SECURITIES AND EXCHANGE COMMISSION
In the Matter of the Application of
OPINION OF THE COMMISSION
Ground for Remedial Action
Violation of All Holders Rule
Corporation's tender offer was not open to all holders of the class of securities subject to the tender offer where the corporation offered to purchase shares of the target company only from shareholders of record with respect to an upcoming shareholders' meeting of the target company or from shareholders who had obtained a proxy to vote the shares from a shareholder of record. Held, it is in the public interest to order that corporation cease and desist from committing or causing any violations or future violations of Section 14(d)(4) of the Securities Exchange Act of 1934 and Exchange Act Rule 14d-10(a)(1) thereunder.
Richard M. Phillips, Paul Gonson, Charles R. Mills, James E. Day, and Leigh M. Freund, of Kirkpatrick & Lockhart LLP, for WHX Corporation.
Luis R. Mejia, for the Division of Enforcement.
Appeal filed: October 25, 2000
Last brief received: March 9, 2001
Oral argument: April 23, 2003
The Division of Enforcement appeals from the decision of an administrative law judge dismissing charges against WHX Corporation ("WHX"). WHX was charged with violations under the Williams Act in connection with a failed 1997 takeover bid. The law judge concluded that WHX did not violate Rule 14d-10(a)(1) of the Securities Exchange Act of 1934 ("the All Holders Rule" or "the Rule")1 / when WHX offered to purchase shares of the target company only from shareholders of record with respect to an upcoming shareholders' meeting of the target company or from shareholders who had obtained a proxy to vote the shares from a shareholder of record. The Division asserts that the law judge's conclusion is erroneous because it was based on her findings that no harm occurred and that WHX had relied reasonably on the advice of its attorneys, factors that the Division maintains are irrelevant to a determination of whether WHX violated the All Holders Rule. The Division contends that WHX violated the All Holders Rule and that the Commission should impose a cease-and-desist order on WHX based on this violation. WHX argues that the law judge correctly found that its tender offer did not violate the All Holders Rule and that, in any event, a cease-and-desist order is not appropriate. We base our findings on an independent review of the record except with respect to those findings not challenged on appeal.
WHX, a Delaware corporation with its principal place of business in New York City, is a publicly-traded holding company with subsidiaries engaged in various activities including manufacturing and distributing steel products, operating a casino and race track, and investing in securities. Ronald LaBow has been chairman of the board of directors of WHX since 1991. LaBow has responsibility for corporate oversight and investment activities.
Dynamics Corporation of America ("DCA") was a New York corporation headquartered in Greenwich, Connecticut, which manufactured commercial and industrial products. During the relevant period, DCA's stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act2 / and was traded on the New York Stock Exchange, Inc.
In early 1997, WHX was considering conducting a hostile cash tender offer for DCA. Two impediments stood in the way of WHX acquiring control of DCA through the purchase of shares in a hostile tender offer. The first of these impediments was DCA's poison pill anti-takeover defense. As constituted in March 1997, the poison pill would have been triggered if any shareholder acquired 20 percent or more of DCA's outstanding stock or made an offer for at least 25 percent of DCA stock without the approval of the DCA board of directors. DCA's poison pill was a "flip-over" poison pill which allowed DCA shareholders to buy additional shares of the post-merger company at a bargain price in the event of an unwelcome merger.3 / This poison pill meant that, after a merger with DCA, DCA's shareholders could dilute substantially WHX's equity interest in the post-merger company. The second impediment was New York Business Corporation Law ("NYBCL") Section 912(b), which prohibits a New York corporation from engaging in any business combination with any shareholder that is a beneficial owner of 20 percent or more of the corporation's outstanding stock for a period of five years after the shareholder first acquired ownership of 20 percent of the outstanding stock, unless the shareholder receives the approval of the New York corporation's board of directors.4 /
To address these two impediments, WHX devised a takeover strategy that involved a two-part process -- WHX would conduct a cash tender offer and a proxy solicitation at the same time. To avoid triggering the poison pill and NYBCL Section 912(b), WHX offered to purchase only the number of DCA shares that would keep WHX's ownership of DCA below the 20 percent level. WHX then would solicit proxies from shareholders whose shares they did not obtain as a result of their tender offer. WHX would solicit these proxies in order to obtain enough votes to elect WHX's slate of four directors to the DCA board of directors at the next annual shareholders' meeting (which was scheduled for May 2, 1997). The new directors would then vote to neutralize the provisions of DCA's poison pill with respect to WHX's tender offer and vote (in compliance with NYBCL Section 912(b)) to approve a merger with WHX. WHX planned to complete the merger by purchasing for cash all remaining outstanding shares of DCA stock for the same price per share that WHX paid on the front end of the tender offer.
WHX confronted a potential obstacle in implementing this strategy, however. When WHX commenced its tender offer on March 31, the March 14 record date for the May 2 annual shareholders' meeting already had passed. DCA shareholders who bought shares after the record date would not be record holders for purposes of the May 2 annual meeting and would not have the right to vote their shares at this meeting. Accordingly, WHX risked the prospect of buying shares tendered by non-record holders that it would be unable to vote at the annual shareholders' meeting instead of shares tendered by record holders who would be able to provide WHX with proxies to vote the tendered shares.
WHX, with the assistance of legal counsel, developed a strategy to address this potential obstacle. WHX's tender offer contained a condition that required that shares be tendered only by a record holder as of March 14 or by a shareholder who had obtained a proxy to vote the shares from the shareholder of record as of March 14 (the "Record Holder Condition"). WHX believed that this condition would ensure that WHX could vote tendered shares at the May 2 shareholders' meeting.
WHX's attorney believed that there might be a question as to whether the Record Holder Condition complied with Exchange Act Rule 14d-10(a)(1), which requires that tender offers be open to all security holders of the class of securities subject to the offer. Therefore, on March 24, he faxed a letter to the Office of Mergers and Acquisitions (part of the Commission's Division of Corporation Finance) requesting an exemption from, or a no-action ruling regarding, the All Holders Rule. Later that day, a Commission staff member in the Office of Mergers and Acquisitions telephoned WHX's counsel, informed him that the Commission did not issue no-action letters with respect to the All Holders Rule, and suggested that he withdraw the request. Counsel testified that he inferred from this conversation that the staff regarded the Record Holder Condition to be impermissible under the All Holders Rule. That afternoon, counsel sent a letter to the Office of Mergers and Acquisitions withdrawing the request.
