Federal And State Takeover Laws

• Author: James D. Cox/Thomas Lee Hazen
• Profession: Professor of Law at Duke University/Professor of Law at the University of North Carolina, Chapel Hill
• Pages: 564-585

§ . F R  T

The Will iams Act provisions i mpose disclosure requ irements on various

persons in connection with tender offers and stock acquisitions.1 The

required disclosures include identification of the entity launching the

takeover attempt and a description of the pur pose of the proposed action

and related future pla ns. Disclosure is requi red of any person who acquires

more than 5 percent of the outstanding shares of any class of equity

security subject to t he Act’s reporting requirements.2 This provision

serves to prevent secret creeping acquisitions—that is, acquisitions in

which the target company learns of the takeover attempt too late to

take any action. At t he same time, an overall ef fect of the Will iams Act

disclosure requirements as well as its many substantive rules regulating

the conduct of tender offers is to increase the cost of a takeover, to

increase the premiums that are paid to target shareholders, and to ra ise

the uncertainty as to whether a bid for control will be successful.3

Under section 14(d), similar disclosu re is required for “a tender offer

for or request or invitation for tenders of” any equit y security subject to

the reporting requ irements of the Exchange Act.4 Disclosure and SEC

filings must also be made by anyone resisting, opposing, or supporting

any tender offer.5 Section 14(e) of the Exchange Act is not lim ited to

reporting compan ies; in effect it applies Rule 10b-5 standards to all

conduct and statements in connection w ith a tender offer.6

Other rules and reg ulations that affect tender offers include SEC

Rule 14e-5, which prohib its tender offe rors from buy ing shares through

means other than t he tender offer itself,7 and Rule 14e-4, which proh ibits

short tendering and hedged tendering during a tender offer.8 Rules 14e-

19 and 14e-210 govern the behavior of the tender offeror and the target

management, respectively. Rule 14(e)-3 is a general prohibition of insider

trading dur ing a tender offer.11

While sect ion 14(e) provides an express remedy on ly for the SEC or

crimina l enforcement,12 the bulk of 14(e) litigation has arisen from implied

private causes of act ion.13 Section 14(e) is the preferred provision to proceed

under, as it depends on the plaintiff ’s status as a target of some deceptive act

in connection with a tender offer rather than on the narrower purchaser/

seller requirement of Rule 10b-5.14 There remains some question as to t he

requirement of scienter.15 It seems clear, however, that section 14(e) does

require detrimental reliance in order to establish a private remedy.16

564 | C  C G: C  L

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In proceeding under 14(e), the plaintiff may be the tender offeror

(but not a defeated tender offeror seeking damages),17 the target

management,18 or shareholders of the target company.19 There is no set

definition of “manipulation,” and there has been much controversy as

to what is required for a 14(e) action. The Supreme Court examined

this question and held that in order to state a cause of action there must

be some element of non-disclosure, misrepresentation, or deception.20

Accordingly, fully disclosed conduct that may be manipulative wil l not

support an implied cause of action.

§ . F R  S ()

Any person other than the issuer who acquires, directly or indirec tly,

benefici al ownership21 of more tha n 5 percent of a class of equity security

registered pursuant to sect ion 12 of the 1934 Act22 must f ile appropriate

disclosures with t he SEC within 10 days after reaching the five percent

threshold, pursuant to section 13(d)(1).23 In 2010, the SEC was given

the authority to shorten the 10-day f iling window. Somewhat similar

disclosures are requi red of an issuer’s purchases of its own shares (or

through its aff iliate) by virtue of sect ion 13(e).24

Any person acquiring 5 percent of a class of equity secur ities

must, within 10 days after reaching the 5 percent threshold, file with

the Commission six copies of a statement ref lecting the information

required by section 13(d)(1).25 Thus, under section 13(d)(1) the purchaser

has a 10-day window between the crossing of the 5 percent threshold

and the disclosure date. This gives the hostile bidder some important

runn ing space to gain momentum toward acquiring cont rol of the target

com pany. Ther e is n o exp ress lim itat ion on th e amo unt o f sec uri ties tha t

may be purchased prior to filing the required Schedule 13D. An SEC

advisory group recommended amendi ng the rules to requi re filing i n

advance of the 5 percent purchase,26 but no such change ha s taken place.

The appropriate filing under section 13(d)(1) is embodied in

Schedule 13D.27 Holders of less t han 20 percent of the class of securities

who certify t hat they do not have an intent to exercise control of the

issuer (referred to as a “passive investor”), may use Schedule 13G in

place of Schedule 13D.28 Certain “qualified institutional investors” also

may report their holdings on Schedule 13G regardless of whether their

holdings are 20 percent or greater of a class of the issuer’s securities,

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