Hon. WILLIAM PROX MIRE,

SECURITIES AND EXCHANGE COMMISSION,
Washington, D.C., April 19, 1976.

Chairman, Committee on Banking, Housing and Urban Affairs, U.S. Senate, Washington, D.C.

DEAR CHAIRMAN PROXMIRE: You have requested our views concerning S. 2522, a bill designed to provide full disclosure to investors concerning persons intending to file tender offers.

Section 1 of the bill would amend Section 12 of the Securities Exchange Act of 1934 (the "Act") by adding a provision, subsection "(n)," that a tender offer shall not be made for a security registered under Section 12, or for certain other securities,1 unless the offeror has filed with the Commission information and documents specified by the Commission and comparable to those required in an application to register a security pursuant to Section 12 of the Act. This filing, which the bill denominates as a "registration statement," would become effective in 60 days, except as otherwise ordered by the Commission. The section continues, "Until such registration statement becomes effective it shall not be deemed filed for the purposes of section 14 (d) of this title." "

Section 2 of the bill would amend Section 13 (a) of the Act to make its periodic reporting requirements applicable to every "person" registered pursuant to proposed Section 12(n).

Section 3 of the bill would amend Section 15(d)(1) of the Act to require any person making a tender offer for a security registered under Section 12 of the Act, or for certain other securities, to file the statement presently required under Section 14(d) with the Commission at least 60 days prior to the time copies of the offer are first published or sent to shareholders. Section 14(d) (1) would also be amended to require the Commission to send a copy of the statement to the officers of the target company within five days of receipt.

Section 4 provides that the amendments will apply to any tender offer made on or after September 1, 1975, "as to any transaction not consummated prior to [its] effective date."

BALANCED REGULATION POLICY CONSIDERATIONS

In adopting the Williams Act in 1968, the Congress made clear its intent to establish even-handed regulation which did not favor either the tender offeror or incumbent management, but which ensured the investing public full disclosure concerning the offer. S. Rep. No. 550, 90th Cong., 1st Sess. at 3 (1967); H.R. Rep. No. 1711, 90th Cong., 2d Sess. at 4 (1968). Recently, in Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58 (1975), the Supreme Court recognized this fact, stating:

"The Congress expressly disclaimed an intention to provide a weapon for management to discourage takeover bids. . . . Indeed, the Act's draftsmen commented upon the 'extreme care' which was taken to avoid tipping the balance of regulation either in favor of management or in favor of the person making the takeover bid."

Under the provisions of the Williams Act, 15 U.S.C. § 78m (d)-(e), 78n(d)(f) (1970), no public filing is required until the time a tender offer is "first published or sent or given to security holders." 15 U.S.C. 78n (d). Thus, a potential tender offeror can prepare an offer and plan its implementation in private and, when the circumstances are right, proceed expeditiously. Management of the target company has some time to communicate its views to shareholders, since under Section 14(d) (5) of the Act tendered shares are withdrawable until seven days after the offer is first made, but its opportunity to engage in more sophisticated forms of opposition, such as the negotiation of a defensive merger, is limited. Nonetheless, as you are no doubt aware, the techniques for defending against unwelcome tender offers have become well developed. See E. Aranow & H. Einhorn, Tender Offers for Corporate Control, 219-298 (1973) [hereinafter cited Aranow & Einhorn]; Bradshaw, Defense Tactics Employed by Incumbent Managements in Contesting Tender Offers, 21 Stan. L. Rev. 1104 (1969); Comment, Cash Take-Over Bids, 44 Tul. L. Rev. 517 (1970); Schmults and Kelly,

1 These are: "any equity security of an insurance company which would have been required to be so registered except for the exemption contained in section 12(g) (2) (G) of [the Act], or any equity security issued by a closed-end investment company registered under the Investment Company Act of 1949 [sic]."

2 As discussed infra, p. 7, the meaning of this language is unclear.

3 See note 1, supra.

Cash Take-Over Bids-Defensive Tactics, 23 Bus. Law 115 (1967); see also Cary, Corporate Devices Used to Insulate Management from Attack, 25 Bus. Law 839 (1970); Hays and Taussing, Tactics of Cash Takeover Bids, 45 Harv. Bus. Rev. 135, 142-47 (1967); Mullaney, Guarding against Take-overs--Defensive Charter Provisions, 25 Bus. Law 1441 (1970).

By requiring an offeror to disclose his intentions 60 days in advance, S. 2522 would provide incumbent management with substantial additional time within which to commence defensive maneuvering and, thus, may significantly alter the existing balance. If the effectiveness of the tender offer mechanism were thereby impaired, investors would lose an effective means for replacing ineffective management as well as the opportunity from time-to-time to tender shares owned by them at prices generally higher than the market.

