Ruling creates uncertainty under Section 13(d)

Abstract

Purpose

The purpose of this paper is to explain the implications of a June 11, 2008 decision by the US District Court for the Southern District of New York in CSX Corp. v. The Children's Investment Fund Management (UK) LLP concerning beneficial ownership and reporting obligations under Section 13(d) of the Securities Exchange Act of 1934 for long parties to cash‐settled total return equity swaps.

Design/methodology/approach

The paper summarizes the decision, discusses the court's analysis as written by Judge Lewis A. Kaplan, notes the court's limitation of its ruling to the facts of the case, explains why two funds that “compare notes” may be considered a group, discusses the permanent injunction against the defendants enjoining them from future violations of Section 13(d), and analyzes the implications of the judge's decision.

Findings

A new decision by the federal district court in New York creates uncertainty regarding whether the long party to a cash‐settled total return equity swap will be deemed to beneficially own the publicly traded reference security for purposes of Section 13(d) of the Securities Exchange Act of 1934. Holders of cash‐settled total return swaps have historically relied on the absence of the legal right to vote or dispose of the reference security as a basis not to file a 13D with respect to the shares referenced in those swap contracts. The new decision casts doubt on that reasoning, and finds that an investor that consciously structured its swap contracts to try to end‐run its otherwise applicable reporting obligations was deemed to beneficially own the shares subject to the swaps, and accordingly had violated Section 13(d) by failing to file a Schedule 13D in the required time.

Practical implications

The ruling is important for financial institutions and investors who deal in derivatives such as equity swaps and who must determine whether and when reporting under Section 13(d) is required.

Originality/value

The paper is an analysis and provides guidance by experienced securities lawyers.

Citation

McGuiness, W., Simmons, P.L., Schwenkel, R.C. and Sorkin, J.E. (2008), "Ruling creates uncertainty under Section 13(d)", Journal of Investment Compliance, Vol. 9 No. 3, pp. 24-28. https://doi.org/10.1108/15285810810908707