Opinion ID: 692029
Heading Depth: 1
Heading Rank: 3

Heading: The Wasserman Transaction

Text: Captioned the Equal treatment of securities holders, Rule 14d-10 prohibits a bidder from making a tender offer that is not open to all shareholders or that is made to shareholders at varying prices. 16 The gist of plaintiffs' claims is that Matsushita violated the antidiscrimination requirements of the Rule by paying Wasserman and Sheinberg premiums pursuant to the tender offer. Negotiations between Matsushita and MCA began in August 1990, when a representative of Matsushita telephoned MCA's financial advisor to express interest in acquiring MCA. During the course of the talks, Matsushita stressed that it wanted Wasserman and Sheinberg to commit their shares to Matsushita in advance of the friendly takeover and to remain in MCA's employment for five years. On the morning of November 26, 1990, Matsushita and Wasserman entered into the Capital Contribution and Loan Agreement, pursuant to which Wasserman agreed to exchange his MCA shares for preferred stock in a subsidiary Matsushita would create called MEA Holdings. Performance of the Capital Contribution and Loan Agreement was conditioned on the tender offer in several respects. First, neither Matsushita nor Wasserman was obligated to perform the Agreement if any of the conditions of the tender offer were not satisfied. See Capital Contribution and Loan Agreement Sec. 7(c), ER 357 Exhibit S at 12. If, for example, Matsushita did not acquire 50% of MCA's common stock as a result of the tender offer, the Wasserman deal would be off. Second, the timing of performance was tied to the tender offer. The Wasserman exchange was scheduled to take place immediately following the time at which shares of MCA Common Stock are accepted for payment pursuant to and in accordance with the terms of the offer.... Id. Sec. 2(a), ER 357 Exhibit S at 4. Third, the amount of cash Matsushita was required to contribute in order to fund MEA Holdings was dependent upon the tender price, with Matsushita agreeing to contribute to MEA Holdings 106% of the highest price paid ... for any shares of MCA Common Stock pursuant to the [tender] offer. Id. at Sec. 1(c), ER 357 Exhibit S at 2. Finally, the redemption value of Wasserman's preferred stock was set as the tender price. Id. Thus if Matsushita increased the tender price at the last minute in response to a competitive bid for MCA, Matsushita would have been required to increase both its funding of MEA Holdings and the amount paid upon the redemption of the Wasserman preferred stock. Moments after signing the Capital Contribution and Loan agreement, Matsushita and MCA announced the $71 per share tender offer. Shareholders were given from the time of the announcement until 12:01 a.m. on December 29, 1990 to tender their shares. The owners of 91% of MCA's common stock did so, and at 12:05 a.m., Matsushita accepted all tendered shares for payment. At 1:25 a.m., Matsushita exchanged Wasserman's shares for MEA Holdings preferred stock pursuant to the Capital Contribution and Loan Agreement. MCA was merged into Matsushita as a wholly owned subsidiary on January 3, 1991. Whether the Wasserman transaction violated Rule 14d-10 depends upon whether Wasserman received greater consideration than other MCA shareholders during such tender offer, Rule 14d-10(a)(2), or whether he received a type of consideration not offered to other MCA shareholders in a tender offer. Rule 14d-10(c). 17 Matsushita argues that the Wasserman transaction falls outside the Rule's ambit because it closed after the tender offer period expired. The tender offer period, Matsushita contends, ended when it accepted the tendered MCA shares for payment--at 12:05 a.m. on December 29, 1990, one hour and 20 minutes before Wasserman's shares were exchanged. In Matsushita's view, liability under Rule 14d-10 boils down to a pure question of timing: the Rule is simply a mechanical provision concerned with payments to shareholders of a target corporation only during a specifically-defined tender offer period. Brief of Matsushita at 23 (emphasis in original). Outside that period, Matsushita insists, Rule 14d-10 is without effect because the Rule is engaged (or not engaged) depending upon when payment is made. Id. at 23, 35 (emphasis in original). Although Matsushita argues that Rule 14d-10 is designed to operate only during a specifically-defined tender offer period, neither the phrase tender offer period nor a specific time frame is to be found in the Rule's text. To be sure, section (a)(2) of the Rule prohibits paying one security holder more than another during such tender offer. But the term tender offer, as used in the federal securities laws, has never been interpreted to denote a rigid period of time. On the contrary, in order to prevent bidders from circumventing the Williams Act's requirements, Congress, the SEC, and the courts have steadfastly refused to give the term a fixed definition. Instead, we have held that [t]o serve the purposes of the Williams Act, there is a need for flexibility in