, it's what's legal.
- [24:42]
B
Yeah. So if it's. Exactly. If it's not fraud, it doesn't violate Section 10B. But here's the thing. Let's say he actually did make that argument. Let's say this somehow got to a court. Let's pretend I'm not sure which is.
- [24:55]
A
By the way, that's not happening. I don't think the. No one's gonna be bringing this.
- [24:59]
B
I have a theory on this. But, but, but, but let's say it got to a court. He makes that argument. It's very possible a court would accept that defense, but it's also possible they would reject it. And the reason I say that is there have been cases where defendants made that Exact argument. I disclosed. I disclosed and therefore it wasn't fraudulent.
- [25:20]
A
Right? Yeah. Right.
- [25:21]
B
Yeah. And it turns out courts don't like that argument. They dislike it and they find reasons to say that disclosure wasn't good enough. So, theoretically, disclosure is supposed to mean there's no fraud, but in practice, I can already think of what, what you might argue here, like a court could say it's not enough to generally disclose the feed is available because he hasn't been specific about what precise information he's going to take for himself and post about. For any specific piece of information he has. We don't know if he plans to keep it in confidence. If he goes into a room with Pentagon officials and the meeting is categorized as top secret, should everyone just assume he has his fingers crossed behind his back? We don't know. Trump Media is already. Trump Media, as you said, is already insisting there's no conflict and Trump's. Trump's job as president between Trump's job as president and what they're selling. Now, if that's true, that means he's not selling any governmental information. So does that mean they're disclaiming that he's planning to post proprietary government information? I mean, it's just not clear that this disclosure of the feed itself is sufficient to moot the fraud or, you know, get rid of the fraudulent aspects of any specific post about specific information. And Trump might say something like, well, I gave myself permission to use the government information, but I don't think that flies at all for a bunch of reasons. I mean, you can't put the president in the statute and say he's covered by it, and then the President can unilaterally say, oh, no, I'm not.
- [26:47]
A
No. Okay. Oh, interesting. And that assumes, like I said, that this will go somewhere, and I think it's unlikely that anyone's going to pick up this.
- [26:55]
B
That's not exactly true, because I agree there is no chance that this SEC or this DOJ is going to bring a case. But private plaintiffs can sue.
- [27:09]
A
Oh, under, under the Stock act, under
- [27:12]
B
general insider trading law, anyone who trades at around the same time of the illicit trade is allowed to sue for disgorgement of the illicit gains, anyone who traded and anyone who tipped the traders. So that means a private plaintiff could, theoretically, if I'm right, sue Trump Media. And the. And the high speed. Leave aside whether they could sue Trump himself, whether there's an immunity doctrine, I have no idea. But they could sue Trump Media and they could sue anyone who buys the feed, but they'd have to know who that was and they'd have to show that they traded at about the same time. But otherwise they can sue for a disgorgement of the illegal profits for the price that was charged for the data feed. So it wouldn't absolutely shock me if some enterprising plaintiff took a shot. It could happen.
- [28:02]
A
Okay. Oh, that will be fun to see. Wow. All right, so we'll have to follow this starting like in around August you said?
- [28:10]
B
I think I said, yeah, August 1st.
- [28:12]
A
All right, cool. We'll see who buys this. All right, well, we have more to talk about related to the SEC, the new SEC rules affecting SPVs. And we'll do that shortly here at Shareholder Primacy.
- [28:30]
B
Shareholder Primacy is brought to you by free flow analytics.com the only free database of corporate directors, their influence and their performance. If you own a stock or retirement plan, go to free flow analytics.com and look up which of your elected directors are performing well and which aren't. Use your vote in the alternative democracy and get your data @free float analytics.com now back to the show. Welcome back to Shareholder Primacy. I'm Ann Lipton here with Mike Levin. So last week we saw this little bit of, little noticed bit of SEC not regulation, interpretation of the regulations pertaining to financial activists. And based on this announcement, as I gather, activists like, which are institutional investors are going to have. Yeah. Are going to have to disclose their own investors, their own limited partners, I guess in some situations.
- [29:28]
A
In certain situations, exactly.
- [29:29]
B
Okay, so what are these situations?
