Beyond "Market Transparency": Investor Disclosure and Corporate Governance.

• Author: Platt, Alexander I.

Table of Contents Introduction I. The Need To Understand 13F's Impacts on Corporate Governance A. Institutional Investors, Securities Regulation, and Corporate Governance B. The Unique and Important Information Generated by 13F 1. The 13F regime 2. How 13F data is used 3. The lack of any substitute source for 13F data C. Efforts to Reform 13F 1. The SEC's proposal (2020) 2. The NYSE's rulemaking petition (2013) 3. Proposed legislation (2021) D. The Legal Case for Considering 13F's Corporate-Governance Impacts II. 13F's Impacts on Corporate Governance A. Hedge Fund Activism 1. Activist targeting 2. Activist campaign tailoring 3. Competing for shareholder votes in proxy contests 4. Enhancing shareholder voting in proxy contests 5. Activist detection and defense 6. Activist settlements B. Shareholder Proposals 1. Proposal targeting by sponsors and management 2. Competing for votes on shareholder proposals 3. Enhancing voting on shareholder proposals 4. Settlement of shareholder proposals C. Shareholder Litigation 1. Identifying lead plaintiffs 2. Class certification 3. Claims processing 4. Facilitating settlement D. Engagement 1. Manager-initiated engagement 2. Shareholder-initiated engagement 3. Coordinated engagement E. Tacit Shareholder Influence 1. Policy statements 2. Anticompetitive effects of common ownership III. Implications A. 13F Reform 1. Hedge fund activism 2. Shareholder proposals 3. Shareholder litigation 4. Engagement 5. Tacit shareholder influence B. The Case Against "Market Transparency" as a Regulatory Touchstone C. The Contingency of Corporate Governance Conclusion Introduction

Every quarter, hedge funds and mutual funds have to report what stocks and bonds they own, using the U.S. Securities and Exchange Commission's Form 13F. I forget why?

--Matt Levine, Bloomberg (1)

An upstart hedge fund recently took on ExxonMobil and won. The fund, Engine No. 1, bought $50 million worth of Exxon stock, (2) dropped another $30 million persuading fellow shareholders that Exxon was not transitioning quickly enough away from fossil fuels, and won enough votes at the company's 2021 shareholder meeting to get three of its candidates elected to the board of directors. (3) Remarkably, Engine No. 1 achieved this victory despite holding just 0.02% of Exxon's outstanding shares. (4)

When success depends on the ability to win support from other shareholders, as it does for activists like Engine No. 1, the ability to identify those shareholders is essential. Activists may evaluate a potential corporate target's shareholder base to assess their prospects before even launching a campaign. They may also tailor campaigns to appeal to the particular preferences of these shareholders. And once a campaign is underway, activists may also use this information to support targeted lobbying efforts. Engine No. 1, for instance, made calls to key investors to shore up support in the final hours of its successful campaign. (5)

Nor are activists the only parties who benefit from the ability to identify a firm's shareholders. Managers of targeted firms also may leverage this information to aid in their own lobbying efforts. Exxon, for instance, made "calls to investors in a last-ditch attempt to win their votes." (6) Before the vote, managers also may use this information to gauge an activist's prospects of success and may be willing to negotiate settlements with the most promising campaigns, just as Exxon did with another hedge fund that had launched a campaign a few weeks before Engine No. I. (7)

This information--the identities of a company's investors--seems elementary, if not downright primitive. In today's world of algorithmic traders, machine learning, and robo-advisors, a list of a company's shareholders doesn't exactly get the blood pumping. It is easy to see how it could come to be taken for granted.

