IU International Corp. v. NX Acquisition Corp.

840 F.2d 220, 1988 WL 10622

• Court: Court of Appeals for the Fourth Circuit
• Decided: February 11, 1988
• Docket: No. 88-3013
• Status: Published

Opinions

MURNAGHAN, Circuit Judge:

The plaintiff, IU International Corporation (IU), is the target of a tender offer by the defendants, a group of companies who formed defendant NX Acquisition Corporation (NX) to make the tender offer. NX commenced the offer on January 6, 1988, by filing required disclosure documents with the Securities and Exchange Commission (SEC) and by transmitting to IU shareholders an Offer to Purchase any and all IU shares for $17.50 per share. The offer was to expire February 3, 1988. At oral argument on February 1, 1988, counsel for defendants represented that NX has raised the offering price to $20.00 per share and extended the expiration date to February 12, 1988.

The Offer to Purchase disclosed that defendant NEOAX Inc. (NEOAX) had obtained commitment letters in aggregate amount of 416 million dollars from two banks: 311 million dollars to be used to acquire IU shares and 105 million dollars to refinance NEOAX debt. The offer stated that NEOAX intended to raise the remaining funds needed to buy the IU shares through the sale of securities to be underwritten by Drexel Burnham Lambert, Inc. (Drexel). The offer stated that Drexel had informed NEOAX that it was “highly confident” that it could arrange the placement of up to 360 million dollars of NEOAX debt securities and up to 40 million dollars of NEOAX cumulative preferred stock. The offer disclosed that defendant Dyson-Kiss-ner-Moran Corporation had committed to purchase 10 million dollars of the preferred stock.

On January 13, 1988, IU filed an action in the United States District Court for the District of Maryland seeking to enjoin defendants from the purchase of IU shares pursuant to the tender offer. IU alleged that the defendants violated the Securities-Corporate Equity Ownership-Disclosure Act, Pub.L. No. 90-439, 82 Stat. 454 (1968) [hereinafter Williams Act] (codified as amended at 15 U.S.C. §§ 78m, 78n (1981 & Supp.1987)). The alleged violation of the Williams Act was NX’s failure to disclose, in the SEC filing prior to initiation of the tender offer, information regarding financing for the purchase of the remaining IU shares after exhaustion of the 311 million dollars in bank loans. There is no allegation that NX had information that it did not disclose. Rather, the allegation is that the Williams Act requires NX to have completed more substantial steps in acquiring financing, specifically to have known and disclosed “expected sources and expected terms” of the financing.

IU moved for a preliminary injunction against execution of the tender offer. The district court heard argument on January 20, 1988 and denied the motion from the bench. IU filed a notice of appeal on January 22, 1988. Briefs of the SEC, as ami-cus curiae, the parties, and a reply brief by IU were filed January 26, 27 and 28. We heard oral argument on February 1, 1988 and issued an order affirming the district court one day later. The order indicated that, as this opinion reflects, opinions stating views of the members of the court would follow.

The district court in denying the preliminary injunction considered each of the four factors set forth in Blackwelder Furniture Co. v. Selig Mfg. Co., 550 F.2d 189 (4th Cir.1977). It concluded that the balance of hardships favored NX, that IU failed to demonstrate a strong likelihood of success on the merits, and that the public interest would not be served by a preliminary injunction. We affirm the denial of the preliminary injunction on two bases. First, we hold that IU has no chance of success on the merits because the Williams Act does not impose a threshold requirement on what state financing must be in prior to commencement of a tender offer; the Williams Act only requires disclosure of whatever financing arrangements exist. Second, we hold that IU failed to establish irreparable harm at the time it appeared before the district court and at the time it argued before our panel.

The Williams Act, an amendment to the Securities Exchange Act of 1934, was enacted in 1968. It requires a party making a tender offer for more than 5% of a company’s outstanding shares to file a statement with the SEC setting forth certain information. That statement must include, among other information,

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 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) (emphasis supplied). The Williams Act, both in its original enactment and by a 1970 amendment, authorized the SEC to implement its provisions. The SEC’s regulations are set forth in 17 C.F.R. §§ 240.13d, 240.13e, 240.14d, 240.14e, 240.14f. The form that the bidder files with the SEC is Schedule 14D-1, set out in 17 C.F.R. § 240.14d-100.

