Page images

or other share capital of another corporation by a corporation as to which the Securities and Exchange Commission has given to the Secretary of the Treasury or his delegate the certification provided for in section 851 (e) of the Internal Revenue Code of 1954 for the taxable year of such corporation last preceding the date of acquisition.”

This proposal has two mechanical advantages: the language is simple and brief, and the status which confers the exemption is determined not only by definition but by action of an independent Government agency-the Securities and Exchange Commission. This action of the Commission is already provided for by Congress under the Internal Revenue Code of 1954 for a different purpose but in a highly relevant way.

Under the Tax Code registered investment companies generally, which comply with certain requirements as to diversification and distribute their income as taxable dividends, escape a direct corporate tax on such income. A company which so qualifies is called a "regulated investment company." To obtain this advantage the company must have at least 50 percent of its assets invested in companies of which it does not own more than 10 percent of the voting stock. In 1951 the Congress recognized that companies in our category, in order to fulfill their ecenomically and socially useful purposes, must in most cases own more than such 10 percent. Congress therefore removed this 10 percent restriction from such companies if they obtain from the SEC the certification provided for in section 851 (e) of the Internal Revenue Code referred to in our proposed amendment. American Research & Development Corp. has complied with the requirements of section 851 (e) of the code and has obtained the required certificate of the Securities and Exchange Commission which permits it to file its income tax return for 1855 as a regulated investment company.

It would, of course, be easy for Congress to refer us to the administrative agencies for relief under their exemptive powers. We believe our case is so clearcut that to do so would unduly burden the agencies and leave us handicapped by the necessary and unavoidable delay of the administrative process. Congress has recognized and approved the public interest in venture capital companies like American Research & Development Corp. Investment and supervision of venture capital is a delicate and risky business which would be seriously impaired by the restraints of the proposed legislation.

I noticed with great interest that in stating the position of the Department of Justice on May 24, 1956, Judge Barnes cited companies in our exact category as an example of the kind of case in which the administrative agencies would use the broader exemptive powers which he suggested. We urge that you act favorably on that suggestion in order to provide the administrative agencies with sufficient power to deal with the numerous and complex problems which will face them if this legislation is enacted. We urge this in addition to our own request for a statutory exemption.

Before concluding I can do no better than to quote briefly from the report of the Senate Finance Committee to accompany H. R. 4473 which Congress enacted as the Internal Revenue Act of 1951 :

"It has been brought to the attention of this committee that the 10 percent stockownership limitation constitutes a serious impediment to the development of so-called venture capital companies. These are investment companies which are used principally to provide capital for other companies engaged in the development or exploitation of inventions, technological improvements, new processes and products which were not previously generally available. In such cases the investment company must provide most of the capital needed to finance the venture and will frequently hold more than 50 percent of its assets in stock representing more than 10 percent of the voting stock of the operating companies. As a result, it cannot qualify under supplement Q' if it invests more than 50 percent of its assets in such companies. Unless this rule is amended, it will not be possible for an investment company to devote itself principaily to the development of such ventures and obtain the benefits of supplement Q.

"The venture capital company promises to serve as an instrument for directing an increasing portion of the current savings of the country into the small, innovating ventures which are so important for long-run economic progress. Therefore, section 336 of this bill amends section 361 of the code so as to permit venture capital companies to qualify as regulated investment companies * * *” We urge that you follow the views expressed in the foregoing quotation and exempt corporations like ours from this proposed legislation. We also urge that you expand the exemptive powers of the administrative agencies in the manner proposed by the Department of Justice.

1 Now subch. M of the 1954 code.

I will be glad to answer any questions which you may have.


New York, March 18, 1957. Hon. EMANUEL CELLER, Chairman, Committee on the Judiciary,

House of Representatives, Washington, D. C. DEAR MR. CELLER: The undersigned respectfully submits views on the pending bill (H. R. 2143) which proposes a waiting period of 60 days on mergers and acquisitions where the purchase price of the company to be acquired exceeds $2 million and the combined net worths exceed $10 million.

1. Summary of views.--(a) This legislation, in my opinion, will unintentionally but inevitably bring hardships to the vast middle group of businesses on which the future of America depends, and could thereby distort the natural growth of our economy :

(1) It will needlessly and harmfully impede the sound growth of thousands of medium-sized companies in the range of $6 to $25 million net worth.

