Collusive Bidding in the Market for Corporate Control

• Jurisdiction: United States,Federal
• Citation: Vol. 79
• Publication year: 2021

79 Nebraska L. Rev. 48. Collusive Bidding in the Market for Corporate Control

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Joshua M. Fried, R. Preston McAfee, Melanie Stallings Williams, Michael A. Williams*

Collusive Bidding in the Market for Corporate Control

TABLE OF CONTENTS

I. Introduction....................................... 48
II. Overview of Antitrust Laws......................... 51
III. Supreme Court Precedent for Application of
Antitrust Laws to the Sale of Stock................ 57
IV. The Current Test: Discerning Common Themes in
Silver, Gordon and Securities Dealers.............. 63
V. Does the Sale of Stock Fall Within the Purview
of `Trade or Commerce' Under the Sherman Act?...... 64
VI. The Implied Revocation of the Sherman Act in the
Market for Corporate Control by the Williams Act... 66
VII. Economic Analysis.................................. 70
VIII. Conclusion......................................... 74

I. INTRODUCTION

After a brief hibernation, mega-mergers and corporate acquisitions have returned with a vengeance. Merger activity has risen dramatically in recent years, with activity increasing at record rates for each

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of the past four consecutive years.(fn1) In 1998, mergers and acquisitions resulted in $2.4 trillion in announced activity.(fn2) The first three quarters of 1999 outpaced that rate, with $2.2 trillion generated in the first three quarters alone.(fn3) Unlike the mergers of the 1980s, which occurred more often as a result of leveraged buyouts of undervalued companies, the mergers and acquisitions of the 1990s have taken on a different flavor. Instead of attempting to capitalize on the cash flows of companies trading below their supposed market values, entities are uniting to achieve more efficient operations and provide a greater return as they court potential investors.(fn4) The impetus behind the recent wave of corporate integration is premised on allowing companies to better compete in the world economy by achieving synergistic and competitive advantages over rivals.(fn5) By contrast, leveraged-buyout firms accounted for only 10% of the hostile takeovers since 1994, down by half since the 1988-89 period.(fn6) Strategic investors, normally those in a business related to that of the target, initiated the remaining takeovers. These strategic investors acquire their targets not only to achieve greater efficiencies in their own companies, but often to obtain the target company for relatively bargain rates. `[T]he prospect that strategic investors will produce a more competitive company has helped bring the `takeover premium' down to 26% last year from 58% in 1988.'(fn7) Many of the recent mergers in which the acquiring company made a tender offer for the stock of the target company were effectuated consensually. Increasingly, such tender offers consist of the stock of the acquiring company coupled with cash or bonds, rather

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than the all-cash tender offers that characterized the era of mergers of the 1980s.(fn8)

However, the collective impact on individual shareholders who hold stock in a target company is often ignored in the broader context of business mergers and acquisitions. Notably, when several companies initially tender offers to shareholders of a target company, the price of the finite block of stock rises as a result of the competitive forces attempting to acquire it. This is what is often referred to as the `market for corporate control.'(fn9) When two or more entities vie for a finite block of stock of a target company, what are the qualitative and quantitative effects of the collusive transaction between potential buyers which reduce this market from several bidders to one? Specifically, what are the legal implications and economic effects of an agreement among potential buyers of stock in which suitors exit the bidding process in exchange for some sort of compensation thereby lowering the purchase price necessary to gain control of the corporation as a result of the diminished competition?(fn10)

The issue is not merely of academic interest, since several recent mergers have followed this pattern. For example, in a communications industry battle both Global Crossing and Qwest separately bid to acquire two companies: Frontier and U.S. West. Rather than engage in a bidding war, the rival suitors agreed to split the prizes, with Global Crossing getting Frontier while Qwest acquired U.S. West. Global Crossing received approximately half of an $800 million `breakup fee' in relation to the U.S. West deal, in exchange for Qwest's promise not to continue to pursue Frontier.(fn11) In a similar exchange, rival suitors Bethlehem Steel and Allegheny Teledyne each attempted to acquire Lukens. Bethlehem succeeded in gaining Lukens only after agreeing to sell some assets to Allegheny.(fn12) Similarly, with both Comcast and

