Opinion ID: 451604
Heading Depth: 2
Heading Rank: 2

Heading: Issuer Repurchases Under Section 13(e)

Text: 16 Issuer repurchases and tender offers are governed in relevant part by section 13(e) of the Williams Act and Rules 13e-1 and 13e-4 promulgated thereunder. 15 U.S.C. Sec. 78m(e) (1981); 17 C.F.R. Sec. 240.13e-1 (1984); 17 C.F.R. Sec. 240.13e-4 (1984). 17 The SEC argues that the district court erred in concluding that issuer repurchases, which had the intent and effect of defeating a third-party tender offer, are authorized by the tender offer rules and regulations. The legislative history of these provisions is unclear. Congress apparently was aware of an intent by the SEC to regulate issuer tender offers to the same extent as third-party offers. Senate Hearings 214-16, 248; Exchange Act Release No. 16,112 [1979] Fed.Sec.L.Rptr. (CCH) p 82,182 at 82,205 (Aug. 16, 1979) (proposed amendments to tender offer rules). At the same time, Congress recognized issuers might engage in substantial repurchase programs ... inevitably affect[ing] market performance and price levels. House Hearings at 14-15; see also House Report 1711, U.S.Code Cong. & Admin.News 1968, at 2814-15. Such repurchase programs might be undertaken for any number of legitimate purposes, including with the intent to preserve or strengthen ... control by counteracting tender offer or other takeover attempts.... House Report 1711, U.S.Code Cong. & Admin.News 1968, at 2814; House Hearings at 15. Congress neither explicitly banned nor authorized such a practice. Congress did grant the SEC authority to adopt appropriate regulations to carry out congressional intent with respect to issuer repurchases. The legislative history of section 13(e) is not helpful in resolving the issues. 18 There is also little guidance in the SEC Rules promulgated in response to the legislative grant of authority. Rule 13e-1 prohibits an issuer from repurchasing its own stock during a third-party tender offer unless it discloses certain minimal information. 17 C.F.R. Sec. 240.13e-1 (1984). The language of Rule 13e-1 is prohibitory rather than permissive. It nonetheless evidences a recognition that not all issuer repurchases during a third-party tender offer are tender offers. Id. In contrast, Rule 13e-4 recognizes that issuers, like third parties, may engage in repurchase activity amounting to a tender offer and subject to the same procedural and substantive safeguards as a third-party tender offer. 17 C.F.R. Sec. 240.13e-4 (1984). The regulations do not specify when a repurchase by an issuer amounts to a tender offer governed by Rule 13e-4 rather than 13e-1. 3 19 We decline to adopt either the broadest construction of Rule 13e-4, to define issuer tender offers as virtually all substantial repurchases during a third-party tender offer, or the broadest construction of Rule 13e-1, to create an exception from the tender offer requirements for issuer repurchases made during a third-party tender offer. Like the district court, we resolve the question of whether CHH's repurchase program was a tender offer by considering the eight-factor test established in Wellman, 587 F.Supp. at 1256-57. 4 20 To serve the purposes of the Williams Act, there is a need for flexibility in fashioning a definition of a tender offer. See Smallwood v. Pearl Brewing Co., 489 F.2d 579 (5th Cir.), cert. denied, 419 U.S. 873, 95 S.Ct. 134, 42 L.Ed.2d 113 (1974). The Wellman factors seem particularly well suited in determining when an issuer repurchase program during a third-party tender offer will itself constitute a tender offer. Wellman focuses, inter alia, on the manner in which the offer is conducted and whether the offer has the overall effect of pressuring shareholders into selling their stock. Wellman, 475 F.Supp. at 823-24. Application of the Wellman factors to the unique facts and circumstances surrounding issuer repurchases should serve to effect congressional concern for the needs of the shareholder, the need to avoid giving either the target or the offeror any advantage, and the need to maintain a free and open market for securities. 21 2. Application of the Wellman Factors. 22 Under the Wellman test, the existence of a tender offer is determined by examining the following factors: 23 (1) Active and widespread solicitation of public shareholders for the shares of an issuer; (2) solicitation made for a substantial percentage of the issuer's stock; (3) offer to purchase made at a premium over the prevailing market price; (4) terms of the offer are firm rather than negotiable; (5) offer contingent on the tender of a fixed number of shares, often subject to a fixed maximum number to be purchased; (6) offer open only for a limited period of time; (7) offeree subjected to pressure to sell his stock; [and (8) ] public announcements of a purchasing program concerning the target company precede or accompany rapid accumulation of a large amount of target company's securities. 24 475 F.Supp. at 823-24. 25 Not all factors need be present to find a tender offer; rather, they provide some guidance as to the traditional indicia of a tender offer. Id. at 824; see also Zuckerman v. Franz, 573 F.Supp. 351, 358 (S.D.Fla.1983). 26 The district court concluded CHH's repurchase program was not a tender offer under Wellman because only two of the eight indicia were present. 587 F.Supp. at 1255. The SEC claims the district court erred in applying Wellman because it gave insufficient weight to the pressure exerted on shareholders; it ignored the existence of a competitive tender offer; and it failed to consider that CHH's offer at the market price was in essence a premium because the price had already risen above pre-tender offer levels. A. Active and Widespread Solicitation 27 The evidence was uncontraverted that there was no direct solicitation of shareholders. 587 F.Supp. 1253. No active and widespread solicitation occurred. See Brascan Ltd. v. Edper Equities Ltd., 477 F.Supp. 773, 789 (S.D.N.Y.1979) (no tender offer where defendant scrupulously avoided any solicitation upon the advice of his lawyers). Nor did the publicity surrounding CHH's repurchase program result in a solicitation. 587 F.Supp. 1253-54. The only public announcements by CHH were those mandated by SEC or Exchange rules. See Ludlow Corp. v. Tyco Laboratories, 529 F.Supp. 62, 68-69 (D.Mass.1981) (schedule 13d filed by purchaser could not be characterized as forbidden publicity); Crane Co. v. Harsco Corp., 511 F.Supp. 294, 303 (D.Dela.1981) (Rule 13e-1 transaction statement and required press releases do not constitute a solicitation); but cf. S-G Securities, Inc., 466 F.Supp. at 1119-21 (tender offer present where numerous press releases publicized terms of offer). 28 B. Solicitation for a Substantial Percentage of Issuer's Shares 29 Because there was no active and widespread solicitation, the district court found the repurchase could not have involved a solicitation for a substantial percentage of CHH's shares. 587 F.Supp. 1253-54. It is unclear whether the proper focus of this factor is the solicitation or the percentage of stock solicited. The district court probably erred in concluding that, absent a solicitation under the first Wellman factor, the second factor cannot be satisfied, see Hoover Co. v. Fuqua Industries, [1979-80] Fed.Sec.L.Rprt. (CCH) p 97,107 at 96,148 n. 4 (N.D.Ohio 1979) (second Wellman factor did not incorporate the type of solicitation described in factor one), but we need not decide that here. The solicitation and percentage of stock elements of the second factor often will be addressed adequately in an evaluation of the first Wellman factor, which is concerned with solicitation, and the eighth Wellman factor, which focuses on the amount of securities accumulated. In this case CHH did not engage in a solicitation under the first Wellman factor but did accumulate a large percentage of stock as defined under the eighth Wellman factor. An evaluation of the second Wellman factor does not alter the probability of finding a tender offer.