(2) It could harm another important segment of our business community: owners of companies in the $2 to $7 million range who for valid reasons

may seek to sell their businesses during the coming years. (b) On the other hand, it will impose no real obstacles and may indeed create advantages---for certain acquirers whose activities may not be in the national interest :

(1) The corporate giants which can acquire what they want through economic strength will find that its restrictions are mere flyspecks in their plans, and indeed they may be indirectly aided by such legislation.

(2) The “professional" acquirers will find opened up vast new areas ripe for profitable exploitation. The detailed reasons behind these views are set forth below, but since complete support cannot be provided within the compass of a letter, an opportunity to testify before your committee would be appreciated.

2. These views stem from 19 years of varied experience in mergers and reorganizations.--In weighing these views it should be kept in mind that the undersigned speaks from a background of 19 years of specialization in the field of acquisitions, mergers, and reorganizations. As you will note from the enclosure, experience in hundreds of these transactions has been gained in many capacities—as a business and financial consultant, Wall Street lawyer, a broker, tax adviser, financial analyst, and 8 years as an attorney in the SEC's Corporate Reorganization Unit.

These views are submitted at the suggestion of Robert Bicks, Esq., an Assistant Attorney General in the Antitrust Division. Last November Mr. Bicks was a guest lecturer at the conference on mergers sponsored by the American Management Association, and the undersigned was then afforded an opportunity to debate informally with Mr. Bicks the substance of the views set forth herein, following which Mr. Bicks urged the undersigned to testify to the same effect before the appropriate congressional committees.

3. The basic objective of the bill is commendable.--At the outset it is stressed that no one can soundly quarrel with the basic objective of the bill to afford the Government a reasonable opportunity to block transactions which run counter to the antitrust laws. I differ only with the method, since I believe that this objective can be achieved by alternate measures which will not impose severe hardships on certain segments of the business community. My views also stem from my personal observation that at least 95 percent of today's acquisitions pose no problem of antitrust violation. This in turn raises the basic question of whether it is fair to penalize the 95 percent of the business community which is lawabiding in order to make it siinpler to catch the 5 percent of the acquirers which, unintentionally or otherwise, ignore the antitrust laws. At the very least, you will want to weigh the harm done to the vast majority alongside of the need to curtail the small minority.

4. Subtle reasons why bill will impose widespread hardship. It is respectfully submitted that, as a practical matter, this proposal will work serious hardships

on (1) medium-sized acquiring companies having net worths above $6 million and (2) sellers of businesses worth more than $2 million.

These consequences ensue not from cause and effect which are visible on the surface but rather from subtle factors which are largely subjective. Perhaps these subjective factors are patent only to those of us who live in the midst of the market place for mergers and who therefore appreciate the delicate interworkings of this market which often generates a particular merger. These subjective factors can best be illustrated by a series of hypothetical situations :

(a) Supposing the reader were the owner of X company, a business having a sales price of $3 million, and for valid reasons you wanted to find a buyer. Further suppose that you had the choice of dealing (1) with Y company, which has a net worth of $8 million, so that the transaction would entail a 60-day wait, or (2) an acquirer (individual or corporate) where the wait would not be involved. Whether you liked it or not, you probably would choose the second alternative. Why? Nothing is more disruptive to the seller's business than an unwarranted waiting period. Regardless of what secrecy may be attempted, word almost inevitably leaks out, and unfortunate consequences may then ensue to the seller's business-competitors can use the sales rumors with telling effect; key employees, uncertain of status, may defect; finances may be adversely affected during such an interregnum.

(b) A substantial part of the mergers and sales of businesses in the small to medium range originate through the activity of investment bankers, brokers, finders, and other intermediaries. To those of us who understand the thinking and ways of these intermediaries, there is no doubt that intermediaries with companies to sell will avoid like the plague any acquirer who has to wait 60 days. Put yourself in the place of a broker who has just been given authority to sell X company for a price of $3 million. Self-interest requires that such intermediaries deal to the extent possible with acquirers who act expeditiously. They are paid only if their deal closes, so that they waste their time and money if they get their deal tied up with a slow acquirer and in the meantime someone else brings about a deal with a fast acquirer. That is why certain companies and professional acquirers are always concluding so many acquisitions. Because it is known to intermediaries that they act with expedition, they receive most of the good deals. The amateur acquirers who have not learned to move expeditiously receive submissions only from the novice intermediaries, or when the deal is of no interest to the more expeditious acquirers. These already are the realities of today. Now if you superimpose a 60-day additional delay on the buying activities of many companies, is there any doubt that intermediaries will channel their flow of deals away from such companies? It is the small-to-medium-sized acquiring company which will be primarily hurt; the very large companies rely less on intermediaries since they can afford to maintain a staff to seek out suitable acquisition opportunities.

