Beneficial Ownership Group Formation Under Section 13: The 2026 Definitive Guide

For any investor coordinating with others on a public company position, the group formation question under Section 13 is one of the highest-stakes compliance calls in securities law. Get it wrong and the filing clock starts immediately, a passive Schedule 13G can convert to an activist Schedule 13D, and both SEC enforcement and private litigation become live risks.

This guide explains exactly what a "group" is under Sections 13(d)(3) and 13(g)(3) of the Exchange Act and Rule 13d-5(b)(1), which activities create one, which do not, and what happens the moment one is formed. The SEC's Corporation Finance Interpretations on Sections 13(d) and 13(g) were last updated September 2, 2026, making this the most current treatment available.

Key takeaway: A group is formed the instant two or more persons agree to act together for the purpose of acquiring, holding, voting, or disposing of an issuer's securities. At that moment, the group aggregates every member's holdings. If the total exceeds 5% of the registered class, the filing clock starts.

What Is a "Group" Under Section 13(d)(3) and Rule 13d-5(b)(1)?

A Section 13 group exists when two or more persons agree to act together for the purpose of acquiring, holding, voting, or disposing of an issuer's equity securities. The statutory basis is Sections 13(d)(3) and 13(g)(3) of the Securities Exchange Act of 1934, which treat such a group as a single "person" for beneficial ownership reporting purposes. Rule 13d-5(b)(1) operationalizes this by requiring an agreement to act together.

As Skadden summarized in its analysis of the SEC's October 2023 final rules: "Sections 13(d)(3) and 13(g)(3) of the Exchange Act state that a 'group' is formed when two or more persons act as a group for purposes of acquiring, holding or disposing of issuer securities. Rule 13d-5(b)(1) under the Exchange Act states that a group is formed when two or more persons agree to act together for purposes of acquiring, holding, voting or disposing of issuer securities."

Three elements define a group:

1. Two or more persons (individuals, entities, or both)
2. An agreement to act together (formal, informal, or implied from conduct)
3. A common purpose relating to the issuer's securities: acquiring, holding, voting, or disposing

Note that Rule 13d-5(b)(1) adds "voting" to the statutory list in Section 13(d)(3), which covers only acquiring, holding, and disposing. This matters: shareholders who agree only to vote together, without any agreement to buy or sell, can still form a group under the rule.

The Agreement Requirement: Formal, Informal, or Implied?

The agreement does not need to be written, signed, or even explicitly stated. The SEC has been clear that group formation "does not depend solely on the presence of an express agreement" and that concerted action by investors may be sufficient depending on circumstances. At the same time, the SEC has also stated that a group cannot form "without some type of agreement, arrangement, understanding or concerted action" and that "at a minimum, indicia, such as an informal arrangement or coordination in furtherance, of a common purpose to acquire, hold, or dispose of securities of an issuer" is required.

This creates a gray zone that compliance teams must navigate carefully. Parallel action alone, without any communication or coordination, does not create a group. But informal coordination, even a phone call where two investors agree to vote the same way on a board election, can.

The SEC's CFIs provide a concrete example: "Under Section 13(d)(3), the shareholders have formed a group given that they have agreed to act together for the purpose of voting the equity securities." A voting agreement for a board candidate is a group, full stop.

What the 2023 SEC Rule Amendments Changed (and Didn't Change)

The SEC voted 4-1 on October 10, 2023 to adopt Exchange Act Release No. 34-98704, the most significant overhaul of beneficial ownership reporting rules in decades. For group formation specifically, the outcome was a deliberate half-step.

What the SEC proposed but did not adopt: The original February 2022 proposal would have eliminated the "agreement" requirement from Rule 13d-5(b)(1) entirely, making group formation automatic upon concerted action without any agreement. Institutional investors and shareholder rights advocates pushed back hard, arguing this would chill legitimate shareholder engagement. The SEC backed down.