Nevertheless, WHX's counsel advised LaBow that WHX could proceed with a tender offer that included the Record Holder Condition. LaBow testified that counsel was confident that he could persuade the staff that the Record Holder Condition was consistent with the All Holders Rule. Counsel based this belief in part on his view that there was no Commission precedent indicating that the Record Holder Condition would violate the All Holders Rule. After discussions with counsel, LaBow decided to keep the Record Holder Condition in the tender offer.
On March 31, 1997, WHX commenced its hostile cash tender offer for DCA via newspaper advertisement and a press release. The tender offer included the Record Holder Condition which was set forth on the cover page and repeated on page two of the offer:
Shares shall not be deemed to be duly or properly tendered, and they will not be accepted for purchase by the Purchaser, unless (i) they are tendered to the Purchaser by the shareholders of record as of the close of business on March 14, 1997 (the "Record Holder"); or (ii) they are tendered to the Purchaser by or on behalf of a shareholder who has obtained a valid, irrevocable proxy to vote such Shares in connection with their purchase directly from the Record Holder, or pursuant to a chain of purchasers from the Record Holder whereby each successive purchaser through and including the shareholder tendering Shares to Purchaser has obtained a valid, irrevocable proxy to vote such Shares in connection with the purchase of such Shares from the prior owner of such Shares; (iii) if tendered by a shareholder not meeting the criteria of subparagraph (i) or (ii) immediately above, the Shares tendered are accompanied by a proxy duly executed by the Record Holder in favor of the shareholder tendering his Shares to the Purchaser.
The tender offer also noted that WHX had been "informally advised" by the staff of the Commission that the Record Holder Condition was not permissible under the All Holders Rule. It noted further that WHX did not concur with the staff's position "due to the special circumstances of the timing of the Offer in relation to the Annual Meeting and the Purchaser's intention to complete the merger, in which all shareholders will receive the same consideration paid to shareholders who satisfy the Record Holder Condition."
On April 4, 1997, Commission staff informed WHX's counsel that it was prepared to recommend that the Commission bring an enforcement action to enjoin WHX's tender offer unless WHX withdrew the Record Holder Condition from its offer. Counsel then submitted two letters to the Commission, one dated April 4 and the other dated April 7, addressing matters raised by the staff and detailing the reasons that he believed the Record Holder Condition did not violate the All Holders Rule and that enforcement action was not warranted.
On April 8, 1997, Commission staff informed counsel that the Commission had authorized an enforcement action to enjoin the tender offer on the basis that the Record Holder Condition was not permissible under the All Holders Rule. Counsel subsequently advised the staff that WHX would withdraw the Record Holder Condition from the Offer, and it did so by means of a Supplemental Offer to Purchase dated April 10.5 /
The All Holders Rule provides that "[n]o bidder shall make a tender offer unless . . . [t]he tender offer is open to all security holders of the class of securities subject to the tender offer."6 / The All Holders Rule does not prohibit tender offers for "fewer than all outstanding securities of a class," but the Rule provides that "all security holders must be able to accept the tender offer if they so choose."7 / The Commission promulgated the Rule to further the purposes of the Williams Act8 / by "assuring fair and equal treatment of all holders of the class of securities that is the subject of a tender offer."9 / Specifically, the All Holders Rule promotes thedisclosure purposes of the Williams Act by ensuring that "all members of the class subject to the tender offer receive information necessary to make an informed decision regarding the merits of the tender offer."10 / We find that WHX's tender offer violated the All Holders Rule because it excluded shareholders who were unable to provide a proxy to vote at the May 2 shareholders' meeting from participating in the tender offer.
WHX argues that the terms of its tender offer facially complied with the plain language of the All Holders Rule because WHX "expressly solicited tender offers from all holders, and it did not bar any holder from participating in the offer." We disagree. The plain language of the All Holders Rule required that WHX's tender offer be open to all DCA security holders of the class of securities subject to the tender offer, in this case DCA common stock. WHX's offer was not, on its face, open to all holders of DCA common stock. By its terms WHX's offer expressly excluded DCA stockholders who were unable to provide a proxy to vote at the May 2 annual shareholders' meeting. Rather than facially complying with the All Holders Rule, the Record Holder Condition contained in WHX's tender offer violated the plain terms of the Rule.
WHX next argues that its tender offer did not violate the All Holders Rule notwithstanding the Record Holder Condition because, as a practical matter, the offer did not have the effect of barring any shareholder from participating. According to WHX, its tender offer was open to all DCA shareholders as long as they could provide a proxy to vote the tendered shares at DCA's May 2 shareholders' meeting.11 / WHX assumed that obtaining a proxywas a mere formality that shareholders easily would be able to accomplish.
The Division's expert witnesses testified that the difficulties of identifying owners of stock traded on the New York Stock Exchange arise from the netting and clearing process, and from the practice of holding stock through nominees. Specifically, most shares traded on the New York Stock Exchange are held -- and more than 90 percent of DCA's outstanding shares were held -- in the name of Cede & Co., a nominee of the Depository Trust Company ("DTC"). DTC is a central securities depository that accepts securities for deposit from its participants, broker-dealers and banks whose customers are the beneficial owners of the stock. DTC enables buyers and sellers to transfer ownership of stock by means of computerized book entries rather than physical delivery of stock certificates. DTC's books reflect net movements in participants' positions but do not reflect individual transactions. Indeed, DTC does not know the identity of the beneficial owners, but only of the participant banks and broker-dealers to whose accounts securities are credited.