fashioning a definition of a tender offer. SEC v. Carter Hawley Hale Stores, Inc., 760 F.2d 945, 950 (9th Cir.1985). Even if the language of Rule 14d-10(a)(2) were to provide a measure of support for Matsushita's timing argument, Matsushita would still be unable to account for the language of Rule 14d-10(c), which prohibits a bidder from offer[ing] ... more than one type of consideration in a tender offer if shareholders are not permitted to choose between the different types of consideration offered. (Emphasis added). Section (c)(1) makes no mention of payment and no mention of timing. Instead, Rule 14d-10(c)(1) prohibits a bidder such as Matsushita from offering a shareholder, such as Wasserman, not only consideration of greater value than that offered to other shareholders, but also consideration that is different from that offered to other shareholders. It endows each shareholder with the equal right to elect among each of the types of consideration offered, regardless of when actual payment is made. The administrative history of Rule 14d-10 underscores how strained Matsushita's timing argument is. It suggests anything but the notion that the SEC intended the Rule to be a mechanical provision concerned not with discriminatory tender offers, but with the timing of payment to favored shareholders. In promulgating Rule 14d-10, the SEC emphasized the need for equality of treatment among all shareholders who tender their shares. Id., 1985 WL 61507, 1985 SEC LEXIS 1175 at  15 (quoting S.Rep. No. 550, 90th Cong., 1st Sess. 10 (1967)). It further characterized Rule 14d-10 as a substantive provision necessary to achieve the investor protection purposes of the [1934] Exchange Act and the Williams Act. SEC Release No. 34-22198, 1985 WL 61507, 1985 SEC LEXIS 1175 at  2 (July 1, 1985). At no point in its discussion of the Rule's purposes did the SEC suggest that the Rule's sole focus is the timing of payments. Matsushita implicitly acknowledges that Rule 14d-10 does not contain a rigid time frame of its own when it urges us to read Rule 14d-10 as incorporating, sub silentio, the time frame set out in Rule 10b-13, which prohibits side purchases from the time [a] tender offer or exchange offer is publicly announced or otherwise made known ... [to security holders] until the expiration of the period ... during which securities tendered pursuant to such tender offer or exchange offer may by the terms of such offer be accepted or rejected. Matsushita justifies fusing elements of two separate regulations by asserting that for purposes of the Williams Act and the SEC Rules promulgated thereunder, Rule 10b-13 defines the time period of a tender offer. Brief of Matsushita at 24. Matsushita offers no authority for incorporating Rule 10b-13's time frame into Rule 14d-10. In promulgating the all-holders, best-price Rule in 1986, the SEC gave no hint that its new regulation would be governed by Rule 10b-13's time clock. Nor does the Williams Act fully incorporate Rule 10b-13's timing provisions. Rule 10b-13 prohibits bidders from making side deals during a fixed period of time; it does not purport to serve as a general definition of when a tender offer begins and ends. In fact, in Rule 14d-2, the SEC rejected the notion that Rule 10b-13 timing determines when tender offers start for purposes of section 14(d)(7) and the rules promulgated thereunder. 18 We therefore reject Matsushita's timing argument. Indeed, if adopted, it would drain Rule 14d-10 of all its force. Under Matsushita's reading, even the most blatantly discriminatory tender offer--in which large shareholders were paid twice as much as small shareholders--would fall outside Rule 14d-10's prohibition, so long as the bidder waited a few seconds after it accepted all of the tendered shares before paying the favored shareholders. Rule 14d-10's equality requirements, which expressly preclude bidders from discriminating among holders of the class of securities that is the subject of the offer, either by exclusion from the offer or by payment of different consideration, SEC Release No. 34-23421, 1986 WL 71340, 1986 SEC LEXIS 1179 at  10 (July 11, 1986), cannot be so easily circumvented. An inquiry more in keeping with the language and purposes of Rule 14d-10 focuses not on when Wasserman was paid, but on whether the Wasserman transaction was an integral part of Matsushita's tender offer. If it was, Matsushita violated Rule 14d-10 because it paid him, pursuant to the tender offer, different, and perhaps more valuable consideration than it offered to other shareholders. 