- [29:31]
A
So, so this pertains to special purpose vehicles, SPVs. So and there's all sorts of definitions about what an SPV is. But basically a SPV is like a one time use corporate shell that holds investment from, you know, a syndicate or from a diverse group of share of investors. Could be anybody, could be individuals, could be institutions, could be foundations, whatever, who all contribute kind of money, they create the vehicle and that's used, it's for a special purpose. Okay. And the special purpose in this instance is to invest in a given company for activist intent. Okay. And this, this happens more than people might expect. But it's still not highly common.
- [30:25]
B
Yeah, I mean I usually think of you investing in a fund that does
- [30:28]
A
different engagements rather than most, most activists that we read about. And in fact most activists that are at work have funds. So they go and, you know, raise a bunch of money and then invest in a number of, of situations. I know one fund that I'm friends with, if their number is two, they have two different investments that they work, that are activists. I mean, there's others.
- [30:53]
B
But, but, and, but when investors invest in those, they don't necessarily know, like the pitch isn't, we're going to do an activism at this one company if
- [31:01]
A
you're being pitched for that investment. You know, sometimes the portfolio managers say, here's the 10 companies I'm considering.
- [31:07]
B
Right.
- [31:08]
A
Or something. But this is very specific. Someone goes to you, Ann, and says, if you have a million dollars, we're planning on putting it to work at SpaceX. It's not happening. But we mentioned it. We try not to mention SpaceX.
- [31:24]
B
We almost went a whole show.
- [31:26]
A
Sorry, sorry. And so it's a vehicle that invests specifically for that purpose. And sometimes you'll lay out your plan and say, this is what we're doing, we're doing a proxy contest or whatever. And that'll come up in a minute about the proxy contest. And this again happens a little more. You know, there's probably a few dozen, not even that many that get formed in a given year to do this, but it's not completely unusual.
- [31:53]
B
I didn't even know it was a thing.
- [31:55]
A
Yes, well, you know, sometimes a newer activist or someone who doesn't do it a lot might, you know, because they haven't raised a fund, nonetheless, it's a really good idea. And they'll go talk to somebody who'll say, okay, I'll give you the $10 million I know you need 30 if you can go find 20 other million, millions of dollars, we'll put it in this vehicle and, and we'll go, I will go off to the races and we'll start doing the activism at the company that you just talked to me about. So that's kind of what's going on within spv. Now immediately you can sort of see some. Why would you form an SPV? Why wouldn't you just like tell all 10 people to just go make an individual investments in. And then we'll form a 13D group. Assuming that you're hitting the 5% threshold or form a group or something like that. Why don't you just co. Well, it does make life a little easier. Okay. But SPVs in some part are designed to not reveal, conceal the identity of some of these investors.
- [32:58]
B
Right.
- [32:58]
A
Okay. Maybe they don't want to be associated with it. Maybe they, it's too small for them. They're really big investors and they don't want to, you know, manage it separately if they were to. Okay, so.
- [33:13]
B
And if they're going to be Lawsuits or whatever, you don't want to be the target of the lawsuit.
- [33:16]
A
Right, right. You don't want to be sued individually. It helps limit liability. Okay, so that's kind of what's going on with SPVs. Well, what happened last week is the SEC through the corporate corp. Fin. Corporate finance. You know, their, their, you know, marquee division of, of the SEC issued a CFI corporate finance interpretation about these SPVs. Now, the interpretation was very straightforward. It said any SPV that forms, that files A third form, 13D, because they have more than 5% in activist intent, needs to disclose all the investors in the SPV in, in that 13D5. I think it's.
- [34:03]
B
So you can't shield your identity if you invest in a vehicle.
- [34:08]
A
Right.
- [34:09]
B
That is intent, that is just intended for one particular engagement.
- [34:13]
A
Correct. So, and this was interesting at a few different levels. But let's, let's make sure that, you know, we make mention one thing which is that this only applies to 13D filers.
- [34:25]
B
Well, but there was a. Right. Yeah. Oh, so if you're not a 13D filer.
- [34:28]
A
If you're not a 13D filer.
- [34:30]
B
But there's a proxy one too.
- [34:33]
A
Yes, there's a related one related to soliciting proxies, which we'll get to in a sec. Okay.
- [34:38]
B
Okay.
- [34:39]
A
So if you're soliciting proxies a little down the road, that presumes in the proxy contest. Right.
- [34:45]
B
So if you're doing your engagement at a 4% level, you're not filing a 13 year.
- [34:48]
A
Right, exactly.
- [34:49]
B
So you're not revealing anything.
