Court Opinion

ID: 8958160
Source: CourtListenerOpinion
Date Created: 2022-11-27 09:26:08.000736+00
Date Added: 2024-06-11T17:10:07.973490
License: Public Domain

HARRISON L. WINTER, Chief Judge,
dissenting:
The issue presented by this appeal— whether the Williams Act and the implementing SEC regulations require that a bidder disclose at the outset of a tender offer the expected sources and terms of all funds to be borrowed in financing the acquisition — is a narrow one. It has been considered by only one other court of appeals, Newmont Mining Corporation v. Pickens, 831 F.2d 1448 (9 Cir.1987), reh’g denied (Feb. 1,1988), which held by a split vote that a representation like that in the instant case was compliance with the Act and the regulations. Judge Pregerson dissented, and I am in agreement with his views.
I think that the Act and the regulations require a sufficient disclosure of the terms of financing a tender offer for the full period of at least twenty days before the close of the offer to enable an investor in the corporation sought to be acquired to make a reasoned decision as to whether or not to tender. While the terms and conditions of the financing need not, in my view, be fixed in every detail, or unconditional, I am not persuaded that the bare disclosure that approximately $350 million of debt securities will be issued and sold, that it is anticipated that a portion of the debt securities “may bear interest at an increasing rate,” that an undisclosed portion of them will be subordinated to other debts of the acquirer, and that Drexel Burnham has stated that “based on current conditions ... it is highly confident it can arrange the placement of (i) up to $360 million of Debt Securities [of NEOAX] ... in order to provide a portion of the financing for the Offer” is a disclosure in compliance with the Act or the regulations.1
I respectfully dissent.
I.
To decide the case I think it unnecessary to look behind the terms of the Act and the regulation. Tender offers are regulated in part by 15 U.S.C. § 78n(d) which provides that before making a tender, an offeror, who is the beneficial owner of more than 5 per centum of the class of equity securities sought to be obtained, must have first filed with the SEC a statement containing the information specified in 15 U.S.C. § 78m(d). The provisions of § 78m(d) which are appli*226cable here are quite specific. The person inviting tenders must file a statement containing information with respect to:
the source and amount of the funds or other consideration used or to be used in making the purchases, and if any part of the purchase price is represented or is to be represented by funds or other consideration borrowed or otherwise obtained for the purpose of acquiring, holding, or trading such security, a description of the transaction and the names of the parties thereto....
15 U.S.C. § 78m(d)(l)(B).
The SEC has authority to promulgate implementing regulations, and it has exercised that authority with respect to tender offers. The prescribed filing form requires the would-be acquirer to disclose its “source of funds”, 17 C.F.R. § 240.14d-100, and in the instructions as to how to comply, the regulation states:
(b) If all or any part of such funds or other consideration are or are expected to be directly or indirectly, borrowed for the purpose of the tender offer:
(1) Provide a summary of each loan agreement or arrangement containing the identity of the parties, the term, the collateral, the stated and effective interest rates, and other material terms or conditions relative to such loan agreement; and
(2) Briefly describe any plans or arrangements to finance or repay such borrowings, or if no such plans or arrangements have been made, make a statement to that effect.
(c) If the source of all or any part of the funds to be used in the tender offer is a loan made in the ordinary course of business by a bank as defined by section 3(a)(6) of the Act, the name of such bank shall not be made available to the public if the person filing the statement so requests in writing and files such request, naming such bank, with the Secretary of the Commission.
17 C.F.R. § 240.14d-100, Item 4 of Schedule 14D-1.
This regulation must be read in conjunction with 17 C.F.R. 240.14e-l(a) which specifies that a tender offer must be held open for not less “than twenty business days from the date the offer is first published or sent or given to security holders....” This expands the seven-day minimum notice period for disclosures established by Congress: “seven days after the time definitive copies of the offer ... are first published or sent or given to security holders— ” 15 U.S.C. § 78n(d)(5) (emphasis added). SEC also requires a tender offer to remain open for at least ten business days from the date of any notice of increase or decrease in the class of the securities being sought or the consideration offered or the dealer’s soliciting fee. 17 C.F.R. § 240.14e-l(b). See 15 U.S.C. § 78n(6), (7).