What the SEC did instead: Rather than amending the rule text, the SEC issued interpretive guidance in the adopting release clarifying how the existing standard applies to specific fact patterns, including shareholder engagement, voting agreements, and proxy contest coordination. The rule text of Rule 13d-5(b)(1) is unchanged. The guidance is not.

What did change as of September 30, 2024:

These accelerated deadlines apply to groups as well as individual filers. For a group that forms and simultaneously crosses 5%, the 5-business-day clock for Schedule 13D starts at the moment of formation.

For a full treatment of Schedule 13D amendment mechanics post-2023, see Schedule 13D Amendment Requirements: 2026 Practitioner Walkthrough.

How Group Formation Triggers the 5% Threshold

When a group forms, every member is deemed to beneficially own all securities held by every other member. This is the aggregation rule under Rule 13d-3, which defines beneficial ownership as having or sharing the power to vote or dispose of a security. For group purposes, each member's holdings are attributed to all other members.

The practical consequence: five investors each holding 1.5% of a company's shares can individually stay below the 5% reporting threshold indefinitely. The moment they agree to vote together on a board nomination, they form a group with 7.5% aggregate beneficial ownership. A Schedule 13D (or 13G if eligible) is due within 5 business days.

The group is deemed to have "acquired" the securities held by all members at the moment of formation, even if no member purchased a single additional share. This is not a technicality. It is the mechanism that makes group formation an instantaneous triggering event, not a gradual process.

For calculating the 5% threshold, the denominator matters too. Section 13(d)(4) excludes shares "held by or for the account of the issuer or a subsidiary of the issuer" from the outstanding class, so issuer repurchases reduce the denominator and can push a group over 5% even without any new purchases.

Does Shareholder Engagement Create a Group?

This is the live question for ESG teams, institutional investors, and activist funds in 2026. The SEC's 2023 guidance attempts to draw a line, but the line is fact-specific and not always bright.

The SEC provided guidance that the following activities, standing alone, generally do not create a group:

• Discussions about an issuer's general business, operations, or strategy without any agreement to act together with respect to the issuer's securities
• Voting in the same way on a matter without any prior agreement or coordination
• Independently reaching the same investment decision based on publicly available information

The following activities are more likely to create a group:

• Agreeing to vote together on a specific matter, including a board election or shareholder proposal
• Coordinating on a proxy contest, including agreeing to nominate the same candidates or support the same slate
• Sharing material non-public information about a planned Schedule 13D filing with the purpose of causing others to buy shares, if those purchases follow as a direct result
• Entering a voting agreement or shareholder agreement that binds parties to vote their shares in a particular way

The ESG dimension is genuinely unsettled. Institutional investors increasingly coordinate on ESG-related votes, climate resolutions, and governance matters. Whether a coordinated ESG voting campaign constitutes group formation depends on whether the coordination involves an agreement to act together with respect to the issuer's securities, or merely a shared policy position applied independently. The SEC's 2023 guidance does not resolve this cleanly, and practitioners should treat any coordinated ESG voting effort with caution.

The Wolf Pack Problem: Why the SEC Didn't Close the Loophole

The "wolf pack" refers to multiple activist investors who coordinate informally, each staying below 5% individually while collectively holding a controlling stake, without ever forming a formal group. Each investor stays just under the threshold, communicates through informal channels, and acts in concert without a written agreement. The target company is effectively subject to a coordinated activist campaign with no public disclosure.

The wolf pack problem was the central policy driver behind the SEC's 2022 proposal to eliminate the agreement requirement from Rule 13d-5(b)(1). If concerted action alone, without any agreement, were sufficient to form a group, wolf packs would be captured. The SEC ultimately declined to adopt this change, citing concerns about chilling legitimate shareholder engagement and the difficulty of defining "concerted action" without an agreement element.

The result: wolf pack activity remains in a legal gray zone. The SEC's interpretive guidance signals that informal coordination in furtherance of a common purpose can constitute a group, but without a rule change, enforcement depends on proving an agreement, arrangement, or understanding, which is difficult to establish without documentary evidence.

