under S 14(e) to take action substantially identical to that which the Subcommittee might take through legislation. The Commission has broad rule-making authority under § 14(e). It has demonstrated no reluctance in interpreting that language to authorize regulation of practices that appear to bear little relationship to S 14(e)'s antifraud purposes. For example, the Commission has issued Rule 14e-1, requiring tender offerors to keep their offers open for 20 business days, despite the fact one may reasonably question how the length of time an offer is open can be viewed as having any deceptive, manipulative or fraudulent effect. Somewhat inexplicably, however, the Commission has shied away from addressing the far more significant issue of what defensive tactics should be outlawed as manipulative or fraudulent, except insofar as it has required target company managements to disclose whether they support, oppose, or take no position concerning a tender offer. See Rule 14e-2. At the very least, the Subcommittee might wish to question the SEC as to the reasons why it has failed to initiate any regulatory action concerning the pivotally important subject of defensive tactics. - the Finally, I suggest that the Subcommittee add to its agenda one matter that relates, at least tangentially, to defensive tactics, and that involves important public policy issues proliferation of litigation relating to tender offers. Federal courts almost uniformly have held that target companies who allege that tender offer documents contain materially false or misleading statements have standing to maintain an implied cause of action to enjoin the tender offer. At first blush, it may seem clear that target companies should be allowed to maintain such suits, since they have the potential to promote the integrity of the tender offer process. However, what appears reasonable as a matter of theory has become abusive as a matter of practice. Virtually every time a tender offer is made (and virtually every time someone files a Form 13D after purchasing more than 5 percent of an issuers stock), the target company files for an injunction, claiming that the offeror's (or purchaser's) disclosure documents are materially false and misleading. It seems clear that the objective of most such suits is not to elicit information that will be viewed as important by target company shareholders, but to obstruct or defeat the tender offer by intimidating or embarassing the offeror company. The direct costs associated with such suits are high; specialized law firms stand prepared to dispatch platoons of litigators within days, if not hours, of the filing of a tender offer. The indirect costs involving the time and mental energies of the courts, which often must decide complex questions of law under intense time pressure, and of the executives of offeror corporations, who often are required to spend days on end being deposed by the target company's attorneys are even higher. Yet the pay-off from all this litigation, in terms of improvements in the quality of the information disclosed to target company shareholders, seems to be pitifully small. litiga One This situation cries out for Congressional intervention. Some action should be taken to reduce or eliminate the tion carnivals that accompany virtually every tender offer. strategy that the Subcommittee might consider to accomplish this goal is amending the Williams Act to make clear that (i) target companies and their shareholders do not have standing to maintain private actions for injunctive relief, and (ii) enforcement of SS 131(d) and 14(e) is exclusively the responsibility of the SEC. Alternatively, the Subcommittee might consider simplifying the Act's disclosure requirements, and changing the standard of fault that must be pled and proved in connection with suits to enjoin tender offers, so as to make such suits much more difficult to maintain. I appreciate the opportunity you have provided me to participate in your review of federal regulation of tender offers. If you have any questions about this letter and its attachment, or if you would like me to participate further in your proceedings, either in writing or by testifying before the Subcommittee, please feel free to call on me. Respectfully submitted, Elliott W Elliott J. Weiss Visiting Professor of Law EJW: kmh Enc. I am writing to ask for your help and comments on legislation pending before the Committee on Energy and Commerce relating to tender offers. On Thursday, June 28th, the Subcommittee on The legislation contains provisions derived in large part from our hearings and from proposals by the Securities and Exchange Commission. In addition, the legislation contains provisions related to margin requirements, derived from H.R. 5250. Given the short time left in the 98th Congress I have worked very closely with the minority Members of the Subcommittee to put together a bi-partisan bill; this is embodied in H.R. 5693. To its credit, the bill curbs some of the most blatant specific abuses in takeovers today. However, it does not address many other concerns that I have heard voiced again and again. In particular, H.R. 5693 does not lower the overall addressing abuses by both "bidders" and "targets," this bill strikes a very reasonable balance, not giving either side in a tender offer a favorable position. Providing there is strong support, I hope to offer the provisions of H.R. 5972 as an amendment to H.R. 5693 when the full Committee on Energy and Commerce considers the legislation. The bill has two key provisions. First, it appears that much of the frantic nature of the takeover process is brought on by the fact that, under current law, a tender offer can be effected in as little as 20 business days. Many experts have argued that the tender offer process would operate in a much more rational atmosphere if there were more time provided. H.R. 5972, therefore, includes a provision extending the minimum offering period to 60 days. - Second, there has been much discussion about abusive tactics used by corporate managers to thwart tender offers tactics which often severely damage the financial health of a "target" company itself solely in order to maintain management's control. It is extremely difficult to identify specifically and curb the wide range of defensive, tactics which have been or could be used. Moreover, banning or requiring a shareholder vote on a long list of tactics would unnecessarily tie target management's hands. Certain tactics may be beneficial to a company under certain circumstances, but may hurt the company or serve primarily to prevent shareholders from exercising their free choice in other cases. H.R. 5972, therefore, also includes a provision giving shareholders a narrow remedy to enjoin actions taken to thwart a hostile tender offer management's desire to preserve its power may present a conflict of interest with the best interests of the company and its shareholders. If such a provision is included in H.R. 5693 at the full Committee markup, I would anticipate offering an additional amendment to delete certain provisions of H.R. 5693 relating to specific prohibitions on actions taken by a target company during a tender offer. when I am enclosing a copy of H.R. 5972, as well as the floor statement made on introduction of the bill, which explains these provisions in greater detail. The floor statement also sets forth the beginnings of an agenda for hearings in the next Congress. It is clear that we have much work to do. Some have expressed misgivings that we are moving forward with legislation at this time, before many of the broader questions are answered. However, the legislation now before the Energy and Commerce Committee will not foreclose consideration of those issues. Indeed, if we can the fairness of the takeover process in this Congress, we can return to address the broader issues in a much less pressured atmosphere in the coming Congress. I would appreciate any comments you might have on either H.R. 5693, as amended, on H.R. 5972, or on other proposals you believe should be considered during the Committee's markup of the legislation. Because we plan to consider the legislation within the next month, it would be most helpful if you could write or telephone your comments within the next two weeks. Please contact me or Marti Cochran of the Subcommittee staff at (202) 225-9304 with any comments or questions you might have. |