Litigation and the Cash Tender Offer
| Publication year | 1981 |
| Pages | 2790 |
| Citation | Vol. 10 No. 11 Pg. 2790 |
1981, November, Pg. 2790. Litigation and the Cash Tender Offer
In recent months, headlines have announced in bold print what many corporate executives have known for some time: corporate takeovers are once again in vogue and the trend to tender offers, especially cash offers, is likely to intensify. The new acquisition fever and movement toward unfriendly takeovers is due in great part to the present state of the oil and gas industry. Anyone who followed the battle for control of Conoco would not be surprised to learn that other cash-rich corporate giants have employed investment banking specialists to start the process of identifying acquisition targets. The movement may gain even greater intensity in the future because of recent changes in corporate tax laws. Yet, this recent volume of activity is hardly a recent phenomenon.
What may be described as the current takeover wave probably started as early as 1974 and, in 1978 alone, twenty-two corporations worth $5.7 billion were targets of major tender offers that at some stage were hostile; i.e., opposed by the target's management. In recent months, money has become less of an obstacle and present economic factors often make the acquisition of an energy company particularly attractive. The purchase of undervalued oil in the marketplace may be substantially cheaper than trying to find it. Moreover, many large mergers result in economies of scale that improve productivity. Acquisitions that involve diversification may be an absolute necessity for companies whose assets or dwindling supplies are concentrated in an unstable market environment or geographic area. In comparison to proxy fights, a cash tender offer is also more likely to catch the target company by surprise and it may well be faster and less expensive.
Whatever the motivation, the courtroom is almost inevitably the arena for much of the conflict which arises if the target company resists the overtures of the offeror. Whether the resulting battle starts as a clearly defined raid or with more subtle negotiations and open market purchases of stock, there is very likely to be a flurry of litigation as the principals seek to advance or to protect their respective interests. The resistance of the target company must necessarily be vigorous, since cash offers are rarely defeated.(fn1)
In many ways, tender offer litigation is an art form. Usually, it is inherently complex because of the number of issues involved, the nature of those issues and the simultaneous adjudication of those issues in a variety of administrative and judicial forums. The litigation process is often made more complicated by the fact that the principals and their advisors may engage several law firms. In the Conoco battle, for example, Conoco engaged both its traditional outside counsel and a second firm specializing in mergers and acquisitions. Conoco's investment banking
firm hired its own lawyers. Each of the three giants who competed for control of Conoco were represented by at least one law firm and, of course, their bankers retained additional firms.
This article explores many of the conventional and some of the unconventional litigation techniques used by offering companies and those companies which are the subject of unfriendly cash tender offers.
The litigation strategy of the offeror will necessarily be defined and governed by the overall takeover strategy. Nevertheless, a few operative rules of thumb may be identified.
Even before the first formal steps toward acquisition are taken, the offeror must engage and form its project team. Since tender offer litigation is basically large case litigation involving securities law, antitrust law, financing law and other specialized fields of law, it is essential that the project team include lawyers with major experience in the appropriate fields. In addition, the project team should include an investment banking firm, an outside public relations firm, an independent accounting firm, as well as other specialists.(fn2)
Within the project team, a litigation team should be formed in advance of actual litigation. The offeror's litigation team must be prepared for immediate and decisive action on the assumption that the target company will seek judicial and administrative protection on several fronts. It may even be wise to retain local counsel in advance of the offer in jurisdictions where the target is most likely to commence litigation.
Long before the first litigation shot is actually fired, litigation counsel for the offeror must be intimately involved in the overall plan of preparation for the tender offer. Since it can be anticipated that much of the target's litigation effort will be aimed at convincing some court that the offering documents do not accurately or fully disclose various material facts, the offeror's litigation counsel must be involved in the preparation of those documents.
The actual drafting, of course, should be performed by the offeror's securities lawyers, but the litigation team must spare no effort to learn in advance all information that could possibly arise later through the discovery efforts of the target and which should have been included in the offering documents. The most direct and thorough way to obtain such information is to meet with each principal executive or manager of the offering company and to ask the same type of difficult questions which may be asked by counsel for the target.
There was a time when it was conventionally assumed that once the tender offer had been made, there was little for the offeror's lawyers to do except to wait for the target company to initiate a lawsuit for the purpose of obtaining an injunction against the offer. It is now routine, however, for litigation counsel for the offeror to at least consider striking the first litigation blow.
There are various reasons why, in certain circumstances, such an initiative may be an excellent litigating tactic. First, it may be important for the offeror to select the litigating forum. Presumably, a target company is going to select a forum which it perceives to be most favorable to its cause. A second advantage which may be gained by the offeror commencing the litigation has a great deal to do with creating a psychological atmosphere favorable to the offeror. By initiating the litigation itself, the offeror is telling the marketplace, and perhaps even the court, that it has no fear of
litigation and that it intends to challenge vigorously the expected claims of the target.
Finally, if the offeror is concerned about any provision of an applicable state anti-takeover statute which requires prior notice of the tender offer, it may be advantageous to initiate an action for declaratory judgment (attacking the state statute; e.g., on grounds that it is preempted by the Williams Act(fn3) and that it places an unconstitutional burden on interstate commerce) at the same time that the offer is announced.(fn4)
Should it seem advantageous to the offeror to commence litigation, several conventional theories are available. For instance, the offeror might file suit in federal court, alleging that the communications by the target company to its own shareholders regarding the offer or other actions of the offeror in some way included material misrepresentations or omissions (e.g., that such communications exaggerated the target's own financial condition and future prospects) in violation of §§ 10(b), 14(d) and 14(e) of the Securities and Exchange Act of 1934 ("1934 Act"). It is most common for the offeror to allege that the target's resistance has no valid business purpose and is designed solely to defeat the offer.
The litigation theory pursued by the offeror may well be determined by the initial reaction of the target company to the offer. For example, the target's management could react by issuing a press release advising its shareholders that the price being offered is inadequate, that the offeror has violated the Williams Act and that the proposed merger of the two companies would create antitrust problems. In response, the offeror might allege that in describing the offer as inadequate, the target's officers and directors violated the antifraud provisions of § 14(e) by omitting the material information that the offering price was significantly greater than the price at which the stock had been traded for some time on the open market; that the target's management is engaged in a conspiracy to entrench themselves in their positions (since the offeror presumably owns at least some of the target's stock, a corollary allegation may be made that each of the target's officers and directors are violating their fiduciary duty to the...
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