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Federal Regulation of Corporate Takeover Bids or Tender Offers

Traditionally, proxies of shareholders of corporate takeover targets were sought for votes in favor of the takeover. Rules were issued by the Securities and Exchange Commission to regulate the content of proxies so that shareholders were able to make an informed decision and were provided some protection.

However, the practice of corporate takeovers through tender offers of cash for shareholder stock developed. In response to the growing practice of such tender offers or takeover bids, Congress enacted Sections 14(d) and 14(e) of the Securities Exchange Act. These provisions authorized the Securities and Exchange Commission to regulate the content of tender offers that were not made through the use of proxy solicitations.

Section 14(d) makes illegal a tender offer for any class of registered equity security or of an exempted stock of insurance companies or closed end investment company registered stock if the person making the tender offer will acquire more than 5% of the class of securities for which the tender is being made if that person has not first filed required information with the SEC. In addition to information requirements, Section 14(d) also contains several substantive provisions. For example, if the tender offer is revised to offer a higher price, that higher price must be offered to all recipients of the tender offer.

Section 14(e) makes illegal the use of any untrue statement of a material fact or the use of any fraudulent, deceptive, or manipulative acts or practices in connection with a tender offer or in connection with a solicitation either for or against a tender offer. This provision barring use of fraudulent practices in connection with a tender offer applies to tender offers generally rather than just tender offers for securities registered under the Securities Exchange Act of 1934.

To assist in the determination of when Section 14(d) requirements arise, disclosure requirements for any person who directly or indirectly owns more than 5% of a class of registered securities are provided in Section 13 (and in corresponding Commission rules and schedules) of the Securities Exchange Act. There are exemptions from these disclosure requirements for specified institutional investors or passive investors that do not seek to control the issuer of the stock.

The phrase “tender offer” is not defined in the Securities Exchange Act or in SEC rules. However, a “tender offer” includes more than the traditional concept of a surprise and hostile takeover attempt. A tender offer may also include an offer to purchase securities of a company with directors who agree with the acquisition. Generally, a tender offer for purposes of SEC regulation may be considered any publicly announced transaction or series of transactions by which a person seeks control of a company and in which there is a danger that the persons receiving the tender offer may be misled.

While ordinary open market transactions are not likely to be considered tender offers, a result-oriented analysis of whether the transaction has the same results as a traditional tender offer may provide a basis for determining whether non-traditional methods of acquiring control of a company should be subject to tender offer regulation.

June 20, 2014

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