The record thus shows that it would have been essentially impossible for a non-record holder who bought DCA shares held in the name of Cede & Co. on the New York Stock Exchange prior to the announcement of the tender offer to determine the identity of an owner of DCA shares in order to obtain the proxy necessary to tender the shares to WHX.12 / Thus, the Record Holder Conditionwould have prevented such a shareholder from accepting WHX's tender offer. This is all that is required to establish a violation of the All Holders Rule.13 /
WHX argues further that its tender offer did not violate the All Holders Rule notwithstanding the Record Holder Condition because the Williams Act and the Rule allow a tender offer to be conditioned on the transfer of the voting rights of a particular share of stock. WHX points to the Supreme Court's opinion in CTS Corp. v. Dynamics Corp. of America14 / as support for this claim.
In CTS Corp., the Supreme Court upheld a state statute that focused on the acquisition of "control shares" in an issuing public company. Under the state statute, an entity that acquired "control shares" did not necessarily acquire voting rights in those shares. Rather the acquiror gained voting rights in the "control shares" only if a majority of the target company's disinterested shareholders decided to confer voting rights on the "control shares."15 / The statute further provided that the acquiror could require the management of the target corporation to hold a specially scheduled shareholders' meeting within 50 days of the commencement of the offer for the purpose ofdetermining if voting rights would transfer to the "control shares."16 /
The appellants in CTS Corp. asserted that "no rational offeror will purchase shares until it gains assurance that those shares carry voting rights," and that, because it was "possible that voting rights would not be conferred until a shareholders' meeting 50 days after the commencement of the offer, [the statute] impose[d] a 50-day delay."17 / The appellants argued that, therefore, the state statute was in conflict with the Williams Act and the shorter 20 business-day period established by Exchange Act Rule 14e-1 as the minimum period for which a tender offer may be held open.18 /
The Supreme Court disagreed with appellants, finding "the alleged conflict illusory."19 / The Court stated that the 50-day period specified in the statute for a shareholder meeting did not preclude an offeror from purchasing the shares as soon as federal law permitted (after the 20 business-day period established by Exchange Act Rule 14e-1). The Court noted in dicta that, if an offeror feared an adverse shareholder vote pursuant to the state statute, it could make a conditional tender offer, "offering to accept shares on the condition that the shares received voting rights within a certain period of time."20 /
WHX reasons broadly from this dicta that the Supreme Court endorsed the type of restriction contained in the Record Holder Condition.21 / The condition postulated by the Court in dicta in CTS Corp., however, differed markedly from the one at issue here. In CTS Corp., the hypothetical condition would not have preventedany shareholders from tendering their shares. Rather, once the shares were tendered, the acquiror's conditional acceptance of the tendered shares would affect all shareholders equally. By contrast, the Record Holder Condition prevented certain shareholders (those who lacked voting rights at the time of tender) from even tendering their shares. Thus, the dicta in CTS Corp. endorses a very different type of restriction than the Record Holder Condition, and WHX's reliance on this dicta is misplaced.
WHX's analysis of CTS Corp. ignores the basic principles of the Williams Act upon which the Supreme Court relied in its decision in that case, and which support our findings with respect to the All Holders Rule in this matter. According to the Court, the state statute at issue in CTS Corp. operated on the "assumption, implicit in the Williams Act, that independent shareholders faced with a tender offer often are at a disadvantage."22 / The Court concluded that the state statute furthered a basic purpose of the Williams Act -- "plac[ing] investors on an equal footing with the takeover bidder."23 / For example, if shareholders believe that a successful tender offer will be followed by a purchase of non-tendering shares at a depressed price, individual shareholders may be coerced into tendering their shares.24 / The Court concluded that the state statute at issue in CTS Corp., like the Williams Act, protected shareholders from the coercive aspects of some tender offers by providing a means whereby shareholders as a group could reject the offer, even though individual shareholders might be inclined to accept it.25 / In so doing, the Court reasoned, the state statute furthered the federal policy of investor protection.26 /
The concerns with the fairness of tender offers and with the protection of investors from coercion articulated by the Court in CTS Corp. are equally applicable here. When faced with the difficulty created by the fact that the record date for the May 2shareholder meeting had passed, WHX responded by crafting a tender offer that, through the use of the Record Holder Condition, addressed that difficulty but made it impossible for certain shareholders to tender their shares. The All Holders Rule makes such a discriminatory response impermissible.
WHX repeatedly asserts that the Record Holder Condition was not within the zone of discriminatory devices with which the Williams Act and the All Holders Rule are concerned because it had the "economically justifiable" purpose of ensuring that tendered shares contained their full bundle of rights, including the ability to be voted at the May 2 shareholders' meeting. While the Record Holder Condition may have been economically justifiable for WHX, it unfairly disadvantaged shareholders who bought DCA stock between March 14 and March 31 because, as the record establishes, these shareholders would not have been able to obtain proxies and could not participate in the tender offer.
We have no doubt that there are numerous occasions when it is in the economic interest of a tender offeror to use its superior bargaining position to impose on a tender offer a condition that is advantageous to the offeror without regard to the effect of such a condition on the tendering shareholders. The All Holders Rule protects shareholders from the unfair treatment that results from such an imbalance in bargaining power.27 / Rather than justifying WHX's conduct, then, the argument that it was in WHX's financial interest to violate the All Holders Rule illustrates the need to enforce compliance with the Rule.28 /
WHX claims that, unlike in CTS Corp., no coercion is present here because WHX committed to pay the same share price to non-tendering shareholders, if the proposed merger were completed, as it paid to tendering shareholders. The Williams Act, however, is concerned with the equal treatment of shareholders during the pendency of the tender offer regardless of whether any proposed merger is ultimately successful. Under WHX's Record Holder Condition, those shareholders excluded from tendering their shares would not receive the tender price for their shares if the contemplated merger were unsuccessful. Application of the All Holders Rule in this instance, therefore, serves the same purpose of protecting investors in the context of a tender offer that the Supreme Court in CTS Corp. identified as central to the Williams Act.