Thus I read the Act and the regulations to mean that a holder of equity securities who is invited to tender must be given at least twenty days notice of “a description of the transaction and the names of the parties thereto” of funds to be borrowed to finance the acquisition of securities which may be tendered. Since I view the primary purpose of the Act to afford a holder of equity securities sufficient information to make a reasoned decision of whether or not to tender when the offer to purchase is conditioned upon the obtention of funds to make payment — and only incidentally to provide that information in a neutral manner so as not to give either party a weapon to encourage or discourage takeover bids, to me it makes eminently good sense to require twenty-day disclosure of exactly what the Act and the regulations require.2 *227I think it fairly obvious that a stockholder of IU International Corporation would wish to assess his chances of being paid for shares that he tenders because his tender may be accepted and payment is conditioned upon NEOAX’s obtaining the funds to pay.
II.
Both in briefs and in oral argument the would-be acquirer and the SEC urge two principal arguments. First they assert that the terms and conditions of the debt offering to acquire the stock are not known and cannot be known at the time that the tender is made. Second they assert that, as a practical matter, they will be known as the date for expiration of the tender offer approaches and the information will then be required to be disclosed. NEOAX represents in oral argument that shareholders of IU International will have five days within which to decide whether or not to tender or to withdraw a tender previously made.
These arguments do not persuade me because I read the Act and the regulations to require that stockholders of IU International have a right to twenty days’ notice.3 Of course, I would not contemplate that every term and condition of the proposed debt offering be in place before the tender is made. Whatever commitment is made by Drexel Burnham Lambert can be conditional or contingent upon events yet to occur. The interest rate on the debt securities can be stated within a range or by a formula using a recognized base such as the current rate of federal securities at the time of the offering or some other established index. In this connection it is significant that the acquirer is presently able to state that the debt securities will be subordinated to the other debt of the issuer and that they may bear interest at an increasing rate. The anticipated term of the debt securities, the security, if any, to be provided for them, the anticipated rate of interest, the voting rights, if any, of the purchasers of the securities in the first instance or in the event of a default are all matters which may affect the success of the proposed borrowing. In short, I think that the Act and the regulations require the disclosure, in at least conditional or contingent terms, of the principal terms of the contemplated debt offering. If in fact this cannot possibly be done, the remedy is to seek Congressional modification of the statute. The remedy is not to ask a court to alter the plain and unambiguous lan*228guage of the statute.4
It may well be that, by amendment, some or all of the requisite information may become available before the tender offer expires. The regulations do require amendments to the tender registration as and when significant additional information is developed or significant changes occur. However, as I have said, I think it imperative that the requisite information be supplied at least twenty days before tenders are accepted. I do not think the Act vests in the tender offeror the discretion to decide when first to release material information on an offer. The SEC has exercised the discretion afforded it by Congress in this respect by establishing a twenty-day notice period for the original disclosures under Rule 14e-l(a), 17 C.F.R. § 240.14e-l(a).5 Nor do I think that Congress in adopting the Act intended to rely on economic forces or economic realities to cause a shareholder in a target company to be supplied the information to enable him to make a reasoned decision as to whether to tender.6
In summary, I think that the Act and the regulations are being violated by this tender. It follows that IU has demonstrated a strong likelihood of success, and it and its shareholders have shown irreparable harm because they are being deprived of their statutory rights. I would reverse and remand with directions to enjoin the offer until compliance with the Act and regulations is forthcoming.
ON PETITION FOR REHEARING AND SUGGESTION FOR REHEARING IN BANC
The appellant’s petition for rehearing and suggestion for rehearing in banc were submitted to this Court. In a requested poll of the Court, a majority of judges *229voted to rehear the case in banc. A majority of judges having voted to grant rehearing in banc,
IT IS ORDERED that rehearing in banc is granted.
Entered at the direction of Chief Judge Winter.

