May 14, 2020

Tender Offers

Tender Offers

SEC Enforcement Proceedings Under Section 15(c)(4) of the Securities Exchange Act of 1934
      William R. McLucas and Laurie Romanowich, 41(1): 145–74 (Nov. 1985)
The SEC has administrative powers under section 15(c)(4) of the Exchange Act to enforce certain reporting provisions of the Act. In a 1984 amendment to the statute, the SEC's enforcement authority under section 15(c)(4) was broadened to include violations of section 14 of the Exchange Act, which now brings proxy and tender offer violations within the reach of the agency's administrative enforcement powers. Further, the amendment expressly empowers the agency to pursue administrative remedies against individuals who were "a cause of" violations of certain provisions of the Act. This Article analyzes the SEC's past use of this administrative enforcement power, as well as several issues the agency has confronted in connection with these proceedings, and explores some of the questions that may arise as a result of the recent expansion of the scope of section 15(c)(4).

Guidelines for Directors: Planning for and Responding to Unsolicited Tender Offers
      Committee on Corporate Laws, 41(1): 209–21 (Nov. 1985)
Although unsolicited tender offers pose some very important issues (for example, the government's proper regulatory role), this Report focuses on the responsibility of a board of directors and the issues to be considered by the board in preparing for and in reacting to an unsolicited tender offer. The wide range of actions available to the board are reviewed. Absent an abuse of discretion, and so long as improper motive or disabling self-interest is not present, the actions taken by directors basically will be governed by the business judgment doctrine.

Guidelines for Directors: Planning for and Responding to Unsolicited Tender Offers—Amendments
      Committee on Corporate Laws, 41(4): 1341–42 (Aug. 1986)
This Report was initially published for comment in the November 1985 issue of The Business Lawyer. After revision to accommodate intervening case developments and comments received, this Report was approved by the Committee on Corporate Laws in December 1985, except for the changes set forth herein.

The Case Beyond Time
      Lyman Johnson and David Millon, 45(4): 2105–25 (Aug. 1990)
The Delaware Supreme Court's decision in Paramount Communications, Inc. v. Time Inc ., 571 A.2d 1140 (Del. 1990), is the latest landmark in the ongoing effort to define target company management's responsibilities in hostile tender offers. This Article seeks to articulate some of the decisions' unarticulated implications. It considers Time's applicability to cases involving refusal to redeem poison pills as well as its deeper significance for the meaning and continued vitality of the Revlon and Unocal decisions.

The Fiduciary Duties of Insurgent Boards
      John M. Olson, 47(3): 1011–29 (May 1992)
Many recent corporate takeover attempts have employed the combination of a tender offer and a proxy contest. This Article analyzes the fiduciary duties of directors elected through the efforts of tender offerors and suggests that there may be problems in combining the two takeover methods.

Empty Voting and Hidden (Morphable) Ownership: Taxonomy, Implications, and Reforms
     Henry T. C. Hu and Bernard Black, 61(3):1011–1070 (May 2006)
Most American publicly held corporations have a one-share, one-vote structure, in which voting power is proportional to economic ownership. This structure gives shareholders economic incentives to exercise their voting power well and helps to legitimate managers' exercise of authority over property the managers do not own. Berle-Means' "separation of ownership and control" suggests that shareholders face large collective action problems in overseeing managers. Even so, mechanisms rooted in the shareholder vote, including proxy fights and takeover bids, constrain managers from straying too far from the goal of shareholder wealth maximization.

In the past few years, the derivatives revolution, hedge fund growth, and other capital market developments have come to threaten this familiar pattern throughout the world. Both outside investors and corporate insiders can now readily decouple economic ownership of shares from voting rights to those shares. This decoupling—which we call "the new vote buying"—is often hidden from public view and is largely untouched by current law and regulation. Hedge funds, sophisticated and largely unfettered by legal rules or conflicts of interest, have been especially aggressive in decoupling. Sometimes they hold more votes than economic ownership, a pattern we call "empty voting." That is, they may have substantial voting power while having limited, zero, or even negative economic ownership. In the extreme situation of negative economic ownership, the empty voter has an incentive to vote in ways that reduce the company's share price. Sometimes hedge funds hold more economic ownership than votes, though often with "morphable" voting rights—the de facto ability to acquire the votes if needed. We call this "hidden (morphable) ownership" because under current disclosure rules, the economic ownership and (de facto) voting ownership are often not disclosed. Corporate insiders, too, can use new vote buying techniques.

