Tender Offers: Whether Section 14(e) of the Williams Act No Longer Implies a Private Right of Action.

• Author: Walkley, Christopher

"We are unaware of any situation, involving any other law, where the Court has rejected a private right of action that has become so entrenched for so long, without any hint of dissent or disapproval from the courts or political branches." (1)

1. INTRODUCTION

   In 1968, Congress passed the Williams Act to regulate the purchase of publicly held companies via cash tender offers. (2) The Williams Act protects shareholders in cash tender offer acquisitions that were previously unregulated because of statutory gaps. (3) To help shareholders make informed investment decisions, the antifraud provisions of section 14(e) of the Williams Act (Section 14(e)) are broad and cover all communications related to a tender offer. (4)

   On April 20, 2018, the Ninth Circuit decided in Varjabedian v. Emulex Corp. (5) that the mens rea standard under Section 14(e) was no longer scienter but mere negligence to defraud. (6) The Ninth Circuit's decision created a circuit split, breaking away from five other circuit courts that held scienter--not negligence-was the proper standard. (7) Seeking harmony among the nations' courts, the petitioners submitted a petition for a writ of certiorari asking the Supreme Court to decide whether Section 14(e) "supports an inferred private right of action based on a negligent misstatement or omission made in connection with a tender offer." (8) The Court granted the petition for a writ of certiorari on January 4, 2019. (9)

   The petitioners, however, argued that the broader issue beyond the mens rea debate was whether Section 14(e) even implied a private right of action. (10) Respondents argued that the petitioners were raising a new issue that the Ninth Circuit had not previously considered. (11) After oral arguments, the Court dismissed the petition as "improvidently granted" on April 23, 2019. (12) Thus, the looming question in securities law is whether the once undisputed implied private right of action still exists under Section 14(e). (13)

   This Note analyzes the competing arguments surrounding whether courts should continue to imply a private right of action under Section 14(e) despite the modern trend favoring restraint in inferring implied private rights. (14) This Note further discusses how tender offers have evolved over time, providing context for why Congress saw a need to protect shareholders. (15) This Note will then discuss the legislative history of the Williams Act to provide insight into Congress's intent, which is essential in determining if a private right of action is implied under Section 14(e). (16) Part II then concludes with a history of the evolution of how the Supreme Court determines if an implied private right of action exists. (17) In Part III, this Note outlines the most compelling arguments the Court will encounter if asked to decide whether to imply private rights of action under Section 14(e). (18)

2. HISTORY

   1. Historical Background on Tender Offer Basics, Use, and Regulation

      1. Basic Tender Offer Mechanics

         Tender offers are not defined within the '34 Act. (19) A tender offer, however, is understood as a solicitation to purchase stock directly from the shareholders of a corporation. (20) A tender offer is made by either a third party or the company itself, known respectively as a third-party tender offer and an issuer tender offer. (21) Third-party tender offers are used to acquire target companies in either negotiated or hostile acquisitions, while issuer tender offers are used to buy back stock to defend from takeovers or for other business aims. (22)

         Tender offers are active for a limited duration and expire after a set period of time, legally a minimum of twenty days. (23) The acquirer fixes the purchase price, usually set above the current market price to induce shareholders to sell. (24) Under the SEC's best-price rule, tender offers have a single offer price that is made to every shareholder, and offerors cannot solicit different shareholders with different prices. (25) An offeror can structure a tender offer so that the offeror is not obligated to purchase any shares unless shareholders tender a specified minimum amount of shares. (26) If, however, the tender offer will result in the acquirer owning less than 5% of the target company's stock--known as a "mini-tender offer"--offerors are subject to fewer rules and regulations. (27)

         Acquirers complete a hostile takeover via a third-party tender offer or a proxy contest. (28) Third-party tender offers quickly allow offerors to obtain a majority of a company's shares--as soon as six weeks--and thus gain effective control over the company's corporate affairs. (29) On the other hand, a proxy contest can take numerous months to complete because the acquirer must lobby shareholders to authorize the acquirer to vote on their behalf, vote to replace the current directors with those in favor of acquisition, and then gain 100% ownership by using a merger agreement or subsequent tender offer. (30)

