Corporate Takeovers - Securities Regulation

Corporate Takeovers

1. § 13(d) of the Exchange Act

   1. § 13(d) requires a filing by any person who becomes the beneficial owner of more than 5% of a class of equity securities registered pursuant to § 12 or of certain other issuers (i.e., publicly held companies)

      1. The filing is a Schedule 13D

         • There are a variety of EXEMPTIONS from the filing requirement under § 13(d)(6) and Rule 13d-1

           • Most relate to acquisitions where alternative regulatory schemes under the securities laws will apply

           • The most important exemption (not falling into the alternative regulation" category is the Creeping Acquisition

             • Situations where the acquisition in question, together with all others made by the same person during the preceding 12 months, does not exceed 2% of the class.

      2. Rule 13d-3 provides that the proper test for beneficial ownership is whether the person in question directly or indirectly has either voting power or investment power over the securities in question.

         • Voting power included "the power to vote or direct the voting" of the securities.

         • Investment power means the ability to dispose (or direct the disposition) of the securities in question.

           • The definition also encompasses situations where, through options or warrants, the person has the right to acquire securities of the issuer.

   2. § 13(d) "requires a group that has acquired, directly or indirectly, beneficial ownership of more than 5% of a class of a registered equity security, to file a statement with the SEC, disclosing, inter alia, the identity of its members and the purpose of its acquisition." Wellman v. Dickinson (pg. 968)

      1. § 13 (d)(3) states that "[w]hen two or more persons act as a partnership, limited partnership, or other group for the purposes of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a 'person' for purposes of this subsection."

         • Under § 13(d)(3), a "group" is defined as an aggregation of persons or entities who "act . . . for the purposes of acquiring, holding or disposing of securities. . . ." Wellman v. Dickinson (pg. 968)

         • "The statute contains no requirement . . . that the members be committed to acquisition, holding, or disposition on any specific set of terms." Wellman v. Dickinson (pg. 968)

         • "[T]he touchstone of a group within the meaning of § 13(d) is that the members combined in furtherance of a common objective." Wellman v. Dickinson (pg. 968)

   3. Schedule 13D

      1. The filing required is the Schedule 13D, which is transmitted to the SEC, the relevant stock exchanges, and the issuer of the securities in question.

      2. Schedule 13D must disclose matters such as

         • The background and identity of the acquirer

         • The source of funding

         • The number of shares owned

         • Any contracts or arrangements with respect to such shares

         • The purpose of the acquirer, including any plans or proposals regarding possible exercise of control over the issuer

      3. The Schedule 13D must be filed within ten days of passing the 5% threshold

      4. Thereafter, amendments must be filed promptly whenever any "material changes" occur with respect to the original disclosures.

         • Under Rule 13d-2, an acquisition or disposition of 1% or more of the class of securities in question is presumptively material

           • Acquisitions or dispositions of less than that amount may or may not be material, depending upon the circumstances

   4. § 13(d) may be enforced by the SEC.

      1. In SEC v. First City Financial Corp., the court ordered $2.7 million in profits to be disgorged for a violation of § 13(d).

      2. As a result of the Securities Enforcement Remedies Act of 1990, the SEC has authority to seek a civil penalty for a violation of § 13(d).

   5. As far as private actions are concerned, virtually all courts permit equitable relief.

      1. Courts have been reluctant to order much beyond corrective disclosure and a short cooling off period for violations of § 13(d) after the Supreme Court's decision in Rondeau v. Mosinee Paper Corp. (holding that an injunction barring the voting of the defendant's shares was impermissible for a violation of § 13(d), since the traditional standards governing equitable relief - irreparable harm - had not been established) (pg. 972)

   6. Passive Ownership Report

      1. § 13(g) requires a filing along the lines of the Schedule 13D by persons who are 5% beneficial owners.

         • The reporting requirements under § 13(g) (that is, a Schedule 13G) are much more lenient than those for § 13(d).

      2. Under Rule 13d-1(b), the most important category of persons entitled to use the simplified filing procedures is the "passive" investor who acquired the stock in the ordinary course of business and without any intent to change or influence the control of the issuer.

         • For these investors, only annual filings are required (except upon passing a 10% ownership threshold or thereafter when such ownership increases or decreases by more than 5%.

