| Release No. 34-15230 October 13, 1978
|
 Table of Contents
|
I. Background
The increased use of tender offers to obtain corporate control has prompted many companies to consider defensive techniques to fend off hostile offers. In the past, these defensive measures have typically focused on actions taken on the even of a tender offer or during a tender offer contest. 3 The primary purpose of such measures has been to deter unfriendly takeovers by relying, for the most part, on the single most effective weapon in the arsenal of the subject company-delay. 4 Recently, companies which view themselves as potential subject companies have given increased attention to other defensive measures, such as internal controls in the companys charter or bylaws. As with the delay techniques, the primary purpose of the defensive charter provisions is to deter unfriendly takeovers. Rather than using delay as the means to accomplish this purpose, these measures are designed to make the subject company unattractive as a potential target long before any specific tender offer is announced. By making a tender offer impracticable or by increasing the bidders costs and likelihood of failure should an offer be made, theses provisions are intended to cause a potential bidder to look elsewhere, rather than commence a tender offer for such a company.
Typically, a corporation proposing to adopt amendments to its charter or bylaws is required by state corporation law to submit the proposal to a shareholder vote. 5 In such cases, corporations subject to, inter alia, Section 12 of the Securities Exchange Act of 1934 "Exchange Act" (15 U.S.C. 78a et seq., as amended by Pub. L. No. 94-29 (June 4, 1975)) are required to furnish either proxy materials or information statements to shareholders, pursuant to Regulation 14A (17 CFR 240.14a-1 to 240.14a-103) or Regulation 14C (17 CFR 240.14c-1 to 240.140c-101), respectively. Over the years, the Division has reviewed many proxy and information statements containing anti-takeover measures and has gained a great deal of experience in identifying issues, formulating comments and dealing with registrants and their counsel.
Since at least since 1969, the Division has taken the position that when management sponsors anti-takeover proposals and other devices to insulate management from removal, the issuers proxy material or information statements should disclose in a prominent place that the over-all effect of the proposal is to render more difficult the accomplishment of mergers or the assumption of control by a principal stockholder, and thus to make difficult the removal of management. Moreover, the Report recommended that the Commission staff should intensively review proxy materials containing anti-takeover proposals with a view to requiring more adequate and uniform disclosure of the advantages and disadvantages of the managements proposals. 6
In view of this recommendation and the increased attention given to defensive measures, the Division wishes to advise registrant that the treatment of anti-takeover proposals in proxy materials or information statements will generally be reviewed for compliance with the position stated below. 7 It is hoped that this advance notice will facilitate the preparation of proxy materials or information statements for the upcoming proxy season.
II. Position of Division of Corporation Finance With Respect to Disclosure in Proxy or Information Statements Containing Anti-Takeover Proposals
The Divisions review of proxy and information statements containing anti-takeover measures will continue to focus on three areas: the placement of the disclosure in the statement; the disclosure of anti-takeover proposals generally; and the disclosure of specific types of provisions being proposed.
A. Placement of Disclosure
It a proxy or information statement contains an anti-takeover proposal, it should be included in a list of all proposals in the proxy soliciting material or disclosed in the information statement. The listing should be placed in the notice or forepart of the materials. If more than one anti-takeover proposal is included, they should not be separated by unrelated proposals in the listing made in the notice of materials.
The disclosure concerning an anti-takeover proposal should be set forth in a prominent place in the proxy or information statement. All of the information which is related to the proposal should forth in one place in the materials. If disclosure in more than one place cannot be avoided, cross-references are suggested. If the statement contains more than one anti-takeover proposal, the disclosure of each should generally not be separated by unrelated information or other proposals in the statement.
B. Content of Disclosure
1. General Issues
Despite significant variations in the form and operation of anti-takeover proposals, there are several areas in which certain basic disclosures are generally applicable. These include:
a. The reason(s) for the proposal and the bases of such reason(s). The proxy or information should clearly indicate why management is proposing to amend the corporations charter or by-laws. The term "bases" for the reasons means an explanation of the factors and/or principles supporting or serving as a foundation for the reason stated.
If the proposal is the result of managements knowledge of any specific effort to accumulate the issuers securities or to obtain control of the issuer by means of a merger, tender offer, solicitation in opposition to management or otherwise, a description of any such effort should be included. If the measure is not the result of any specific effort, disclosure should be made to that effect and a statement included as to why, in the absence of such efforts, the measure is being proposed at this time.