(c) Let us suppose, however, that X company does work out an agreement to sell for $3 million to Y company, which has a net worth of $8 million. X and Y then notify the Government, and the deal marks time for 60 days. In the meantime, the deal leaks out to certain of the professional acquirers who decide that X company is worth $3.5 million to them. They offer X company that amount and a prompt closing unaffected by the 60-day wait that applies to others. It is probable that Y will lose the deal. It is natural to expect that this sort of surveillance will surround most deals during the 60-day suspense period. Companies in Y's position will be left only the deals that the astute acquirers do not want. They will spend their time and money developing deals, and end up as a stalking horse for the professionals and their coterie of finders.

In summary, the inevitable effect of such legislation would be as follows:

(a) Acquiring companies having a net worth in excess of $6 million will be preempted to a considerable extent from dealing in an important area of the diversification field-companies which cost $2 to $7 million. Is it fair to put these buying companies at a serious competitive disadvantage in this market?

(0) By the same token, this major segment of the buying market will be denied as a practical matter to sellers in the range above $2 million. It is a matter of hard economics that if you take away this part of the buying market, sellers in this range will suffer. Inevitably they as a group will realize a smaller price, or a less satisfactory deal, if they are compelled to deal in a restricted buying market. Buyers who can pick up the deals without the waiting period will be the gainers. As I see it, the bill would have the effect of creating an area particularly ripe for the activity of speculators (individuals, syndicates, or smaller corporations) who could buy to advantage because of the great competitive advantage they will enjoy. On the assumption that these will not be the logical acquirers for these businesses, is our national economy bettered by legislation which will tend to bring about sales to the less logical acquirers rather than to the corporation where the seller's business appropriately belongs?

(c) The corporate giants have the economic strength so that they can acquire at will, whether or not a 60-day wait is involved. Indeed, this bill may help them; to the extent that it dries up the market among medium-sized buyers, it should make more situations available to the giants. As above pointed out, the seller of a $3 million company faces much embarrassment when word leaks out of a prospective sale to a little-known $8 million company. But would this same embarrassment exist if the buyer is General Motors? I think not. Also, as already noted, these large companies rely less on originating intermediaries.

(d) The above results, in my opinion, will not be materially mitigated by the bill's provision for establishment of "procedures for the waiver by the appropriate [authority] * * * of all or part of the notification and waiting requirements in appropriate cases * * *" I assume that the appropriate authorities will, largely on an ad hoc basis, dispense with the requirements where the parties can demonstrate that the wait serves no purpose, or would be harmful.

But such waiver comes too late in the process to check the chain of events which is set in motion prior to the time the parties are in a position to apply for a waiver.

When the owners of X company, or their intermediaries, first cast about for a buyer, they will have no way of knowing whether a waiver will be granted. Rather than gamble on the possibility of a waiver, they will set their thinking in favor of buyers who can move without delay. From that moment on, a large category of buyers will in practical effect be preempted from dealing with X.

5. If constructive mergers are artificially deterred, our national economy wilt suffer.Of course, the proposed legislation will have one undoubted effectto reduce sharply the number of mergers. Such a result may please many who thoughtlessly find it easy to damn all mergers. It will not please you or the great majority of informed citizens who appreciate that most mergers serve a healthy and vital purpose: they are the results of fundamental economic forces which if artificially prohibited will run contrary to the basic precepts of our capitalistic economy. While the activities of some professional acquirers may not always be in the public interest, and while certain evils occasionally creep into the merger field (there are indeed many areas where congressional action may be warranted), the great majority of mergers stem from sound business


(1) Estate-tax considerations inevitably compel a disposal of the successful family or closely held business when it reaches a certain size.