And so it has. The best--and, in many cases, the only--source for information about a firm's shareholders is produced under a mostly forgotten provision of federal securities law. For forty years, institutional investors like mutual funds and hedge funds have been disclosing their equity-portfolio holdings every quarter as required under section 13(f) of the Securities Exchange Act of 1934 (Exchange Act) and the rules promulgated under that statute (hereinafter, collectively, 13F). (8) And yet the possibility that 13F plays a role in activism or other corporate-governance interactions has been almost completely overlooked. Although countless studies in law and Finance rely on 13F disclosures, none have turned the microscope around to examine the program itself. (9) Similarly, accounts of the federal regulations that mediate the relationship between investors and corporations uniformly omit 13F. (10)

But 13F can no longer be ignored. In 2020, the U.S. Securities and Exchange Commission (SEC) pulled the provision out of obscurity and onto the chopping block, proposing to eliminate about 90% of current reports. (11) Now there is a concerted effort to significantly expand the reporting required under this regime. (12) Although these reforms point in opposite directions, they have one thing in common: Each ignores the impact of 13F on corporate governance. (13)

This Article Fills that gap. I present an original, holistic account of 13F's impact on corporate governance. (14) I trace the impact of this provision and the information it generates across five key domains: hedge fund activism, (15) shareholder proposals, (16) shareholder litigation, (17) engagement, (18) and what 1 call "tacit shareholder influence." (19) In each area, I show how 13F systematically alters governance outcomes by supplying actors with information to which they would not otherwise have access. In total, I map twenty discrete ways across the five domains listed above in which 13F is altering the corporate-governance landscape--the overwhelming majority of which have never been previously identified, much less closely examined. Although scholars have devoted substantial attention to the role of securities regulation in advantaging shareholders over management (or vice versa) in each of these domains, they have entirely overlooked 13F's vital role. (20)

As I show, 13F has played an important role in driving key governance trends that have been of particular interest for recent scholarship in law and finance. Among other findings, I show that 13F:

* Mitigates the short-term bias of hedge fund activism: 13F allows hedge fund activists to specifically tailor campaigns toward winning support from existing firm shareholders and, as a result, aligns activism with the interests of long-term investors. (21)

* Fosters "collaboration" between shareholders and managers: 13F may promote settlements between managers and shareholders in the contexts of hedge fund activism, shareholder proposals, and litigation; it also promotes direct engagement between shareholders and managers. (22)

* Facilitates a "competition for votes": 13F enables interested parties to lobby shareholders in corporate elections, in some cases skewing outcomes in favor of management. (23)

* Fosters coordination among shareholders: 13F may enable information sharing and other forms of coordination among shareholders on governance activities in voting and engagement. (24)

* Promotes institutional investor support of "stakeholder-friendly policies: 13F may enable various key channels for institutional activists to advance progressive environmental, social, and corporate-governance (ESG) policies in their portfolio companies, including through activism, shareholder proposals, engagement, and public statements. (25)

* Facilitates the anticompetitive effects of common ownership: 13F serves as a "causal mechanism" for the anticompetitive effects of common ownership because, as explicitly admitted by the National Association of Manufacturers and other key interest groups, corporate managers use 13F disclosures specifically to learn about the extent to which their companies' own shareholders are also invested in competitors. (26)

This Article's original account shows that the consequences of the informational subsidy provided by 13F are complex. 13F does not uniformly favor a particular constituency; it advantages shareholders over managers in some domains, and the opposite in others. Nor is there an easy conclusion regarding the net welfare effects of the program; some impacts seem obviously beneficial, while others seem just as obviously harmful, and many elide easy assessment.

Nevertheless, no substantial reform of 13F may be responsibly undertaken without accounting for how the reform will alter the corporate-governance landscape. To that end, this Article analyzes how each of the major proposed reforms would likely reshape the governance landscape by changing the impacts tracked here. Contrary to conventional wisdom, I find that, in several areas, shareholders and/or other corporate stakeholders might be made better off with less transparency about institutional holdings. (27)

My findings pose a direct challenge to a dominant theme in the universally hostile (28) reaction to the SEC's 2020 proposal to curtail 13F: that the 13F program's core purpose is to promote "market transparency." (29) The proposals to expand the program are similarly grounded in the alleged importance of expanding "transparency." (30) I argue that this mode of analysis is misguided; "transparency" is not, by itself, a sound basis for policymaking in this domain. (31) The information produced by 13F has unequal effects--it advantages certain groups over others and skews the results of governance processes. To evaluate the program, policymakers must look past its effect on "transparency" to examine how the information is actually being used in the marketplace, by whom, and to what ends (32)

The findings presented here that 13F has been skewing corporate-governance outcomes also support a broader critique. Corporate...