Because We Said So: The SEC's Overreaching Efforts to Regulate Mini-Tender Offers

A “mini-tender offer” is a tender offer to buy less than 5% of a class of securities. Because § 14(d)(1) of the Securities Exchange Act of 1934 (the “1934 Act”) requires bidders to register only those tender offers that will result in beneficial ownership of more than 5% of a class of securities, a bidder can complete a mini-tender offer without registering the offer with the Securities and Exchange Commission (“SEC”). While mini-tender offers were initially used most frequently to acquire illiquid limited partnership interests, the use of mini-tender offers has expanded over time. Now bidders are making mini-tender offers for corporate securities, particularly in the high-tech arena, and for shares of exchange-listed closed-end funds. To the SEC and to issuers, mini-tender offers are a coercive takeover abuse, violating the protective spirit of the Williams Act through insufficient and deceptive disclosure. To mini-tender offerors, it is an efficient and legal mechanism to buy securities from willing sellers. However characterized, mini-tender offers have rocketed in popularity in the past five years, as noted by the SEC. The Depository Trust Corporation (“DTC”) reported thirty-nine mini-tender offers in 1997, and 537 in 1998. DTC noted a sharp rise in mini-tender offer volume during 1999, the last year for which annual volume statistics are publicly available; in the first five weeks of 1999 alone, DTC received more than 300 mini-tender offers. As of January 2001, DTC was processing thirty to forty mini-tender offers each month on behalf of the securities firms and clients it serves. In 2002, DTC processed 531 mini-tender offers. The increasing popularity of mini-tender offers has highlighted a gap in the federal tender offer rules. According to the SEC, mini-tender offers are not subject to the filing, disclosure, and procedural requirements of § 14(d) of the 1934 Act and Regulation 14D thereof, but are subject to the 1934 Act's anti-fraud provisions of § 14(e) and Regulation 14E. Thus, mini-tender offerees are, absent any additional statutory or administrative assistance, denied certain protections of the tender offer rules, including proration and withdrawal rights. The SEC has been vocal about the dangers it perceives from mini-tender offers, bringing enforcement actions against mini-tender offerors, and issuing investor alerts and an interpretive release. This Article examines the legalities of mini-tender offers and of the regulatory responses thereto. Part II traces the legislative history and operation of the Williams Act and its application to mini-tender offers. This Part concludes that mini-tender offers likely do not constitute tender offers under the Williams Act as currently constituted. Part III evaluates the regulatory response to mini-tender offers, demonstrating the insufficiency of the SEC's efforts to curb abuses in mini-tender offers. This Part raises questions about the statutory support for some such efforts; to date, such efforts include the SEC's issuance of an interpretative release containing “recommended” disclosures for mini-tender offerors, and a handful of enforcement actions for alleged violations of § 14(e). Part IV proposes several possible solutions to the problems created by unregulated mini-tender offers. The Article concludes that the SEC must take steps to bring mini-tender offers conclusively within the definition of tender offer for purposes of the Williams Act, and then must promulgate binding regulations to achieve the desired investor protections.