Federal Regulation of Stock Purchases

Question 1

What is a “Saturday Night Special”?

Answer 1

A cash tender offer for a public company is made or announced over the weekend. Tender offeror only needs X% to get control of the company; first come, first accepted. Shareholders stampede to get in on major per share premium, but they may be selling themselves short. They may not have access to inside information that would allow them to make an informed business decision. Tender offer loves this.

Question 2

What does **The Williams Act **apply to?

Answer 2

Regulation of Cash Tender Offers

The purpose of the Williams Act is to insure that public shareholders who are confronted by a cash tender offer for their stock will not be required to respond without adequate information regarding the qualifications and intentions of the offering party

Question 3

What does Section 13(d) of the Williams Act apply to?

Answer 3

• Section 13(d) = applies to open market purchases of stock of a public company by a third party (tender offer context is NOT required)
  
  • Requires filing of a disclosure document (Schedule 13D) with the SEC when a person/group acquires more than 5% of a “reporting company”
    
    • Schedule 13D must be filed within 10 days after acquiring the securities

Question 4

What does Section 13(e) apply to?

Answer 4

• Section 13(e) = relates to issuer repurchase of its own securities
  
  • Disclosure is required in the following contexts:
    
    • Repurchase during 3rd party tender
    • Self-tender
    • Going private

Question 5

What does **Section 14(d) **apply to?

Answer 5

• Section 14(d) = applies when a third party makes a tender offer for shares of a publicly-traded Target
  
  • Regulation 14D requires that Bidder comply with various disclosure requirements
    
    • Also dictates that Bidder follow certain procedures

Question 6

What does **Section 14(e) **apply to?

Answer 6

• Section 14(e) = prohibits material misstatements, omissions, and fraudulent practices in tender offer context
  
  • Applies to tender offers for reporting companies and non-reporting companies

Question 7

Williams Act - Additional Safeguards

Answer 7

1. Minimum offering period (Rule 14-e-1)
2. Right of withdrawal (Rule 14d-7)
3. Pro-rata purchasing in oversubscribed offering context (Rule 14d-8)
4. Parity of market premium; i.e. enhance in tender price during offering period (§ 14(d)(7) and Rule 14d-10(a)(1))
5. Rule 14e-2 requires that TARGET management file Schedule 14D-9 with the SEC within 10 days after tender offer commencement
6. Target management must recommend acceptance, rejection, or no opinion regarding the offer (with an explanation for the “no opinion” stance)

Question 8

What does the term control mean?

Answer 8

The term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.

Question 9

Tests to Determine Whether a Tender Offer is Present:

Answer 9

1. Wellman Test:
   
   • Active and widespread solicitation of public shareholders for the shares of an issuer;
   • Solicitation made for a substantial percentage of the issuer’s stock;
     
     • Probably looking at whether they were going after a certain block of shares
   • Offer to purchase made at a premium over the prevailing market price;
   • Terms of the offer are firm rather than negotiable;
   • Offer contingent on the tender of a fixed number of shares, often subject to a fixed maximum number to be purchased;
   • Offer open only for a limited period of time;
   • Offeree subjected to pressure to sell his stock; and
   • 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. S-G Securities test:
   
   • A publicly announced intention by the purchaser to acquire a block of the stock of the target company for purposes of acquiring control, and
   • A subsequent rapid acquisition by the purchaser of large blocks of stock through open market and privately negotiated purchases
     
     • Court says this test is vague and difficult the apply

Question 10

What is the Kennecott Copper Test?

Answer 10

A solicitation constitutes a tender offer when, viewing the transaction in light of the totality of circumstances, there appears to be a likelihood that unless the pre-acquisition filing strictures of the William’s Act are followed there will be a substantial risk that solicitees will lack information needed to make a carefully considered appraisal of the proposal put before them.