Federal And State Takeover Laws

AuthorJames D. Cox/Thomas Lee Hazen
ProfessionProfessor of Law at Duke University/Professor of Law at the University of North Carolina, Chapel Hill
§ . 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
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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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