The Securities and Exchange Commission voted yesterday to put a halt to corporate takeover bids that promise a high cash price to shareholders who get their stock in early, but don't guarantee the money to owners who tender their stock after the first 10 days.
Shareholders who sell their stock after the first deadline -- the so-called pro-ration date--may get securities worth far less than the cash part of the offer.
The new rule, adopted on a 3-2 vote with Chairman John S.R. Shad dissenting, requires that an early cut-off date for cash guarantees must be discontinued. Instead, the pro-ration date must be the day the offer to buy the company expires.
The so-called two-tier tender offer has been employed in hostile takeovers so the acquiring company can gain quick control of the target company before it has time to maneuver. It was used first in the bidding war for Conoco Oil, won by E.I. du Pont de Nemours & Co. in 1981.
For example, a company may offer $100 a share in cash for 50 percent of the outstanding stock of another company and securities worth $75 for the remaining 50 percent of the stock. Shareholders who tender their stock by the first pro-ration date (10 days after the offer is made) are guaranteed some cash. If 75 percent of the outstanding stock is tendered by the first pro-ration date, a stockholder in the target company who sent in 100 shares by the deadline would get $100 a share for 66 2/3 of his shares and securities worth $75 a share for the rest.
If the stockholder missed the deadline, he would get only securities.