New York Times – The bad news reached Neil Ashe, the chief executive of CNet, as he lounged on the beach in Mexico on vacation with his family over the holidays. The company’s lawyer called to say that two hedge funds had secretly acquired the equivalent of a 21 percent stake in CNet and planned to mount a proxy contest to take over the board.

For Mr. Ashe this was surprising — and upsetting — on two counts. First, one of the funds, Jana Partners, had quietly approached the company earlier in the year and talked to Mr. Ashe about becoming a friendly, long-term shareholder.

“They indicated to us that they were a long-only deep-value hedge fund,” Mr. Ashe said at an investor conference. “I spent an hour with them on the phone answering questions about our business.” But in the aftermath of that conversation, “we didn’t hear anything from them again.” Mr. Ashe figured the firm had decided against making the investment.

And the other unhappy surprise? Jana and the second hedge fund, Sandell Asset Management, had magically acquired the equivalent of more than a fifth of the company without anybody knowing. Given the existence of the decades-old 13D rule, which requires investors to disclose stakes of more than 5 percent, and the Hart-Scott-Rodino Act, which requires activist investors like Jana to disclose when they invest more than about $60 million, how could it possibly be that the hedge funds could suddenly own the equivalent of 21 percent of CNet’s shares? How could it even be legal?

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