In Finance, what is a Parking Violation?

A parking violation is an illegal tactic in which stocks are “parked,” so to speak, with a third party to conceal the identity of their owner. Parking violations can be prosecuted under the law if they are uncovered by investigators or regulators. Despite the risks, people sometimes engage in this activity because they feel that the potential benefits may outweigh the risks or they are confident that they can accomplish it in such a way that they will not be caught.

In a parking violation someone conceals his or her identity by having stocks held or financed by a third party. The third party is handling the stocks solely for the purpose of concealing identity, in contrast with perfectly legal situations in which stocks may be assigned to a third party. Surface investigation of the stocks would suggest that the third party is the controller. Thus, the company being traded would be unaware that a high percentage of its stock is 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 stocks with third parties, people can quietly buy up a controlling share of stock 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 utilize a parking violation as a tactic in part of a larger plan.

In the United States, people who own more than five percent of a company's stock must file reportings 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 could be made aware of potential takeover attempts so that they could take action, if desired.

Someone who holds more than five percent of a company's stock without reporting is in violation of the law. Reporting, however, would alert companies to the fact that someone was attempting to buy up a controlling share. Thus, people may utilize a parking violation to try and avoid the reporting requirement. If it is suspected that such a violation is occurring, this can be reported to regulators who will investigate the specifics of the situation and determine whether or not action needs to be taken.