Court Opinion

ID: 8963940
Source: CourtListenerOpinion
Date Created: 2022-11-27 10:00:44.774408+00
Date Added: 2024-06-11T17:10:17.629607
License: Public Domain

WEIS, Circuit Judge,
dissenting.
The issue before us is a narrow one— whether Drexel Burnham Lambert is a “bidder” required to make certain disclosures under the Williams Act. The district judge believed that, in its activities at issue here, Drexel Burnham “has gotten dangerously close to the point at which this Court would not hesitate to classify Drexel Burn-ham as a bidder.” I am convinced that Drexel passed that point and is within the class of persons Congress intended to be governed by the Williams Act.
In cases such as this where a regulatory agency lurks in the wings, there is an unfortunate tendency for the litigants to rely almost entirely on regulations, rulings, releases, and other appendages rather than referring to the governing statute itself. The agency publications are then construed by the litigants in the manner most favorable to their best interests, seizing upon *66isolated administrative utterances to bolster the arguments and in the process losing sight of the plain language of the legislative enactment and its evident intent.
The resolution of the issue before us should begin with the statute itself. The Williams Act provides in pertinent part:
“It shall be unlawful for any person, directly or indirectly, ... to make a tender offer for ... any class of any equity security ... if, after consummation thereof, such person would, directly or indirectly, be the beneficial owner of more than five per centum of such class, unless ... such person has filed with the Commission a statement containing such of the information specified in section 78m(d) of this title, and such additional information as the Commission may by rules and regulations prescribed as necessary or appropriate in the public interest or for the protection of investors.”
15 U.S.C. § 78n(d)(l).
Two observations on this language are worth noting. First, the statute does not use the word “bidder.” Second, the discretion entrusted to the Securities and Exchange Commission — a quite broad delegation — is to determine what “additional information” beyond that listed in the statute should be required of the “person” making a tender. The statute does not purport to grant the SEC discretion to determine who shall file the statement with the agency.
The Act provides a broad definition of “person.” “When two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a ‘person’ for purposes of this subsection.” 15 U.S.C. § 78n(d)(2). Thus, the word “person” includes not only its plural, but entities such as partnerships, syndicates, and “groups” as well.
The word “bidder” is a term that the SEC adopted obviously for ease of reference. In a 1979 Release, the agency explained that the “terms ‘bidder’ and ‘subject company’ provide short-hand references to the principal participants in a tender offer and avoid certain pejorative terms now commonly used to describe participants in a tender offer. The term ‘bidder’ would mean any person who makes a tender offer or on whose behalf a tender offer is made.” Securities Exchange Act Release No. 15548, [1979 Transfer Binder] Fed.Sec.L.Rep. (CCH) 1181,935, at p. 81,216 (Feb. 5, 1979).
It is significant that in using the term “principal participants” the SEC Release was referring to both the bidder and the subject company — not the bidder alone. There is no basis to infer that “principal participants” applies to only some of the “bidders.”
In a regulation, the SEC did define “bidder” as “any person who makes a tender offer or on whose behalf a tender offer is made.” 17 C.F.R. § 240.14d-l(b)(l). This definition simply tracks the language of the statute, however, and does not purport to limit the class of those required to comply with the Act. It follows that the agency’s use of the word “bidder” must be read in harmony with the statutory language and not as an attempt to narrow the scope of the Act — action beyond the Commission’s authority. To avoid terminological confusion, I shall also use the word “bidder” as designating those required by the Williams Act to make disclosure.
The legislative history states that the term “person” as used in section 14(d)(2) is identical with section 13(d)(3). In explaining the latter subsection’s definition of person, the House Report stated:
“This provision would prevent a group of persons who seek to pool their voting or other interests in the securities of an issuer from evading the provisions of the statute because no one individual owns more than 10 percent of the securities. The group would be deemed to have become the beneficial owner, directly or indirectly, of more than 10 percent of a class of securities at the time they agreed to act in concert. Consequently, the group would be required to file the information called for in section 13d(l) within 10 days after they agree to act together, whether or not any member of the group had acquired any securities at *67that time. This provision is designed to obtain full disclosure of the identity of any person or group obtaining the benefits of ownership of securities by reason of any contract, understanding, relationship, agreement or other arrangement.”