The establishment of a 60-day waiting period would also significantly prolong disruption of the market in the shares of the target company which generally follows the announcement of a tender offer. Even during the waiting period, depending upon their views of whether consummation of the offer seems likely, speculators will generally be interested in acquiring shares for the purpose of tendering them at a profit and will thus drive the market price of the shares towards that specified in the offer. Persons who want to purchase or sell shares of the target company during this period for bona fide investment purposes will be unable to do so without incurring speculative risks. The disruption would, of course, be compounded by the pendency of more than one offer. Moreover, the possibilities during this prolonged period for misuse of non-public information concerning the probability of consummation of the offer are apparent. Arguably, additional time for the Commission to investigate the adequacy of disclosure might be desirable in some cases. This issue was raised, however, during the Congressional consideration of the bills which became the Williams Act in 1968 and the Congress concluded at that time that the problems connected with a pre-offer filing outweighed the benefits. Since then a number of states have enacted legislation imposing various waiting periods and other requirements upon tender offers for shares of companies which are incorporated or have their principal place of business or substantial assets therein." Although the Commission has not yet taken a formal position on the propriety of such state legislation, significant questions have been raised as to whether the carefully balanced regulation enacted by Congress in 1968 preempted such state legislation and whether, in any event, it constitutes an unconstitutional burden on interstate commerce. See Aranow & Einhorn, supra, at 156–58, 172; Sommer, The Ohio Takeover Act: What Is It?, 21 Case W. Res. L. Rev. 681 (1970). But see Shipman, Some Thoughts About the Role of State Takeover Legislation: The Ohio Takeover Act, 21 Case W. Res. L. Rev. 722 (1970). In any event, we recommend that the bill be amended to provide specifically that the regulatory scheme established by Congress with respect to tender offers is exclusive and that state regulation of tender offers is preempted. Otherwise, the obvious interest of states in making their laws attractive so that management will locate corporate operations within their borders seems certain to encourage the imposition of ever greater and possibly conflicting state requirements with respect to tender offers which are opposed by management. We understand that a number of states, in addition to those referred to in n. 5, are presently drafting laws applicable to tender offers. Significantly, the propriety of such state legislation is extremely difficult to challenge in court because of the time within which a tender offer must, as a practical matter, be completed. Judicial resolution of this question in a particular case would require a substantial period of time to obtain.

In the 1967 and 1968 hearings on the bills which ultimately became the Williams Act. the Commission recommended that offering materials be filed with it on a confidential basis five days prior to commencement of an offer. The purpose of this requirement would have been to provide time for staff review to help ensure full disclosure. This recommendation was opposed by the industry and rejected by the Congress because of concern about leaks, misuse of inside information and market disruptions. S. Rep. No. 550. supra, at 4; Hearings on S. 510 Before the Subcommittee on Securities of the Senate Committee on Banking and Currency, 90th Cong., 1st Sess. at 20, 35, 72-76. 87-89, 98, 105. 139-40, 151. 163. and 245 (1967); Hearings on H.R. 14475 and S. 510 Before the Subcommittee on Commerce and Finance of the House Committee on Interstate and Foreign Commerce, 90th Cong., 2d Sess. at 44-46, 50, and 52-54 (1968).

These include Colorado (Blue Sky Law), Idaho (Business Corporation Act). Indiana (Business Take-Over Law), Kansas (Takeover Bid Disclosure Law), Minnesota (Corporate Take-Over Law), Nevada (General Corporation Law), Ohio (Securities Law), South Dakota (Blue Sky Law), Virginia (Take-Over Bid Disclosure Act), and Wisconsin (Corporate Take-Over Law).

Rather than impose a significant waiting period before a tender offer can be made, we suggest that the period during which offerees are permitted to withdraw shares which they have tendered might be extended to 21 days. As discussed above, Section 14(d)(5) of the Act presently permits offerees to withdraw shares tendered during the first seven days after "definitive copies of the offer. . . are first published or sent or given to security holders. . . ." If this period were extended, as we recommend, incumbent management and interested parties supporting or opposing a tender offer would have more time to present their views to shareholders, and shareholders, for their part, would have more time to consider all viewpoints presented. Such an extension of the withdrawal period, however, would not delay the offeror's attempts to solicit tenders and would minimize the period during which the market would be disrupted.

