2 Senate Democrats Introduce Bill to Curb Activist Hedge Funds

Two Senate Democrats introduced a bill on Thursday that would take aim at activist hedge funds and their ability to act together in “wolf packs” to overtake public companies.

The bill would shorten the number of days that activists have to disclose newly acquired shares in a company and force the disclosure of derivatives and other holdings that now don’t have to be reported. It would also redefine the rules about who has to report when they have amassed a greater than 5 percent stake in a company.

The bill, by Senator Tammy Baldwin of Wisconsin and Senator Jeffrey A. Merkley of Oregon, comes after years of debate about reforming share ownership disclosures both at the Securities and Exchange Commission and among shareholder advocacy groups. Senator Elizabeth Warren, the Massachusetts Democrat, and Senator Bernie Sanders of Vermont, who is vying for the Democratic nomination for president, are co-sponsoring the bill.

Activism is on the rise. The pending merger of Dow Chemical and DuPont came after months of prodding by Nelson Peltz of Trian Fund Management. Carl C. Icahn threatened a proxy battle at the American International Group before the insurer agreed this year to give board seats to his firm and another activist, John Paulson of Paulson & Company.

William A. Ackman has pushed for a merger of Canadian Pacific Railway and Norfolk Southern, which the latter has rejected three times. Mr. Ackman’s fund is also being hurt by the sharp drop in the price of shares of Valeant Pharmaceuticals, with which he first teamed up in 2014 in an unsuccessful campaign to acquire its rival, Allergan.

Last year, the number of companies receiving public demands by an activist investor grew 16 percent, to 551, according to Activist Insight. About half the demands sought board seats on the targeted companies, another fifth pushed mergers or other transactions, and 12 percent pushed for share buybacks or sales or spinoffs of real estate.

The Senate bill was inspired by what happened at the Wausau Paper Company, the target of the activist fund Starboard Value in 2011. The battle between the two ultimately led to the closing of a paper mill in Brokaw, Wis., eliminating more than 100 jobs and devastating the local economy.

“We cannot allow our economy to be hijacked by a small group of investors who seek only to enrich themselves at the expense of workers, taxpayers and communities,” Ms. Baldwin said on Thursday.

Investors have 10 days to report to the S.E.C. when they have acquired more than 5 percent of a public company’s shares, but they don’t have to report derivatives positions and they don’t have to report when they fall below the 5 percent threshold.

The bill aims at curbing the power of “wolf packs,” which occur when a lead fund tips off others that a disclosure is about to be made, giving the other funds the opportunity to buy the same stock before the 10-day window is up. The bill would shorten that window to two days.

John C. Coffee Jr., a Columbia University Law School professor, has studied the “wolf pack” phenomenon and found abnormal buying in the days immediately leading up to an ownership disclosure.

“This pattern should not be surprising,” he wrote in a paper last May. Those who learn of the pending filing “face a nearly riskless opportunity for profitable trading, if they act quickly.”

The bill would define separate investors acting together as a single group for disclosure requirement purposes and force them to disclose derivatives positions.

“Activists are having a chilling effect on reinvestment in the United States as they threaten companies and advocate reduced investment through share buybacks versus investing to build long-term enterprises,” said Hank Newell, the former chief executive of Wausau Paper.