H.R.Rep. No. 1711, 90th Cong., 2d Sess. (1968), reprinted in 1968 U.S.Code Cong. & Admin.News 2811, 2818. Congress thus intended that disclosure be made by those expansively designated persons or groups obtaining the benefit of securities ownership through a variety of arrangements.
In defining the need for the legislation, Congress acknowledged the difficulties that a shareholder faces when notified of a tender offer. Given the many variables inherent in such offers, the decision whether to accept the tender, sell the stock in the market, or hold the shares should be made on the basis of adequate information. “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.” Id. at 2812. As the Committee reasoned:
“The persons seeking control, however, have information about themselves and about their plans which, if known to investors, might substantially change the assumptions on which the market price is based. This bill is designed to make the relevant facts known so that shareholders have a fair opportunity to make their decision____
“The bill avoids tipping the balance of regulation either in favor of management or in favor of the persons making the takeover bid. It is designed to require full and fair disclosure for the benefit of investors while at the same time providing the offeror and management equal opportunity to fairly present their case.
“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.” Id. at 2813. See also Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 57-58, 95 S.Ct. 2069, 2075-76, 45 L.Ed.2d 12 (1975); 11A E. Gadsby, Business Organizations: The Federal Securities Exchange Act of 1934 § 7A.01 (A. Sommer ed. 1988). As the Supreme Court characterized the legislative intent, “what Congress had in mind was the protection of shareholders, the ‘pawn[s] in a form of industrial warfare.’ ” Piper v. Chris-Craft Indus., 430 U.S. 1, 30, 97 S.Ct. 926, 943, 51 L.Ed.2d 124 (1977).
The need for full disclosure during the pendency of the tender has been echoed by the Courts of Appeals. In Prudent Real Estate Trust v. Johncamp Realty, Inc., 599 F.2d 1140, 1147 (2d Cir.1979), the Court of Appeals for the Second Circuit surmised that, if the bidder is prosperous, “the stockholder might decide to hold his shares in the hope that, if the offer was only partially successful, the bidder might raise its bid after termination of the offer or infuse new capital into the enterprise.” On the other hand, the “poor financial condition of the bidder might cause the shareholder to accept for fear that control of the company would pass into irresponsible hands.” Id.
Similarly, in the case of a partial tender, a shareholder must weigh staying with the company and the bidder as part of the minority bloc, a decision in which the bidder’s financial condition may be quite significant.
The appellate courts have had little opportunity to determine what entities should be considered as offerors. Perhaps this is not surprising, for in most tender cases time constraints preclude an appeal from the decision of the district court.
In Prudent Real Estate Trust, the Court of Appeals for the Second Circuit required disclosure from the principal stockholder of a corporation that partially owned and controlled the acquisition vehicle. In that case, the interests represented by the principal stockholder supplied 20% of the financing, but he had the right to vote shares acquired from the target company and to manage its properties after acquisition. Prudent Real Estate Trust, 599 F.2d *68at 1147. See also Arkansas Best Corp. v. Pearlman, 688 F.Supp. 976 (D.Del.1988) (individual defendants controlled companies which owned acquisition vehicle, and were committed to purchase $37 million of target stock).
In Koppers Co. v. American Express Co., 689 F.Supp. 1371 (W.D.Pa.1988), the district court noted that the defendant Shearson companies had acquired a substantial, although not controlling, interest in the acquisition vehicle. In addition, the Shearson interests had committed themselves to provide a large financial contribution to the purchasing company and, in return, take either unsecured subordinated notes or preferred stock with limited voting rights. Moreover, Shearson would earn substantial brokerage fees. As the court pointed out, the Shearson interests acted as advisor, underwriter, equity partner, and financier to the acquisition vehicle. In those circumstances, the court ruled that the Shearson companies were playing a central, participatory role in the tender offer; the fact that they would control less than 50% of the acquisition vehicle would not exempt them from bidder obligations. Id. at 1389-90. The majority distinguishes Koppers because the Shearson companies were to have representation on the board of the surviving entity. That distinction is unconvincing — the test is beneficial ownership of stock.
