January 16, 2009
Stuart M. Riback
Just in time for the new year, the United States Court of Appeals for the Eleventh Circuit (the federal appellate court covering Georgia, Florida and Alabama) decided a case that clarifies who is required to file a Form 13D with the SEC as a member of a “group” that owns more than 5% of an issuer’s stock. This was an issue of first impression in the Eleventh Circuit and only the second appellate decision on the issue in the country. The reason this was an open question is that § 13(d) requires members of a group that holds more than 5% of an issuer to file with the SEC, but § 13(d) does not explain what makes a person part of a “group.” We’re pleased to have represented the defendants who prevailed on this issue, both at the trial court and on appeal in the Eleventh Circuit.
The case started when Hemispherx Biopharma, a biotech company headquartered in Pennsylvania, accused several South African individuals and companies of acting together with a Belgian named Bart Goemaere to take over Hemispherx. According to Hemispherx, Goemaere controlled over 30% of Hemispherx’s stock, and the South African defendants provided various sorts of assistance to him as part of a scheme to drive down the price of Hemispherx stock in order to make a takeover easier.
Hemispherx asserted a number of claims against Goemaere, the South African defendants and a series of John Does. The most interesting was the claim that Goemaere and the South African defendants together were required to file a Form 13D with the SEC. Under §13(d) of the Securities Exchange Act of 1934, any person or group that owns more than 5% of a public company’s equity securities is required to file with the SEC certain information relating to their holdings, financing and intentions. According to Hemispherx, because the South African defendants had assisted Goemaere in the alleged takeover scheme, they were required to have filed a Form 13D even though they owned no shares of Hemispherx.
Whether persons who own no interest in an issuer’s securities can nevertheless be deemed members of a “group” required to file a Form 13D had never been decided by the Eleventh Circuit. Only one other appeals court had ever addressed the question—the Third Circuit in a case called Rosenberg v. XM Ventures, 274 F.3d 137 (3d Cir. 2001), which answered the question in the negative. The subsection that requires a group to file a Form 13D does not in so many words require that all members of the group have to be owners of stock. Neither, for that matter, do the regulations under § 13(d) address the issue directly. Hemispherx took the position that any person who, in the words of § 13(d)(3), joins a “group for the purpose of acquiring, holding, or disposing of securities of an issuer” must file a form 13D whether or not that person owns any shares.
The Eleventh Circuit concluded that membership in a § 13(d) “group” requires ownership of stock. The purpose of § 13(d) is to ensure that the issuer is notified when someone is accumulating a significant number of its shares. The reason for requiring filing by a “group” is to make sure that a collection of persons acting together cannot structure their holdings so that each of them remains below 5% while together they hold more than 5%. In other words, the purpose of the “group” concept is to prevent people who own securities of the issuer from combining to control more than 5% while avoiding reporting that combined control. In light of that purpose, there is no basis for requiring non-shareholders to file a Form 13D.
The court noted that just because non-shareholders don’t have to file, that doesn’t mean that their existence and role will not be disclosed. The 5% shareholder with whom they are cooperating is required by Form 13D to disclose various information about people who are working with that 5% shareholder, so that information would be disclosed anyway. In addition, the court noted that applying § 13(d)(3) to non-owners would expand the concept of a § 13D group “beyond reason.” Because acquiring at least 5% of a public company’s stock “may require the assistance of legions of attorneys, bankers, financial advisors, and accountants,” dispensing with an ownership requirement would sweep all of these people into the “group” required to file a Form 13D. As the Eleventh Circuit observed, “This cannot be what Congress intended.”
The bottom line is: if you own at least 5% of a public company’s stock, or you together with others own at least 5% of a public company’s stock, you have to file a Form 13D. If you don’t own any stock of the company, you don’t have to file a Form 13D. The bright line rule brings us some certainty in the law, which is always a good thing.
There are other issues decided in this opinion, too, one of which I think the Eleventh Circuit got wrong. The lower court had sent the remaining claim in the case to arbitration in South Africa, but the Eleventh Circuit didn’t think the issue was arbitrable. That means this dispute isn’t over yet. But the most interesting and unsettled issue of federal law in the case, the §13(d) issue, has now been settled.