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ATandT vying to acquire MediaOne, Comcast agreed to withdraw its offer after ATandT `gave' its cable systems in Baltimore and Washington, D.C. to Comcast.(fn13) All of these examples involve one acquirer paying another to refrain from competitive bidding. This behavior, known as `bid rigging,' is normally considered a per se violation of the Sherman Act.(fn14) But while such cases are routinely prosecuted by the U.S. Justice Department, there is no history of such treatment in themarket for corporate control.(fn15)

Part I of this article will examine the historical evolution of antitrust laws, specifically as they have been applied to the market for corporate control. Part II will examine the current judicial opinions advanced which reject the application of antitrust laws to the market for corporate control, including the supposed nonapplicability of antitrust laws to the sale of stock and the implied revocation of the antitrust laws by virtue of the enaction of the Williams Act. Part III will address the inability of the Securities and Exchange Commission to regulate the market for corporate control via the Williams Act in that there is no inherent conflict between the Commission's disclosure requirements and the policy of antitrust laws. Part IV will analyze the quantitative economic effects of the diminution of competition in the market for corporate control and examine its aggregate effect on shareholders.

II. OVERVIEW OF ANTITRUST LAWS

A review of the development of antitrust law in the context of its concurrent application to other areas of federal law, especially securities regulation, provides the requisite foundation to determine whether the Sherman Act is applicable to the market for corporate control. The Sherman Act was enacted in 1890 to curb the abuses of unreasonable economic restraints imposed by entities endeavoring to limit trade through the restriction of competitive conditions.(fn16) Section 1 of the Sherman Act provides: `Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal.'(fn17)

A literal interpretation of the plain language of the Sherman Act would void all contracts because an agreement by two parties necessa

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rily restrains trade by virtue of the contracting parties' exclusionary agreement.(fn18) In order to avoid this unintended result,(fn19) courts have inquired as to whether the restraint of trade `is unreasonably restrictive of competitive conditions.'(fn20) This `Rule of Reason' test was first articulated by the Supreme Court in Standard Oil v. United States,(fn21) and its application has been relatively unchanged throughout the last century.(fn22) Congress has also chosen to statutorily exempt certain industries from antitrust liability even though their participants may form agreements and combinations that would otherwise unreasonably restrain trade.(fn23) An unreasonable restraint of trade may be found when either the contract itself or the surrounding circumstances `give rise to the inference or presumption that they had been entered into . . . with the intent to do wrong . . . and to limit the right of individuals, thus restraining the free flow of commerce and tending to bring about

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. . . enhancement of prices.'(fn24) If the agreement is so plainly anticompetitive on its face that no further analysis of the particular industry is needed to ascertain the contract's illegality, it fails the first test of the Rule of Reason and is illegal per se.(fn25) If the anticompetitive effects of the agreement are discerned only through an analysis of the circumstances unique to the particular business or industry, the history of the restraint and reasons underlying its imposition, the agreement fails the second test of the Rule of Reason and thus violates the Sherman Act.(fn26) The Court developed this test with the belief that the restraint of trade would shackle free competition and eventually force an increase in prices, which contravened the public policy advanced by the Sherman Act.(fn27) Thus, the test for whether an agreement violates antitrust laws focuses on whether the restraint of trade is simply subsumed within and fosters competition, or whether it suppresses and

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eviscerates free trade.(fn28) The Rule of Reason rejects any analysis that focuses solely on whether the price set by the competitors is reasona-ble.(fn29) The antitrust laws, after all, were designed to prevent unreasonable restraints of trade, not to set reasonable prices in the marketplace.(fn30)

The jurisprudence interpreting the Sherman Act has been refined over the past century in the context of its application to alleged antitrust violations.(fn31) However, the interplay of antitrust laws with other federal laws and regulations, particularly statutes governing corporate mergers and acquisitions, has received considerably less attention.

One of the seminal cases in which the Supreme Court explicitly addressed...