SOMMER & BARNARD
Attorneys at Law ∑ PC
June 7, 1999
Jonathan G. Katz, Secretary
United States Securities and
450 Fifth Street, N.W.
Washington, DC 20549-6009
Re: File Number S7-28-98
Ladies and Gentleman:
Thank you for the opportunity to comment on Exchange Act Release No. 40633, "Regulation of Takeovers and Security Holder Communications," (the "Takeover Proposal"). This firm represents a number of public companies organized under the laws of Indiana and certain other states. The Boards of Directors of our clients are concerned about the impact of the Takeover Proposal on their ability to take effective and timely action in the best interests of the corporation in response to an unsolicited tender offer.
The Staff has requested comment on questions set out between footnotes 123 and 124 of the Takeover Proposal. We have set forth below those questions and, immediately following each question, our response:
The elimination of the five business day commencement rule and the requirement to file a registration statement proposals would encourage potential bidders to make "test the water" noises without bidding, or to throw up "air balls" (unsolicited, unreal bids designed to cause rejection of necessary shareholder votes in negotiated transactions). The only protection from "air balls" that you propose are the existing anti-fraud protections plus a new anti-fraud rule, Rule 14e-8. Rule 14e-8 would define as "fraudulent, deceptive or manipulative" acts the announcement of a potential tender offer (i) without the intention to commence and complete the offer, or (ii) that is intended to manipulate the market price of the stock of the bidder or target, or (iii) in the absence of a reasonable belief that the bidder will have the means to purchase securities to complete the offer.
Because of the necessity to prove a form of "intent" under both existing anti-fraud rules and proposed Rule 14e-8, it would be difficult for a target whose stock had been moved by a pre-commencement announcement to bring an action successfully. As you know, the Private Securities Litigation Reform Act of 1995 (the "Reform Act") made it much more difficult for private citizens to sue for anti-fraud violations. In general, the Reform Act requires pleadings to specify each allegedly misleading statement, the reason the statement is misleading, and, "with particularity" all facts upon which an information and belief allegation is made. See, Section 21D(b)(1) of the Securities Exchange Act of 1934 (the "Exchange Act"). In addition, if a plaintiff is seeking money damages, the complaint must state with particularity facts giving rise to a "strong inference" that the defendant acted with the requisite state of mind. See, Section 21D(b)(2) of the Exchange Act. The impact of the Reform Act has not been fully felt yet, but it is clear both that Congress intended to cut down substantially on private securities litigation and that the federal courts got the message.
Of even more concern, once the stock has been driven out of the hands of the retail investors, there would be no remedy that could be fashioned to undo the damage. And if the stock had moved into the hands of arbitrageurs, assuming a fraudulent announcement, the market in that stock would be destabilized because the arbitrageurs would not want to hold the stock when no offer was forthcoming, and would dump it as quickly as they could. Finally, in the context of a negotiated transaction, merger partners would justifiably seek to protect against "air balls" in their bust up negotiations, potentially raising significantly the costs associated with attempting to have a negotiated deal either because disgruntled shareholders would seek to overcome the deal protections or because someone would have to pay for a deal thwarted by an "air ball."
We believe that the five day rule and the prompt filing rule provide investors much more certainty as to the viability of an offer than does the Takeover Proposal. Investors today are much less likely to be driven to sell their shares in the market prematurely than would be the case under the Takeover Proposal.
The existing rules provide security holders with better information sooner. The risk of an "air ball" is limited by the five business day commencement rule and investors receive more complete information sooner.
Yes. The proposed rules would tend to drive unsophisticated investors to sell into the market because of uncertainty as to both timing and existence of a bid, and some kinds of bidders will exploit that tendency.
Yes. Absent the existing rules, there will be no easily ascertainable means of reducing this risk in light of the Reform Act. When an "air ball" is launched, the damage will have been done before any action under any rule could be taken.
If the focus is solely on the targetís investors, a cash announcement poses a greater risk than a stock announcement. On the other hand, if one were concerned about the bidderís investors as well, a stock offer could, and likely would, cause turmoil in both stocks. In the case of rational bidders, the latter situation is much less likely to occur.
The five business day rule has the great benefit of providing relative certainty in a very short period of time to what could otherwise be a chaotic market. Therefore, it would be more important to maintain the five business day rule than to force an artificial harmonization.
No. It is inadequate protection for investors because of the tendency of an announcement containing price, standing alone, to drive the stock, and for the arbitrageurs or the asset players to pay a discount from that price.
Yes. That need has to be measured against the risks that investors will react on incomplete information, as well as the fact that the actual time that it takes to prepare and disseminate communications in a cash tender offer is very short. In that context, there is no need to deviate from the current five-business day rule.
We submit that the five business day commencement rule and the requirement to file a registration statement promptly are critical elements to a level playing field and adequate disclosure to unsophisticated investors and should not be abandoned.
/s/ James A. Strain
James A. Strain