- [34:50]
A
Right. And so your SPV can, you know, go forth. You could, I mean, but at least
- [34:55]
B
until you run into an advanced notice bylaw that requires disclosure. So that's all separate. Right.
- [35:00]
A
So, so it's for 13D filers. And again, all, you know, all your 2, 4, 10, whatever number of investors will be on that 13D, assuming that you're at 5%. So let, and that again, based on what we talked about, SPVs. And why form them? That may give some SPV activist investors or their limited partners, because usually these are like LLCs or something like that, a little bit of heartache. Is it going to be a little harder to raise investment if you know you're going to be just disclosing who I am, assuming you hit the 5% threshold. So there's a couple of two or three aspects to this we want to cover. First, we'll cover the 13D mechanics, then we'll talk about proxy solicitation. Okay, first, let's ask. We. Let's talk a little bit about what the. The actual. It's not even a regulation. This interpretation is corporate finance interpretations. These used to be called cndis, the compliance and disclosure interpretations. And you're probably, you know, a little familiar with. With that little bit of. Of sec.
- [36:13]
B
Yeah.
- [36:15]
A
Policy or whatever making. They only come for. I think they only come from Corp. Fin. Corporate finance. I don't believe any other division of the SEC issues these kind of interpretations.
- [36:27]
B
Yeah, no, because they're. They're the ones who do the. Yeah.
- [36:30]
A
Right. And the regs. This is the lowest level of SEC kind of taking a stand on something. There's. This is. This is less relevant than like no action letters. This is certainly different than, you know, regulation and whatever the commission itself does. This is just the staff basically saying, here's kind of how we think about this particular issue.
- [36:57]
B
Yes. But we've also seen ones where it was pretty clear that the staff was taking its marching orders from higher ups. Like it's.
- [37:05]
A
Well, that's.
- [37:05]
B
And that's like, remember, remember when they did their whole thing where they said you can't be a 13G filer if you engage in ESG.
- [37:12]
A
Right.
- [37:13]
B
Conversations. There is no question that was coming from the higher.
- [37:17]
A
And that was a C. That was a cfi, that was a cmdi.
- [37:20]
B
Right.
- [37:20]
A
Or whatever it was. And it's just basically a public statement saying. And usually it's in the form of like Q and A. It's like I kind of. I've been rereading some of these to kind of get up to speed on this one. And this is kind of like the SEC Corp. Fin staff's mailbag.
- [37:33]
B
Yes, it is. Although I always wonder if they're generating their own questions because they want to put out an answer.
- [37:39]
A
I wonder that about podcasters too. So anyway, so this is just the staff saying, here's how we're going to interpret this. And in this case, it's how they're going to interpret the rules around filing form 13D. That if it's an SPV and the language in this CFI is actually pretty precise. It says if you form an activist a vehicle for a specific purpose and the investors are informed of that purpose in advance and so on and so forth. There's some very specific conditions that have to be met. That's when you have to disclose them in the 13D. But again, this is just corp Finn staff saying, this is kind of how
- [38:24]
B
we think about it. It.
- [38:25]
A
There is a good chance that this kind of came down from the commission. Yeah, but that's something I wanted. I'll talk about in a minute. The next interesting part of this is this little bit of companion regulation that came out related to a specific part of activism. Proxy contests.
- [38:46]
B
Right.
- [38:46]
A
Okay. So. And it's one of the least read, I'm guessing, parts of a proxy statement and certainly one of the least understood is that at some point in a proxy statement remember reading about who the participants in the proxy solicitation are. The participants?
- [39:07]
B
I don't. Well, I mean, I can. Reliability. Oh, yeah. Okay.
- [39:12]
A
Okay. So anyway, there's a list of what are called participants and you list all the principles and you list some proxy solicitor and some of their staff. It's anybody who can reasonably be expected to kind of be touching or contacting or talking to a shareholder in the solicitation of the proxy. So usually you list as the participants, like the portfolio management, the relevant staff from the fund, all the director candidates. Because sometimes you might talk to a director candidate. Okay. This is just to give the shareholder world a little heads up about who you might be talking to.
- [39:44]
B
Okay.
- [39:45]
A
If I can't remember the threshold, it's like $500 of cost per investment. If you exceed that and almost every SPV investor would be part of this, you have to list the investors, those limited partners as participants in the solicitation as well. So if this SPV gets as far as the proxy contest, then they're going
- [40:10]
B
to have to disclose again.
