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79. Issuer Purchases of I 240 TENDER OFFER AND TAKEOVER REGULATION Ch. 11 "-§ _79__ --'ISSUER PURCHASES OF ITS OWN STOCK 241 position with respect to bidder's offer. The Rule 14e-2 statement must also include all reasons for the position taken, or the stance of Two-tiered tender offers permitted. Sometimes a tender neutrality, as well as any explanation of the inability, to take a offer decides to make a tender offer for control of a company and position. In setting forth its reasons, the target com~any s ma~a~e­ ~hen follows .t~e tender offer by .a merger of the target company ment is of course subject to all of the rules concermng matenah_ty mto the acqmrmg company at a price below that which was paid in as well' as the p~tential civil and criminal liabilities for matenal the tender offer. This is commonly referred to as a two-tiered front­ misstatements. end loaded offer. There is not~ing under federal law to prohibit such offers so long as the first step adequately discloses any plans Insider trading prohibited. 1934 Act Rule 14e-3 p~o~i?its for a second step merger. In contrast, a number of states have insider trading during a tender offer. The Rule 14e-3 proh1b1t10ns adopted fair price statutes that place insurmountable barriers on expressly apply not only to insiders of the target c~mpanJ:' bu~ als_o these front-end loaded offers. to anyone else. The rule goes on to state that there 1s n? ~wlatwn 1f the transaction was an independent investment declSlOn rather Target's defensive tactics not prohibited. As discussed in than based on knowledge of material non-public information. Rule § 81 below, frequently managell1ent will want to oppose a third­ 14e-3 supplements the insider trading prohibitions that are found party tender offer and will do so by engaging in defensive tactics. in 1934 Act Rule 10b-5. See § 96 below. State law may place significant restrictions on the target company's Prohibition of contemporary purchases during tender management's ability to fend off a hostile offer. For a while there offer. 1934 Act Rule 14e-5 prohibits tender offerors. ~rom p~rchas­ :-vas som~_question as to whether federal law would have an impact ing shares subject to a tender offer and related secunties durmg the m curta1lmg these defensive tactics. It is now clear that this is term of a tender offer. As discussed earlier, the tender offer entirely within the purview of state law. The Schreiber decision commences once the Schedule TO is filed with the SEC. Rule 14e-5 now makes it clear that defensive tactics cannot violate 1934 Act prohibits not only purchases of the securities subjec_t to _a tender § 14(e), even if manipulative, unless there has been a material offer but also of any securities immediately convertible mto such misrepresentation or omission. secu;ity. In contrast, the purchase of an _option or sec~rity_ futures product is allowed, since it is not i~m~dmtelJ:' convertible u~to ~he § 78. Arrangements Affecting Director Turnover in underlying security. See In re Comm1sswn Gmdance on ~-pphcatwn Connection With a Tender Offer-1934 Act of Certain Provisions of Securities Act of 1933, Secunties Act of § 14(f) i ~. ~--, .... , ~ 1934 Rules Thereunder to Trading in Security Futures Products, .... ! ·" Sec. Act Rel. No. 33-8107, Sec. Exch. Act Rel. No. 34-46101, 2002 As is the case with any transfer of corporate control tender WL 1357820 (SEC June 21, 2002). However, if the futures contract offers :nill fr~q~ently result in a shift in corporate man;gement. expires before the termination of the tender offer then the purchase Accordmgly, 1t 1s not uncommon to find tender offers containing of a security futures product will be precluded under Rule 14e-5. agreements relating to management turnover and the election of new directors. These control transfers can raise problems under Short tendering and hedged tendering prohibited. Short state law relating to invalid control premiums and other breaches tendering of securities during a tender offer is the practice of of fiduciary duty. Under 1934 Act § 14(f), when a tender offer for tendering or guaranteeing securities not owned by the pe~s?n eq_uity securities subject to the Act's reporting requirements con­ making the tender or guarantee. 1934 Act Rule 14e-:4 proh1?1ts tams agreements concerning the designation of new directors other­ short tendering and "hedged tendering." Hedged tendermg cons1sts wise than through a formal vote at a meeting of securities holders of tendering shares that are encumbered by a call option or some ~here :nust be full disclosure. Contemplated management turnover: other obligation to sell the shares to someone ot~er than the tender mcl~dmg any arrangement regarding the make-up of the majority offeror. Rule 14e-4 is designed to prevent tendermg shar~s that are of d1rectors, also must be disclosed. not actually owned. The prohibition against short tendermg means that during a tender offer, it is illegal to tender s~ares that you _do not own. Thus, it is necessary that anyone tendermg shares durmg § 79. Issuer Purchases of Its Own Stock-1934 Act a tender offer either actually be the owner or be a bo?"