WHX argues further that the All Holders Rule does not require offerors to guarantee every holder a right to participate in a tender offer. In support of this argument, WHX notes that tender offers routinely are subject to conditions that some shareholders may not be able to satisfy for reasons outside of the control of the offeror. WHX offers as examples of such conditions shares that have been pledged as collateral for loans and shares held subject to a trust that prevents tender without the consent of the beneficiaries. In these examples, however, the offer is open to all shareholders, but an action taken independently by an individual shareholder encumbers the shares and limits the shareholder's ability to participate in the offer. With respect to the WHX offer, the shareholders could not participate simply because they purchased shares after the record date but prior to WHX's tender offer. They took no action to encumber their shares or otherwise to limit their ability to participate in the tender offer; WHX created the limitation when it made its tender offer after the record date for the May 2 shareholder meeting had passed and structured the offer to require the delivery of proxies. Use of the Record Holder Condition created an offer that discriminated among DCA shareholders.
WHX next maintains that the All Holders Rule was ambiguous as applied to its tender offer. In support of this claim, WHX points to a record holder condition contained in DCA's tender offer for CTS Corporation, dated March 14, 1986, which the Commission did not challenge. WHX implies that the Commission's failure to challenge that condition means that the Commission sanctioned the Record Holder Condition here. WHX's argument ignores the fact that the Exchange Act gives the Commission the discretion to investigate "as it deems necessary to determine whether any person has violated, is violating, or is about to violate" any provision of the Exchange Act or the "rules orregulations thereunder."29 / Even if DCA's tender offer contained a condition that violated the Williams Act, the Commission's decision "not to prosecute or enforce, whether through civil or criminal process, is a decision generally committed to an agency's absolute discretion."30 / In exercising its discretion whether to bring an enforcement proceeding, the Commission "must not only assess whether a violation has occurred," but also must engage in an "often . . . complicated balancing of a number of factors."31 / Thus, the Commission's decision not to prosecute cannot be construed as a determination that the record holder condition in DCA's tender offer was legal. Any such contention is also belied by WHX's subsequent decision to seek guidance from Commission staff concerning the permissibility of the Record Holder Condition.32 /
WHX also argues that the Division has not brought actions against two other offerors who have used a record holder condition subsequent to WHX's tender offer. WHX's argument isunavailing for the reasons discussed above. Moreover, both offerors identified by WHX, after receiving comments from the staff, amended their offers to ensure that all holders received equal treatment without the need for the Commission to authorize an enforcement action. In this case, only after we authorized an injunctive action against WHX to stop its tender offer did WHX remove the Record Holder Condition.
WHX also rebuffs the Division's argument that footnote 35 of the Adopting Release is evidence that WHX's use of the Record Holder Condition violated the All Holders Rule.33 / Footnote 35 states that a "tender offer directed only to holders of record would not comply with the all-holders requirement."34 / The Division argued to the law judge that the term "holders of record" refers to those who owned stock as of the record date. WHX, however, contends that this term refers to the registered holder whose name appears on the stock certificate, as opposed to the beneficial owner of the stock.35 /
Even if WHX's interpretation of the footnote is correct, however, the footnote merely provides one example of a tender offer that would not comply with the All Holders Rule. The express terms of the All Holders Rule prohibit WHX from using the Record Holder Condition and it is not necessary to rely on a footnote in the Adopting Release to establish that WHX violated the Rule.
WHX next argues that, even if inclusion of the Record Holder Condition in its tender offer violated the All Holders Rule, WHX should not be found liable because it did not act with the requisite state of mind and because no shareholders were harmed by the Record Holder Condition. We must determine, therefore, whether it is necessary to establish that a tender offeror acted with a particular state of mind or that shareholders were harmed in order to find a violation of the All Holders Rule.
WHX contends that, even if the All Holders Rule prohibited it from including the Record Holder Condition in its tender offer, WHX did not violate the Rule because the Division failed to establish that WHX acted with scienter or negligence. WHX argues that finding a violation under the All Holders Rule requires the Division to establish scienter, or at least negligence, because, according to WHX, the Commission relied on Section 14(e) of the Exchange Act36 / as authority for the Rule. WHX argues that a finding that scienter is not required to establish a violation of the All Holders Rule would produce a standard that fails to distinguish between discriminatory tender offers that are manipulative and those that are non-manipulative. According to WHX, this would result in the lack of a "close nexus between the prohibited conduct and statutory aims" of Section 14(e) of preventing fraud, deception, and manipulation.
We disagree. Scienter is not an element of a violation of the All Holders Rule. The Commission intended the Rule to be a disclosure provision without a scienter requirement rather than an antifraud provision with a requirement of scienter. At the time of its adoption, the Commission noted that the All Holders Rule "would realize the disclosure purposes of the Williams Act" and promulgated the Rule pursuant to the Commission's authorityunder Section 14(d) of the Exchange Act.37 / The Commission stated that the Rule furthers the disclosure objectives of the Williams Act by "ensuring that all members of the class subject to the tender offer receive information necessary to make an informed decision regarding the merits of the tender offer" and that these disclosure objectives would be ineffective if "tender offer disclosure is given to all holders, but some are barred from participating in the offer."38 /
Moreover, it is not necessary to demonstrate fraud to establish a violation of the All Holders Rule even to the extent that the Commission promulgated the Rule pursuant to Section 14(e). While Section 14(e) provides a broad antifraud prohibition,39 / Congress amended the Williams Act in 1970 by adding to Section 14(e) the sentence: "The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative."40 / The Supreme Court has recognized that, in so doing, Congress granted the Commission authority under Section 14(e) "to regulate nondeceptive activities as a 'reasonably designed' means of preventing manipulative acts."41 / Through Section 14(e), Congress also granted the Commission the authority to promulgate rules to regulate nonfraudulent activity, without regard to state of mind, as a means of preventing fraudulent, deceptive ormanipulative acts.42 / We conclude that the All Holders Rule is consistent with the authority granted by Congress in Section 14(e) and that scienter is not a requirement for finding a violation of the Rule.43 /
WHX then argues that, even if scienter is not necessary to establish a violation of the All Holders Rule, a finding of negligence is required. WHX failed to raise this argument before the law judge and, therefore, failed properly to preserve this argument on appeal. In any event, we note that the argument is without merit. Neither the Rule nor the Adopting Release indicates that a violation may be found only where an offeror knew or should have known that a tender offer violated the All Holders Rule.44 / We conclude that WHX acted deliberately andwillfully by including the Record Holder Condition in its tender offer in spite of the plain language of the All Holders Rule and by failing to remove it even after being advised by Commission staff that the Record Holder Condition violated the All Holders Rule and that the staff would recommend enforcement action.
