A Schedule 13D is a document that must be filed with the Securities and Exchange Commission (SEC) within 10 days of the purchase of more than 5% of the shares of a public company by anyone investor or entity. It is sometimes referred to as a beneficial ownership report.

This document, which is publically available, provides useful information about majority ownership in the company. It reveals the name, ownership amount, and stated intentions of any investor who has purchased a substantial share of a company. (The buyer might not intend an outright takeover. It might, for example, be a purchase by an activist investor seeking more management input.)

It also must indicate how the purchase is being financed.

Key Takeovers

  • The Schedule 13D is a required SEC filing for entities acquiring more than 5% of the stock of a public company.
  • It is seen as a signal of an imminent corporate takeover.
  • Significant information in the 13D includes the source of the funds used for the purchase.

The Schedule 13D can be found in the EDGAR database maintained by the SEC. (EDGAR stands for Electronic Data Gathering, Analysis, and Retrieval. It's the SEC's tool for collecting, indexing, and validating the information it requires public companies to submit.

When Schedule 13D Is Significant

The filing of a Schedule 13D has taken on significance in the financial industry as a takeover indicator.

Generally speaking, an acquiring company embarking on a friendly takeover will make a tender offer before acquiring any significant or additional holdings of a target company.

Hostile Takeover Strategy

In a hostile takeover, however, the acquiring company will often make a toehold purchase that falls below the minimum disclosure level. When the funding has been finalized and is in place, as with a leveraged buyout (LBO), the black knight will buy additional shares and then file the Schedule 13D and the tender offer simultaneously.

The 13G form

This alternative form indicates a large purchase by an entity that has no takeover intentions.

This strategy is intended to prevent competitors from bidding up the share price and making the acquisition more expensive. It also prevents the target from putting up takeover defenses.

The Funding Disclosure

Investors and arbitrageurs often refer to the 13D to judge an acquisition's chances of success. Because the funding sources are disclosed, it's easier to see whether the acquiring company is over-leveraging itself.

Over-leveraging is seen as having an adverse impact on the future earnings of both companies if the deal goes through.

The Schedule 13G

There is a Schedule 13G filing specifically for entities that acquire between 5% and 20% without intending a takeover or any other action that will materially impact the company's shares.

If the investor is not passive or the ownership stake is above 20%, the buyer would have to file a Schedule 13D.

The Schedule 13G is not a harbinger of a takeover. Occasionally, mutual funds and insurance companies find themselves going over the 5% margin merely because of the massive size of the funds they are managing.