The Securities and Exchange Commission yesterday proposed rules abolishing a controversial technique in corporate takeovers known as a "market sweep."
The proposed rules are aimed at blocking takeover specialists from undercutting the tender offer process, which is designed to ensure that all stockholders are given an equal opportunity to take advantage of an offer.
Tender offer rules prohibit bidders from purchasing stock outside of the offer, which states a specific time and deadline.
However, other parties can purchase all the stock they want on the open market, and in a number of recent takeover battles professional speculators known as arbitrageurs have assembled large blocks of stock.
Bidders then have been able to acquire target companies by dropping their tender offers and dealing directly with one or more arbitrageurs, thus leaving other stockholders out of the dealing directly with one or more arbitrageurs, thus leaving other stockholders out of the deal.
The technique, which is known as a market sweep or a "sweep of the street," can also be used as a defensive tactic by a company seeking to acquire enough stock to block a takeover.
According to the commission staff, the tactic puts undue pressure on individual private stockholders to sell immediately while the arbitrageurs are buying or risk getting a lower price later.
The proposed rule would prohibit open market purchases of more than 10 percent of a takeover target's stock from the time a tender offer is announced until 30 days after it is withdrawn or 10 days after it expires.
The commission voted 4-1 to publish the proposed rules for public comment, after it rebuffed an attempt by Commissioner Joseph A. Grundfest to water down the proposal by leaving it as an option for stockholders of companies to adopt by vote.
Grundfest argued that it was not certain the proposed rules would benefit stockholders in all instances.
Grundfest had pushed for a rewriting of the proposed rules, but settled for an attachment to the proposal that requests comments on his idea.
The commission would consider the comments when revising the rules for final action. That revision is expected to be made in several months.
Commissioner Charles C. Cox voted against proposing the rules. He contended that the outcome of only five or six takeover battles over the past few years would have been affected. He also said that he was not convinced of the need for special rules.
SEC Chief Economist Kenneth Lehn and Economic and Policy Analysis Director Jeffry L. Davis backed Cox, contending that it's not clear from the evidence that stockholders left out of market sweeps ultimately suffer.
Pushing for the rules were the SEC's divisions of corporation finance, enforcement and market regulation.
In another matter, the commission voted 3-2 to send back to the drawing board a staff proposal aimed at stepping up compliance with SEC rules requiring reports from top executives and board members when they buy or sell stock in their own companies.
Such reports are closely watched by speculators on the theory that the actions of corporate insiders are a good tipoff to the future value of a stock.
According to the SEC staff, late filings and failures to file are unacceptably high. The staff members had proposed that corporations be given the responsibility of monitoring their insiders to make sure that they comply.
Another proposal would have prohibited insiders from selling their stock for up to a year if they failed to make the proper disclosures.