The consideration to be used by NX in making the purchase of IU shares is to be represented by borrowed funds. Therefore, NX falls within the Williams Act requirement that it provide “a description of the transaction and the names of the parties thereto” for the lending arrangements in the disclosure document that it filed with the SEC. IU concedes that the requirement was met as to the bank financing but asserts a failure to meet the requirement as to the sale of NEOAX securities by Drexel. Our construction of the Williams Act provision finds that the requirement was met. We conclude that the Williams Act requires disclosure of whatever financing arrangements exist, but does not require that they exist in a particular form before commencement of a tender offer. A transaction that does not yet exist or unas-certained parties thereto simply cannot be disclosed.

One reading of the Williams Act would require that lending commitments and the names of the parties thereto be disclosed, and by definition exist, before initiation of a tender offer. The Ninth Circuit recently rejected that theory. It held that a tender offeror was not required to have the terms of its financing arrangements settled at the time the tender offer commences. Newmont Mining Corp. v. Pickens, 831 F.2d 1448 (9th Cir.1987). A second reading, advanced by NEOAX and the SEC in the present case, finds no requirement of the Williams Act concerning the status of lending arrangements prior to an offer. A bidder need only disclose what exists. A third reading advanced by IU is an intermediate one. It would require offerors to disclose and therefore to have ascertained and to have revealed “expected sources and expected terms” of the offeror’s borrowings. We adopt the second reading.

Five factors lead us to that conclusion. First, the Williams Act is primarily, though not exclusively, a disclosure statute. We therefore construe narrowly its “substantive” requirements. Second, the Williams Act is designed to maintain neutrality between bidder and target. Given a choice between plausible readings of a provision, we prefer the one yielding a neutral result. Third, the harms that IU suggests will result from our construction of the provision do not exist in the present case and will not generally exist. Fourth, even if those harms did exist, the construction advanced by IU does not obviate them any more than our construction. Fifth, our construction agrees with the SEC interpretation.

The Supreme Court has indicated that disclosure is the primary purpose of the Williams Act and that maintaining neutrality between bidder and target was the Congress’ intent.

The purpose of the Williams Act is to insure that public shareholders who are confronted by a cash tender offer for their stock will not be required to respond without adequate information regarding the qualifications and intentions of the offering party.... By requiring disclosure of information to the target corporation as well as the Securities and Exchange Commission, Congress intended to do no more than give incumbent management an opportunity to express and explain its position. The Congress expressly disclaimed an intention to provide a weapon for management to discourage takeover bids or prevent large accumulations of stock which would create the potential for such attempts. Indeed, the Act’s draftsmen commented upon the ‘extreme care’ which was taken ‘to avoid tipping the balance of regulation either in favor of management or in favor of the person making the takeover bid.’

Rondeau v. Mosinee Paper Corp., 422 U.S. 49, 58-59, 95 S.Ct. 2069, 2076, 45 L.Ed.2d 12 (1975).

While it is a disclosure statute, the Williams Act does have “substantive” effects. The SEC filing that is required prior to commencement of the offer, the Schedule 14D-1, must disclose among other items: the purchase price, date of closing, number of shares sought, and members of the bidding group. IU argues that those items, while subject to later change, must exist and must be disclosed with an initial filing. One cannot, according to IU, state only that those items are subject to finalization. It urges a similar requirement for the statement of the source and amount of funds, particularly borrowed funds. However, there is a fundamental difference between the date, price, quantity and identity of the buyer on the one hand and a financing contingency on the other. The terms of the first four are essential to an offer, but the terms of the last is not. While the existence of a financing contingency is a material term of an offer and the fact of contingency must be stated, how the financing will ultimately occur is not essential to an offer. That difference means that only the terms of certain elements, like price, must be stated, and therefore must exist, for a tender offer to be valid under the Williams Act. We construe narrowly the substantive effect of a disclosure statute.