~ _fide § 13(e) and the Going Private Rule; Issuer beneficial owner of the shares being tendered. The proh1b1twns Self-Tender Offers against short tendering and hedged tendering a:e de~igned to Issuer's Share Repurchases eliminate related manipulative practices in connectwn w1th a ten­ der offer. 1934 Act Rule 13e-1 applies to an issuer's purchases of its own stock after a third party has filed a tender offer for its securities. --~1!!1'1!!~-"'!''~"''q. .,.,..,.-,. i-=<rC.?f• . f .i, § 79 ISSUER PURCHASES OF ITS OWN STOCK 243 242 TENDER OFFER AND TAKEOVER REGULATION Ch. 11 An issuer of securities subject to the 1934 Act's registration and equity security subject to the Act's reporting requirements, or (2) a reporting requirements may not purchase its own securities once a proxy solicitation subject to Regulation 14A, or a distribution of third party tender offer has been made unless ~~e issuer files w_ith information subject to Regulation 1.4C, to the holders of equity the SEC eight copies of a statement contammg the followmg securities subject to the Act's reporting requirements that is sent information: (1) a description of the securities to be purchased; (2) out by the issuer or affiliate in connection with a merger, consolida­ the names and classes of persons from whom the securities are to tion, reclassification, recapitalization, reverse stock split, or similar be purchased; (3) the purposes for which they are being purchase~; transaction. Any of the .foregoing Rule 13e-3 transactions are and (4) the source of all funds used to finance the purchases. Th1s covered by the Schedule 13E-3 disclosure and filing requirements if filing is supplemented by Schedule 14D-9 which requires a state­ the effect of the transaction or transactions is the cessation of the ment to be filed by an issuer making a solicitation or recommenda­ reporting obligations under the 1934 Act. A difficult problem is tion to security holders to accept or reject the tender offer and R~le judging the point at which the issuer should be able to predict a 14e-2's provisions requiring the issuer to send to. th~ secunty reasonable likelihood of such a result. It is not always easy to holders a statement recommending acceptance or reJectwn of the determine at what point a transactiOn or se~ies of transactions is tender offer or expressing no opinion toward it. Issuer purchase of likely to result in the issuer having fewer than three hundred its own shares is just one of the possible responses to a tender offer. shareholders. The Schedule 13E-3 disclosures are similar to those An issuer's filings under Rule 13e-1 with regard to defensive share required under Schedule 13D and Schedule TO. ~~;:' repurchases do not alleviate the need for ma~n~ fi~ings under 19~4 Can the SEC require substantive fairness? Prior to the ,: ·~:' -~. :· Act Rule 13e-3 or Rule 13e-4 if the transactwn 1s hkely to result m Supreme Court decision in Santa Fe Industries, Inc. v. Green, 430 the cessation of 1934 Act reporting obligations or constitute a U.S. 462 (1977), the SEC proposed a series of going private rules, tender offer. one of which would have given the SEC power to prohibit such transactions merely on the basis of unfairness to the shareholders. Manipulation in Connection With Issuer Repurchases Although it would appear that the Santa Fe decision precludes Purchases by an issuer or affiliate of its own securities, if not scrutiny of transactional fairness, the SEC continued to take the properly handled, can raise questions of manip_ulation. 1934 Act position that it has the power to regulate the fairness of going Rule 14e-5 prohibits purchases by persons makmg a tender offer private transactions. In 1977, the Commission included the fairness other than pursuant to the terms of the tender offer. 1934 Act Rule requirement in its post-Santa Fe version of its going private rules. 10b-18 provides a safe harbor from the antimanipulation rules for However, when the going private rules were adopted, and as qualifying purchases by the issuer and affiliates. Purcha~es pursu­ currently enforced, the SEC deleted the fairness requirement, not­ ant to issuer purchases or tender offers governed by mther Rule ing that it "believes the question of regulation should be deferred 13e-1 or 13e-4 are excluded from Rule 10b-18's safe harbor.
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