         Negotiated corporate takeovers are accomplished through either a third-party tender offer or a merger agreement. (31) The main advantage tender offers provide over merger agreements is speed in closing a deal. (32) A merger agreement fuses one legal entity into another in a one-step process. (33) Generally, a merger agreement, once approved by the board, requires approval by 50% of the shareholders, resulting in the acquirer receiving 100% ownership and control of the company. (34) A tender offer, on the other hand, will usually result in the acquirer having control but does not guarantee 100% ownership because not every shareholder accepts the tender offer. (35) Therefore, tender offers require a two-step process to complete full acquisition, which can take as little as six weeks to complete, yet a one-step merger agreement can take several months due to increased regulatory requirements. (36)

      2. Use of Tender Offers in the Markets

         Although effective, acquirers seldomly used tender offers prior to 1960. (37) Still, because tender offers fell in a statutory gap, acquirers began using tender offers to take advantage of shareholders by not disclosing pertinent information. (38) Leading up to the passage of the Williams Act in 1968, tender offers had become a popular tool for corporate takeovers. (39) Tender offers remained popular until the SEC adopted the best-price rule in 1986, which resulted in bidders avoiding tender offers due to uncertainty surrounding how courts would apply the new rule. (40) In December 2006, the SEC amended the language of the best-price rule, which clarified its application, and tender offers rebounded, increasing in use from less than 10% of deals in 2006 to more than 24% in 2008. (41) In 2013, Delaware also adopted section 251(h) of the Delaware General Corporation Law, which made tender offers more attractive for acquirers and more relevant in the market. (42)

      3. Regulation of Tender Offers

         Today, tender offers are regulated by the SEC and the '34 Act. (43) State corporate laws generally do not establish additional regulations for tender offers. (44) Preventing deceptive and manipulative conduct during tender offers is an important feature of tender offer regulations. (45)

         Tender offer regulation is built upon the two major federal securities statutes passed in the wake of the Great Depression--the Securities Act of 1933 ('33 Act) and the '34 Act. (46) The two Acts require disclosure of information to investors to enable them to make informed, independent investment decisions. (47) The '33 Act is intended to protect investors from fraud by imposing civil liabilities and promoting standards of fair dealing concerning public offerings of securities. (48) The '34 Act protects investors from stock price manipulations by regulating securities' transactions and establishing reporting requirements for publicly-held companies. (49) The '34 Act also created the SEC, which is equipped with flexible enforcement powers to promote efficient regulation of securities trading. (50) The SEC has general rule-making authority and is authorized to "make such rules and regulations as may be necessary or appropriate to implement the provisions of [the '34 Act]." (51)

         Until the passage of the Williams Act, however, tender offers were not regulated because they fell within a "significant gap" in the statutory framework of the '33 Act and the '34 Act. (52) The Williams Act amended the '34 Act and now mandates certain disclosures when acquirers initiate a tender offer. (53) The Williams Act focuses on disclosure to provide investors with sufficient information when faced with a tender offer. (54) Notably, the Williams Act does not address whether the tender offer is fair; it merely requires sufficient information disclosures to enable the investors to make that fairness determination. (55) The Williams Act thus closed the statutory gap and created a regulatory scheme for tender offers. (56)

         Congress enacted the Williams Act because of the increased number of tender offers used to obtain control of public companies in the 1960s. (57) Without regulation, during a tender offer, the identity of the offeror seeking corporate control could remain secret and the information needed for assessing the value of an offer could remain undisclosed. (58) Prior to the Williams Act, these secret tender offers were known as "Saturday night specials" because neither the intent nor identity of the offeror was disclosed and the offer was only valid for a few days. (59) When passing the Williams Act, Senator Harrison Williams remarked, "[t]oday, the public shareholder ... possesses limited information. No matter what he does, he acts without adequate knowledge to enable him to decide rationally what is the best course of action. This is precisely the dilemma which our securities laws are designed to prevent." (60) After the enactment of the Williams Act, offerors must now disclose material information, including whether the purchase price of...