This article analyzes the new vote buying and its corporate governance implications. We propose a taxonomy of the new vote buying that unpacks its functional elements. We discuss the implications of decoupling for control contests and other forms of shareholder oversight, and the circumstances in which decoupling could be beneficial or harmful to corporate governance. We also propose a near-term disclosure-based response and sketch longer-term regulatory possibilities. Our disclosure proposal would simplify and partially integrate five existing, inconsistent share-ownership disclosure regimes, and is worth considering independent of its value with respect to decoupling. In the longer term, other responses may be needed; we briefly discuss possible strategies focused on voting rights, voting architecture, and supply and demand forces in the markets on which the new vote buying relies.

Cross–Border Tender Offers and Other Business Combination Transactions and the U.S. Federal Securities Laws: An Overview
      Jeffrey W. Rubin, John M. Basnage, and William J. Curtin, III, 61(3):1071—1134 (May 2006)
In structuring cross–border tender offers and other business combination transactions, parties must consider carefully the potential application of U.S. federal securities laws and regulations to their transaction. By understanding the extent to which a proposed transaction will be subject to the provisions of U.S. federal securities laws and regulations, parties may be able to structure their transaction in a manner that avoids the imposition of unanticipated or burdensome disclosure and procedural requirements and also may be able to minimize potential conflicts between U.S. laws and regulations and foreign legal or market requirements. This article provides a broad overview of U.S. federal securities laws and regulations applicable to cross–border tender offers and other business combination transactions, including a detailed discussion of Regulations 14D and 14E under the Securities Exchange Act and the principal accommodations afforded to foreign private issuers thereunder.

Revisiting Consolidated Edison—A Second Look at the Case that Has Many Questioning Traditional Assumptions Regarding the Availability of Shareholder Damages in Public Company Mergers

      Ryan D. Thomas and Russell E. Stair, 64(2): 329-358 (February 2009)
In October 2005, the U.S. Court of Appeals for the Second Circuit in Consolidated Edison, Inc. v. Northeast Utilities ("Con Ed") ruled that electric utility company Northeast Utilities ("NU") and its shareholders were not entitled to recover the $1.2 billion merger premium as damages after NU's suitor, Consolidated Edison, refused to complete an acquisition of NU. This case surprised many M&A practitioners who believed that the shareholder premium (or at least some measure of shareholder damages) would be recoverable in a suit against a buyer that wrongfully terminated or breached a merger agreement. If Con Ed proves to have established a general rule precluding the recovery of shareholder damages for a buyer's breach of a merger agreement, the potential consequences to targets in merger transactions would be substantial—shifting the balance of leverage in any MAC, renegotiation, or settlement discussions decidedly to the buyer and effectively making every deal an "option" deal. This ruling, therefore, has left some target counsel struggling to find a way to ensure that the merger agreement allows for the possibility of shareholder damages while also avoiding the adverse consequences of giving shareholders individual enforcement rights as express third-party beneficiaries of the agreement.

The Con Ed case, however, merits a second look. This Article revisits the Con Ed decision and challenges the conclusion of some observers that the court in Con Ed established a general precedent denying the availability of shareholder damages. This Article also discusses how the holding of Con Ed may very well be confined to the facts and the specific language of the merger agreement at issue in the case. Notwithstanding, the uncertainty surrounding how any particular court may approach the issues raised in Con Ed, this Article proposes model contract language that a target might employ to avoid creating a " Con Ed issue" and to minimize the risk of a result that was not intended by the parties.

