New SEC rule aims to put a leash on predatory investors

The shutdown of a Marathon County paper mill a decade ago ended 450 jobs and forced the village of Brokaw, where the plant was located, to close up shop a few years later.

“It was kind of a double whammy there,” says Randy Radtke, vice president of the Central Wisconsin Labor Council and former president of its predecessor, the Marathon County Labor Council, whose late father had worked at the Brokaw mill for four decades.

Now a new federal securities rule is in place. Veterans of the failed effort to save the mill hope the new regulation will curb the kind of business deals that led to the destruction of both the mill and the village.

The closing of the Brokaw mill and the village’s subsequent dissolution were set in motion when an outside investment group began buying up shares in the mill’s parent company, Wausau Paper.

Hank Newell, Wausau Paper’s former CEO, says the outside group and others like it — he labels them “activist investors” — are driven by short-term goals to make money at the expense of a target company’s long-term stability. The outcome in Brokaw “was a very good example of the unintended consequences of an activist investor,” Newell says.

In October the Securities and Exchange Commission (SEC) completed work on its update of a rule that comes into play when investors are buying up shares in a company. The new rule speeds up the timeline for investors to go public when they buy more than 5% of a company. It also includes new guidelines to tighten up how the rule is triggered.

The rule change is one that Newell along with Sen. Tammy Baldwin (D-Wisconsin) have pursued for years. “These kinds of things take a long time,” Newell says.

Gaining control

In 2011, the New York hedge fund Starboard Value began buying shares in Wausau Paper. Newell, Wausau’s chief operating officer at the time, took over the next year as CEO.

By 2012, Starboard had a sufficient stake to demand the attention of Wausau’s board. Newell agreed to let the investors nominate two board members “rather than get into a proxy fight” with the hedge fund nominating a rival slate. Wausau got a standstill agreement in return. By 2013 “they were agitating again” and demanded two more board members, which Wausau once again agreed to.

At that point, “they did not have control, but had four members on the board,” Newell says. “If you are CEO, what you want on your board are people who are there to be a mentor, a strategic advisor, a confidante,” he added. Instead, “you have people working against you.”

In 2014, the group pushed demands once again and took over the board as Newell resigned and the board chair retired.

During all that time, Newell was trying to steer Wausau Paper to a new future in a changing industry. A deal was in the works to sell the Brokaw mill to another manufacturer. That fell through, however, leading to the mill’s closure in 2012.

The hedge fund owners rejected Newell’s plan for the company.

“They took issue with me personally as CEO [because] Wausau Paper was choosing to invest in the company instead of paying the dividend and buying back shares,” Newell says. But neither of those were in the interests of the company, its customers or its employers, he added: “Paying the dividend and buying back shares does absolutely nothing for them.”

Wausau Paper was ultimately acquired by SCA Tissue North America.

The Brokaw mill, which made office paper, was the village’s leading industry. Its shutdown saddled the village with $3 million in debt, the Wausau Pilot and Review reported in 2018. “The closure, which eliminated 450 hourly and salaried jobs, left Brokaw essentially bankrupt,” the online news outlet reported. The village dissolved, merging with the adjacent village of Maine.

Speeding up disclosure

Even before the dissolution, the effect on Brokaw became a rallying cry for Baldwin, who wrote legislation named after the village to rein in the sort of investor behavior she said was on display in the Wausau Paper story.  Baldwin allied with Sen. David Perdue (R-Ga.) on the legislation.

One of the bill’s provisions would have shortened the deadline for investors seeking control of a company to disclose their plans. Other provisions included requiring coordinating investor groups to make disclosures as a single group and imposing rules against activist investors who would secretly vote against company interests.

Although the bill didn’t advance in Congress, the new SEC rule echoes Baldwin’s proposal in shortening the disclosure time. Baldwin lauded the SEC rule change when it was introduced in 2022 and again in October when it was finalized.

“As communities like Brokaw know all too well, when activist investors buy up companies just to turn a quick profit, hardworking Americans pay the price,” Baldwin said after the final rule was published. “These short-term gains for super wealthy investors can lead to devastating impacts for working families, taxpayers, retirement savers, and local communities, and I am proud to have been fighting them at every turn.”

Under SEC regulations, an investor seeking control who acquires more than 5% of a company’s stock must file a Schedule 13D with the commission. (A passive investor who doesn’t seek control must file a different form, Schedule 13G.)

Historically investors had 10 days to file the disclosure. The new rule cuts that to five days.

“In our fast-paced markets, it shouldn’t take 10 days for the public to learn about an attempt to change or influence control of a public company,” said SEC Chair Gary Gensler when the final rule was announced Oct. 10.

Shareholder rights and responsibilities

The shorter timeline could make a big difference, according to Newell.

One reason activist investors focused solely on a company’s stock price exercise so much influence, he says, is that most big public company shareholders are relatively passive — stock index funds, for example — and follow the outside investor’s lead. The outside activist is “accumulating an inordinate voice for the amount of money he invests,” Newell says.

And the longer an outside investor can quietly accumulate that stock without anyone noticing, the cheaper it is to gain control, he added. “If it becomes public that they’re accruing a position, you have a whole range of hedge funds that jump in and drive the price up.”

He hopes to see the new disclosure requirement drive up stock prices more quickly, potentially discouraging buyers who are looking for a cheap deal that can give them control.

Newell says he appreciates the persistence he saw in Baldwin and her staff as they worked on the issue over the years. “It takes time,” he says. “But little things keep accumulating and can have a positive impact.”

He’d like to see more elements of the original bill get written into law or regulations — in particular, more transparency about “who the actual owners are” investing in private equity firms that have been buying up major industries.

Regulations to reduce stock buybacks could help “eliminate the economic environment in which the shareholder activist thrives” whose only aim is to drive up the price and turn a quick profit regardless of the outcome, he adds.

A more challenging problem may be how to reorient thinking about the role of shareholders in the business ecosystem. Amid the talk of “shareholder rights,” Newell says more attention should be paid to their responsibilities so that a company can maintain and increase its value. That’s something that goes beyond just the immediate financial balance sheet, he argues.

“We were creating a new company that the activists disrupted,” Newell says. “Someone looking at numbers on paper doesn’t have a clue.”