- [40:11]
A
They're going to have to just. And here you don't have to be 5%, you have to be under 5%.
- [40:18]
B
And that's when there's actually going to be liability risk. Because if you're named as being a solicit, soliciting proxies, then if there's a charge that there's a false proxy, you
- [40:26]
A
are going to be some fraudulent. Exactly right. So that's the other thing. So this will possibly affect how SPVs kind of get involved.
- [40:37]
B
Yeah.
- [40:38]
A
In proxy contests maybe.
- [40:39]
B
Well, I wonder, I mean, can you shield it by like. So the limited partners form a limited partnership first and like the, you know, it's like the. The special purpose vehicle for the special purpose vehicle and that's what they disclose.
- [40:52]
A
I don't know. There may be. There may be some workarounds here that I haven't thought about. No one's tested this, I don't think.
- [40:56]
B
Yeah, I know. It's brand new. Yeah.
- [40:57]
A
Right. So. So that's the other thing is that there's now related to the proxy Solicitation rules, all the investors in an SPV will have their identities disclosed again. And that's regardless of whether you file 13D.
- [41:14]
B
And once again. And yeah. Be potentially liable. I mean, I don't know how likely that is. I don't see a whole lot of lawsuits.
- [41:21]
A
This could send a little chill through SPVs. Again, most investors are trying to avoid the 5% threshold anyway, at least are they kind of time we've talked about that. Yeah, so. So there's. There's a chance that people may be looking for. And I've actually heard from a couple friends of mine who are already starting to look for workarounds to say, is there some, some way to kind of get around this again? And the SPVs are not completely common, but they, they happen. I know a bunch of friends of mine that have started SPVs over the years to, for one or other investment activist investments. So this would, this would affect them now. And part of the problem is I can't disagree vehemently with the SEC staff at least thinking this way really. Because if, yeah, if the. Look, the point of 13, again, if we agree with the policy that we should be disclosing who investors in a company are, and I'm not sure I agree or disagree, this in one sense kind of closes a little bit of a loophole that you'd be able to conceal investors in a company by putting them behind an SPV rather than by having them make direct investments and being listed as a long list in a group.
- [42:46]
B
Yeah, but I mean, I always thought. I mean, I don't know. I always thought. I mean, I'm not opposed to sort of knowing who investors are, but the group policy, the 13D. I mean, I think the bigger issue is that you're there and what plans are.
- [42:59]
A
Oh, yeah, wait a sec. Absolutely. I. We can have a much larger discussion about whether 13D makes sense in its current.
- [43:07]
B
But just. Yeah, I mean, like, who the, you know, members of the group are is a lot less important. Unless it's like a name like Elliot.
- [43:14]
A
Absolutely.
- [43:15]
B
The fact that they are there and they do, but there's.
- [43:18]
A
But there's still plenty of, you know, a very large number of investors who like the idea of investing in activist situations but not being for reasons they don't necessarily want to be disclosed. And, you know, we have to decide, you know, as a matter of policy, whether that makes sense or not.
- [43:35]
B
Yeah, yeah. I mean, yeah. I mean, we can think of all kinds of situations. Obviously nobody's going to do the activism stuff at the Elon musk companies. But he's a good example. No, no, no.
- [43:42]
A
There's many smaller ones where like.
- [43:45]
B
But one reason, like, you know, you're not gonna, like, you don't want to, like. Leaving aside all the other issues, if you want access to his private companies, and SpaceX is not private anymore, but if you want access to his private companies, you can't piss him off in his public company. So therefore, you may not want to, like, you know, those kinds of things. Oh, you brought my damage relationships. Yeah, yeah.
