What is Schedule 13D?
Schedule 13D is a form that must be filed with the U.S. Securities and Exchange Commission (SEC) when a person or group acquires more than 5% of any class of a company's shares. This information must be disclosed within 10 days of the transaction. Schedule 13D is also known as a "beneficial ownership report."
Understanding Schedule 13D
Investors may decide to buy a large number of shares in a publicly held company for a variety of reasons. For example, they may be activist investors attempting a hostile takeover, institutional investors who believe the stock is undervalued, or a dissident investor contemplating a proxy contest.
When a person or group of persons acquire a significant ownership stake in a company, characterized as more than 5% of a voting class of its publicly traded securities, the Securities and Exchange Commission (SEC) generally requires that they disclose the purchase on a Schedule 13D form. In some cases, they may be able to use a simpler form, the Schedule 13G.
Once the disclosure has been filed with the SEC, the public company and the exchange(s) on which the company trades are notified of the new beneficial owner. Schedule 13D is intended to provides transparency to the public regarding who these shareholders are and why they have taken a significant stake in the company. The form signifies to the public that a change of control, such as a hostile takeover or proxy fight, may be about to take place, and current shareholders in the company can make informed investing and voting decisions.
- When a person or group acquires 5% or more of a company's shares, they must report it to the Securities and Exchange Commission.
- Among the questions Schedule 13D asks is the purpose of the transaction, such as a takeover or merger.
- If the beneficial owner's holdings change by 1% or more, they must amend their Schedule 13D.
The obligation to file Schedule 13D lies with the new beneficial owner. This is because the target company might not know the person or group behind the transaction. The beneficial owner must file the Schedule 13D within 10 days after their purchase.
Types of Information Required
Schedule 13D requires that the beneficial owner provide relevant information on seven "items." Those are:
Item 1: Security and Issuer. This section asks about the type of securities purchased and the name and address of the company that issued them.
Item 2: Identity and Background. In this section, the buyers identify themselves, including their type of business, citizenship, and any criminal convictions or involvement in civil suits within the past five years.
Item 3: Source and Amount of Funds or Other Considerations. This section notes where the money is coming from, including whether any of it was borrowed.
Item 4: Purpose of Transaction. This is the most important section of Schedule 13D as it alerts investors to any change of control that might be looming. Among other disclosures, beneficial owners must indicate whether they have plans involving a merger, reorganization or liquidation of the issuer or any of its subsidiaries.
Item 5: Interest in Securities of the Issuer. Here the beneficial owner lists the number of shares being purchased and the percentage of the company's outstanding shares that this purchase represents.
Item 6: Contracts, Arrangements, Understandings, or Relationships with Respect to Securities of the Issuer. The beneficial owner should describe any agreement or relationship they have with any person regarding the target company’s securities. For example, that might involve voting rights, finder's fees, joint ventures, or loans or option arrangements.
Item 7: Material to be Filed as Exhibits. These include copies of any written agreements the beneficial owner has entered into with regard to the securities.
Requirement to Disclose Material Changes
If there are any material changes to the information filed in Schedule 13D, the beneficial owners must amend their Schedule 13D within two days. A material change includes any increase or decrease of at least 1% in the percentage of the class of securities held by the beneficial owner.
Most Schedule 13D filings are available for viewing in the SEC's EDGAR database. The database presents Form 13D as “SC 13D – General statement of acquisition of beneficial ownership.” Any amended form is denoted as SC 13D/A.