Investors seeking to influence corporate strategy or to take over a REIT (or any publicly traded company) often purchase a significant percentage of the company on the open market. In doing so, they face a thicket of securities regulations that require eventual public disclosure of their position.

Investors seeking to influence corporate strategy or to take over a REIT (or any publicly traded company) often purchase a significant percentage of the company on the open market. In doing so, they face a thicket of securities regulations that require eventual public disclosure of their position.

Investors with over $100 million in assets under management (AUM) are subject to quarterly 13F filings, disclosing their holdings within 45 days of quarter-end. This gives them a 135-day window before their stake becomes public knowledge. However, once they acquire 5% of a target company, they have five days to file a 13D. Any subsequent trade requires a 13D amendment within two days. Once they reach 10% ownership, they are considered corporate insiders and are subject to Form 4 filings within two days of any trade. Form 4 is a filing that lists trades made by corporate insiders such as executives. Insiders are also subject to the short-swing profit rule prohibiting profits from trades within six months of each other.

Investors seeking to minimize the cost of creating these positions face a tradeoff. Slow, deliberate accumulation minimizes immediate price impact but eventually leads to public disclosure. These disclosures can often lead to a short-term increase in the stock price, especially if the market anticipates an eventual acquisition offer at a premium or if the activist has a reputation for initiating value-creating change. On the other hand, quickly acquiring shares before disclosure can minimize the window for the market to react but runs the risk of significantly increasing the cost of acquisition, especially for companies with lower liquidity or trading volume.

To optimize this tradeoff, some may want to use derivatives. However, if a derivative grants the ability to convert to equity within 60 days, it counts toward the 13D requirement threshold. This means that American options, with the ability to be exercised at any point before expiration, would count toward a 5% ownership stake. European options, which can only be exercised on the day of expiration, offer a potentially useful alternative. Investors who purchased European call options on their target company would not have to count these as part of their ownership stake until 60 days before expiration. Therefore, they may be a useful tool for navigating the price impact and disclosure cost trade-off. In practice, the practicality would depend on premiums and availability of counterparties for such a contract.

Figure 1: Days Before Public Disclosure of Position by Percent of Company Owned

Source: CBRE Econometric Advisors, SEC

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