Parking violations involve hiding the identity of stock owners by having a third party hold or finance the stock. This illegal tactic is often used for hostile takeovers, but is risky due to legal requirements to report ownership.
A parking violation is an illegal tactic where stock is “parked,” as it were, with a third party to hide the identity of their owner. Parking violations can be prosecuted if discovered by investigators or regulators. Despite the risks, people sometimes take up this activity because they believe the potential benefits may outweigh the risks or are confident they can do it in a way that won’t get caught.
In a parking violation, someone hides their identity by having stock held or financed by a third party. The third party handles stocks for the sole purpose of concealing identity, contrary to perfectly legal situations where stocks can be transferred to a third party. Superficial investigation of stocks would suggest that the third party is the controller. Thus, the company being traded would not be aware that a high percentage of its shares are actually 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 stock with third parties, people can quietly buy a controlling stake in a company’s stock without notifying the company of their assets. This is done to catch the company off guard so that a hostile takeover can be made. Corporate raiders, people who specialize in executing hostile takeovers, can use a parking violation as a tactic as part of a larger plan.
In the United States, people 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 law was designed to ensure that companies could be notified of potential takeover attempts so they could take action if desired.
Someone who holds more than five percent of a company’s stock without reporting is breaking the law. The alert, however, would alert companies to the fact that someone was trying to buy a controlling stake. Therefore, people can use a parking violation to try and avoid reporting. If such a breach is suspected to be occurring, it can be reported to regulatory authorities who will investigate the specifics of the situation and determine whether or not action needs to be taken.
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