"During The Tender Offer

“DURING THE TENDER OFFER” OR SOME TIME AROUND IT: HELPING COURTS INTERPRET THE BEST-PRICE RULE Michael A. Akiva∗ I. INTRODUCTION Over the past three decades, tender offers have gained appeal as a means of acquiring corporations. With this development came an increase in regulations surrounding the tender offer process. Unlike proxy contests, which have long been subjected to extensive disclosure requirements,1 tender offers were once conducted with almost complete freedom due to the minimal paperwork necessary to effectuate the offer.2 In addition, the offeror was able to coerce shareholders into tendering by threatening to decrease the price offered per share.3 Seeing a need for regulation, Congress enacted the Williams Act 4 to deal with these problems. The Act was intended to protect investors from being forced into making hasty decisions by requiring bidders to publicly disclose information about the tender offer.5 ∗ J.D. Candidate, UCLA School of Law 2006; B.S., University of Southern California, 2003. I would like to thank Professor Lynn Stout for her assistance and guidance in writing this Comment. I would also like to thank Professor ______ ____ for her help and guidance, and Steve Hardle for ____ valuable input. 1 113 CONG. REC. 854, 855 (1967) (statement of Sen. Williams): [W]here control is sought through a proxy contest, information must be filed under the Securities Exchange Act which tells shareholders the identity of the participants and their associates, their stockholdings and when they acquired them, the extent to which the shares were purchased with borrowed funds and the identity of the lender if the funds were obtained otherwise than through a bank loan or margin account. 2 See id. (“But no information need be filed where a cash tender offer is made to stockholders”). 3 Senator Williams noted this situation in his address to Congress. 4 Pub. L. No. 90-439, 82 Stat. 454 (1968). Exchange Act of 1934. Id. at 856. The Act added §§13(d)-(e) and 14(d)-(f) to the Securities 5 113 CONG. REC. 854, 856 (1967) (statement of Sen. Williams). 353 354 TRANSACTIONS: THE TENNESSEE JOURNAL OF BUSINESS LAW [VOL. 7 In the mid-1980s, Congress added the “best price, all-holders” rule to the Act. 6 Essentially, this addition required all shareholders of the target class to be treated equally “during [the] tender offer.” 7 However, given the Securities and Exchange Commission’s and Congress’s reluctance to define the term “tender offer,”8 the courts have struggled to determine what transactions should be included in the tender offer.9 This struggle has resulted in a circuit split, with circuits falling into one of two groups, each endorsing a competing interpretation of the best price rule. The Ninth Circuit has decided “best price” cases by questioning what transactions should be included in the tender offer. 10 On the other hand, the Seventh Circuit has framed the issue by asking when the tender offer occurs.11 In doing so, the Seventh Circuit looked to the text of other regulations in the Williams Act and determined that there is a specific start date for tender offers. 12 These competing interpretations have produced dichotomous judicial consequences. In subsequent decisions, the Ninth Circuit’s test has been ambiguous and difficult to apply consistently, whereas the Seventh Circuit’s test has often been too rigid to allow shareholders a cause of action. Given that the Williams Act was intended partly to protect investors and partly to protect the tender offer process,13 this debate has been costly from both the corporate and the investor perspective. By protecting investors, Congress presumably meant to allow them free and equal access to information and the open markets. However, by excluding all transactions that occur before the start of the tender offer, the Seventh Circuit’s test is easily manipulated and, consequently, acquiring companies can easily avoid the rule. Conversely, the Ninth Circuit’s test 6 See 17 C.F.R. § 240.14d-10 (2005). 7 See § 240.14d-10(a)(2) (2005). 8 See Note, The Developing Meaning of “Tender Offer” Under the Securities Exchange Act of 1934, 86 HARV. L. REV. 1250 (1973) (hereinafter “Developing Meaning”). 9 See infra Part III. 10 See Epstein v. MCA, Inc., 50 F.3d 644, 656 (9th Cir. 1995), rev’d on other grounds sub nom. Matsushita Electric Indus. Co., Ltd. v. Epstein, 516 U.S. 367 (1996). 11 See Lerro v. Quaker Oats Co., 84 F.3d 239, 246 (7th Cir. 1996). 12 Id. at 245. 13 See infra Part II.1. 2006] INTERPRETING THE BEST-PRICE RULE 355 does not facilitate or protect the tender offer process because it is too ambiguous to apply consistently, which results in costly protracted litigation concerning the motivation behind private transactions between the acquiring company and target executives. This divergence between the two circuits stems in part from Congress’s and the SEC’s reluctance to define a tender offer. The Ninth Circuit tried to define the term but did so in a piecemeal fashion, incorporating only those transactions occurring in the case before it. The Seventh Circuit, on the other hand, tried to clarify what the Act already made clear; namely when a tender offer begins. The question of when a tender offer begins, however, seems moot when looking at the text and legislative history of the Williams Act. Because both Circuits have done an imperfect job in interpreting Rule 14d-10, judicial resolution of this matter seems unlikely, and either the SEC or Congress should intervene. Section II of this article discusses the Williams Act and the history of the “best price, all-holders” rule. Section III discusses the split that arose from the Act’s ambiguity. Section IV addresses the problems with the current judicial tests and discusses a recent district court decision that some feel has provided clarity to the application of those tests. Section V recommends more clarity, not in drawing dates, but by defining what a tender offer is and creating a safe harbor so that bidders and investors know what is permissible under the Act. II. THE WILLIAMS ACT AMENDMENTS TO THE SECURITIES EXCHANGE ACT OF 1934 A. The Williams Act Amendment to the Securities Exchange Act of 1934 The Williams Act amended the Securities Exchange Act of 1934 by adding, among other regulations, section 14(d).14 In doing so, Congress intended to “close a significant gap in investor protection.”15 However, Senator Williams maintained that the Act “balance[d] the scales equally to protect the legitimate interests of the corporation, management, and shareholders.”16 As such, the goals of the Act were 14 Williams Act, Pub. L. No. 90-439, 82 Stat. 454 (1968). 15 113 CONG. REC. 854, 851 (1967) (statement of Sen. Williams). 16 Id. See also 33 S.E.C. Docket 762, Release No. 6,595 (July 1, 1985) (stating that “[i]n implementing this policy of neutrality, the [Securities and Exchange] Commission has administered the Williams Act in an even-handed fashion favori (...truncated)