For issuers defending against activist campaigns, this means that alleging group formation requires showing actual coordination, not just parallel action by investors who happen to have similar views.

Schedule 13D vs. Schedule 13G for Groups: Which Form Applies?

A group must file on Schedule 13D unless every member qualifies for Schedule 13G eligibility. The key distinction is intent: Schedule 13G is available only to qualified institutional investors (QIIs), passive investors, and exempt investors who hold their position without the purpose or effect of changing or influencing control of the issuer.

Group formation itself can destroy 13G eligibility. If a group forms for the purpose of voting together on a board election or coordinating a governance campaign, the group is no longer a passive holder. Even if individual members would otherwise qualify as passive investors, the group's coordinated purpose converts the holding to an active one requiring Schedule 13D.

For a detailed comparison of the two schedules, see Schedule 13D vs. 13G: The 2026 Comparison Every Investor Needs.

Adding a New Member: An Overlooked Conversion Trap

One of the most common compliance mistakes is failing to recognize that adding a new member to an existing group triggers a fresh analysis. The SEC's CFIs are explicit: "By adding a new member that beneficially owns more than two percent of the class of equity securities registered under Section 12, the group effectively acquired those securities. The group and all of its members would be required to report their holdings on Schedule 13D since they would not qualify for the exemption set forth under Section 13(d)(6)(B) of the Exchange Act."

The 2% threshold in Section 13(d)(6)(B) is the key: if the new member holds more than 2% of the registered class, the group is treated as having "acquired" those shares. That acquisition disqualifies the group from the Section 13(d)(6)(B) exemption and, in most cases, from Schedule 13G eligibility. The entire group, including existing members who individually hold less than 5%, must file Schedule 13D.

How Cash-Settled Derivatives Factor Into Group Beneficial Ownership

A group member's cash-settled derivative position can count toward the group's aggregate beneficial ownership in specific circumstances. The 2023 rules did not amend the beneficial ownership definition to automatically include cash-settled derivatives, but the SEC's guidance in Exchange Act Release No. 34-98704 clarifies when they do.

A holder of cash-settled derivatives is deemed to beneficially own the underlying securities if any of the following apply:

1. The derivative's terms give the holder voting or investment power over the underlying securities
2. The derivative was acquired to evade Section 13(d) or (g) reporting requirements
3. The holder has the right to acquire the underlying security within 60 days, or acquires that right with a control purpose

For group purposes, if one member's derivative position meets any of these conditions, those underlying securities are attributed to the group's aggregate holdings. A group that appears to hold 4.8% in direct shares may actually hold 5.3% once a member's total return swap position is included.

Separately, all derivative interests relating to the applicable registered class, including cash-settled security-based swaps, must be disclosed in Item 6 of Schedule 13D regardless of whether they constitute beneficial ownership. This is a disclosure obligation independent of the ownership threshold calculation.

For a deeper treatment of the cash-settled derivatives issue, see SEC Cash-Settled Swaps and Beneficial Ownership Explained.

Investment Advisers and Multi-Fund Group Formation

Investment advisers managing multiple funds with positions in the same issuer face a layered group formation risk. As Paul Hastings notes, "a securities firm and, in some cases, its parent company, other control persons, and private fund clients of an investment adviser may all be members of a group for Section 13 purposes, requiring coordinated filing."

The analysis works as follows:

• An investment adviser that exercises investment discretion over multiple client accounts holding the same issuer's shares may be deemed to beneficially own all of those shares under Rule 13d-3 (because the adviser has voting or investment power over each account)
• If the adviser coordinates with another adviser, or if a fund client independently takes a position and coordinates with the adviser's other funds, a group may form
• The adviser, its parent, and individual fund clients may each be a group member, requiring a joint Schedule 13D or 13G

This is distinct from the Form 13F obligation, which applies to investment managers exercising discretion over $100 million or more in exchange-listed equity securities. Form 13F is a separate reporting regime, but large institutional managers often face both obligations simultaneously.

