There has been a high volume of bankruptcy filings over the last three years of the economic downturn and they do not show any signs of letting up. Whether it is Hostess Brands—with the future of Twinkies at risk, the prospect of iconic Kodak in the Bankruptcy Court or AMR Corp.’s flight into Chapter 11 reorganization. Notwithstanding the broad scope of the United States Bankruptcy Code and the power of the Bankruptcy Courts, there are still securities issues to be considered.
Determining Whether Beneficial Ownership of a Master Limited Partnership's Subordinated Units Should be Reported Under Section 16
A master limited partnership, or MLP, is a limited partnership that is publicly traded. It combines the tax benefits of a limited partnership with the liquidity of publicly traded securities. MLPs are limited by the U.S. Tax Code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation. To qualify for MLP status, a partnership must generate at least 90 percent of its income from what the Internal Revenue Service deems "qualifying" sources. For many MLPs, these sources include all manner of activities related to the exploration, production, processing, refining or transportation of any mineral or natural resource, such as oil, natural gas and coal.
The limited partnership interests of an MLP are typically called common units and are analogous to common stock of a corporation. The MLP common units represent equity or ownership interests in the MLP. MLPs also have subordinated units, which also represent equity or ownership interests in the MLP. The MLP common and subordinated units generally provide limited voting rights and entitle the holder to a share of the company's success through distributions and capital appreciation.
A person who is the record owner of less than 5% of the stock of a publicly held company, which is registered under Section 12 of the Securities Exchange Act of 1934, becomes a member of an existing group that beneficially owns over 20% of the stock. While a member of the group, the person participates in the joint filing of the group’s Schedule 13D and amendments to it and files a Form 3 and one or more Forms 4 to report the stock it owns (or in which it has a pecuniary interest) and transactions in the stock under Section 16 of the Exchange Act.
That person now wishes, without any sale or transfer of its stock, to cease being a member of the group. It appears that the person will not have to make any filing with the SEC to effect or reflect that exit. The remaining members of the group will sooner or later have to reflect the change in the group resulting from the exit in an amendment to their Schedule 13D. Because the person is not an executive officer or a director of the publicly held company, the SEC’s Rule 16a-2(c) appears to provide that the person does not have any obligation to report on Form 4 (or Form 5) any transaction in the stock after the person’s exit from the group. So it seems straightforward: The person should be able to exit the group and freely engage in trading without any taint from having been a member of the group, right?
Well, perhaps it’s not quite so simple. Rule 16a-2(c) does provide that Section 16 forms must be filed only while a non-insider is a 10% holder, and the SEC’s Compliance and Disclosure Interpretations, Exchange Act Section 16 and Related Rules and Forms, Question. 110.02 confirms that. The Rule and the CDI are consistent with the U.S. Supreme Court’s holding in Foremost-McKesson, Inc. v. Provident Securities Co., 423 U.S. 232 (1976). Nevertheless, a decision of the Second Circuit Court of Appeals in Roth v. Jennings, 489 F.3d 499 (2d Cir. 2007), may pose a concern or raise an issue to be considered.