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The SEC and Exclusionary Tender Offers

July 5, 1985

NEW YORK (AP) _ Earlier this year courts in California and Delaware issued rulings that were widely perceived as giving companies a major new weapon to fight unwelcome ″corporate raiders.″

The rulings prompted some takeover specialists to forecast that the ability of hostile investors to threaten a takeover primarily to extract a profit for their shares might be substantially reduced.

Now, however, the Securities and Exchange Commission is proposing to bar the new weapon that was upheld by the courts - exclusionary tender offers.

The issue goes back to the battle earlier this year between Unocal Corp. and an investor group led by T. Boone Pickens Jr.

Pickens’ group, already holding 13.6 percent of Unocal’s total stock outstanding, made a hostile offer of $54 a share to buy a controlling stake in the oil company. Unocal countered by offering $72 a share to buy back 50 million shares, or about 29 percent of its stock.

But Unocal specifically said Pickens’ stock could not be tendered under its bid. Hence, it was an exclusionary tender offer, and it effectively stalled Pickens’ effort.

Pickens’ group sued in both a federal court in California and in Delaware state court to have the exclusionary offer thrown out, but Unocal’s position was upheld. Pickens eventually negotiated a settlement with Unocal, which is incorporated in Delaware.

The courts in effect found that neither state statutes nor the federal Williams Act, which is the securities law that governs tender offers, barred the exclusionary practice.

Pickens and some takeover lawyers complained that the court rulings could be invoked by target companies to support not only exlusionary tender offers, but a variety of defenses aimed at freezing out an unwelcome suitor.

But this past week the SEC proposed that the exclusionary tender offer be abolished.

The commission said it previously had believed that the Williams Act prohibited such offers, but that since the courts had interpreted the law differently, the SEC’s opposition needed to be specifically declared. Hence, the SEC’s new proposal would require equal treatment to all shareholders in a tender offer.

And the proposal would apply to corporate raiders as well as target companies.

It would not, however, prohibit ″two-tiered″ or ″front-loaded″ bids, in which the first stockholders to tender their shares receive cash for their stock while remaining holders receive securities once the merger or acquisition is completed.

Regardless, an executive of Mesa Petroleum said the SEC proposal - which is now open to a 60-day public comment period - would ″take away the disadvantage that was there″ for outside suitors like Pickens under the court rulings.

Sidney Tassin, Mesa’s assistant to the vice president for finance, said that with the SEC’s proposal ″we’re back to where we were two months ago (before the Delaware court ruling), operating under the premise that management has to deal equally with its shareholders.″

As for Unocal, spors.

Asher B. Edelman, a New York investor who recently took control of Datapoint Corp. after a hostile bid, said that he read the rulings as being ″specifically isolated to the (Unocal) board’s decision in that case″ and that one could not ″massively apply the Unocal ruling to any kind of takeover.″

As a result, Edelman added, the SEC proposal ″reinforces where we were before.″

But the matter of exclusionary offers was of particular interest to risk arbitragers, those professional investors who try to profit on shares of companies involved in a takeover battle.

Since exlusionary offers had the potential to stop a takeover dead in its tracks - and leave arbitragers stuck with shares suddenly declining in value - the court rulings were ″not a decision I was happy to see,″ said George Kellner, managing partner of Kellner, Di Leo & Co., an arbitrage and investment banking firm.

Kellner said he viewed the rulings as limiting the success ″of anybody who was attempting to make a hostile bid with less than 100 percent cash.″ But the SEC proposal, he said, ″I was glad to see and I think it was expected.″

In other developments this past week:

-The Labor Department reported the civilian jobless rate remained at 7.3 percent in June for the fifth consecutive month, the first time that has happened in 15 years.

-Orders to U.S. factories climbed 2.1 percent in May, the first gain in fourth months and the biggest advance since November, the Commerce Department said.

-Sales of new houses rose a robust 9.7 percent in May, the biggest gain in eight months and one that offset much of an 11.5 percent drop in April, the Commerce Department said.

-Spending for new construction climbed 1.5 percent in May for its second straight monthly advance, and is up 8.8 percent from a year earlier, the Commerce Department said.

-Sales of U.S.-made cars in late June tumbled 11.8 percent from a year earlier, leaving sales for the full month 3.2 percent below June 1984, the major automakers said.

-The Conference Board said its measure of help-wanted advertising in 51 major U.S. newspapers was unchanged in May after declining the previous month.

-CBS Inc., trying to thwart broadcaster Ted Turner’s bid to acquire the network, offered to buy 21 percent of its stock from shareholders for $954.8 million in cash and notes.

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