Disclosure should also be made as to whether the corporations charter or by-laws presently contain other provisions having an anti-takeover effect, whether the instant proposal is part of a plan by management to adopt a series of such amendments, and whether management presently intends to propose other anti-takeover measures in future proxy solicitations. If similar measures have been adopted, are being proposed or considered, the inter-relationship of the proposals/provisions should be discussed. A chart or table which would list charter or by-law provisions that have already been adopted which can be used as defensive provisions may also be appropriate. This chart, among other things, may include disclosure concerning a class of authorized, but unissued, common or preferred securities with respect to which the board of directors retains the power to determine voting rights. Additionally, an indication should be made whether or not cumulative voting is provided under the corporations charter or by-laws or pursuant to state law.
b. The over-all effects of the proposal, if adopted. The impact of the proposed amendments upon managements tenure and upon any proposal to alter the structure of the corporation should be disclosed. If appropriate, such disclosure should include statements that the over-all effects of the proposal, if adopted, may (would) be to render more difficult or to discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of the corporations securities and the removal of incumbent management. A statement that the proposal could make the accomplishment of a given transaction more difficult even if it is favorable to the interests of shareholders may be warranted. Thus, the disclosure should focus on the effects of making the removal of management more difficult even if such removal would be beneficial to shareholders generally, and the effect of limiting shareholder participation in certain transactions such as mergers or tender offers whether or not such transactions are favored by incumbent management.
c. The advantages and disadvantages of the proposal. Although this item may overlap disclosure of the effects of the transaction, information should be included concerning the advantages and disadvantages of the proposal both to incumbent management and to shareholders generally. For example, if one of the effects of the proposal would be to render the accomplishment of a tender offer more difficult, the disclosure could include statements to the effect that such a provision may be beneficial to management in a hostile tender offer and may have an adverse impact on shareholders who may want to participate in such a tender offer. The favorable aspect of the proposal, to either management or shareholders, should also be disclosed.
d. Disclosure of how the proposal will operate. Because of the complicated nature of many of these proposals, it may be beneficial to shareholders to include an explanation of the operation of the proposal, if adopted. In the past, examples of the operation of staggered boards have been disclosed. Accordingly, an explanation of the operation of the proposal(s) should also be included in the proxy or information statement. Such an explanation is intended to assist shareholders in their understanding of what they are being asked to vote in favor of.
e. Whether the proposal was the subject of a vote of the issuers board of directors and, if so, the results of such vote. Additionally, consideration should also be given to identifying any dissenting directors and stating the reasons given for any such dissent if available.
f. Limitations on the adoption of such proposals. Disclosure should be included as to whether the rules or practices or any stock exchange on which the issuers securities are listed reserve the right to refuse to list or to de-list any stock which has unusual voting provisions that tender or nullify or restrict its voting.
g. Comparison of anti-takeover measure with comparable provision under state corporation law. If the charter or by-law amendment pertains to a matter that is specifically addressed under state corporation law, a comparison of the provision of such state corporation statute with those of the instant proposal should be furnished. For example, if the defensive charter amendment concerns the vote necessary to approve an extraordinary corporate transaction such as merger, the provision of the proposal, such as the minimum percentage required, should be compared with that under the state statue.
2. Issues Involving Some Specific Anti-Takeover Proposals
Because of the varied nature of anti-takeover proposals, disclosure specifically applicable to the type of proposal should also be made. Where applicable, the disclosure should include the following:
a. Supermajority 8 Voting Provisions
One the specific effect should be indicated to be that management may obtain a veto power over mergers regardless of whether the transaction is desired by or beneficial to a majority of the shareholders and thereby assists management in retaining their present positions. Another specific effects would be to give the holder of a minority of the total shares outstanding and entitled to vote a veto power over a merger which management and/or a majority of the shareholders may believe is desirable and beneficial. In these types of proposals, disclosure should be included of the aggregate percentage of outstanding voting securities beneficially owned by management, the board of directors and principal shareholders of the corporation (including any persons or groups of persons who have filed a Schedule 13D with the Commission). If a supermajority is not needed to repeal such a provision and/or a supermajority is not needed to adopt the provision, disclosure of the reasons should be made.
