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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 12, 2004 Decided April 6, 2004

No. 03–1196

WHX CORPORATION,

PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,

RESPONDENT

On Petition for Review of an Order of the

Securities and Exchange Commission

Charles R. Mills argued the cause for petitioner. With him

on the briefs was Dylan B. Carp. Paul Gonson entered an

appearance.

Giovanni P. Prezioso, General Counsel, Securities and

Exchange Commission, argued the cause for respondent.

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.
2

With him on the brief were Eric Summergrad, Deputy

Solicitor, and Hope H. Augustini, Senior Litigation Counsel.

Before: EDWARDS and HENDERSON, Circuit Judges, and

WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge

WILLIAMS.

WILLIAMS, Senior Circuit Judge: The Securities and Exchange Commission found that WHX Corporation violated the

All Holders Rule, SEC Rule 14d–10(a)(1), 17 C.F.R.

§ 240.14d–10(a)(1), and issued a cease-and-desist order prohibiting the company from committing or causing any future

violations of that Rule. WHX petitioned for review. We find

that the SEC’s decision to issue a cease-and-desist order was

arbitrary and capricious, and therefore vacate the order.

* * *

In March 1997 WHX decided to attempt a hostile takeover

of Dynamics Corporation of America (‘‘DCA’’). But DCA’s

charter had a poison pill that allowed shareholders to purchase new shares at rock-bottom prices if any party acquired

20 percent of DCA’s stock without the approval of DCA’s

board. Further, New York law (New York Business Corporation Law § 912(b)) forbids a New York corporation from

entering into a ‘‘business combination’’ with any shareholder

owning 20 percent of the corporation’s stock until the shareholder has held the stock for at least five years, unless the

shareholder first secures board approval. See Opinion of the

Commission, In re WHX Corporation, Admin. Proc. File No.

3–9634, SEC Exchange Act Release No. 47980 (June 4, 2003)

(‘‘Opinion’’) 2–3.

To overcome the opposition of the incumbent board, WHX

planned a two-stage takeover strategy. First, it would make

a cash tender offer for 19.9 percent of DCA’s common stock,

offering $40 a share. Second, it would conduct a proxy

contest seeking to oust the DCA board and replace it with a

new one that would revoke the pill and approve a merger

with WHX. Under the terms of this merger, WHX would
3

purchase all remaining DCA shares for $40 cash. Opinion at

3.

The timing of WHX’s planned tender offer posed an additional problem. The next annual DCA shareholder meeting

was scheduled for May 2, 1997. But the record date for that

meeting was March 14, 1997, which had already passed by the

time WHX was ready to launch its offer. Because only

holders of record (or holders of proxies from record holders)

could vote at the shareholder meeting, an ordinary tender

offer for common stock would yield WHX at least some (and

possibly many) shares that couldn’t vote at the May 2 meeting. As WHX’s purpose was to maximize its voting power

without running afoul of DCA’s poison pill, it wanted to avoid

buying shares that would be effectively useless. Opinion at 3.

WHX’s solution triggered the SEC sanction at issue here.

It proposed to include in its offer a condition under which the

offer would extend only to those shareholders who were

holders as of the March 14 record date, or who were able to

obtain a valid proxy. WHX’s attorney recognized that this

condition might be thought to violate the so-called All Holders

Rule, see Opinion at 4, which was promulgated under § 14(d)

of the 1934 Securities Exchange Act, 15 U.S.C. 78n(d), and

which provides:

(a) No bidder shall make a tender offer unless:

(1) The tender offer is open to all security holders of

the class of securities subject to the tender offer.

