A parking violation is when shares are held by a third party to hide the owner’s identity, often for a hostile takeover. This is illegal if not reported to the SEC, but some do it to avoid detection.
A parking violation is an illegal tactic where shares are “parked,” so to speak, with a third party to hide the identity of their owner. Parking violations can be prosecuted under the law if discovered by investigators or regulators. Despite the risks, people sometimes engage in this activity because they feel the potential benefits may outweigh the risks, or they are confident they can achieve it in such a way that they don’t get caught.
In a parking violation, someone hides their identity by having shares held or financed by a third party. The third party handles the shares for the sole purpose of identity concealment, in contrast to perfectly legal situations where the shares may be assigned to a third party. Superficial investigation of the stocks would suggest that the third party is the controller. Therefore, the company being traded would be unaware that a high percentage of its shares are concentrated in the hands of a single owner.
The reason people use the parking violation tactic is usually because they are planning a hostile takeover. By parking shares with third parties, people can quietly buy a controlling stake in a company without alerting the company to their activities. This is done to catch the company off guard so that a hostile takeover can be accomplished. Corporate raiders, people who specialize in executing hostile takeovers, may use a parking violation as a tactic as part of a larger plan.
In the United States, persons who own more than five percent of a company’s stock are required to file reports with the Securities and Exchange Commission (SEC) under the Williams Act. This aspect of the Williams Act was passed in 1968 in response to a series of hostile takeovers. By requiring people to register, the Act was designed to ensure that companies can be made aware of potential takeover attempts so they can take action, if they choose.
Someone who owns more than five percent of a company’s shares without reporting is breaking the law. However, the reports would alert the companies to the fact that someone was trying to buy a controlling stake. Therefore, people may use a parking violation to try to avoid the reporting requirement. If such a breach is suspected to be occurring, this can be reported to regulators who will investigate the details of the situation and determine whether or not action is necessary.
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