WHX also claims that it did not violate the All Holders Rule because no investors tendered their shares before WHX removed the Record Holder Condition on April 10, 1997 and, therefore, no shareholders were harmed. On its face, the All Holders Rule contains no requirement that harm to shareholders be established in order to find a violation. Moreover, to the extent harm is an element of a violation of the All Holders Rule, the only harm that must be shown is that the terms of the offer prevented certain shareholders of the class of securities subject to the offer from tendering their shares.45 / The Williams Act and the All Holders Rule are designed to protect all shareholders, regardless of whether they tendered their shares.46 / Courts and commentators "alike have stated that 'nontendering shareholders are within the class for whose protection the Williams Act was specifically designed.'"47 / The protection from unfairness afforded by the Rule would be undermined by requiring the Division to show that a shareholder has been harmed in some wayother than being foreclosed from participating in the tender offer. Accordingly, we reject WHX's argument that WHX did not violate the All Holders Rule because no shareholders were harmed.48 /
* * *
We conclude that WHX violated Exchange Act Rule 14d-10(a)(1) and Exchange Act Section 14(d)(4) by including the Record Holder Condition in its tender offer for DCA.
The Division seeks a cease-and-desist order under Section 21C(a) of the Exchange Act.49 / WHX contends that there is no basis for entry of a cease-and-desist order because there is no risk of future violation. According to WHX, the factual circumstances of its tender offer were unusual and WHX conducted the tender offer in good faith. WHX also claims that it has conducted two tender offers subsequent to the DCA offer without "regulatory incident" and that, apart from this case, it has never been the subject of a Commission investigation or action.
In KPMG Peat Marwick, LLP,50 / we concluded that the "likelihood of future violation" requirement that governs the issuance of injunctions in court proceedings is not the appropriate standard for issuance of a cease-and-desist order in an administrative proceeding. Although there must be a showing of "some risk" of future violation, that risk need not be very great to warrant issuance of a cease-and-desist order. In the ordinary case and absent evidence to the contrary, a finding ofpast violation raises a risk of future violation sufficient to support our ordering a respondent to cease and desist.51 / WHX has made a career of establishing and promoting public companies and will be presented with opportunities to violate the law in the future. Given this fact and the conduct found in this proceeding, we consider the risk that WHX will violate the All Holders Rule in the future to be much greater than that needed to meet the standard articulated in KPMG.
As a guide in exercising our "broad discretion in choosing a sanction,"52 / we consider the range of traditional factors relevant to a determination that a sanction is in the public interest:
including the seriousness of the violation, the isolated or recurrent nature of the violation, the respondent's state of mind, the sincerity of the respondent's assurances against future violations, the respondent's recognition of the wrongful nature of his or her conduct, and the respondent's opportunity to commit future violations. In addition, we consider whether the violation is recent, the degree of harm to investors or the marketplace resulting from the violation, and the remedial function to be served by the cease-and-desist order in the context of any other sanctions being sought in the same proceedings.53 /
Our sanctions inquiry is a flexible one, and no one factor is dispositive.54 /
We find that WHX's violation was serious. Compliance with the All Holders Rule is essential to assure fair and equal treatment of all holders of the class of securities that is the subject of a tender offer and WHX's violation was neither technical nor inadvertent. WHX violated this clear and unambiguous Rule in a deliberate and willful manner. Moreover, WHX's failure to amend timely its tender offer to comply with the All Holders Rule, even after Commission staff explained WHX's obligations, counsels that we grant the requested relief.
Although state of mind is not an element of an All Holders Rule violation, it is a factor for the Commission to consider in determining what sanction is in the public interest.55 / WHX argues that it lacked the state of mind necessary to support the imposition of a cease-and-desist order when it included the Record Holder Condition in its tender offer because WHX relied on its counsel's advice that the condition did not violate the All Holders Rule.56 /
We have determined that the All Holders Rule has no scienter requirement. Reliance on the advice of counsel usually is unavailable where intent is not an element of the violation.57 / However, even assuming that WHX relied in good faith on the advice of counsel when it initially decided to include the Record Holder Condition in its tender offer, the firm, led by a sophisticated and experienced chairman, acted at its peril in following counsel's recommendation to refuse to remove the Record Holder Condition in the face of the staff's warning that itviolated the clear and unambiguous language of the All Holders Rule.
WHX chose to ignore the staff's warnings and continue in violation of the All Holders Rule, thereby requiring the Commission to authorize an enforcement action to remedy the violation. Only then, in the face of an enforcement proceeding, did WHX amend the tender offer. Given the warnings WHX received from Commission staff that the Record Holder Condition plainly violated the All Holders Rule, and its decision to challenge the Rule by refusing to amend its tender offer even though it had been informed that doing so would lead to the Commission's authorization of enforcement action, WHX cannot credibly claim that its state of mind was sufficiently innocent to militate against imposition of a cease-and-desist order.58 /
WHX argues that the fact that it has conducted two tender offers without incident subsequent to its tender offer to DCA shareholders and that, other than the present case, it has not been the subject of a Commission investigation or enforcement action, counsel against relief. When these facts are balanced against the seriousness of WHX's violation of the All Holders Rule and its repeated ignoring of the plain language of the Rule and the warnings of Commission staff, however, we believe that a cease-and-desist order is fully warranted in the public interest.
