Chapter 17 - § 17.7 • CONTROL PERSON OBLIGATIONS
| Jurisdiction | Colorado |
§ 17.7.1—Reports Of Beneficial Ownership
Under the 1934 Act, persons who are officers, directors, or beneficial owners of more than 10 percent of any class of equity securities of the company that are registered under the 1934 Act are subject to certain reporting requirements. The § 16 rules define the term "officer" to make it clear that a person's functions, and not merely title, will determine the applicability of the § 16(a) reporting requirements.168 The definition includes persons in charge of a principal business unit, division, or function (such as sales, administration, or finance), as well as any other person who performs significant policy-making functions (not merely ministerial functions) for the issuer.169
An initial report on Form 3 is required whenever the reporting requirements first become applicable, either because the company's 1934 Act registration becomes effective or a person becomes an officer, director, or 10 percent shareholder. The Form 3 must list the amount of all equity securities of the company of which the person is a beneficial owner. The reporting person must file the Form 3 within 10 days of the date the registration statement becomes effective under the 1934 Act or the date when a person becomes an officer, director, or 10 percent shareholder.170 Transactions prior to the person's becoming subject to the reporting requirements are exempt from the reporting requirements, although if the officer or director became subject to § 16 as a result of the issuer registering securities under § 12, such transactions must be reported if they occur within six months prior to the first required Form 4 (reporting a change in beneficial ownership, after the Form 3).171
Reports on Form 4 are required for any transaction that results in a change in beneficial ownership while the person is an officer, director, or 10 percent shareholder of the issuer. In some cases, the Form 4 reporting obligation continues for up to six months after the individual has become a non-affiliate. An officer or director is still subject to the reporting requirements of § 16 for transactions occurring within six months after the person leaves such position if there is a potentially matching transaction that occurred during his or her tenure.172
Except in very limited circumstances, Form 4 is due at the SEC by the end of the second business day after the change in beneficial ownership has occurred. This period imposed by § 403 of the Sarbanes-Oxley Act of 2002 accelerated the previous requirement — that such reports were due at the SEC not later than the tenth day of the month following the transaction.
It is important to remember that all changes in beneficial ownership (unless specifically exempt from the reporting obligation) are reportable, not only transactions that are traditional purchases or sales. For example, gifts and stock dividends, as well as presently exercisable puts, calls, options, or other rights or obligations to buy or sell securities, can trigger the reporting requirements.
Rule 16a-3 requires that reporting persons file an annual report on Form 5 within 45 days following the end of the issuer's fiscal year. Form 5 requires the disclosure all ownership, including ownership resulting from transactions that are exempt from the reporting requirement of Form 4. A Form 5 filing is not required if all transactions were previously reported.
Item 405 of Regulation S-K requires corporations to disclose in annual reports and proxy statements if directors, officers, or significant shareholders are even a day delinquent in filing required reports on Forms 3, 4, or 5. The disclosure must also state the number of reports that are delinquent.
The SEC can take action against late filers, although typically the delinquencies need to be a pattern of delinquencies. Generally, the SEC will not take action as a result of a single delinquency or few delinquencies. In In re Societe Des Tuyaux Bonna,173 Bonna consented to the entry of a permanent cease and desist order as a result of the SEC's allegations that it had filed 12 late Forms 4 from February 1988 through June 1992. According to the SEC, "Bonna has had a practice of accumulating a number of late Forms 4 and then belatedly bringing its filings current."
In SEC v. Engle,174 a statutory insider of a number of companies agreed to pay a $75,000 civil penalty to settle SEC allegations that he failed to file timely a number of § 16(a) reports between April 1980 and September 1993 (reporting transactions with a value of over $44 million). In SEC Release No. 34-40362,175 Jacqueline B. Mars, without admitting or denying the allegations, consented to a cease and desist order issued by the SEC for her failure to timely file 17 amendments to her Schedule 13D reports (for periods ranging from one week to almost three years) and 13 Forms 4 for periods ranging from three weeks to more than two years.
In calculating "beneficial ownership" for the purposes of § 16, one must look to whether the reporting person has any "pecuniary interest" in the securities: "the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in the subject securities."176 The "directly or indirectly" test is similar to the test formerly applied in the § 16 context, derived from Rule 13d-3: one who controls the power to vote or to dispose of securities beneficially owns such securities. For example, securities held by custodians, brokers, relatives, executors, administrators, or trustees on behalf of another and securities held for the account of another by pledgees, securities owned by a partnership in which such person is a member, and securities owned by any corporation that is or should be regarded as a personal holding corporation of such person would be considered to be held beneficially by such person.
A "beneficial" owner of a security also includes any person who directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, has or shares (1) voting power (which includes the power to vote, or to direct the voting of, such security), or (2) investment power (which includes the power to dispose of, or to direct the disposition of, such security). When shares owned by others might be attributed to an insider for § 16 purposes, it is the insider's obligation "to ensure that they will know about trades made by others that inure to the insider's benefit."177
When shareholders are members of a "group" for the purposes of Rule 13d-3, they must report as a group. The question whether a "group" exists is a factual inquiry, and the agreement for the existence of a group may be formal or informal, and may be proved by direct or circumstantial evidence.178 When the issue is potential liability for § 16(b) violations, if a member of a group has no beneficial interest in shares of the issuer, then that person will not be liable for the group's § 16(b) violations.179
In addition, a person will be deemed to be the beneficial owner of any security for which he or she has the right to acquire the voting power or investment power within 60 days, including any right to acquire such security (1) through the exercise of any option, warrant, or right; (2) through the conversion of a security; (3) pursuant to the power to revoke a trust, discretionary account, or similar arrangement; or (4) pursuant to the automatic termination of a trust, discretionary account, or similar arrangement. In many cases, venture capitalists that finance public companies include "share cap limitations" in their purchase agreements by which they are prohibited from acquiring more than 4.99 percent of the company's outstanding capital stock, although generally the holder is entitled to waive that provision upon at least 61 days' notice.180
An attorney who held 12.9 percent of a company's stock as nominee for two individuals was not deemed to hold those shares beneficially for reporting purposes under Rule 13d-3 since he could vote the shares only at the direction of the two individuals pursuant to the nominee agreement.181
Section 16(a) violations appear not to support a private right of action. In Scientex Corp. v. Kay,182 the court noted that there was no evidence in the legislative history intended to imply a private right of action for § 16(a) violations, and...
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