#11137 - Protecting And Selling Control - Corporations

Protecting and Selling Control - Tender Offers/Proxy Contests

1. Methods and Defenses

   1. Tender Offers (puts the shareholders in a prisoner's dilemma)

      1. Defenses

         • Poison Pill: a shareholder rights plan

         • Staggered board

   2. Proxy Contests

      1. attempt to pack the board with those friendly to the bidding company (generally done in conjunction with tender offer so that the newly packed board can redeem the poison pill)

2. Regulatory Framework

   1. Federal Regulation

      1. Purposes: (1) ensure that shareholders receive the information they need to make informed decisions; (2) protect shareholders from deceptive acts and practices; (3) outlaw certain coercive tactics that otherwise could be employed by bidders or target companies during tender offers

      2. Tender offers

         • The federal regulation of tender offers is contained in the Williams Act, of which amended the Securities Exchange Act of 1934 (1934 Act), and in the SEC regulations thereunder.

         • Principle provisions:

           • Any person (including corporations, etc.) who makes a tender offer for more than 5% of a public corporation's stock must file its offer with the SEC, and publish as part of its offer information about the bidder and its controlling shareholders, the bidder's purpose, and the terms on which the bidder plans to consummate any second-step transaction. § 14(d)(1).

           • A tender offer must remain open for a minimum of 20 business days. Rule 14e-1.

           • Shares that are tendered may be withdrawn any time before the offer expires. § 14(d)(5), Rule 14d-7

           • A new offer, or an increase in the price of the original offer, extends the duration of the offer and the withdrawal periods by 10 business days. Rule 14e-1.

           • If the offer is for less that all of the corporation's shares, the bidder must accept tendered shares on a pro-rata basis. § 14(d)(6), Rule 14d-8.

           • If the bidder raises it offering price during the offer, it must pay the higher price to all tendered shareholders, including those who tendered in response to its previous, lower offer. § 14(d)(7).

           • It is unlawful for any person, including the bidder and the target company, "to make any untrue statement of material fact or omit to state any material fact necessary in order to make the statements made . . . not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer. Rule 14e-3.

      3. Proxy Contests

         • All of the rules adopted pursuant to § 14(a) of the 1934 Act, including the Rule 14a-9 prohibition of materially false or misleading statements in proxy solicitations apply to proxy contests.

         • Two additional Proxy Rules apply to contests for corporate control.

           • Rule 14a-7 requires a target company to provide a challenger seeking to solicit proxies (the bidder) with estimates of the number of shareholders and estimates of the cost of mailing proxy materials to those shareholders.

             • The target company must either promptly mail the bidders' proxy materials to the shareholders (for which the bidder pays the reasonable costs of mailing) or furnish the bidder with a mailing list of all shareholders.

           • Under Rule 14a-11, all participants in an "election contest," which is defined as a proxy solicitation in opposition to another candidate for director, must disclose their biographical information and their securities holdings in the target company.

             • Rule 14a-11 treats as a "participant" the issuer, its directors, all nominees for election as directors, and committees or groups soliciting proxies or financing a solicitation.

         • SEC rules make it difficult to proceed secretly

           • § 13(d) of the 1934 Act requires any "person" who acquires more than 5% of the stock of a public company to file a Schedule 13D within 10 days after reaching the 5% threshold.

   2. State Regulation

      1. After CTS Corp. v. Dynamics Corp. of America, of which found certain anti-takeover statutes to be constitutionally permissible, a majority of states adopted laws or strengthened their anti-takeover laws

      2. All of these laws have been drafted as either mandatory or default rules

         • (1) Control share laws

           • Bar any bidder who acquires more than a stated percentage of a target company's stock from voting that stock unless the bidder first obtains approval of the target's board of directors to make the bid.

             • If the board opposes the takeover bid, the bidder must conduct a proxy contest and secure support from a majority or supermajority of the target company's shares

         • (2) Business combination laws

           • Bar for three to five years any business combination (such as a second-step merger) involving a target company and a bidder who has acquired, without first securing the approval of the target's board of directors, more than a given percentage of a target's stock.

             • Delaware has adopted a rather mild business combination statute:

               • DGCL § 203 bars for three years a business combination between a covered corporation and an "interested stockholder," which is defined as a person holding more than 15% of the corporation's stock or an entity controlled by such a person, UNLESS:

                 • the target corporation's board of directors gave prior approval to the business combination or the transaction in which the bidder became an interested stockholder;

                 • the interested stockholder (the bidder) acquires more than 85% of the corporation's stock (excluding certain stock held or controlled by management) in the transaction in which it became an interested stockholder; or

                 • following the transaction in which the bidder became an interested stockholder but did not acquire more than 85% of the corporation's stock, the target corporation's board (which presumably will have been elected by the interested shareholders) and holders of at least two-thirds of the target's stock held by persons other than the interested stockholder vote to approve the business combination.

               • Thus, if a hostile bid is attractive enough to garner the support of more than 85% of a Delaware corporation's non-management shareholders, DGCL § 203 imposes no burdens on the bidder.

         • (3) Poison Pill laws

           • Explicitly authorize the use of poison pills (shareholder rights plans).

         • (4) Constituency statutes

           • Permits the board of directors of a target company to take account of the interests of employees, customers, creditors, suppliers, the community and other constituencies, in addition to the interests of shareholders, when deciding how to respond to an unsolicited takeover bid.

             • Neither the DGCL or the MBCA has...