A hostile takeover is a transaction in which an acquirer gains control of the target company by going directly to its shareholders without the consent of the target's board of directors.1 It usually starts with a "tender offer" in which the acquirer offers to purchase a sufficient amount of the target company's stock from its shareholders to obtain control.2 After acquiring a majority of the target's shares, the acquirer can vote for directors who are favorable towards the acquirer's offer.3 The new board will then cause the target company to do a cash-out merger to eliminate any remaining shareholders who did not tender their shares in response to the tender offer.4
In general, the following two regulatory schemes govern a hostile takeover process in the U.S.: (a) federal law and (b) the law of the state of incorporation for the target company. This article focuses on the timing and notice requirements under federal law and states' anti-takeover defenses.
federal Regulation The Williams Act (the Act) provides the federal regulatory framework for tender offers and proxy contests.5 The Act is primarily concerned with disclosure and timing issues.
A. Tender Offers: Section 14d and Regulation 14D. Section 14d of the Securities Exchange Act of 1934 (the Exchange Act) and Regulation 14D require a bidder to make specific disclosures to security holders and mandate certain procedural protections.
(1) Tender Offer. While the term "tender offer" has not been clearly defined in any statutory provision or rule, the courts generally have applied the following eightfactor test in determining whether a particular acquisition program constitutes a tender offer.6 However, it is not required to have all eight factors:7
(i) active and widespread solicitation of security holders;
(ii) solicitation for a substantial percentage of the issuer's stock
(iii) offer is at a premium over the current market price;
(iv) terms are fixed as opposed to flexible;
(v) offer is conditioned upon the tender of a fixed number of securities;
(vi) offer is open for a limited period of time;
(vii) offer pressures security holders to respond; and
(viii) public announcements of a purchasing program concerning the target company precede or accompany rapid accumulation of a large amount of target company's securities.
(2) Applicability. Section 14d and Regulation 14D apply to all tender offers for Section 12 registered equity securities made by parties other than the target (or affiliates of the target), so long as upon consummation of the tender offer the bidder would beneficially own more than 5% of the class of securities subject to the offer.8 A bidder must include any shares it owns before the commencement of the tender offer in calculating the 5% amount.9 Section 14d and Regulation 14D do not apply to a tender offer by an issuer for its own securities. Such tender offers are subject to Rule 13e-4.10
Footnotes
1 Jay W. Eisenhofer & Michael J. Barry, Shareholder Activism Handbook (2013) [hereinafter Handbook].
2 Id.
3 Id.
4 Id.
5 See 15 U.S.C. §§78m(d)-(e); see also 15 U.S.C.§§78n(d)-(f).
6 See Wellman v. Dickinson, 475 F.Supp. 783, 823-24 (S.D.N.Y. 1979); see also SEC v. Carter Hawley Hale Stores, Inc., 760 F.2d 945, 950 (9th Cir. 1985). But see Hanson Trust PLC v. SCM Corp., 774 F.2d 47, 56-57 (2d Cir. 1985) (stating that the purpose of Section 14d is to protect the ill-informed solicitee, and that the question of whether a solicitation constitutes a tender offer within the meaning of Section 14d should be considered in the light of the totality of circumstances). See also the SEC's explanation of tender offer (SEC's explanation) available at https://www.sec.gov/answers/tender.htm.
7 Wellman at 823-24; see also the SEC's interpretation (SEC Interpretation) available at https://www.sec.gov/rules/interp/34-43069.htm#P36_3809.
8 17 C.F.R. § 240.14d-1; SEC Interpretation. For purposes of Sections 14d and 14e and Regulations 14D and 14E, the term "beneficial owner" has the same meaning as that set forth in Rule 13d-3; provided, however, that, except with respect to Rule 14d- 3 and Rule 14d-9(d), the term will not include a person who does not have or share investment power or who is deemed to be a beneficial owner by virtue of 13d-3(d)(1). 17 C.F.R. § 240.14d-1(g)(1). Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power and/or investment power. It also includes any person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement or device with the purpose of effect of divesting such person of beneficial ownership of a security or preventing the vesting of such beneficial ownership as part of a plan or scheme to evade the reporting requirements of Section 13d or 13g. All securities of the same class beneficially owned by a person, regardless of the form such beneficial ownership takes, will be aggregated in calculating the number of shares beneficially owned by such person; provided, however, that a person will be considered to be a beneficial owner, if that person has the right to acquire beneficial ownership of such security, as defined in Rule 13d-3(a) within 60 days, including but not limited to, any right to acquire: (A) through the exercise of any option, warrant or right; (B) through the conversion of a security; (C) pursuant to the power to revoke a trust, discretionary account or similar arrangement; or (D) pursuant to the automatic termination of a trust, discretionary account or similar arrangement. 17 C.F.R. § 240.13d-3. The Code of Federal Regulations is available at http://www.ecfr.gov/cgibin/text-idx?SID=2eacbbbce55554c0cd8edf4d9bd1b282&node=17:4.0.1.1.1.2.86.200&rgn=div8.
9 SEC interpretation.
10 See 17 C.F.R. § 240.13e-4.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
