Thu 01/28/2021 10:40 AM
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While GameStop and AMC Entertainment stocks continue to rally, largely credited to buzz on a Reddit subthread called WallStreetBets, one question we have been asking is whether a group of individuals that agrees to buy specific stocks and options could constitute a “group” for purposes of change of control definitions under debt documents. Continue reading for our Americas Covenants team's analysis of the stock purchases by retail investor groups and Request a Trial for access to the linked debt documents, tear sheets, and summaries as well as our coverage of thousands of other stressed/distressed debt situations.

Under a credit agreement, a change of control would result in an event of default and would entitle a majority of lenders to accelerate the debt under the credit agreement. A typical change of control under bond indentures allows holders to put their bonds to the company at 101% of par.

One common change of control trigger under debt documents is the acquisition by a person or group of a specified percentage of voting stock of the borrower or issuer or its parent company. Specifically, a change of control would be triggered if:
“[A]ny "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the [SEC] Act) is or becomes the ‘beneficial owner’ (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of 50% or more of the total voting power of all Voting Stock of the [Company].”

The beneficial ownership trigger is typically either more than 35% or more than 50% of the voting stock of the company.

Under section 13(d) of the Securities and Exchange Commission Act, a person is deemed a beneficial owner “if that person has the right to acquire beneficial ownership of such security ... within sixty days, including but not limited to any right to acquire: (A) Through the exercise of any option, warrant or right.”

In the past month, members of WallStreetBets have been purchasing shares and options in companies such as GameStop and AMC. When an option is purchased, it gives the holder the right to purchase 100 shares of the underlying company. Under the SEC Act, the definition of “beneficial owner” includes the right to purchase shares.

The question then arises whether members of the group can be deemed to be a “group” under the SEC Act. Under section 13(d)-5(b)(1), the members of the WallStreetBets group can be deemed a group because “[w]hen two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer, the group formed thereby shall be deemed to have acquired beneficial ownership, ... of all equity securities of that issuer beneficially owned by any such persons.”

However, section 13d-5(b)(2) of the SEC Act notes that “a group shall be deemed not to have acquired any equity securities beneficially owned by the other members of the group solely by virtue of their concerted actions relating to the purchase of equity securities” unless there is an “agreement among[] or between any members of the group to act together with respect to the issuer or its securities except for the purpose of facilitating the specific purchase involved” (emphasis added).

Despite their “concerted actions relating to the purchase of equity securities,” the members of the WallStreetBets group likely do not constitute a “group” under the SEC Act due to their lack of an agreement to vote their shares together (emphasis added). As a result, this group’s recent equity and options purchases would not activate the beneficial ownership change of control trigger under the debt documents.

--Maribeth Lemen
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