The Securities and Exchange Commission (SEC) staff recently updated its guidance on circumstances in which investors engaging with issuers on ESG and other matters can file a short-form Schedule 13G as a passive or institutional investor rather than a long-form Schedule 13D.
The updates are in the form of a significant revision to Question 103.11 and the publication of a new Question 103.12 of the SEC’s Compliance and Disclosure Interpretations on Section 13(d) and Section 13(g) of the Exchange Act, which are available here.
The prior guidance allowed investors engaging on ESG topics to often file a Schedule 13G rather than a Schedule 13D. The prior guidance stated that:
- “Generally, engagement with an issuer’s management on executive compensation and social or public interest issues (such as environmental policies), without more, would not preclude a shareholder from filing on Schedule 13G so long as such engagement is not undertaken with the purpose or effect of changing or influencing control of the issuer and the shareholder is otherwise eligible to file on Schedule 13G …” and
- “Engagement on corporate governance topics, such as removal of staggered boards, majority voting standards in director elections, and elimination of poison pill plans, without more, generally would not disqualify an otherwise eligible shareholder from filing on Schedule 13G if the discussion is being undertaken by the shareholder as part of a broad effort to promote its view of good corporate governance practices for all of its portfolio companies, rather than to facilitate a specific change in control in a particular company.”
The new guidance takes a different approach. It provides that:
“Generally, a shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more, would not be disqualified from reporting on a Schedule 13G. A shareholder who goes beyond such a discussion, however, and exerts pressure on management to implement specific measures or changes to a policy may be “influencing” control over the issuer. For example, Schedule 13G may be unavailable to a shareholder who:
- Recommends that the issuer remove its staggered board, switch to a majority voting standard in uncontested director elections, eliminate its poison pill plan, change its executive compensation practices, or undertake specific actions on a social, environmental, or political policy and, as a means of pressuring the issuer to adopt the recommendation, explicitly or implicitly conditions its support of one or more of the issuer’s director nominees at the next director election on the issuer’s adoption of its recommendation; or
- Discusses with management its voting policy on a particular topic and how the issuer fails to meet the shareholder’s expectations on such topic, and, to apply pressure on management, states or implies during any such discussions that it will not support one or more of the issuer’s director nominees at the next director election unless management makes changes to align with the shareholder’s expectations.”
Investors will need to closely consider this new guidance in determining whether and when engagement with issuers requires filing on a Schedule 13D rather than a Schedule 13G.
This post comes to us from Ropes & Gray LLP. It is based on the firm’s memorandum, “SEC Staff Publishes New Guidance on When Shareholder Engagement on ESG and Other Matters Requires Schedule 13D Filings,” dated February 11, 2025, and available here.