A 13D is a document filed to disclose the ownership of registered equity services. It has to be filed with the Securities and Exchange Commission (SEC) and with the relevant stock exchange(s) within 10 days of when an individual, a company or a related group buys 5% or more of any class of a public company's stock. The filing also has to disclose which individual or group holds voting power over the shares.

These filings are available at the SEC website, and through a number of paid services like Edgar Online. In this article, we'll show you what you can learn by following these filings.

Signals or Signs of Change
The presumed reason behind the existing 13D regulations is that investors who take large positions in stocks can affect their trading patterns and prices. This is especially true for stocks that don't trade a large daily volume. For example, when FastChannel (DGIT) purchased of 11% of Point.360 (PTSX) in a privately negotiated transaction on Dec. 22, 2006, PTSX's stock rose by 37% the following day. In other words, for wary investors, a 13D regulation can present an opportunity for stock price appreciation.

The 13D may also be a precursor to a takeover attempt on the part of an outside investor, or part of a process to gain seats on the board or de facto control of the company by owning a large, controlling block. (For related reading, see The Basics Of Mergers And Acquisitions and Trade Takeover Stocks With Merger Arbitrage.)

The filing of 13Ds is the most important signal to investors that a change of control at a company may be underway or that an investor is trying to get management to make changes to increase shareholder value through methods such as cost-cutting or the sale of part or all of the company.

When an investor purchases more than a 5% share in a company and files a 13D, that investor may also attach a letter to management explaining the reason for the action. These letters are usually critical of management and the board directors, and address the reasons that the investor believes the company's stock is undervalued. In a November 2006 letter to the management of Advocat (AVCA), Bristol Capital Advisors and Oakdale Capital Management requested a stock split to increase trading volume in the company. Bristol and Oakdale stated the purpose of their investments and their desire for significant change:

"While we appreciate that Advocat represents what we believe to be the most compelling opportunity in the nursing home sector due to your low occupancy rates and relatively poorer payer mix relative to your peers (factors that we perceive as opportunities, not risks), your low daily trading volume has impeded the ability of sophisticated investors to take advantage of the opportunity and has resulted in Advocat trading at a substantial discount to the valuation of its peers. As you have rejected our offer to acquire the Company, we ask that you do what is in the best interests for all the shareholders and engage immediately in a 3:2 share split as well a share repurchase program."

The implied threat is that if management will not act, the shareholder may take further steps. (For related reading, see Evaluating A Company's Management.)

High-Profile 13D Filings
Some attempts to influence stock prices and management actions occur at very large companies. For example, if we take a look at the 13D filings for GM from 2005 to 2006, we'll discover that billionaire Kirk Kerkorian and his company, Tracinda Corporation, acquired about a 10% stake in General Motors. In early 2006, Kerkorian was able to get one of his representatives on the board and pressed for cost cuts and for an alliance between GM and overseas car companies Renault and Nissan. Ultimately, the discussion between the car giants proved fruitless and any hopes of an alliance were dashed. As a result of this, Kerkorian's representative resigned his seat and Kerkorian sold the bulk of his position in GM.

Another high profile 13D was filed when corporate raider Carl Icahn bought more than 5% of Time Warner in 2005. He began the process of getting two board seats and even got investment bank Lazard to set a value on each of the company's units in the event of a breakup. (To learn more, read Use Breakup Value To Find Undervalued Companies.) This gives Icahn the right to use his shares to attempt to unseat management if he is not happy with the company's results in the future. The effect was a significant rise in the stock's price.

What Can You Do with 13D Filings?
Recently, a number of websites have started to track 13Ds so that investors can immediately find out which companies have new, large investors coming in. Among these new sites is 13D Tracker.

A survey of 13D Tracker and the SEC website would indicate that, on average, one to three 13Ds are filed each business day. Investors should not only watch for these filings on stocks they own, but may find value in checking the SEC website for 13D filings of companies that they don't own. Often, these 13Ds come in advance of change of management control, a breakup of the company, an increase in stock price, or a sale of the company to another public company or private equity interests. All of these can provide opportunities for diligent investors.

For more insight, see Cashing In On Corporate Restructuring and Pinpoint Takeovers First.

Related Articles
  1. Financial Advisors

    SEC Audit? How Financial Advisors Can Be Ready

    Your firm may never be audited by the SEC, but you need to be prepared nonetheless. Follow these tips to make sure you're in compliance and organized.
  2. Investing Basics

    What are the fiduciary responsibilities of board members?

    Find out what fiduciary duties a board of directors owes to the company and its shareholders, including the duties of care, good faith and loyalty.
  3. Investing News

    What Affirmative Action Means for Businesses

    A look at what Affirmative Action means for your business.
  4. Investing

    Protect Your Creations--Register Your Trademark

    Federally registering your brand name or logo offers the broadest protection against potential trademark infringement.
  5. Entrepreneurship

    Hiring? Regulations Small Businesses Need to Know

    When a small business becomes an employer, it has new responsibilities. Make sure you familiarize yourself with regulatory requirements.
  6. Stock Analysis

    Is There Any Upside Left for Walgreens?

    Walgreens is about to get much bigger, but does bigger equal better in this case?
  7. Professionals

    Top SEC Exam Hacks for Financial Advisors

    These five tips will help financial advisors pass muster when the SEC comes knocking.
  8. Economics

    China's Former One-Child Policy Explained

    A look at China's former plan to control population growth.
  9. Entrepreneurship

    Top 3 Billionaires Living In New York City

    Take a look at the careers of New York City's three most successful and famous billionaires: David Koch, Michael Bloomberg and Carl Icahn.
  10. Entrepreneurship

    6 Signs It's Time to Take Your Business Public

    There's much more to going public than getting a pile of cash to grow your company. Here's how to tell if you're ready for everything an IPO entails.
  1. Are UTMA accounts escheatable?

    Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>
  2. What is the SEC's escheatment process?

    The U.S. Securities and Exchange Commission (SEC) does not have its own escheatment process. Rather, the SEC notes that the ... Read Full Answer >>
  3. Can the IRS audit you after a refund?

    The U.S. Internal Revenue Service (IRS) can audit tax returns even after it has issued a tax refund to a taxpayer. According ... Read Full Answer >>
  4. How does escheatment impact a company?

    In recent years, state governments have become increasingly aggressive in enforcing escheatment laws. As a result, many businesses ... Read Full Answer >>
  5. What happens if property is wrongfully escheated?

    If your financial accounts, such as bank, investment or savings accounts, are declared dormant and the managing financial ... Read Full Answer >>
  6. How do financial advisors help you avoid escheatment?

    Financial advisors can help you avoid the escheatment of your financial assets by regularly reviewing all of your accounts, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center