Opinion ID: 221139
Heading Depth: 2
Heading Rank: 2

Heading: Group Violation

Text: There are three kinds of groups that might be found in the present matter. One might consist of one or more long parties (the Funds) and one or more short counterparties that have hedged with shares (the banks). The second might consist of the Funds, i.e., TCI and 3G. The third might consist of banks that have purchased shares as a hedge. Only the possibility of a group comprising TCI and 3G is at issue on this appeal. As we have noted, the statute and the implementing rule are both concerned with groups formed for the purpose of acquiring shares of an issuer. See 15 U.S.C. § 78m(d)(3); 17 C.F.R. § 240.13d-5(b)(1). The District Court recognized that whether a group exists under section 13(d)(3) turns on `whether there is sufficient direct or circumstantial evidence to support the inference of a formal or informal understanding between [members] for the purpose of acquiring, holding, or disposing of securities.' CSX I, 562 F.Supp.2d at 552 (quoting Hallwood Realty Partners, L.P. v. Gotham Partners, L.P., 286 F.3d 613, 617 (2d Cir.2002)) (emphasis added). Endeavoring to meet the statutory standard, the District Court found that TCI and 3G formed a group, within the meaning of section 13(d)(3), with respect to CSX securities, and that this group was formed no later than February 13, 2007. See id. at 555. Then, after identifying the Defendants' activities and motives throughout the relevant period, id. at 553, the Court stated, These circumstances... all suggest that the parties' activities from at least as early as February 13, 2007, were products of concerted action.... Id. at 554 (emphasis added). These findings are insufficient for proper appellate review. Although the District Court found the existence of a group with respect to CSX securities, the Court did not explicitly find a group formed for the purpose of acquiring CSX securities. Even if many of the parties' activities were the result of group action, two or more entities do not become a group within the meaning of section 13(d)(3) unless they act as a ... group for the purpose of acquiring ... securities of an issuer. 15 U.S.C. § 78m(d)(3). Moreover, because the District Court deemed the Funds, as long parties to cash-settled total-return equity swap agreements, to have a beneficial interest in shares acquired by hedging short parties to such agreements, the Court did not distinguish in its group finding between CSX shares deemed to be beneficially owned by the Funds and those owned outright by the Funds. However, with our current consideration of a group violation confined to CSX shares owned outright by the Funds, a precise finding, adequately supported by specific evidence, of whether a group existed for purposes of acquiring CSX shares outright during the relevant period needs to be made in order to facilitate appellate review, and we will remand for that purpose. Because the combined total outright ownership of CSX shares by TCI and 3G crossed the 5 percent threshold by April 10, 2007, a TCI/3G group, if it was formed for the statutorily defined purpose, would have been required to file a section 13(d) disclosure within ten days, i.e., by April 20, 2007, see 15 U.S.C. § 78m(d); 17 C.F.R. § 240.13d-1. Thus, on remand the District Court will have to make findings as to whether the Defendants formed a group for the purpose of acquiring, holding, voting or disposing, 17 C.F.R. § 240.13d-5(b)(1), of CSX shares owned outright, and, if so, a date by which at the latest such a group was formed. Only if such a group's outright ownership of CSX shares exceeded the 5 percent threshold prior to the filing of a section 13(d) disclosure can a group violation of section 13(d) be found.