The proposed requirement that offerors publicly file information comparable to that contained in an application to register securities under Section 12 of the Act would not seem, in itself, to impair the tender offer mechanism. Arguably, such a disclosure requirement might provide incumbent management with fertile grounds for defensive litigation designed solely to impede the offer, but under some circumstances information of this type may well be important to investors in deciding whether to tender. Unless the offer is for all tendered shares, pro rata acceptance pursuant to Section 14(d) (6) of the Act is a possibility. Accordingly, even those investors who decide to tender may be concerned with the desirability of the offeror achieving control of the target company and may thus be interested in full disclosure of the offeror's business and financial condition. The possibility was discussed briefly in H.R. Rep. No. 1711, supra at 2-3 (1968). In addition, a number of courts have considered whether such information must be disclosed pursuant to the general requirement of Section 14 (e) of the Act that in connection with a tender offer all material information must be disclosed. See Missouri Portland Cement Co. v. Cargill, Inc., 375 F. Supp. 249, 267-68 (S.D.N.Y., 1974), affirmed in part, reversed in part, on the grounds, 498 F. 2d 851 (C.A. 2, 1974), certiorari denied, 419 U.S. 883 (1974); Corenco Corporation v. Schiavone & Sons, 362 F. Supp. 939, 948-50 (S.D.N.Y., 1973), affirmed on other grounds, 488 F. 2d 207 (C.A. 2, 1973); Copperweld Corporation v. Imetal, [Current Binder] CCH Fed. Sec. L. Rep. 195,362, at pp. 98,804-06 (W.D. Pa., 1975); Alaska Interstate Co. v. McMillian, [Current Binder] CCH Fed. Sec. L. Rep. 195,276, at pp. 98,405-06 (D.Del., 1975).

If a question exists, it is only whether such disclosure should be required in connection with every tender offer. Significantly, under Section 14(d) (1) of the Act the Commission already has broad authority to require offerors to file such information as is "necessary or appropriate in the public interest or for the protection of investors." Rule 14d-1 promulgated by the Commission thereunder, 17 CFR 240.14d-1, presently requires a statement containing the information and exhibits required by Schedule 13D, 17 CFR 240.13d-101. Schedule 13D calls for certain information concerning the identity of the offeror and its management, the source and amount of the funds to be used, the purpose of the offer, including proposals to liquidate or merge the target company or to sell its assets, any interest in or contract relating to the securities of the target company, and the identity of any persons employed to solicit shareholders. In addition, copies of all offering, advertising and soliciting materials must be filed as exhibits. Our staff is presently considering whether these requirements should be expanded, particularly with respect to the offeror's financial condition.

THE FILINGS AND REPORTING REQUIREMENTS

As noted above, Section 1 of the bill would amend Section 12 of the Act to require a tender offeror, whether one or more individuals or a corporation, to file a registration statement thereunder. Presently, only securities are registered under that section, and it appears that other sections of the Act applicable by their terms to registered securities (e.g., Sections 14(a)-(c) and 16) would be inapplicable to registered persons unless amended. Section 13(a) of the Act, however be amended to apply to both registered securities and registered offerors. Thus, an offeror who registers pursuant to proposed Section 12(n) of the Act would become obligated to comply with the periodic reporting requirements of Section 13 (a) even after the offer is consummated.

The apparent purpose of this requirement is to ensure that current information as to the offeror's operations continues to be available after the consummation of the offer to investors who wish to evaluate the investment merits of

shares of the target company which the offeror has not acquired. It seems desirable, therefore, to provide for deregistration where the offer has been abandoned after registration or where all, or substantially all, of the securities of the target company have been acquired, either initially or subsequently, by the offeror.

Furthermore, as a practical matter the registration requirement of proposed Section 12(n) of the Act will have the greatest impact on foreign tender offerors and may result in retaliatory action by foreign governments. Although most domestic corporate offerors would be reporting companies due to the requirements of Section 12(a), 12(g) and 15(d) of that Act, most foreign offerors would not. Even those foreign offerors who otherwise might be required to report may be exempted by the Commission pursuant to Section 12(g)(3) of the Act and Rule 12g3-2 thereunder, 17 CFR 240.12g3–2."

TRANSACTIONS COVERED

The term "tender offer," which is not defined either by the bill or by existing statutes, would appear to encompass both a cash offer and an offer to exchange securities. The latter, of course, is already subject to the registration requirements of the Securities Act of 1933.

In addition, proposed Section 12(n) would apply to all tender offers regardless of the percentage of the target company's securities the offeror seeks to obtain. Section 14(d), on the other hand, is limited to tender offers which would result in the offeror holding beneficial ownership of more than 5% of a class of a target company's shares. It may be appropriate that proposed Section 12 (n) be reconciled with Section 14 (d) in this regard.