(2) Credit conditions and lack of capital may make mandatory a merger. Unfortunately, small- and medium-sized businesses are always at a disadvantage in our capital markets. Until legislation corrects this situation-perhaps through tax incentives——the small entrepreneur often has no choice except to seek out a merger.

(3) Technological obsolescence forces many companies to find stronger partners.

(4) Time often erodes the managerial competence of enterprises which once flourished. The hard fact is that thousands of our businesses are in real need of the injection of new talent and ideas which a change of ownership usually entails.

(5) Many companies tie up more capital than is warranted by the business needs or the return thereon to their stockholders; in large part this capital has accumulated during the past 15 years of lush earnings when, whether justified or not, the principal stockholders have plowed back earnings rather than pay dividends which would be largely absorbed by personal income taxes. The result is that today you will find thousands of companies that have assets out of proportion to the amounts earned for stockholders. From the national standpoint, this entails a great waste of capital which could be more productively employed elsewhere. The national welfare is thus furthered when new owners take over and effect a better use of such capital.

There are other good reasons for mergers, but the important point is that if they are artificially prohibited not only will our economy in general suffer but also hardship may occur unnecessarily to many important groups: workers, stockholders, suppliers, and entire communities.

6. The basic objective of the bill can be achieved through other alternatives.Perhaps the above consequences might be justified if satisfactory alternatives were unavailable. But this is not the case; the following are examples of satisfactory solutions :

(a) By raising the figures at which notice is required so as to exclude medium and smaller companies. For example, notice might be required where the combination involves a $30 million net worth, or a purchase price in excess of $7 million. This approach may be sound for these reasons :

(1) When larger companies are involved, there is a much greater probability that antitrust violations may occur. By the same token, the likelihood of violations may be infinitesimal among smaller combinations.

(2) If the corporate parties are of substantial size, the dangers inherent in “leaks” and rumors during the waiting period are less troublesome. It is the smaller company which is likely to suffer in the ways above indicated while marking time for 60 days.

(3) As above noted, it is in this range that the activities of intermediaries have an important influence in the pairing up of parties.

(b) By providing that companies in this lesser size range may elect to give the 60-day notice, but if they elect not to do so, they must supply the Government the same data when the transaction is publicly announced ; that if within 60 days after such data is supplied, the Government proceeds against the acquisition, it will have the same legal remedies as would be available if the transaction were not consummated; that the parties would be precluded from setting up any defense that the transaction had been consummated. In other words, if corporate parties elect not to give advance notice, they would move ahead at their peril. If the Government later intervenes successfully, the parties would face the problem of unscrambling the transaction, whatever the cost and difficulty.

7. Conclusion.-I believe that the points I have raised should be fuly explored by your committee. To that end I as an interested citizen will gladly make myself available for testimony before your committee. Very truly yours,


SAN FRANCISCO, CALIF., March 14, 1957. Hon. EMANUEL CELLER, Chairman, Committee on the Judiciary,

House Office Building, Washington, D. C. The California State Chamber of Commerce is opposed to legislation which would require submitting advance notice and information to the Government of intention by corporations of acquiring stock or assets of other corporations, on the grounds that such requirements is an unjustified further intrusion by Government into private corporate affairs in an area where the public interest is already adequately protected by antitrust laws, and because available sources of public information of corporate intent to merge are already sufficient.

JAMES MUSSATTI, General Manager, California State Chamber of Commerce.

STATEMENT OF COMMERCE & INDUSTRY AssOCIATION OF NEW YORK, INC. Commerce & Industry Association of New York, Inc., now in its 60th year, is the largest service chamber of commerce in the eastern part of our country, representing approximately 3,500 business concerns in the Metropolitan New York area engaged in almost every level and type of commercial enterprise from small machine shops to some of the most prominent firms in the country. The association is recognized internationally as "the voice of New York business."

At the outset, we wish to make it perfectly clear that while we find certain features of H. R. 2143 highly objectionable, we do not believe that there is anything unreasonable in the basic idea of premerger notification.

It is our sincere hope that the constructive criticism we offer here today to H. R. 2143 will accomplish the dual purpose of providing meaningful premerger notification to appropriate executive agencies and at the same time eliminate the undesirable provisions of the bill.

« PreviousContinue »