The Securities and Exchange Commission may propose regulations to overrule a court decision last week that allows bidders to acquire significant stakes in public companies without following rules that protect shareholders.
Last week, the Second Circuit Court of Appeals in New York unanimously upheld the right of London-based Hanson Trust PLC to acquire 25 percent of SCM Corp., makers of Smith-Corona typewriters, in five privately negotiated cash transactions. Hanson bought the shares last month from professional investors known as arbitrageurs only a few hours after withdrawing a tender offer to buy SCM stock, an offer that Hanson had made to all SCM shareholders.
Generally, offers to acquire shares in a target company are regulated by the Williams Act, which was adopted in 1968 to ensure that all shareholders are treated fairly and have enough time to decide whether to sell their stock. The act includes minimum time periods that bids must remain open and seeks to prohibit discrimination against small stockholders.
The New York court said that because Hanson purchased shares from a small group of sophisticated investors, the Williams Act did not apply. But merger experts said yesterday that allowing Hanson to purchase shares from arbitrageurs only hours after withdrawing its offer to buy shares from all stockholders would lead to abusive takeover tactics that discriminate against small stockholders.
Even though the SEC filed a brief in the Hanson case alleging that the company's purchase of SCM shares was an illegal tender offer that should have been regulated by the Williams Act, SEC officials said yesterday that no decision has been made about whether to propose a new rule. Commission officials confirmed that they are considering a proposal, while other sources said SEC Chairman John S.R. Shad has agreed to testify on the issue later this month before the House subcommittee on telecommunications, consumer protection and finance.
Rep. Timothy E. Wirth (D-Colo.), who is chairman of that subcommittee, sent a letter to Shad last week urging the commission to take action that would protect the interest of all shareholders.
"The commission . . . argued strongly about the dangers to shareholders resulting from large purchase programs conducted without the protection of the Williams Act," Wirth said in a letter to Shad. "If the commission continues to believe, as it has argued in the litigation, that shareholders are significantly harmed by large purchase programs conducted outside of the Williams Act, then the commission is obligated to suggest how to develop clear statutory boundaries delineating acceptable and unacceptable practices in this area."
Merger experts said one danger of the Hanson Trust decision is that a bidder will adopt the following "abusive" strategy: announce the intention to buy shares in a company, or purchase 5 percent of a company and hint that an offer may be forthcoming for the rest; wait a few days until much of the stock moves into the hands of professional investors; drop the broad offer to all stockholders, and simply purchase shares from Wall Street professionals in private transactions that exclude small stockholders and that occur more quickly than the 20-day minimum offering period required under the Williams Act.
"The small stockholder gets excluded by this process," said A. Gilchrist Sparks III, a merger lawyer with the Wilmington law firm of Morris, Nichols, Arsht & Tunnel. "I think it is a matter of serious concern. The decision seems to sanction a technique which would allow one to do an end run around the tender offer rules that afford investors protection. It is an abuse of the process."
"The decision will have an extraordinary impact on the conduct of takeovers," said Arthur Fleischer Jr., a merger lawyer with Fried, Frank Harris, Shriver & Jacobson. "This case says a bidder can go into the market and buy shares and that is not a tender offer. From a legal point of view, the result is disturbing. What it means is that, in the future, white knights friendly acquirers selected by companies that are the target of hostile takeover bids are going to ask for aggressive lock-ups."
Lock-ups are options granted to friendly acquirers that are designed to discourage competing takeover bids. Fleischer believes white knights making tender offers, with mandatory 20-day offering periods, will demand lock-ups to avoid being outmaneuvered by bidders.