         • If a person entitled to file on Schedule 13G changes his intentions, so that a "control person" comes into existence, he is precluded from acquiring any additional shares for ten days after filing Schedule 13D.

2. § 14(d) of the Exchange Act

   1. § 14(d)(1) makes it unlawful to make a tender offer for the equity securities of any publicly held company if upon consummation the bidder would own more than 5% of the class in question UNLESS the bidder files and transmits to the target company a Schedule TO.

      1. The Schedule TO requires that the bidder describe , among other things, its identity and background, its source of funding, the purpose of the bid, and any plans or proposals with respect to the target company.

      2. After commencement of the bid, material changes in the prevailing terms and conditions, as well as updating of the required disclosure, must be reported. Copies of other soliciting material must also be filed with the Commission. See Rule 14d-3(b).

      3. Whether scienter must be shown to establish a violation of § 14(d) or § 14(e) is open to question.

      4. The filing deadline is triggered by the commencement of the bid.

         • Rule 14d-2(a) defines this to be the date "when the bidder has first published, sent or given the means to tender to securities holders." (pg. 977)

         • Rule 14d-2(b) provides that pre-commencement communications will not trigger the filing obligations so long as they do not provide any means to tender and all written communications are filed with the SEC (and delivered to the target) as of the date they are used.

   2. Regulation 14D - Delivery of Information to target shareholders

      1. Delivery of Information to target companies is addressed separately under Regulation 14D

         • Rules 14d-4 and 14d-6 taken together provide for alternative means of communicating the mandated disclosure information to those faced with the tendering decision:

           • Long-Form Publication provides for fairly elaborate disclosure about the bidder and the bid (much of what is provided for in the Schedule TO) in one or more newspapers of general circulation.

           • Summary Publication (used more frequently) permits the bidder to publish a short, less-detailed advertisement to shareholders in one or more such newspapers, inviting them to request formal materials from the bidder.

             • If this option is chosen, the bidder may not include anything more than specified "tombstone"-like information in the notice, and the follow up material must then contain the full mandatory disclosure.

           • Direct Communication via the use of the target's shareholder list.

         • Rule 13d-4(d) provides that, if there are any material changes in the information given to shareholders, they must be "promptly disseminated . . . in a manner reasonably designed to inform security holders of such change." (pg. 977)

         • Rule 14d-9 requires that any other person who solicits or makes recommendations to shareholders with respect to the tender offer to file a Schedule 14D-9, indicating his relationship to the bidder and disclosing certain conflict of interest information.

3. § 14(e) of the Exchange Act

   1. § 14(e) of the Exchange Act makes it unlawful to make any untrue statement of material fact, or omit to state any material fact necessary to make statements made not misleading, or to otherwise engage in any fraudulent, deceptive, manipulative acts or practices in connection with any tender offer - whether or not the bid is covered by § 14(d). (pg. 978)

      1. Target shareholders have standing to sue under § 14(e).

         • AND most courts have granted target companies to seek some form of equitable relief. See Florida Commercial Banks v. Culverhouse (pg. 978)

         • BUT The bidder does NOT have standing to sue under § 14(e). Piper v. Chris Craft Industries, Inc. (pg. 978)

      2. Courts have indicated that (1) there is no purchaser-seller rule equivalent to that under Rule 10b-5, and (2) non-tendering shareholders may recover by showing causal injury and need not allege individual reliance. See, e.g., Plaine v. McCabe (pg. 978)

      3. Whether Scienter must be shown to establish a violation of § 14(d) or § 14(e) is an open question.

         • The resemblance to the language of § 17 of the '33 Act suggests that scienter might be required for allegations of fraudulent or deceptive activity, but not necessarily for the bar against untrue statements.

         • BUT a number of cases have indicated that § 14(e) is to be construed para materia with Rule 10b-5. See, e.g., Connecticut Natl Bank v. Fluor Corp. (pg. 979)

      4. Misrepresentation or nondisclosure is a necessary element of § 14(e). Schreiber v. Burlington Northern Inc. (pg. 999)

      5. Field v. Trump left the door open to whether foregoing a state remedy could be actionable under § 14(e) (think about Santa Fe in...