The SEC’s recent enforcement settlement involving a fund manager highlights the SEC’s focus on an investor’s “control purpose” triggering the requirement to file on a Schedule 13D as opposed to a short-form 13G. At issue was HG Vora Capital Management’s 5% interest in a public company, and whether it had complied with its obligations to supersede its existing filing with a long-form Schedule 13D filing within 10 days of no longer being “passive.”

Schedule 13G is available to passive investors (over 5%) that acquired shares “not with the purpose nor with the effect of changing or influencing the control of the issuer,” so long as their ownership remains below 20%. The SEC has a broad view of the types of activities that could show such a “control purpose,” or, from the SEC’s point of view, that a “passive intent” no longer exists. Urging the issuer to consider an extraordinary business transaction, for example, or changes in business operations or strategy, could disqualify an investor from “passive” status in the agency’s view. Once a passive intent no longer exists, the investor will no longer be able to file on 13G as a passive investor, and must switch to the longer Schedule 13D. With the SEC’s recent revisions to the rule shortening the filing deadlines, this determination must be made quickly to avoid missing the public filing deadline.  

HG Vora filed on a Schedule 13G as of year-end 2021, disclosing it owned 5.6% of the company’s stock. However, from January through mid-April 2022, HG Vora nearly doubled its interest to 9.9% of the total outstanding common stock, all held by an affiliated hedge fund that directly owned the shares. The SEC also noted HG Vora’s additional economic exposure to the company through swap agreements.

According to the SEC order filed to reflect the settlement, we understand the facts as follows. HG Vora had apparently considered ways the company could become more efficient, liquidate non-core business assets, and develop a more efficient capital structure by issuing debt securities. The development of this view, alone, did not change HG Vora’s status as a passive investor. Then it began conversations with a private-equity firm about providing asset-backed financing to the company–still not a control intent.

When did the firm move from passive to active status? HG Vora held discussions with a private-equity firm about an acquisition of the company. On April 26, 2022, HG Vora “first considered making its own acquisition bid” with financial backing from the private-equity firm. As part of this potential bid, HG Vora “began drafting an offer letter” for all of the company’s outstanding common stock.  As part of this offer letter, HG Vora included a “’placeholder’ offer price of $85 per share.” According to the SEC, it was “no later than” this date that HG Vora shifted from a passive investor to an activist investor (with Schedule 13D filing obligations within 10 days, on May 6).

On April 27, HG Vora contacted outside counsel to advise on its Schedule 13D filing, and provided counsel with a copy of the draft offer letter shortly thereafter. On May 12, 2022, HG Vora first met with the public company’s management to discuss the potential bid, following up with a letter to management the next day. The proposed purchase price was $86 per share, or a “20.3% premium to [the] common stock’s prior-day closing price…” It was on May 13, when this letter and premium purchase price were transmitted to the public company that HG Vora filed its Schedule 13D.

The SEC found this seven-day delay in filing Schedule 13D violated Section 13(d)(1) of the Exchange Act and Rule 13d-1 thereunder. HG Vora was sanctioned with a $950,000 fine and a cease-and-desist order.

The SEC has recently revised the Regulation 13 D-G rules, shortening the filing deadlines for both Schedule 13Ds and Schedule 13Gs and generally requiring Schedule 13Gs to be amended more frequently, and reflecting a new focus by the agency on the speed and timeliness of filings, and providing additional guidance on when the SEC believes a “group” may be formed between investors. Because a “control purpose” can quickly lead to filing obligations now within five business days, caution is required to avoid triggering inadvertent violations. When engaging with a public company, fund managers and other investors should be mindful that any such engagement could easily land it in a grey area on the question of whether a control intent exists, depending on a historical review of all of the facts. In light of the new filing deadlines and other rule changes, we expect regulators to be highly focused on compliance with the rule.   

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Photo of Frank Zarb Frank Zarb

Frank Zarb is a partner in our Corporate Department and a member of the Capital Markets Group, where he concentrates his practice on equity finance and a wide range of regulatory matters under U.S. federal securities laws.

He counsels public and private companies…

Frank Zarb is a partner in our Corporate Department and a member of the Capital Markets Group, where he concentrates his practice on equity finance and a wide range of regulatory matters under U.S. federal securities laws.

He counsels public and private companies, hedge funds and family offices, and market intermediaries and other financial institutions on a wide range of transactional and securities regulatory compliance matters including:

  • Equity investments and dispositions in public and private companies
  • Public company registration, disclosures and preparation of periodic reports
  • Tender offers, equity lines, proxy contests, SPACs, and other highly regulated transactions
  • Regulation M, Regulation SHO, Forms 13F and 13H, insider trading and other trading issues
  • Corporate governance and stock exchange listing standards
  • Federal and state proxy requirements as well as shareholder proposals and communications
  • Regulation of financial intermediaries, including trading of public and private equity, and complex and novel trading structures
  • Advocating with the SEC on behalf of a market intermediary related to back-office processing matters.