In Pabst Brewing Co. v. Kalmanovitz, 551 F.Supp. 882 (D.Del.1982), the court determined that two individuals were the “primary motivating force behind the formation and capitalization of [the acquiring vehicle] for the effectuation of the tender offer.” Id. at 892. In that case, the acquiring corporation had been created for the express purpose of extending a tender offer. The court distinguished dissimilar rulings in Raybestos-Manhattan, Inc. v. Hi-Shear Indus., 503 F.Supp. 1122 (E.D.N.Y.1980), and Gray Drug Stores v. Simmons, 522 F.Supp. 961 (N.D.Ohio 1981), where the acquiring corporation had not been formed for the purpose of accomplishing the acquisition. Pabst Brewing Co., 551 F.Supp. at 891-92. Because I am not persuaded that Raybestos and Gray Drug Stores are correctly decided, I need not consider here whether the distinction that the court drew in Pabst was significant.
Other district courts have been diverted from the basic “offeror” inquiry by focusing on whether the alleged bidder has a “dominant” or “controlling” role in the transaction, or whether that entity or another corporation — even a “shell” — is the actual offeror. Nothing in the Act indicates that Congress intended that only an entity or individual that “dominates” or “controls” the group making a tender offer is bound by the disclosure requirements. The absence of language narrowing the statute’s application in that manner is compelling, as is the legislative history which sought to prevent the “pooling” of interests as a device to evade disclosure.
The Williams Act, as illustrated by its legislative history, is not concerned with dominance by particular entities within an offering group, but rather with the desirability of disclosures by all parties who combine to make an offer. The expressed intent of Congress was full and fair disclosure. Therefore, in the event of doubt on a particular disclosure question, courts should exercise liberality in order to carry out the remedial purposes of the statute. Excess information may well be harmless, but inadequate disclosure could be disastrous to the shareholder.
The majority relies principally on an interpretation of Item 9 of the SEC’s special instructions for complying with the Schedule 14D-1 disclosure requirement. See 17 C.F.R. § 240.14d-100. I pass over the interesting question of whether such agency “instructions” can amount to an administrative construction of the statute because I read Item 9 as not constricting the scope of disclosure, but instead as a caution against evasion.1
*69As the district court pointed out in Arkansas Best Corp. v. Pearlman, 688 F.Supp. 976 (D.Del.1988), “[u]nder the plain wording of Item 9, it would appear that natural persons who are bidders would never have to disclose material financial information.” Id. at 980. However, the SEC stated in a Release that “financial information concerning a bidder who is a natural person may be material.” Securities Exchange Act Release No. 13787 [1977-78 Transfer Binder] Fed.Sec.L.Rep. (CCH) 1181, 256, at p. 88,379 n. 2 (July 21, 1979). In Arkansas Best the district court found that individuals who were the dominant and motivating principals behind a series of partnerships and corporations formed for the purpose of making a tender offer were bidders. That case demonstrates the danger of relying on the wording in Item 9 without considering its purpose.
Properly read, Item 9 heeds the statutory language which prohibits “any person, directly or indirectly” from making a tender offer without complying with the Act. See 15 U.S.C. § 78n(d)(l). The formation of a shell corporation for the purpose of making a tender without disclosing who or what is behind the legal facade would be a blatant device to circumvent the express congressional prohibitions against an undisclosed party “indirectly” acquiring beneficial ownership. The SEC recognized this danger and, in discussing the proviso to Item 9 stated, “However, it should be specifically noted that the Commission will not tolerate schemes to circumvent the requirements of Item 9 by relying on this proviso.” Securities Act Release No. 58444 [1977-78 Transfer Binder] Fed.Sec.L.Rep. (CCH) If 81,256, at p. 88,380 (July 21, 1977) (citing example of shell corporation formed for reasons other than acquisition).