17 C.F.R. § 240.14d–10(a)(1). The SEC adopted this rule in

1986 in response to concerns about ‘‘discriminatory tender

offers’’ that would pressure ‘‘security holders who are excluded from the offer TTT to sell to those in the included class’’ in

order to receive the premium price, but who ‘‘would not

receive the information required by the Williams Act, would

have their shares taken up on a first-come first-served basis

and would have no withdrawal rights.’’ Amendments to

Tender Offer Rules: All–Holders and Best–Price, Exchange
4

Act Release No. 34–23421, 51 Fed. Reg. 25873, 36 SEC

Docket 131, 132 (July 17, 1986). Moreover, the SEC explained that, without this rule, the ‘‘equal treatment’’ provisions of the Exchange Act would easily be circumvented: an

offeror could simply address an offer to ‘‘a privileged group of

security holders who hold the desired number of shares’’

rather than purchasing the desired number of shares from all

tenderers on a pro rata basis for the same consideration. Id.

at 133. In adopting the All Holders Rule, the SEC appears

to have been reacting in part to the decision in Unocal Corp.

v. Pickens, 608 F. Supp. 1081 (C.D. Cal. 1985), which upheld

as lawful a defensive self-tender that offered a high premium

but excluded the shareholder attempting the takeover. See

Proposed Amendments to Tender Offer Rules, Exchange Act

Release No. 34–22198, 50 Fed. Reg. 27976, 27977 n.5 (July 9,

1985).

Seeking guidance, WHX faxed the SEC’s Office of Mergers

and Acquisitions a letter on March 24, asking for either a noaction letter or an exemption from the rule. The letter

suggested several reasons why WHX thought the All Holders

Rule should not apply to its proposed condition. First, it

contrasted the condition with the highly discriminatory offers

which precipitated the rule, such as that involved in Unocal,

where shares tendered by or on behalf of the would-be

acquirer were deliberately excluded from what in essence

would be a dividend to the eligible shareholders. Under

WHX’s offer, by contrast, even a shareholder who had bought

after the record date had some possibility of securing a proxy,

and in any event would receive ‘‘the same per share price TTT

in the cash merger following successful completion of the

tender offer.’’ Letter from Ilan Reich to Dixon Requesting

an Exemption or No–Action Ruling (March 24, 1997) at 3.

Second, WHX argued that here the only ‘‘discrimination’’

reflected a virtually universal disenfranchisement of shareholders inherent in the practicalities of limiting voting to

holders as of the record date. If it is legitimate to have a

record date at all—which by its nature deprives late purchasers of the right to vote at the annual meeting—then why,
5

WHX asked, should the All Holders Rule embrace all holders

on the last day of the tender offer? Id.

A staffer with the SEC’s Office of Mergers and Acquisitions called WHX’s lawyer back the same day to inform him

that the Commission did not issue no-action letters on All

Holders Rule issues and that WHX should withdraw its noaction letter request. WHX did so that afternoon. Opinion

at 4. Although the staffer said only that the SEC didn’t give

no action letters on that subject, not that it refused to give

such a letter on these facts, and although WHX’s lawyer

found the staffer not at all clear, he interpreted the statement

as an indication that the Office of Mergers and Acquisition

staff informally believed that the proposed condition would

violate the All Holders Rule. Opinion at 4; Transcript of Ilan

K. Reich, In re WHX Corporation, File No. HO–3204 (Dec. 5,

1997) (‘‘Transcript’’) 81, 85–86, 88–89. Nonetheless, in light

of counsel’s belief that there were strong arguments why the

condition did not violate the All Holders Rule, and the lack of

contrary Commission precedents, WHX decided to proceed.

It announced its hostile tender offer, including the record

holder condition, on March 31, 1997. The tender offer letter

noted that the SEC staff had ‘‘informally advised’’ WHX that

the record holder condition might offend the All Holders

Rule, but explained that WHX believed ‘‘special circumstances’’ justified the condition. Opinion at 4.

On April 4, 1997 staff of the Office of Mergers and Acquisitions contacted WHX to say that the staff believed that the

condition violated the All Holders Rule and was prepared to

recommend enforcement action to enjoin the tender offer

unless WHX withdrew the condition. In response, WHX’s

counsel wrote to the SEC Commissioners ‘‘to explain the

rationale for [the record holder provision] and to respectfully

suggest that no remedial relief is necessary based on the

unusual circumstances at hand.’’ Letter to Hon. Arthur

Levitt from Ilan Reich Regarding Tender Offer by SB Acquisition Corporation (April 4, 1997) at 2. The letter went on to

argue that the All Holders Rule was adopted to prevent

tender offers that discriminated against particular identifiable

shareholders, and that WHX’s condition did no such thing.
6

WHX reiterated its commitment to buy all outstanding shares

at the tender offer price if its takeover bid should succeed.