. In this case, NEOAX, Inc. and the other defendants, seek to acquire all of the outstanding common stock of IU International Corporation, and thereafter to merge IU into NEOAX or one of its subsidiaries. The acquisition will be financed by various borrowings by NEOAX. Significant for this case, the tender is conditioned upon NEOAX’s ability to complete the borrowings. Shares may not be withdrawn after acceptance but payment is not required to be made immediately upon acceptance. There is uncertainty in the regulations as to when payment must be made after acceptance of tendered shares. They state only that payment must be made. "promptly". 17 C.F.R. § 240.14e-l(c). The SEC asserts that the payment may be required within five business days; IU says that payment may be deferred for as long as thirty days. Whether five days, thirty days, or some period in between, the ability of NEOAX to complete its borrowings may be a matter of prime importance to shareholders of IU in determining whether to tender their stock since they may not withdraw their stock after the tender offer closes.

. The purpose of the Williams Act is to protect security holders by ensuring "that public shareholders who are confronted by a cash tender offer for their stock will not be required to respond without adequate information_” Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 35, 97 S.Ct. 926, 946, 51 L.Ed.2d 124 (1977) (internal quotation omitted). Congress wished that the Act place "investors on an equal footing with the takeover bidder.” Id. at 30, 97 S.Ct. at 943. Accord, Edgar v. MITE Corp., 457 U.S. 624, 633, 102 S.Ct. 2629, 2636, 73 L.Ed.2d 269 (1982). Congress adopted the disclosure provision of 15 U.S.C. § 78n in 1968:
in response to the growing use of cash tender offers as a means of achieving corporate take*227overs... ■. The proliferation of cash tender offers.... removed a substantial number of corporate control contests from the reach of existing disclosure requirements of the federal securities law.
Piper, 430 U.S. at 22, 97 S.Ct. at 939.
The goals of neutrality and disclosure are generally reconcilable. "Congress sought to protect the investor not only by furnishing him with the necessary information but also by withholding from management or the bidder any undue advantage that could frustrate the exercise of an informed choice.” Edgar v. MITE Corp., 457 U.S. at 634, 102 S.Ct. at 2636.
Without knowledge of who the bidder is and what he plans to do, the shareholder cannot reach an informed decision. He is forced to take a chance. For no matter what he does, he does it without adequate information to enable him to decide rationally what is the best possible course of action. This is precisely the kind of dilemma which our Federal securities laws are designed to prevent.
S.Rep. No. 550, 90th Cong., 1st Sess. 2 (1967); H.R.Rep. No. 1711, 90th Cong., 2d Sess. 2 (1968), reprinted in 1968 U.S.Code Cong. & Admin.News 2811, 2812. The legislative history directly addressed any possible conflict between neutrality and disclosure;
The bill avoids tipping the balance of regulation either in favor of management or in favor of the person making the takeover bid....
While the bill may discourage tender offers or other attempts to acquire control by some who are unwilling to expose themselves to the light of disclosure, the committee believes this is a small price to pay for adequate investor protection. In fact, experience under the Securities Act of 1933 and the Securities Exchange Act of 1934 has amply demonstrated that the disclosure requirements of the Federal securities acts are an aid to legitimate business transactions, not a hindrance.
Id. at 2813-14 (emphasis added).

. NEOAX’s suggestion that five days’ notice is sufficient contravenes the Commission's twenty-day notice period, 17 C.F.R. § 240.14e-l(a). It is also contrary to Congress’ provision for at least seven days’ notice "after the time definitive copies of the offer” are sent to shareholders. 15 U.S.C. § 78n(d)(5).

. I do not question that SEC may have considerable flexibility in its rule-making authority and that a rule once made may be altered. I find it significant, however, that SEC’s initial administrative interpretation of the Act was to require disclosure of the data I would hold must still be required. See Newmont Mining Corporation v. Pickens, 831 F.2d at 1454-55 (Pregerson, J., dissenting).

. In oral argument, the SEC contended that it had discretion to determine the length of the notice period for subsequent disclosures of the terms of NEOAX’s borrowing, citing a nonbinding interpretative release it issued last year. 52 Fed.Reg. 11458 (April 9, 1987). However, that release only concerned the Commissions' views "with respect to the disclosure and dissemination of material changes in tender offer materials previously provided to security holders, in accordance with Rules 14d-d(c) [sic].” Id. (emphasis added). Rule 14d-4(c), 17 C.F.R. § 240.14d-4(c), provides in part:
Publication of changes. If a tender offer has been published or sent or given to security holders ...a material change in the information published, sent or given to security holders shall be promptly disseminated to security holders in a manner reasonably designed to inform security holders of such change....
This is not applicable to the issue before us. We are concerned with what information must be provided at the outset of the tender offer, and therefore the pertinent SEC regulation is Rule 14e-l(a), 17 C.F.R. § 240.14e-l(a) (see supra) by which the SEC long ago determined the notice period for required disclosures at the outset of tender offers: twenty days.

.In this connection, it is important to note that the SEC, after construing the disclosure provisions as not requiring publication of expected financing arrangements at the outset of a bid, must perforce rely upon economic realities to prevent a bidder from disclosing financing arrangements after the tender offer period has closed. It argues that a bidder "almost certainly must have financing arrangements by the time the tender offer is ready to be concluded, or else it will not have the cash in hand for prompt payment.” Appellate Br.SEC at 22 (emphasis added). If the status of the bidder’s financing does not materially change before the offer closes, the requirement that material changes be disclosed, 240 C.F.R. §§ 240.14d-4(c), 240.14d-6(d), will not be triggered. Therefore, there can be no legal requirement that a bidder disclose its financing arrangements before a bid closes unless it is required that financing arrangements — contingent or final — be disclosed at the outset of the bid in accordance with 15 U.S.C. § 78m(d)(l)(B) and 17 C.F.R. § 240.14d-100.
A regulation under the antifraud provision, Rule 14e-l(c), 17 C.F.R. § 240.14e-l(c), requires only prompt payment for shares after the tender offer closes. See supra. The SEC’s restrictive interpretation of the disclosure provisions thus puts it in an anomalous position. It invokes the Act’s antifraud provisions and regulations to support its contention that disclosure after the bid closes is discouraged and discourageable, but it must rely on allegations of economic realities, unsupported by the record before us, to prevent complete circumvention of the Act's clear disclosure requirements.