Frank’s practice is both domestic and international, beginning with his experience in senior positions with the Securities and Exchange Commission. As a member of the staff of the SEC’s Office of International Corporate Finance, Frank advised U.S. companies seeking to do business in the EU, Asia and the Middle East, as well as companies from those regions doing business in the U.S., or otherwise seeking to comply with the U.S. securities laws.  In the Office of Chief Counsel, he focused on federal proxy rules, and supervised a team of staff members that provided guidance in the course of proxy season.

Prior to joining the Firm, Frank was deputy general counsel/chief securities counsel for Bristol Myers Squibb Co. in a new position required by the SEC. Prior to joining Bristol-Myers, Frank was a corporate partner with Morgan, Lewis & Brockius.

Social Responsibility

Frank is a Trustee of the Gerald R. Ford Presidential Foundation, and he provides significant pro bono assistance to non-profit social service institutions in the Washington, D.C. area.

Photo of Robert Pommer Robert Pommer

Robert W. Pommer III is a partner in the Litigation Department and a member of Proskauer’s Securities Litigation, White Collar Defense & Investigations groups and the Asset Management Litigation team.

Bob’s practice focuses on a broad range of securities-related enforcement and compliance issues.

Robert W. Pommer III is a partner in the Litigation Department and a member of Proskauer’s Securities Litigation, White Collar Defense & Investigations groups and the Asset Management Litigation team.

Bob’s practice focuses on a broad range of securities-related enforcement and compliance issues. He represents private fund managers, financial institutions, public companies, and their senior executives in enforcement investigations and litigation conducted by the SEC, the U.S. Department of Justice, and other governmental entities and financial services regulators. He also conducts internal investigations and counsels investment advisers and public companies on regulatory compliance, corporate governance and other SEC-related issues.

Prior to his career in private practice, Bob served as Assistant Chief Litigation Counsel in the SEC’s Division of Enforcement for nine years. While there, he investigated and litigated several high-profile cases involving complex financial fraud and audit failures. Bob also worked on enforcement actions involving insider trading, investment adviser and broker-dealer issues, market manipulation and other violations of the federal securities laws.

Photo of Louis Rambo Louis Rambo

Louis Rambo is a partner in the Corporate Department and a member of the Capital Markets Group. He focuses his practice on counseling public companies and their boards of directors on corporate governance, capital markets transactions, mergers and acquisitions, securities regulation, disclosure and…

Louis Rambo is a partner in the Corporate Department and a member of the Capital Markets Group. He focuses his practice on counseling public companies and their boards of directors on corporate governance, capital markets transactions, mergers and acquisitions, securities regulation, disclosure and shareholder activism. Prior to joining the Firm, Louis served as an attorney in the Division of Corporation Finance with the Securities and Exchange Commission.

Photo of Joshua M. Newville Joshua M. Newville

Joshua M. Newville is a partner in the Litigation Department and a member of Proskauer’s White Collar Defense & Investigations Group and the Asset Management Litigation team.

Josh handles securities litigation, enforcement and regulatory matters, representing corporations and senior executives in civil and…

Joshua M. Newville is a partner in the Litigation Department and a member of Proskauer’s White Collar Defense & Investigations Group and the Asset Management Litigation team.

Josh handles securities litigation, enforcement and regulatory matters, representing corporations and senior executives in civil and criminal investigations. In addition, Josh advises registered investment advisers and private fund managers on regulatory compliance, SEC exams, MNPI/insider trading and related risks.

Before joining Proskauer, Josh was senior counsel in the U.S. Securities and Exchange Commission’s Division of Enforcement, where he investigated and prosecuted violations of the federal securities laws. Josh served in the Enforcement Division’s Asset Management Unit, a specialized unit focusing on investment advisers and the asset management industry. His prior experience with the SEC provides a unique perspective to help asset managers manage risk and handle regulatory issues.

Photo of Michael Beckwith Michael Beckwith

Michael Beckwith is a law clerk in the Litigation Department.

Michael earned his J.D. from New York University School of Law and his B.A.., cum laude, from Binghamton University. While in law school, Michael was a Human Rights Scholar at the Center…

Michael Beckwith is a law clerk in the Litigation Department.

Michael earned his J.D. from New York University School of Law and his B.A.., cum laude, from Binghamton University. While in law school, Michael was a Human Rights Scholar at the Center for Human Rights and Global Justice, was an International Law and Human Rights Fellow, and served as Managing Editor of the Journal for Legislation and Public Policy.