We also reject WHX's claim, made in reliance on Upton v. SEC,59 / that its conduct was reasonable because of a lack of fair notice that the Record Holder Condition would violate the All Holders Rule. Due process requires that "laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited."60 / Regulations satisfy due process as long as a "reasonably prudent person, familiar with the conditions the regulations are meant to address and the objectives the regulations are meant to achieve, has fair warning of what the regulations require."61 / The degree of required notice variesaccording to the circumstances.62 / Regulations satisfy due process as long as they are sufficiently specific that a regulated entity "acting in good faith would be able to identify, with ascertainable certainty, the standards with which the agency expects" it to conform "by reviewing the regulations and other public statements issued by the agency."63 /
In this case, WHX had sufficient notice of the conduct prohibited because the Rule's "plain language . . . gives fair notice of what it requires."64 / Our reading of the All Holders Rule with respect to WHX's conduct also is consistent with the language, history, and purpose of the Williams Act and Exchange Act Section 14(d). In any event, WHX was put on notice by Commission staff that its refusal to remove the Record Holder Condition from the tender offer could lead to the Commission's authorization of an enforcement action. Accordingly, our finding that WHX violated the All Holders Rule imposes no new rules of conduct.
We conclude, therefore, that it is in the public interest to order that WHX cease and desist from committing or causing any violations or future violations of Section 14(d)(4) of the Exchange Act or Rule 14d-10(a)(1) thereunder.
An appropriate order will issue.65 /
By the Commission (Chairman DONALDSON and Commissioners GLASSMAN, GOLDSCHMID, ATKINS and CAMPOS).
Jonathan G. Katz
1 / 17 C.F.R. § 240.14d-10(a)(1).
2 / 15 U.S.C. § 78l(b).
3 / See Barron's Dictionary of Finance and Investment Terms 422 (4th ed. 1995).
4 / New York Business Corporation Law § 912(b) (McKinney 1997).
5 / WHX's removal of the Record Holder Condition eliminated the need for the Commission to file the authorized injunctive action.
6 / Exchange Act Rule 14d-10(a)(1), 17 C.F.R. § 240.14d-10(a)(1).
7 / Amendments to Tender Offer Rules: All-holders and Best-Price, Exchange Act Rel. No. 23421 (July 11, 1986), 36 SEC Docket 131, 134 ("Adopting Release").
8 / The purpose of the Williams Act is "the protection of investors who are confronted with a tender offer." Piper v. Chris-Craft Indus., Inc., 430 U.S. 1, 35 (1977). Congress passed the Williams Act in 1968 in response to an increasing number of cash tender offers; before Congress passed the Williams Act, these transactions were not covered by the disclosure requirements of the federal securities laws. See Piper v. Chris-Craft Indus., Inc., 430 U.S. at 22 (citing S. Rep. No. 550, 90th Cong., 1st Sess., 2-4 (1967); H.R. Rep. No. 1711, 90th Cong., 2d Sess., 2-4 (1968)). To remedy this, Congress passed the Williams Act, a disclosure provision intended "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." Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58 (1975).
9 / Adopting Release, 36 SEC Docket at 132. Sections 13(e), 14(d) and 14(e) were added to the Exchange Act as part of the Williams Act amendments and were designed "(1) to promote investor protection by requiring full and fair disclosure in connection with cash tender offers, and (2) to eliminate discriminatory treatment among security holders who may desire to tender their shares." Id. (citationsomitted).
10 / Id. at 133 (citing S. Rep. No. 550, 90th Cong., 1st Sess. 10 (1967)).
11 / Specifically, expert testimony offered by WHX contrasted the Record Holder Condition with the terms of the tender offer in Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985). In that case, Unocal management defended itself against a hostile tender offer by Mesa Petroleum with a self-tender offer that explicitly excluded stock owned by Mesa. The Delaware Supreme Court upheld Unocal's tender offer, rejecting the Commission's argument that the requirement that a tender offer be open to all holders was implicit inthe Williams Act. The Commission adopted the All Holders Rule in response to the Unocal decision. WHX's expert stated that, unlike the offer in Unocal, the Record Holder Condition was open to all holders.
12 / In the normal course, the New York Stock Exchange does not permit shares to trade with a proxy after the record date. Exchange-listed securities can be traded with proxies after the record date in the over-the-counter market. Once the Record Holder Condition became known, therefore, it would have been possible for a purchaser to go to the over-the-counter market and require a proxy to be provided at the time the purchaser acquired the shares. Nevertheless, it would have been extremely difficult for an investor to obtain a proxy to vote at the May 2 shareholders' meeting if that investor bought shares on the New York Stock Exchangebetween the March 14 record date and March 31, the date when the Record Holder Condition became public.
13 / Cf. Polaroid Corp. v. Disney, 862 F.2d 987, 1002 (3d Cir. 1988) In this case, the district court had crafted an exception to the All Holders Rule allowing a tender offer to exclude employee stock option plan shares that the offeror sought to invalidate in an action in state court, conditioned on the offeror's stated intention to amend the offer to include the stock option plan shares should the state court action not be successful. In remanding the case to the district court, the Third Circuit noted that such an exception "was a frail reed upon which to rest a decision" because, "[p]articularly in view of the strength of . . . [the] All Holders Rule violation claims, the district court's exception would swallow the rule."
14 / 481 U.S. 69 (1987).
15 / The Supreme Court stated that the practical effect of this statutory requirement was "to condition acquisition of control of a corporation on approval of a majority of the pre-existing disinterested shareholders." 481 U.S. at 74.
16 / Id. at 75.
17 / Id. at 84.
18 / Id.; 17 C.F.R. § 240.14e-1.
19 / 481 U.S. at 84.
20 / Id.
21 / The hypothetical described in dicta in CTS Corp. may raise other significant issues under the Williams Act. However, as it is not necessary to address those issues in this context, we will assume arguendo that the hypothetical otherwise satisfies the Williams Act and address WHX's analysis without consideration of those other issues.
22 / 481 U.S. at 82.
23 / Id. (citing Piper v. Chris-Craft Indus., Inc., 430 U.S. at 30 (quoting Senate Report accompanying the Williams Act, S. Rep. No. 500, 90th Cong., 1st Sess., 4 (1967)).
24 / Id. at 83.
25 / Id.
26 / Id.
27 / See Piper v. Chris-Craft Indus., Inc., 430 U.S. at 30.