Section 13(d) of the Securities Exchange Act, on the other hand, requires certain informational filings with respect to acquisitions, other than by tender offer, of substantial percentages of the securities of issuers registered pursuant to Section 12 of the Act. It may be that the proposed disclosure requirements are also appropriate as to those transactions. Under Section 13 (d), as under Section 13(a), the Commission already has broad authority to require disclosure of such information "as necessary or appropriate in the public interest or for the protection of investors." It is not entirely clear, however, that this authority would permit the Commission to require periodic reporting of financial information.

WAITING PERIOD

Proposed Section 12(n) provides that registration statements filed thereunder shall become effective 60 days after filing, "except as otherwise ordered by the Commission." It is not clear whether it is intended that the Commission may both shorten or lengthen the statutory period. Further, if the period may be shortened, it is not clear what criteria should be applied. Some clarification would be helpful.

Furthermore, it is not clear whether an amendment to the information filed under Section 14(d), such as would result if the terms of the offer were revised, would extend the proposed waiting period under that Section by an additional 60 days. If this is intended, an offer might be delayed indefinitely where fluctuating market or other conditions compel periodic revisions. On the other hand, potential offerors might otherwise be encouraged to file prior to the time they have actually determined to make an offer so that if they later determine to proceed, the offer might be revised and the waiting period avoided. The probable disruptive effect of such filings on the market in the shares of the target company has already been discussed.

The last sentence of proposed Section 12(n) is also somewhat unclear. It provides:

• Section 12(b) (3) was inserted in the Act because of the concern of foreign issuers and questions as to jurisdiction. S. Rep. No. 379, 88th Cong., 1st Sess. at 29-31 (1963); Hear ings on S. 1642 Before the Subcommittee on Securities of the Senate Committee on Banking and Currency, 88th Cong., 1st Sess. at 309, 310 (1963) (Statement with Respect to Legislative Proposals of the Securities and Exchange Commission to Amend the Securities Exchange Act of 1934 and the Securities Act of 1933); Hearings on H.R. 6789, H.R. 6793 and S. 1642 Before the Subcommittee on Commerce and Finance of the House Committee on Interstate and Foreign Commerce, 88th Cong., 1st Sess. at 179-180 (1963) (written statement of Securities and Exchange Commission).

7 See Aranow & Einhorn, supra, at 69-70; Note, Cattlemen's Investment Co. Fears: Informal Solicitation of Stock Held to Constitute a Tender Offer, 1972 Duke L. J. 1051, 1055-57.

"Until such registration statement becomes effective it shall not be deemed filed for the purposes of section 14(d) of this title."

Section 14 (d) of the Act, however, requires only the filing of certain information, not a Section 12 registration statement. Moreover, the content of these two types of filings is not the same. Thus, some clarification is needed. If it is to be required that the Section 14 filings must include an effective registration statement under proposed Section 12 (n), the total waiting period for a nonreporting tender offeror would be 120 days.' Significantly, however, the filing of a registration statement under proposed Section 12(n) 60 days prior to announcement of the tender offer would probably be meaningless to investors.

DELIVERY REQUIREMENT

Section 3(b) of the bill would add a provision to Section 14(d) requiring the Commission to send a copy of the statement filed by the bidder pursuant to Section 14(d) to the officers of the target company within five (5) days of Commission receipt thereof. Since Section 14 (d) currently requires the offeror to send such information to the target company's management on or before the date it is published or sent or given to any security holders, we suggest that Section 3(b) of the bill be revised so that Section 14(d) continues to place the responsibility for sending materials to the target company on the offeror.

APPLICABILITY

Section 4 would make the provisions of the bill applicable to any tender offer commenced on or after September 1, 1975, but not consummated prior to its effective date, thereby making its provisions retroactive to September 1, 1975, with respect to certain transactions. The desirability of requiring offers which have been almost completed and which have been made in compliance with the full disclosure requirement of Section 14 (e) of the Act to be abandoned and begun again after the applicable waiting period may be questioned.1o

The views herein are those of the Commission and do not necessarily reflect the view of the President. Our views are being submitted simultaneously to the Office of Management and Budget, and we will inform you of any advice received from OMB concerning the relationship of our views to the program of the administration.

Thank you for the opportunity to express our views on this subject.
Sincerely,

RODERICK M. HILLS, Chairman.

Section 12 requires the filing of more extensive information concerning the registrant's business, management and securities, including financial statements.

Presumably, companies whose securities have been registered pursuant to Section 12 would not have to register as offerors as well.

10 The reference in Section 1 of the bill to the Investment Company Act of "1949" is in error. It should read the Investment Company Act of "1940."