Id. at 4.

After receiving its copy of WHX’s letter, the SEC staff

phoned WHX on April 7 to say that it would that day ask the

Commission for authority to seek injunctive relief against the

offer. WHX responded with an April 7 letter to the Commission, arguing that its record holder condition was ‘‘in fact no

different from a standard condition in virtually every single

contested tender offer: namely, that valid tenders will only be

accepted from holders of rights issued under a target’s poison

pill plan.’’ Letter to Hon. Arthur Levitt from Ilan Reich

Regarding Tender Offer by SB Acquisition Corporation (April

7, 1997) at 2.

WHX’s pleas were unavailing. On April 8, the Commission

authorized an enforcement action to enjoin the tender offer.

WHX immediately withdrew the record holder condition.

This withdrawal eliminated any occasion for injunctive action,

and WHX proceeded with its takeover bid, which ultimately

failed because of a competing bid by a ‘‘white knight.’’ Opinion at 5 & n.5.

On June 25, 1998, over a year later, the SEC started ceaseand-desist proceedings against WHX under Section 21C of

the Exchange Act, 15 U.S.C. 78u–3. An Administrative Law

Judge found no violation of the All Holders Rule. In re

WHX Corporation, Initial Decision Release No. 173, Administrative Proceeding File No. 3–9634 (Oct. 6, 2000) (‘‘ALJ

Decision’’) at 24. Although finding that as a practical matter

it would be very difficult for those who purchased shares

between March 14 and March 31 to obtain voting rights, and

that therefore it was ‘‘questionable’’ whether the offer was

really open to these shareholders, the ALJ reasoned that the

kinds of offers that had given rise to the rule had pressured

ineligible shareholders to sell to eligible ones, and that no

such pressure could arise here. Id. at n.19.

The ALJ also stressed WHX’s good faith arguments for the

innocence of its condition under the All Holders Rule, its

reliance on counsel’s prediction that its interpretation would
7

be upheld, and its immediate removal of the condition after

the SEC authorized an enforcement action. Moreover, the

ALJ observed that ‘‘[n]o harm was done by the few days the

offer was arguably out of compliance,’’ and that a sanction

would be ‘‘counterproductive’’ because ‘‘[t]o impose a sanction

after WHX changed its offer to conform to the Commission’s

instructions is a disincentive for similarly situated parties to

comply with the Commission’s views in the future.’’ ALJ

Decision at 24.

The SEC reversed the ALJ and imposed an order requiring WHX to ‘‘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.’’ Order Imposing Remedial Sanction, In re WHX

Corporation, Admin. Proc. File No. 3–9634, SEC Exchange

Act Release No. 47980 (June 4, 2003). The Commission first

found that the record holder condition violated the All Holders Rule, rejecting WHX’s arguments to the contrary. Opinion at 6–15. It found that a violation of the All Holders Rule

required neither scienter or negligence, Opinion at 15–18, nor

a finding of harm, Opinion at 18–19. Insofar as its opinion

addressed WHX’s arguments distinguishing its condition

from the cases giving rise to the All Holders Rule, the SEC

offered only a conclusory statement that the condition ‘‘unfairly disadvantaged shareholders who bought DCA stock

between March 14 and March 31 because TTT [they] would

not have been able to obtain proxies and could not participate

in the tender offer.’’ Id. at 11.

Before us WHX argues that (1) the SEC lacked statutory

authority to promulgate the All Holders Rule in the first

place; (2) even if the All Holders Rule is lawful under the

statute, the SEC’s interpretation of that rule as covering

these facts was arbitrary and capricious; (3) even if the SEC

could lawfully find that WHX’s record holder condition violated the All Holders Rule, the Commission failed to provide fair

notice of its interpretation to WHX, and therefore cannot

impose a sanction without offending the Due Process Clause,

see General Electric Co. v. EPA, 53 F.3d 1324 (D.C. Cir.

1995); and (4) even if each of the first three defenses failed,
8

the imposition of a cease-and-desist order was arbitrary and

capricious given the circumstances of WHX’s violation. Because we agree with WHX’s last claim, we need not reach its

other arguments.