- [44:04]
A
All right. There's one other broader issue that occurred to me as I was thinking about this and how it affect me. And again, I don't. I've. I've, you know, started setting up SPVs for various, you know, once or twice, but I've never really made an activist investment through an spv. It just hasn't been necessary. I mean, you know, they're a bit of a hassle to set up, and there's some legal cost and, you know, you got to manage things in the right way. You got to put together an operating agreement because it's an llc, so. But I'm wondering, and this gets back to your point about whether this was just the staff kind of clearing up a loophole that's bugged some senior staff person for a long time, or whether this is something broader coming down, like from the commission. And if it come down from the commission, you know, it's coming down from someplace greater than the commission, it's probably the White House. All right. This is, as far as I can tell, the first effort under SEC Chair Atkins to really make life harder for financial activists. Okay. Most direct efforts to make life harder for activists have all been in the ESG world about shareholder proposals and proxy advisors and all that kind of stuff. Okay. And we talked about it, that most financial activists just aren't troubled greatly by. At least directly in terms of their own interest by those efforts. You know, clearly it's, you know, bugs some more than others and so forth, but it doesn't really affect the ability. All the ESG stuff about like, 14A8 does not affect the ability of a financial activist to kind of do their thing. Okay, this. Yeah. And you could argue that maybe the move from quarterly to semiannual reporting is. But, but that's not designed, I don't think, to make life hard for, like, financial activists. I think that's just, you know, an expression of policy that some people have long advocated. We can disagree. And I, we, I do disagree with that. I like quarterly reporting but, you know, that's not aimed directly at, you know, that hedge fund activist, financial activist community. This is. And that's. And that. And I'm not sure what to make of that. Go ahead.
- [46:25]
B
I. Well, you've heard my theory on this before, which is this is all going in one direction, which is consolidating the power of managers against their shareholders in general. And I've made this argument before. ESG is sort of like. It's the tip of the spear. It. Like, you can. What. Like, I don't. I've gotten pushback on this. There are definitely people who want to. Who their interest is esg, and they want to get rid of it specifically for political reasons. And they are, you know, the proxy advisor attacks and all of that stuff. That and 1488, that's very specifically because they think ESG is bad for political reasons, and they want to get rid of it. But I think there's sort of a marriage, a kind of an alliance with people who. It's like, it's not so much they care about ESG specifically. It's what they want to do is limit shareholder power. And so what we're seeing is like, ESG becomes the excuse to limit shareholder power across the board. And then, of course, it spreads out in other ways. And it's not that there aren't people who, like, really, for them, it's about esg. And I don't want ESG activism because, you know, I'm conservative, Republican, Texas, whatever. But it's just that they get a lot of their support, and they get a lot of, you know, you know, sort of political alliance with the people where it's just, oh, no, I don't want shareholders to be bothering management at all. And this is why those proxy advisor laws that we've talked about, a lot of them, like, they start with because proxy advisors make ESG recommendations, but they end with and therefore will burden any advice against management.
- [47:54]
A
Right, Right. Yes. I. Where you're going with this. And I. Like I said, I. That's a. It's a very credible interpretation of what's going on. It's just not clear to me that this is directly part of that or whether because it's a C. Because it's a cfi, because it's a policy thing that, you know, it's from the.
- [48:15]
B
So. But so was the thing with ESG commentary from the big mutual funds. I think it's just all part of one larger project, and that project is to make management less accountable to shareholders, period. On all things.
- [48:26]
A
Okay. So, however, if it is in fact part of an effort to start to crack down on financial activists, this worries me. I mean, it worries me per se, a lot. You know, the SPV stuff, again, we could talk about and so forth, but it's going to make life harder for some activists. But whether this is the beginning of a trend to really make life harder for active again, that's been a dream of, you know, a lot of corporate members of the Business Roundtable and so forth, to really make life difficult for. Yeah, like the retail Starbursts program, Right? Yeah.
- [49:04]
B
So excellent retail shareholder voting program. I mean, it starts as, oh, no, we want to get rid of climate activists. But it becomes.
- [49:13]
A
Yeah, exactly. Right. So, so this is one thing I'm going to be kind of pondering and wondering about. We'll sort of see. I mean, there's, there's a ways to sort of see what the SPV world looks like.
- [49:26]
B
Yep.
- [49:27]
A
Again, it's a very small sample, but we can sort of see and sort of see how it works. So anyway, that's what I had for you about this, and it's, it's an interesting.
- [49:36]
B
I did not even know that the SPV thing was a thing, so.
- [49:39]
A
Oh, no, this is, this is, again, it's not a huge deal, but it's not a small deal either. So anyway, all right, we'll return to that at some time soon. But in the meantime, this is Shareholder Primacy, hosted by Ann Lipton and me, Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations. Ann is professor of Law and The Lawrence W. DeMuth Chair of Business Law at the University of Colorado Law School. You can find me, Mike at theactivistinvestor1word.com and Ann@Law. Colorado. Eduardo, thanks for listening. We'll talk again soon.