Beyond Morrison: the effect of the "presumption against extraterritoriality" and the transactional test on foreign tender offers.

• Author: Soshkina, Vladislava
• Position: NOTES

TABLE OF CONTENTS INTRODUCTION I. BACKGROUND: TENDER OFFERS A. The Basics B. Section 14(e) of the Exchange Act and Regulation 14E C. Foreign Companies and Tender Offers to the United States D. SEC Response to Foreign Disinterest II. BACKGROUND: MORRISON A. The Exchange Act, Section 10(b) and Rule 10b-5, and the "Conducts and Effects" Test B. Morrison v. National Australia Bank Ltd 1. The Presumption Against Extraterritoriality 2. The Transactional Test 3. Post-Morrison Decisions III. APPLICATION OF MORRISON A. Extension to the Exchange Act at Large 1. Morrison's Expansive Language 2. Applying the Transactional Test B. Defining Transaction and Determining Domesticity C. Policy: Respect for Foreign Legal Systems, SEC, and Congressional Intent 1. Minimizing Foreign Law Conflicts and Supporting the SEC 2. Promoting Congressional Intent CONCLUSION INTRODUCTION

The world of securities fraud litigation was irrevocably altered on June 24, 2010. On that day, the Supreme Court decided Morrison v. National Australia Bank Ltd. and determined that no cause of action exists for f-cubed transactions--transactions with securities of a foreign company, on a foreign exchange, brought by foreign claimants--under section 10(b) of the Securities and Exchange Act of 1934 (Exchange Act) or its related regulations, namely Rule 10b-5. (1)

The intervening year witnessed an exploration of the boundaries imposed by this new Morrison doctrine, and thus far the courts have not imposed any significant limitations on the "presumption against extraterritoriality" espoused in Justice Scalia's Morrison majority opinion. (2) Although the courts, shareholders, and corporate insiders --both foreign and domestic--have remained focused on Morrison's repercussions for on-exchange securities fraud cases, few have analyzed the potential repercussions the Morrison doctrine holds for extra-exchange transactions, such as tender offers. (3)

Tender offers are public offerings made by an individual, group, or corporation to purchase shares of another target company. (4) Over the last three decades, the number of securities-based cross-border transactions has skyrocketed. (5) In fact, as of 2010, over 33 percent of "agreed transactions" involving U.S. public companies were structured as tender offers. (6) In order to continue the success of the U.S. capital markets and promote foreign interest in U.S. companies and shareholders, the Securities and Exchange Commission (SEC) has, since the 1980s, made a concerted effort to make the United States an attractive market for foreign investors, buyers, and traders. (7) To achieve this goal, the SEC has focused on lowering the transaction costs of doing business in the United States and with U.S. Shareholders. (8) The SEC's primary method for lowering transaction costs is a tiered exemption system. (9) This system permits parties defined as "foreign private issuers" to avoid some of the most costly registration requirements under the Exchange Act. (10)

In cases related to foreign securities before Morrison, U.S. courts generally applied either a "conducts" test, an "effects" test, or an amalgamated "conducts and effects" test to determine whether they possessed subject-matter jurisdiction over a securities violation. (11) Morrison overturned decades of precedent, established mostly by the Second Circuit, and installed a "transactional" test to determine whether a cause of action existed under section 10(b) and Rule 10b-5. (12) Although the analysis in Morrison was directed to fraud cases arising under section 10(b) of the Exchange Act, the language Justice Scalia employed in his majority opinion lends itself to a general application and theory of securities law.

This Note considers the implications of the Morrison doctrine and the "presumption against extraterritoriality" on cases arising under section 14(e) of the Exchange Act. (13) It argues that the language in Morrison naturally extends to limiting the extraterritorial application of section 14(e) by exploring the definition of"transaction" as it applies to the tender offer context. This Note also argues that a failure to extend Morrison to tender offers will run contrary to the SEC's expressed intent to increase the appeal of U.S. markets for foreign private issuers. Further, this Note explores congressional intent as evidenced by Congress's limited amendments to the Dodd-Frank Act regarding extraterritorial application of the Exchange Act. This Note concludes that applying Morrison to tender offers will eliminate causes of actions under section 14(e) of the Exchange Act against foreign private issuers for tender offers that fall under the SEC Tier I and Tier II exemptions.