We accord great deference to the SEC’s decisions as to

choice of sanction, inquiring only whether a sanction ‘‘was

arbitrary, capricious, an abuse of discretion, or otherwise not

in accordance with law.’’ KPMG, LLP v. SEC, 289 F.3d 109,

121 (D.C. Cir. 2002). But review does include verifying

whether the Commission complied with its own standard for

issuing a cease-and-desist order. Id. at 124. It is on that

requirement that the Commission’s action founders.

The Commission noted that there ‘‘must be a showing of

‘some risk’ of future violation,’’ though not necessarily a very

great risk. Opinion at 19. It believed the risk of future

violation by WHX to be ‘‘much greater’’ than needed, and it

went on to say that in exercising its discretion it applied a

‘‘range of traditional factors,’’ 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.

Opinion at 20, citing In re KPMG Peat Marwick, LLP, 74

S.E.C. Dkt. 357, 2001 WL 47245 at *26 (Jan. 19, 2001). No

one criterion, it said, was dispositive. Id.

The Commission’s discussion, however, failed to explain

how any reasonable application of these factors could support

the imposition of a cease-and-desist order. First, the Commission stressed that there was a sufficient risk of a future

violation because ‘‘WHX has made a career of establishing
9

and promoting public companies and will be presented with

opportunities to violate the law in the future.’’ Opinion at 19–

20. Under this view, apparently, the ‘‘risk of future violation’’

element is satisfied if (1) a party has committed a violation of

a rule, and (2) that party has not exited the market or in

some other way disabled itself from recommission of the

offense. Given that the first condition is satisfied in every

case where the Commission seeks a cease-and-desist order on

the basis of past conduct, and the second condition is satisfied

in almost every such case, this can hardly be a significant

factor in determining when a cease-and-desist order is warranted. The Commission itself has disclaimed any notion that

a cease-and-desist order is ‘‘automatic’’ on the basis of such

an almost inevitably inferred risk of future violation. See

KPMG, 289 F.3d at 124–25.

The Commission urges that the ‘‘seriousness of the violation’’ factor weighs heavily in favor of imposing a cease-anddesist order here. The Commission’s assertion that WHX’s

violation was ‘‘serious’’ is premised on two claims: first, that

the All Holders Rule is clear and unambiguous, so that

WHX’s violation indicates willful and deliberate disregard of

the rule; and second, that WHX ignored SEC staff warnings

that its conduct violated the rule, and so proceeded at its

peril. Neither claim passes even a weak rationality standard.

We see no basis for the Commission’s idea that the plain

language of the All Holders Rule clearly and unambiguously

applies to WHX’s record holder condition. Nothing on the

face of the regulation indicates its applicability to such a

condition, and WHX made a number of reasonable, good faith

arguments to the SEC as to why the rule was in fact

inapplicable. The Commission thought otherwise, and its

interpretation of an ambiguous regulation is generally entitled to substantial deference. See Thomas Jefferson Univ. v.

Shalala, 512 U.S. 504, 512 (1994); Bowles v. Seminole Rock &

Sand Co., 325 U.S. 410, 414 (1945). But if the Commission

had endorsed WHX’s interpretation of the All Holders Rule,

we could not have rejected that alternative interpretation as

‘‘plainly inconsistent’’ with the rule—an observation which

suggests that WHX’s position did not contravene the rule’s

unambiguous meaning. Cf. Satellite Broadcasting Co. v.
10

FCC, 824 F.2d 1, 3–4 (D.C. Cir. 1987). Although WHX

received informal indications that its provision violated the

staff’s understanding of the rule (on which more below), there

was no formal Commission precedent or official interpretive

guideline on point. In sum, the Commission had no basis for

treating WHX’s violation as ‘‘serious’’ because of the alleged

clarity of the All Holders Rule.

The Commission’s second argument for the seriousness of

the violation rests on the view that WHX ‘‘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 the condition violated the All Holders Rule. Opinion at

21. Presumably, the Commission was referring to the staff

warnings on April 4 and April 7 that it would recommend

enforcement action if WHX did not remove the record holder

condition, since in the March 24 exchange the staff had

merely said that the Commission ‘‘did not issue’’ no-action

letters on All Holders Rule matters, a statement that on its

face did not address the merits.