Is Delaware's Antitakeover Statute Unconstitutional? Evidence from 1988–2008
      Guhan Subramanian, Steven Herscovici, and Brian Barbetta, 65(3): 685–752 (May 2010)
Delaware's antitakeover statute, codified in Section 203 of the Delaware corporate code, is by far the most important antitakeover statute in the United States. When it was enacted in 1988, three bidders challenged its constitutionality under the Commerce Clause and the Supremacy Clause of the U.S. Constitution. All three federal district court decisions upheld the constitutionality of Section 203 at the time, relying on evidence indicating that Section 203 gave bidders a "meaningful opportunity for success," but leaving open the possibility that future evidence might change this constitutional conclusion. This Article presents the first systematic empirical evidence since 1988 on whether Section 203 gives bidders a meaningful opportunity for success. The question has become more important in recent years because Section 203's substantive bite has increased, as Exelon's recent hostile bid for NRG illustrates. Using a new sample of all hostile takeover bids against Delaware targets that were announced between 1988 and 2008 and were subject to Section 203 (n=60), we find that no hostile bidder in the past nineteen years has been able to avoid the restrictions imposed by Section 203 by going from less than 15% to more than 85% in its tender offer. At the very least, this finding indicates that the empirical proposition that the federal courts relied upon to uphold Section 203's constitutionality is no longer valid. While it remains possible that courts would nevertheless uphold Section 203's constitutionality on different grounds, the evidence would seem to suggest that the constitutionality of Section 203 is up for grabs. This Article offers specific changes to the Delaware statute that would preempt the constitutional challenge. If instead Section 203 were to fall on constitutional grounds, as Delaware's prior antitakeover statute did in 1987, it would also have implications for similar antitakeover statutes in thirty-two other U.S. states, which along with Delaware collectively cover 92% of all U.S. corporations

A Timely Look at DGCL Section 203
      Eileen T. Nugent, 65(3): 753–760 (May 2010)

Hostile Bidders a Meaningful Opportunity for Success
      A. Gilchrist Sparks, III and Helen Bowers, 65(3): 761–770 (May 2010)

A Practical Response to a Hypothetical Analysis of Section 203's Constitutionality
      Stephen P. Lamb and Jeffrey M. Gorris , 65(3): 771–778 (May 2010)

A Trip Down Memory Lane: Reflections on Section 203 and Subramanian, Herscovici, and Barbetta
      Gregg A. Jarrell, 65(3): 779–788 (May 2010)

Preemption as Micromanagement
      Larry Ribstein, 65(3): 789–798 (May 2010)

Is Delaware's Antitakeover Statute Unconstitutional? Further Analysis and a Reply to Symposium Participants
      Guhan Subramanian, Steven Herscovici, and Brian Barbetta, 65(3): 799–808 (May 2010)

The Evolving Role of Special Committees in M&A Transactions: Seeking Business Judgment Rule Protection in the Context of Controlling Shareholder Transactions and Other Corporate Transactions Involving Conflicts of Interest
      Scott V. Simpson and Katherine Brody, 69(4): 1117-1146 (August 2014)
Special committees of independent, disinterested directors have been widely used by corporate boards to address conflicts of interests and reinforce directors’ satisfaction of their fiduciary duties in corporate transactions since the wave of increased M&A activity in the 1980’s. In 1988, The Business Lawyer published an article titled The Emerging Role of the Special Committee by one of this article’s co-authors, examining the emerging use of special committees of independent directors in transactions involving conflicts of interest. At that time, the Delaware courts had already begun to embrace the emergent and innovative mechanism for addressing corporate conflicts. Now, after over thirty years of scrutiny by the Delaware courts, it is clear that the special committee is a judicially recognized (and encouraged) way to address director conflicts of interest and mitigate litigation risk. This article will examine the role of the special committee in the context of conflict of interest transactions, with a particular focus on transactions involving a change of control or a controlling stockholder, from a U.S. perspective (in particular, under the laws of the State of Delaware), and will briefly consider international applications of the concepts discussed. To this end, this article will examine recent case law developments and compare the special committee processes at the heart of two high-profile Delaware decisions, and, finally, provide guidance to corporate practitioners on the successful implementation of a special committee process.

Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
     Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.

As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.

As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.

As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.

Cross-border Tender Offers and Other Business Combination Transactions and the U.S. Federal Securities Laws: An Overview
     John M. Basnage and William J. Curtin III; 71(2): 459-538 (Spring 2016)
In structuring cross-border tender offers and other business combination transactions, parties must consider carefully the potential application of U.S. federal securities laws and regulations to their transaction. By understanding the extent to which a proposed transaction will be subject to the provisions of U.S. federal securities laws and regulations, parties may be able to structure their transaction in a manner that avoids the imposition of unanticipated or burdensome disclosure and procedural requirements and also may be able to minimize potential conflicts between U.S. laws and regulations and foreign legal or market requirements. This article provides a broad overview of U.S. federal securities laws and regulations applicable to cross-border tender offers and other business combination transactions, including a detailed discussion of Regulations 14D and 14E under the Securities Exchange Act of 1934 and the principal accommodations afforded to foreign private issuers in these regulations.