28 / In addition, while WHX argues for an "economic justification" exception to the All Holders Rule, neither the Rule nor the Adopting Release contain any mention of exceptions that would permit a tender offer to be made to fewer than all holders of the class of securities subject to the offer. Indeed, the Commission noted in the Adopting Release that the Rule "expressly preclude[s] bidders from discriminating among holders of the class of securities that is the subject of the tender offer . . . ." Adopting Release, 36 SEC Docket at 132. Thus, the All Holders Rule prohibited WHX from discriminating among DCA shareholders regardless of its "economic justification" for so doing.
29 / 15 U.S.C. § 78u(a)(1).
30 / Heckler v. Chaney, 470 U.S. 821, 831 (1985) (citing United States v. Batchelder, 442 U.S. 114, 123-124 (1979); United States v. Nixon, 418 U.S. 683, 693 (1974); Vaca v. Sipes, 386 U.S. 171, 182 (1967)). See also Chicago Board of Trade v. SEC, 883 F.2d 525, 530-31 (7th Cir. 1989) (citations omitted) (noting that a "[r]efusal to prosecute is a classic illustration of a decision committed to agency discretion" and that "decisions about the best use of the staff's time are for the prosecutor's judgment").
31 / Heckler, 470 U.S. at 831.
32 / To the extent that WHX's argument can be interpreted as a claim that the Commission is estopped from acting in this case because it failed to act against DCA's tender offer, that argument is without merit. Basic elements of estoppel are misrepresentations of fact and reasonable reliance thereon by the party claiming estoppel. Heckler v. Community Health Services, 467 U.S. 51, 59 (1984). In addition, a party asserting estoppel against the government also carries a heavy burden to outweigh the strong, countervailing interest in obedience to the law. Id. None of these elements has been satisfied here. Moreover, as we have stated previously, a "regulatory authority's failure to take early action neither operates as an estoppel against later action nor cures a violation." William H. Gerhauser, Sr., 53 S.E.C. 933, 940 (1998).
33 / WHX makes much of the fact that the Division's opening brief "abandons" this argument, made before the law judge, claiming that this omission both demonstrates the Division's lack of conviction on this point and removes the issue from our consideration on appeal. To support its position, WHX relies on our Rule of Practice 450(b), which states that "[e]ach exception to the findings or conclusions being reviewed shall be stated succinctly." 17 C.F.R. § 201.450(b). WHX's reliance on Rule 450(b) is misplaced. The issue raised on appeal is the scope of the All Holders Rule, a purely legal question, and the fact that the Division did not rely on footnote 35 in its brief does not foreclose us from considering it to aid our resolution of this matter.
34 / Adopting Release, 36 SEC Docket at 131, 134 n.35.
35 / For example, in the case of most securities listed on the New York Stock Exchange, the registered holder listed on the stock certificate is Cede & Co.
36 / 15 U.S.C. § 78n(e). Exchange Act Section 14(e) is a broad antifraud prohibition with respect to tender offers and scienter is a necessary element of a violation of Section 14(e). Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 12 (1985); Piper v. Chris-Craft Indus., Inc., 430 U.S. 1 at 24.
37 / Adopting Release, 36 SEC Docket at 133. The Commission went on to state that it believed it had ample authority under Section 14(d) to adopt Rule 14d-10 and that, "[w]hile not essential to the adoption of [Rule 14d-10], section 14(e) of the Exchange Act provides additional authority" to adopt the Rule. Id. at 133-134.
38 / Id. at 133.
39 / Schreiber, 472 U.S. at 10; Piper v. Chris-Craft Indus., Inc., 430 U.S. at 24.
40 / 15 U.S.C. § 78n(e); see also Schreiber, 472 U.S. at 11 n.11.
41 / Schreiber, 472 U.S. at 11 n.11; see also United States v. O'Hagan, 521 U.S. 642, 672-73 (1997) (holding that "under § 14(e), the Commission may prohibit acts not themselves fraudulent under common law or § 10(b), if the prohibition is 'reasonably designed to prevent . . . acts and practices [that] are fraudulent'") (citing 15 U.S.C. § 78n(e)); United States v. Chestman, 947 F.2d 551, 557 (2d Cir. 1991).
42 / Caleb & Co. v. E.I. DuPont de Nemours & Co., 599 F. Supp. 1468, 1472-73 (S.D.N.Y. 1984) (holding that scienter is not required to establish a violation of a rule drafted pursuant to the Commission's authority under Section 14(e) to design reasonable means to prohibit fraud); see also Chestman, 947 F.2d at 563 (noting that defendant-appellant offered "no persuasive explanation why the authority to 'regulate nondeceptive activities' would not also allow the SEC to regulate nonfraudulent conduct").
43 / The All Holders Rule also assures "fair and equal treatment of all holders of the class of securities that is subject to the tender offer." Adopting Release, 36 SEC Docket at 132. Whether a tender offeror intends to deceive shareholders, therefore, is not the point. The All Holders Rule recognizes that even if no one is deceived as to the discriminatory effect of a tender offer, the offer nonetheless can result in unfair and unequal treatment of shareholders. See Polaroid Corp., 862 F.2d at 995 (holding that the Commission acted within its authority in adopting the All Holders Rule and stating that "[t]he All Holders Rule is not an attempt to proscribe manipulative practices so much as an attempt to ensure that all holders of a class of securities subject to a tender offer receive fair and equal treatment.")
44 / See KPMG Peat Marwick, LLP, Exchange Act Rel. No. 43862 (Jan. 19, 2001), 74 SEC Docket 384, 421 (noting that the phrase "knew or should have known" is standard negligence language) (citations omitted), motion for reconsideration denied, Exchange Act Rel. No. 44050 (Mar. 9, 2001), 74 SECDocket 1351, petition denied, 289 F.3d 109 (D.C. Cir. 2002).
While state of mind is not a factor in establishing a violation of the All Holders Rule, we do consider state of mind in our determination of whether a violation warrants imposition of a cease-and-desist order. KPMG Peat Marwick, LLP, 74 SEC Docket at 428. See infra at note 53 and accompanying text.