It is difficult to understand why WHX’s persistence after

the staff said it would recommend an enforcement action

should establish that WHX’s violation was ‘‘serious’’ or ‘‘willful.’’ True, at that point WHX had a clear idea where the

Office of Mergers and Acquisitions stood on the matter. But

under SEC rules parties at risk of enforcement actions are

entitled to make ‘‘Wells submissions’’ to the Commissioners,

presenting arguments why the Commissioners should reject

the staff’s recommendation for enforcement, see 17 C.F.R.

§ 202.5(c), an entitlement obviously based on recognition that

staff advice is not authoritative. See In re: Initial Public

Offering Securities Litigation, 2004 WL 60290 at *1 (S.D.N.Y

2004); see also Christensen v. Harris County, 529 U.S. 576,

587 (2000) (informal staff opinions lack force of law); Bd. of

Trade of Chicago v. SEC, 883 F.2d 525, 529–30 (7th Cir. 1989)

(statements by SEC staff that they will recommend enforcement are not authoritative agency actions). That procedure

appears to be precisely what WHX followed in this case. In

fact, the SEC staffer who informed WHX’s counsel that the

staff would recommend enforcement not only acknowledged

the propriety of WHX’s making a Wells submission under 17
11

C.F.R. § 202.5(c), but actually told counsel ‘‘to go to the

Commission if he wanted to put something in the nature of a

Wells Submission, that he should feel free to do so.’’ See

Transcript at 131–32. Finding a violation ‘‘serious’’ and ‘‘willful’’ simply because of a failure to comply immediately with

the staff’s interpretation effectively punishes parties who

make Wells submissions that are ultimately unsuccessful. To

do so is arbitrary and capricious, at least in the absence of a

more compelling explanation than the SEC offered in its

Opinion. We further note that SEC counsel at oral argument

acknowledged that there was no other way for WHX to

secure a Commission view in time for a real-world decision.

Thus the SEC’s stated bases for the cease-and-desist order

fall apart. The ‘‘risk of future violation’’ cannot be the sole

basis for its imposition of the order, as the SEC’s standard

for finding such a risk is so weak that it would be met in

(almost) every case; and the finding that the violation was

serious depends on the mistakenly assumed clarity of the rule

and on WHX’s good faith use of procedures made available by

the Commission expressly for parties in WHX’s position.

There is no indication that the other factors the SEC says

it evaluates when considering a cease-and-deist order would

assist it in this case. Other than a brief and underdeveloped

argument, Opinion at 18 n.45, the Commission fails to establish any serious harm to shareholders or the marketplace

caused by the record holder condition. At no point does it

consider the possibility that allowing conditions such as

WHX’s might actually have benefited all DCA shareholders,

including those excluded by WHX’s condition, by increasing

the chances that a lucrative merger would succeed, or might

benefit shareholders generally by increasing the capacity of

the market for corporate control to discipline management.

See generally Edgar v. MITE Corp., 457 U.S. 624, 633–34

(1982). Moreover, though the Commission may be right in its

view that harm is not an element of a violation of the All

Holders Rule (a position we assume but do not decide), so

that the ALJ’s (unreversed) finding of no harm may not

undermine the finding of a violation, it is clearly a factor the

Commission claims to consider when deciding whether to
12

impose a cease-and-desist order. Opinion at 19 n.48. Yet the

section of its order on the appropriateness of the sanction

omits any discussion of harm to shareholders—beyond bland

assertions that the All Holders Rule is important.

WHX committed (at most) a single, isolated violation of the

rule, it immediately withdrew the offending condition once the

Commission had made its official position clear, and the

Commission has offered no reason to doubt WHX’s assurances that it will not violate the rule in the future. In light of

these factors, none of which the Commission seems to have

considered seriously, the imposition of the cease-and-desist

order seems all the more gratuitous.

* * *

The Commission erred in imposing a cease-and-desist order

without a rational explanation of why such a sanction was

appropriate under the Commission’s own standards. We

vacate the Order Imposing Remedial Sanctions and the portion of the Opinion finding the cease-and-desist order justified.

So ordered.