b. Classification of Directors to Serve for Staggered Terms
Unlike certain internal corporate defense measures, staggered board provisions affect every election of directors and are not triggered by the occurrence of a particular event such as a hostile merger. Thus, such systems of electing directors make it more difficult for shareholder to change the majority of directors even when the only reason for the change may be the performance of the present directors. The fact that the provision, if adopted, would be applicable to every election of directors, rather than only an election occurring after a change in control of the issuer, should be disclosed. The number of annual meetings necessary to change the majority of the directors under the staggered system should be contrasted to the number of annual meetings necessary for change under the present system. If a purpose of the proposed amendment is to limit the voting power of a particular block of common stock or to frustrate accumulations of such blocks, appropriate disclosure should be made. If one of the reasons for the proposal is to ensure the continuity of the Board of Directors and/or management, it is suggested that management be asked to disclose whether there have been any problems with respect to such continuity in the past and, if so, to furnish a description of them.
c. Authorization of Certain Classes of Common or Preferred Stock
In certain circumstances, the authorization of classes of preferred or common stock with either unspecified voting rights or rights providing for the approval of extraordinary corporate transactions may be used to create voting impediments or to frustrate persons seeking to effect a merger or to otherwise gain control of the issuer. If used for such a purpose, disclosure should be included as to whether the securities could be privately placed and, if such placement is contemplated by the issuer, whether the purchasers have any affiliation with the issuer or any agreement or understanding as to the manner in which the securities are to be voted.
In certain instances, a proposal to increase the amount authorized of a class of voting securities may have an anti-takeover effect. If used for such a purpose, the considerations discussed above would be applicable. Moreover, such additional shares could be used to dilute the stock ownership of persons seeking to obtain control of the issuer. If the purpose for the increase in the authorization is stated to be the elimination of later delays associated with a stockholder vote on specific issuances, reference should be made to any stock exchange requirements calling for a stockholder vote on issuances of additional shares. Additionally, the number of shares unissued and not reserved for issuance should be stated.
Questions related to these staff instructions should be directed to Rowland Cook (202) 755-1750.
By the Division of Corporation Finance, pursuant to delegated authority.
________________________________
Attachment A. Table Relating to Internal Corporate controls or Anti-Takeover Measure Disclosed in Proxy or Information Statement
Defensive corporate charter amendments/provisions may include, but are not limited, to:
(1) Classification of directors or staggering of boards
(2) Provisions to abolish cumulative voting
(3) Provisions establishing supermajority approval requirements (for example, requiring an 80% favorable vote) for certain corporate transactions including, but not limited to, any proposed merger or sale of assets
(4) Provisions requiring a supermajority vote to cancel a supermajority described in category 3 above, but not to adopt one
(5) Provisions requiring a supermajority vote to amend the corporate charter in any relevant
(6) Provisions which reduce the supermajority required for a merger to a lesser majority unless the other party to the transaction is a "related corporation" (such as one owning more than 5% of any class of voting securities of the issuer) in which case a merger would require supermajority approval of the common stock as a class in addition to approval by the holders of the voting power to all securities of the issuer entitled to vote
(7) The certain of class of equity securities either common or preferred to be placed privately; the favorable vote of which is necessary to approve any tender offer, merger, sale or exchange of assets or other extraordinary corporate transaction
(8) Provisions which prevent the removal of directors without cause or by a supermajority vote
(9) Provisions prohibiting the removal from office for any reason of a director elected for a term longer than one year, notwithstanding any change in control due to tender offers, mergers or other transactions
(10) Provisions prohibiting the calling of special shareholder meetings altogether or allowing them to called only upon the request of a holder or holders of a supermajority of the shares outstanding
(11) Provisions establishing the maximum permissible number of directors
(12) Provisions providing for the election of stand-by successor directors at the same time as the regular directors, who will fill a position upon the death or resignation of a regular director
(13) Reincorporation of the issuer in a state with an anti-takeover statute
(14) Creation of an Employee Stock Ownership Plan which, because of its size, percentage of total outstanding securities of the it issuer which it may own, voting or other provisions, may be used in defense in a contested takeover attempt
(15) Provisions requiring the consideration for any merger following a tender offer to be no less than the highest consideration offered pursuant to the tender offer
(16) Shareholder approval of long term "sweetheart" employment contracts with executive officers of the issuer which cannot be abrogated or rescinded
1Report of the Advisory Committee on Corporate Disclosure to the Securities and Exchange Commission, Committee Print 95-29, House Committee on Interstate and Foreign Commerce, 95th Cong., 1st Sess., November 3, 1977 ("Report"), at p. 39.