1. BACKGROUND: TENDER OFFERS

   1. The Basics

      The term "tender offer" is difficult to define in the context of U.S. securities law. At best, it may be described as "a public announcement by an offeror to buy securities--most typically common stock--of a publicly-traded company at either a set cash price and/or in exchange for a set value of the offeror's securities." (14) Tender offers generally commence when one company, the bidder, mails offers to the shareholders of another company, the target, and publishes a summary advertisement of the offer in a reputable and accessible publication, usually the Wall Street Journal. (15) Although they may be offered at any available price, tender offers are generally made at a price well above a share's market price. (16) Tender offers in the United States must also be open to all security holders of the class of securities targeted by the offer. (17) The price offered to one shareholder must be "the highest consideration paid to any other security holder during such tender offer. (18) Generally, bidders must also specify the minimum and/or maximum number of shares they will accept in order to effectuate a purchase. (19)

      Tender offers first gained popularity in the 1960s as the principal means by which to acquire companies. (20) As the popularity of the practice grew, so did instances of corruption. (21) In order to ensure fair dealing and proper accountability, Congress passed the Williams Act in 1968, which provided for more detailed registration requirements and more explicit fraud provisions. (22) Specifically, the Williams Act amended portions of sections 13 and 14 of the Exchange Act. The section 14 amendments expressly dealt with tender offers. (23) Like the original Exchange Act, the Williams Act also failed to define the term "tender offer." This, however, was a calculated move by Congress because "[i]t feared enterprising parties would structure significant stock purchases so as to fall outside of any static statutory definition." (24) To account for this deficiency, courts and the SEC promulgated an eight-factor test to determine whether a tender offer exists. The test was officially adopted by the court in Wellman v. Dickinson. (25) The factors are:

      1) Whether there is active and widespread solicitation of public shareholders, 2) Whether there is solicitation for a substantial percentage of the issuer's stock, 3) Whether the offer to purchase is made at a premium over prevailing market price, 4) Whether the terms of the offer are firm rather than negotiable, 5) Whether the offer is contingent on the tender of a fixed minimum number of shares, 6) Whether the offer is open only for a limited period of time, 7) Whether the offerees are subject to pressure to sell their stock, and 8) whether the public announcement of a purchasing program precedes or accompanies rapid accumulation of stock. (26)

      These factors, as Congress wished, provide sufficient flexibility and generality to reach the majority of tender offer transactions.

   2. Section 14(e) of the Exchange Act and Regulation 14E

      In relevant part, section 14(e) of the Exchange Act states:

      It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders. (27) Regulation 14E includes the eight rules promulgated under section 14(e). (28) The rules under Regulation 14E run the gamut from basic administrative requirements to avoid fraud, (29) to regulations addressing indirect fraudulent activities, (30) to regulations addressing direct market manipulation through inaccurate or premature announcements of tender offers. (31) These rules, although illustrative, are not exhaustive of potential violations of section 14(e). (32) Generally, section 14(e) and Regulation 14E apply to any and all bidders who choose to include U.S. shareholders in their tender offers.

   3. Foreign Companies and Tender Offers to the United States

      In addition to the limitations on fraudulent activity, the Williams Act created fairly stringent tender offer filing requirements under sections 13(d) and 14(d) of the Exchange Act. (33) Originally, a tender offer served as an automatic trigger for these filing requirements regardless of a bidder's domestic or foreign identity. Foreign private issuers--a majority of existing foreign corporations--are defined as

      any foreign issuer other than a foreign government except for an issuer meeting the following conditions as of the last business day of its most recently completed second fiscal quarter: 1) More than 50 percent of the issuer's outstanding voting securities are directly or indirectly held of record by residents of the United States; and 2) Any of the following: i) The majority of the executive officers or directors are United States citizens or residents; ii) More than 50 percent of the assets of the issuer are located in the United States; or iii) The business of the issuer is administered principally in the United States. (34) Such companies have...