19 Matsushita contends that the Wasserman transaction cannot be deemed a part of the tender offer because it was merely a private exchange of stock, structured to take place after the tender offer finished. But Matsushita's assumption that the Wasserman transaction was private, rather than a part of the tender offer, begs the question. In Field v. Trump, 850 F.2d at 944, the Second Circuit held that [w]hether [an] acquisition of shares in a corporation is part of the tender offer for purposes of the Act cannot be determined by rubber-stamping the label used by the acquiror. To hold otherwise, the court stated, would render virtually all of the provisions of the Williams Act, including its filing and disclosure requirements, subject to evasion simply by an offeror's announcement that offers to purchase ... stock were private purchases. Id. Thus, the court observed that because the Williams Act and its implementing regulations do not define the term tender offer, [c]ourts faced with the question of whether purchases of a corporation's shares are privately negotiated or are part of a tender offer have applied a functional test that scrutinizes such purchases in the context of various salient characteristics of tender offers and the purposes of the Williams Act. Id. at 943-44. See also SEC Release No. 34-22198, 1985 WL 61507, 1985 SEC LEXIS 1175, at  7 (July 1, 1985) ([T]he fact that ... different consideration is offered to different holders of the same class of securities, does not mean that a tender offer has not been made under the Williams Act. Rather, if such a transaction is found to be a tender offer, then the tender offer would not have been made in compliance with the all-holders requirement). Because the terms of the Wasserman Capital Contribution and Loan Agreement were in several material respects conditioned on the terms of the public tender offer, we can only conclude that the Wasserman transaction was an integral part of the offer and subject to Rule 14d-10's requirements. Two facts compel this conclusion: first, the redemption value of Wasserman's preferred stock incorporated the tender offer price by reference, and second, the Capital Contribution and Loan Agreement was conditioned on the tender offer's success. If the tender offer failed, Wasserman would have remained the owner of his MCA stock. This is precisely the arrangement Matsushita made with its shareholders through its public tender offer: if an insufficient number of shares were tendered, each shareholder too would have retained ownership of her MCA stock. The deal Matsushita made with Wasserman thus differed from the tender offer in only one material respect--the type (and possibly the value) of consideration provided. Rule 14d-10(c)(1) forbids just such a transaction. To be sure, the fact that a private purchase of stock and a public tender offer are both part of a single plan of acquisition does not, by itself, render the purchase a part of a tender offer for purposes of Rule 14d-10. Rule 14d-10 does not prohibit transactions entered into or effected before, or after, a tender offer--provided that all material terms of the transaction stand independent of the tender offer. Thus a bidder who purchases shares from a particular shareholder before a tender offer begins does not violate Rule 14d-10. See, e.g., Kahn v. Virginia Retirement Systems, 13 F.3d 110 (4th Cir.1993) (bidder's unconditional private purchase of target's shares two days before tender offer was formally announced did not violate section 14(d)(7) and Rule 14d-10), cert. denied, --- U.S. ----, 114 S.Ct. 1834, 128 L.Ed.2d 462 (1994). If, in advance of the tender offer, Wasserman had become unconditionally obligated to exchange his MCA shares, the transaction would not have violated Rule 14d-10, even if Matsushita believed that acquiring Wasserman's shares was a first step in acquiring MCA. In such a case, both Wasserman and Matsushita would have assumed the burdens of their agreement despite the risk that an anticipated tender offer would fail, or command a different price. But such a course was not followed. Matsushita sought to acquire MCA without purchasing the holdings of individual shareholders block by block and accordingly subjecting itself to the risk that it would end up with a huge investment in MCA stock, but without control. The tender offer device is designed to avoid this risk, but only if holders of the same security are offered precisely the same consideration. Matsushita argues, in the alternative, that the summary judgment should be affirmed because plaintiffs cannot prove that they suffered injury from the Wasserman deal. This argument, however, confuses the question of whether Matsushita complied with Rule 14d-10 with the question whether plaintiffs may recover damages. By paying Wasserman consideration that it failed to offer to other shareholders, Matsushita violated Rule 14d-10(c)(1). It remains to be determined on remand whether the preferred stock Wasserman received had a value greater than $326,959,182, the value of his 4,953,927 shares at the cash tender price of $66 per share. 20 Accordingly, we reverse the summary judgment in favor of Matsushita on plaintiffs' claim that the Wasserman transaction violated Rule 14d-10, reverse the district court's order denying plaintiffs' motion for partial summary judgment that the Wasserman transaction did violate Rule 14d-10, and remand for further proceedings on the question whether the consideration Wasserman received in exchange for his MCA stock had a greater value than what plaintiffs' received and, if so, how much greater.