45 / As the Division illustrates, however, concerns about coercion are implicated here where shareholders may have sold into the market prior to April 10 at a price lower than that of the tender offer because, lacking a proxy, they believed that they would not be able to participate in the tender offer.
46 / Adopting Release, 36 SEC Docket at 133.
47 / Id. (quoting Hundahl v. United Benefit Life Ins. Co., 465 F. Supp. 1349, 1368 (N.D. Tex. 1979)).
48 / While harm to investors is not necessary to establish a violation of the All Holders Rule, we do consider harm in our determination as to whether a violation warrants imposition of a cease-and-desist order. KPMG Peat Marwick, LLP, 74 SEC Docket at 428. See infra at note 53 and accompanying text.
49 / Exchange Act Section 21C(a) authorizes the Commission to order persons to cease-and-desist from committing securities law violations or future securities law violations if it finds that "any person is violating, has violated, or is about to violate any provision" of the Exchange Act. 15 U.S.C. § 78u-3(a).
50 / 74 SEC Docket 384.
51 / KPMG Peat Marwick, LLP, 74 SEC Docket at 430. This conclusion is suggested, though not compelled, by the statutory language of Section 21C(a) which authorizes us to impose a cease-and-desist order on a person who "has violated" the securities laws. Id.
52 / Id. at 429 & n.118 (citing Butz v. Glover Livestock Comm'n Co., 411 U.S. 182, 185 (1973) (holding that an agency's choice of sanction is "peculiarly a matter for administrative competence")).
53 / KPMG Peat Marwick, LLP, 74 SEC Docket at 436.
54 / Id.
55 / Gallagher & Co., 50 S.E.C. 557, 563 (1991), aff'd, 963 F.2d 385 (11th Cir. 1992) (Table). See also supra at note 53 and accompanying text.
56 / Reliance on the advice of counsel is not a complete defense to liability, but is merely one factor to consider. SEC v. Savoy Indus., Inc., 665 F.2d 1310, 1314 n.28 (D.C. Cir. 1981). A valid defense of reliance on counsel must be predicated on a showing of the following four elements: (i) a request for advice on the legality of a proposed action; (ii) full disclosure of the relevant facts; (iii) receipt of advice that the action to be taken will be legal, and (iv) reliance in good faith on counsel's advice. See Savoy Indus., 665 F.2d at 1314 n.28; William H, Gerhauser, Sr., 53 S.E.C. at 943 n.25.
57 / David M. Haber, 52 S.E.C. 201, 206 (1995).
58 / At oral argument, counsel for WHX argued that our Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934, Exchange Act Rel. No. 46898 (Nov. 25, 2002), 78 SEC Docket 3494 ("Motorola Report"), supported WHX's reliance on advice of counsel defense. The Motorola Report examined Motorola's March 2001 failure to make certain disclosures required by Regulation FD, 17 C.F.R. § 243.100, a new regulatory requirement which became effective on October 23, 2000. Motorola received unqualified, erroneous advice of counsel that Motorola's proposed conduct was consistent with Regulation FD. We noted that it appeared that counsel's advice was sought and given in good faith and that Motorola faithfully followed that advice. Based on all the facts and circumstances of the case, we credited Motorola's reliance on counsel, and, in the exercise of our prosecutorial discretion, concluded "that Motorola should not be the subject of a formal enforcement action."
The Motorola Report does not advance WHX's cause. WHX did not receive unqualified advice that its proposed conduct was consistent with a new regulatory requirement. WHX was specifically advised by counsel that Commission staff considered the Record Holder Condition to be inconsistent with the All Holders Rule. WHX cannot claim that it lacked notice that its conduct could result in an adverse ruling by the Commission, and, therefore, WHX can scarcely claim that it made the "honest, carefully considered attempt to comply" with the law that we encouraged in the Motorola Report.
WHX makes a related argument in its brief and at oral argument that it should not be held accountable for violating the All Holders Rule because no "process was available to WHX directly to obtain the Commission's views" on WHX's tender offer "outside of the process that occurred here" and because "it was reasonable for WHX to believe" that Commission action would halt any potential violation. A company is not entitled to rely on the Commission to take enforcement action against it to save it from violating the law. Moreover, in "the process that occurred here," WHX knowingly assumed a potentially large risk that the Commission would pursue enforcement action, stood to gain substantially if such action -- because of limited time or resources -- did not take place, and subjected shareholders excluded from the tender offer to a potentially serious risk of harm. We are therefore not inclined to absolve WHX of responsibility for its conduct of the tender offer.
59 / 75 F.3d 92, 98 (2d Cir. 1996).
60 / Id.; see also Grayned v. City of Rockford, 408 U.S. 104, 108 (1972).
61 / Rock of Ages Corp. v. Secretary of Labor, 170 F.3d 148, 156(2d Cir. 1999) (citing Walker Stone Co. v. Secretary of Labor, 156 F.3d 1078, 1083-84 (10th Cir. 1998); Freeman United Coal Mining Co. v. Federal Mine Safety & Health Review Comm'n, 108 F.3d 358, 362 (D.C. Cir. 1997)).
62 / Village of Hoffman Estates v. Flipside, Hoffman Estates, 455 U.S. 489, 498 (1982).
63 / Trinity Broadcasting v. FCC, 211 F.3d 618, 628 (D.C. Cir. 2000) (quoting General Elec. Co. v. EPA, 53 F.3d 1324, 1329 (D.C. Cir. 1995)).
64 / Rock of Ages Corp., 170 F.3d at 156 (citing Freeman, 108 F.3d at 362).
65 / We have considered all of the parties' contentions. We have rejected or sustained these contentions to the extent that they are inconsistent or in accord with the views expressed herein.
Adm. Proc. File No. 3-9634
In the Matter of the Application of
ORDER IMPOSING REMEDIAL SANCTIONS
On the basis of the Commission's opinion issued this day, it is
ORDERED that WHX Corporation cease and desist from committing or causing any violations or future violations of Section 14(d)(4) of the Securities Exchange Act of 1934 or Rule 14d-10(a)(1) thereunder.
By the Commission.
Jonathan G. Katz