What Happens When a Group Forms Inadvertently

Inadvertent group formation is not a defense to the filing obligation. The 5-business-day clock for Schedule 13D starts at the moment the group crosses 5%, regardless of whether the members realized they had formed a group.

The consequences of a missed filing include:

• SEC enforcement action, including civil penalties and potential injunctive relief
• Loss of Schedule 13G eligibility for any member who was filing on 13G and is now part of an active group
• Private litigation from the issuer or other shareholders, particularly in the context of a contested transaction or proxy fight, where the issuer may allege that undisclosed group formation constitutes a Section 13(d) violation
• Disgorgement risk in some circumstances, particularly where the group acquired shares at favorable prices before the required disclosure

When a group dissolves, members must also consider their amendment obligations. If the dissolution constitutes a material change in previously reported information (for example, the group no longer exists and members no longer aggregate their holdings), a Schedule 13D amendment is due within 2 business days. Members who individually fall below 5% after dissolution may be able to exit the reporting regime, but the dissolution itself must be disclosed first.

A Practical Decision Framework for Compliance Teams

Before coordinating with other shareholders, work through these questions:

1. Are you agreeing to act together? A shared view is not an agreement. An explicit or implicit commitment to vote, buy, or sell in a coordinated way is.
2. Does the coordination relate to the issuer's securities? General governance discussions are lower risk than agreements about how to vote specific shares.
3. What is the aggregate holding? Add up all potential group members' direct holdings, plus any derivative positions that could be attributed as beneficial ownership. If the total approaches or exceeds 5%, the filing obligation is live.
4. What is the purpose? If the group's purpose is to influence or change control, Schedule 13D is required. If every member is genuinely passive, 13G may be available, but group formation for voting purposes typically destroys passivity.
5. Is anyone adding a new member? If the new member holds more than 2% of the registered class, the group must file Schedule 13D regardless of prior eligibility.
6. What is the filing deadline? Five business days from the moment the group crosses 5%. EDGAR accepts filings until 10:00 p.m. ET on the due date.

If any of these questions produce an uncertain answer, the right move is legal counsel before the coordination happens, not after.

FAQ

Does a voting agreement always create a Section 13 group? Yes, if the agreement covers the voting of equity securities of a specific issuer. The SEC's CFIs state explicitly that shareholders who agree to act together for the purpose of voting equity securities have formed a group under Section 13(d)(3), even if the agreement does not extend to buying or selling.

Can a group member who individually owns less than 5% have a filing obligation? Yes. Once a group is formed, each member is deemed to beneficially own all securities held by all other members. If the group's aggregate holdings exceed 5%, every member has a filing obligation, regardless of individual ownership.

What is the difference between Section 13(d)(3) and Rule 13d-5(b)(1)? Section 13(d)(3) is the statutory provision: it covers persons acting as a group for purposes of acquiring, holding, or disposing of securities. Rule 13d-5(b)(1) is the implementing rule: it requires an agreement to act together and adds "voting" to the list of covered purposes. The statute is broader in some respects; the rule adds the agreement requirement and the voting purpose. The SEC's 2023 decision not to amend Rule 13d-5(b)(1) leaves this tension in place.

Does ESG coordination among institutional investors create a group? It depends on whether the coordination involves an agreement to act together with respect to specific securities. A shared ESG voting policy applied independently is lower risk. A coordinated campaign where investors agree to vote together on a specific resolution at a specific company is higher risk and may constitute group formation.

What happens if a group crosses 5% but each member individually stays below 5%? The group must file Schedule 13D (or 13G if eligible) within 5 business days of crossing the 5% threshold. Each individual member is a reporting person and must be identified in the filing. No individual exemption applies once the group is formed.

Are ADRs counted separately from the underlying shares for the 5% threshold? No. ADRs are not a separate class of equity securities for Section 13(d) purposes. The reporting obligation is determined by ownership of the underlying deposited securities class, including ownership through ADRs. A group's ADR holdings are measured against the underlying class.