The Rales brothers apparently recognized that Item 9 did not exclude them as natural persons from the “bidder” designation and its incumbent disclosure obligations. In contrast, the majority’s interpretation of Item 9, taken to its logical conclusion, would suggest that the disclosures made by each of the Rales brothers were gratuitous — a result I doubt the majority or the SEC would espouse.
I believe that the district court erred as a matter of law in concluding that Drexel Burnham is not a bidder. Drexel Burnham obviously is a critical player in the Interco tender offer scenario. It expects to receive between 29% and 36% of voting stock, and substantial proceeds in the event of either success or failure of the tender offer.
The present situation is quite different from one in which a lending institution enters into an arrangement where it seeks the return of the amount it had loaned with interest. The record here conclusively demonstrates that Drexel Burnham’s involvement in the Interco tender far surpasses such a lender-offeror relationship. Drexel Burnham is actually a participant in the venture as a major stockholder — indeed, planning to obtain more shares than each of the Rales brothers. It may be that, if the Rales brothers pool their shares, Drexel Burnham could be out-voted. That result, however, is not inevitable and, in any event, the Williams Act does not restrict disclosure to only the holders of majority interests. It requires compliance by those who become holders of “beneficial interests.”2 That description fits Drexel Burnham.
Events which have occurred since the district court considered the matter have served only to confirm the conclusion that Drexel Burnham is a “bidder.” Apparently, Drexel Burnham was unable to secure outside support for a substantial part of the financing it had pledged to provide. As a result, in the Second Supplement to the *70tender offer dated October 4, 1988, the following statement appears: “The Purchaser [Cardinal Acquisition Corp.] also has received a commitment letter, dated as of September 26, 1988 (“Group’s Commitment Letter”) from the Drexel Burnham Lambert Group Inc. whereby Group has agreed to purchase an aggregate of $609,685 million of Series A Stock and Series B Stock (“Group’s Commitment”).”3
I am not impressed by the fact that, superficially, it appears that Drexel Burn-ham did not become a participant in the venture until after the initial tender was made. Whatever may have been true at the outset of the venture, it is clear that once additional “bidders” are added to the roster, appropriate supplemental disclosure must be made. Otherwise, the opportunities for evasion are so glaring as to frustrate the important goals of the Williams Act.
Whether disclosure beyond that already made must be forthcoming is a question of materiality. Information is material, and disclosure compelled, if there is a substantial likelihood that a reasonable investor would consider the disclosure to have changed the “total mix” of his investment deliberations. TSC Indus. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 2132, 48 L.Ed.2d 757 (1976). This is largely a fact-driven assessment which should, in the first instance, be made by the district court. Because the district judge here decided the case on the theory that Drexel Burnham was not a bidder, there was no necessity for findings on the materiality issue and none were made. I would therefore remand to the district court for determination of that question and stay the closing of the tender offer until a ruling is made.

. It is doubtful that "instructions" on how to complete a form qualify as an administrative construction of a statute so as to be entitled to the deference cited in Chevron, USA v. Natural Resources Defense Council, 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984) or SEC v. Chenery Corp., 332 U.S. 194, 67 S.Ct. 1575, 91 *69L.Ed.2d 1995 (1947). The “instructions” are not a reasoned, considered discussion of the statute.

. See Portsmouth Square, Inc. v. Shareholders Protective Comm., 770 F.2d 866, 873 (9th Cir.1985) ("beneficial owner” of security for section 13(d) purposes — subject to disclosure obligations — is anyone having power to vote, invest, or dispose of security); GAF Corp. v. Milstein, 453 F.2d 709 (2d Cir.1971); Bath Indus., Inc. v. Blot, 427 F.2d 97, 112 (7th Cir.1970) ("beneficial owner” under section 13(d) is anyone with right to determine how stock is voted). See 17 C.F.R. § 240.13d-3. SEC Rule 14d-1(g) states that the definition of beneficial ownership set forth in Rule 13(d)(3) also applies to section 14(d)(1).

. The exemption provided by 17 C.F.R. § 240.13d-3 would not apply here where Drexel Burnham initially agreed to purchase stock.