2Securities Act Release No. 5906 (February 15, 1978).
3These measures include, but are not limited to the following:
(a) repurchase its own securities, to make it less likely for the tender offeror to obtain control of the company; (b) induce friendly third parties to make open market purchases of the target companys securities; (c) announce dividend increases, or stock splits; (d) issue additional shares or classes of stock; (e) take steps to create an incompatibility between the target company and the tender offeror, for example, in inducing possible anti-trust violations should the tender offer be successful; (f) arrange a defensive merger; (g) enter into restrictive loan agreements, with default to occur should the tender offer succeed; (h) institute litigation, challenging either directly or collaterally the conduct or effect of the tender offer; (i) arrange for cross or circular ownership of voting stock by parent and subsidiary corporations; (j) make the dismissal of directors expensive, by entering into costly employment contracts; (k) negotiate contracts-for example, labor, rent, loans or leases-which provide for acceleration, increase, or renegotiation of payment in the event of a change in management; (l) acquire other companies or accelerating the payment of outstanding debt for the purpose of spending access cash, thereby making the balance sheet of the target company less attractive to a potential offeror; (m) judicial action seeking a temporary or permanent injunction against the bidder alleging antitrust violations, inadequate disclosure and other securities laws violations; and (n) triggering the application of state anti-takeover statutes.
4Since time is of the essence to a bidder in tender offers, delay permits the subject company to prepare and consolidate an effective defense and to frustrate the bidders efforts.
5A table listing a number of anti-takeover provisions, including novel measures, is appended to this release as Attachment A. This table is not intended to be an exclusive listing of all such measures. Proxy materials or information statements may contain variations of the provisions listed or other proposals which may be or operate as defensive charter provisions but which may not be included in the table. For a detailed description of specific defensive charter amendments and these strategies generally, see Cary, Corporations 448 (1969 ed.); Aranow & Einhorn, Tender Offers for Corporate Control 219-276 (1973); Aranow, Einhorn & Berlstein, Development in Tender Offers for Corporate Control 193-206 (1977); Brown, Corporation Defenses to Take-over Bids, 44 Tul. L. Rev. 517 (1970); Cary, Corporate Devices Used to Insulate Management from Attack, 25 Bus. Law 339 (1970); Schmults and Kelly, Cash Take-Over Bids-Defense Tactics, 23 Bus, Law 115 (Nov. 1976); Bradshaw, Defensive Tactics Employed By Incumbent Managements in Contesting Tender Offers, 21 Stan L. Rev. 1104 (1969); Kennedy, Defensive Take-over Procedures Since the Williams Act, 19 Catholic U.L. Rev. 158 (1969); Mullaney, Guarding against Take-overs-Defensive Charter Provisions, 25 Bus. Law 1441 (July 1970); Hayes and Taussig, Tactics of Cash Take-over Bids, 45 Harv. Bus. Rev. 135, 142-147 (March-April 1967); Panel, Defending Target Companies, 32 Bus. Law 1349-1364 (May 1977); Panel, Tender Offer Litigation, 32 Bus. Law 1433-1458 (May 1977); Yoran, Advanced Defensive Tactics Against Takeover Bids, 21 Am. J. Comp. L. 541 (1973); "A Backfire from State Takeover Laws" Business Week 25 (Aug. 29, 1977); and Wall Street Journal, p. 10 (Aug. 29, 1977).
6Report of the Advisory Committee on Corporate Disclosure to the Securities and Exchange Commission, Committee Print 95-29, House Committee on interstate and Foreign Commerce, 95th Cong., 1st Sess., November 3, 1977, at D-39 and 415-416.
7In this regard, the Division has established a monitoring system which is mainly intended to quantify the information received via proxy materials. The specific purposes for the monitoring program are: (1) to evaluate the disclosure being made by companies proposing such measures; (2) to determine whether more specific disclosure requirements should be published concerning the purpose and/or effect of such proposals; and (3) to collect data on the frequency of use of such proposals which may serve as an empirical basis for Congressional proposals which may serve as rulemaking action by the Commission. The monitoring program will involve both preliminary materials and definitives. It is presently anticipated that the program, which is already in operation, will continue beyond the upcoming proxy season.
8Supermajority means any percentage requirement that exceeds the comparable requirement under applicable state law. If the requirement under state law is 662/3% to approve a merger, a supermajority provision would be any percentage in excess of the state requirement such as 80%.
 |