The legislative history of the Williams Act and the Supreme Court’s construction of it note the neutrality between bidder and target embodied in the Act. A requirement that a bidder know (and consequently disclose) expected sources and hoped for terms of financing would favor targets. The requirement is an obstacle, of debatable moment, but an obstacle nonetheless, to a bidder. We prefer our construction because it more closely hews to the congressional intent of neutrality.

The parties and the SEC, as amicus curiae, focus on the harm that can befall target shareholders if details of financing arrangements are not disclosed. IU points out that target shareholders, in deciding to tender their shares, need to know the financing terms for several reasons. One, the terms evidence a view as to the financial strength of the successor entity. Two, the terms are highly relevant to the future performance of the successor entity. A high debt load, or oppressive conditions, would affect performance and significant events such as dividend payouts. No party before the court contests that (1) if the terms are known at the time of filing the Schedule 14D-1 they must be disclosed or that (2) if terms become known or change during the course of the offer, they will very likely be material changes for which an amendment is required and possibly necessitate an extension of the offer.

IU suggests two harms that could result from our construction of the Williams Act. First, target shareholders might not have sufficient time adequately to consider the terms of the financing if disclosure comes late; and second, without an initial disclosure requirement the bidder is under no legal obligation to have financing terms finalized, and disclosed, prior to the expiration of the offer.

The first answer to IU’s claimed harms is that IU’s construction, requiring “expected sources and expected terms” be initially disclosed, obviates neither harm. An amendment to a statement of “expected sources and expected terms” is equivalent to an amendment to a statement of nothing. The second answer is that neither harm exists in the present case. Counsel for defendants represented at oral argument that defendants will firm up their financing, amend their SEC disclosure, and disseminate the terms of the financing to IU shareholders at least five days prior to the expiration of the offer, permitting any stockholder to revoke any existing tender.

The third answer is that the harms will not generally occur. The SEC requires prompt payment after the expiration of a tender offer. 17 C.F.R. § 240.14e-l(c). Counsel for the SEC indicates that under current SEC practice, payment is prompt when made within five days. It is highly unlikely that a bidder could delay the finalizing of financing until after expiration of the offer or, if it could, would undertake that risk.¹ The SEC indicates that if bidders undertook not to close financing until after the expiration of an offer then it would, under its antifraud provision authority, examine the situation in a case by case adjudication and on a rule making basis.

The SEC interpretation of the Williams Act points to the fifth factor counseling our decision. The Williams Act gives the SEC wide latitude in deciding what disclosures are necessary. The Ninth Circuit found the delegation of authority so broad that specific disclosure requirements are not within the mandate of the Williams Act but instead are within the SEC's discretion. See Newmont Mining, 831 F.2d at 1451.

The SEC appeared as amicus curiae in Newmont Mining and in the present case, and argued that neither the Williams Act nor SEC regulations create a substantive requirement regarding what state financing must be in before commencing a tender offer. Administrative interpretations are due deference. However, IU argues that the SEC took an opposite view on the matter soon after the passage of the Williams Act and it is that interpretation that is due deference.

The SEC admits of no inconsistency and we find none. IU points to testimony in 1970 of the then Chairman of the SEC, Hamer Budge, before the Senate Committee on Banking and Currency. The testimony was in connection with an amendment to the Williams Act that granted the SEC authority under section 14(e) of the Williams Act, 15 U.S.C. § 78n(e), to proscribe fraud in tender offers. Section 14(e) is an antifraud provision and grants the SEC authority to proscribe conduct which, while not itself fraudulent, should be prohibited in order to prevent fraud. See Schreiber v. Burlington Northern, Inc., 472 U.S. 1, 11 n. 11, 105 S.Ct. 2458, 2464 n. 11, 86 L.Ed.2d 1 (1985).

Budge testified regarding how and why the SEC needed rule making authority under the antifraud section. He was asked for examples of areas of fraudulent practices used in tender offers that the proposed powers would prevent. See Additional Consumer Protection in Corporate Takeovers and Increasing the Securities Act Exemptions for Small Businessmen: Hearings on S. 3431 Before the Subcomm. on Securities of the Senate Comm. on Banking and Currency, 91st Cong., 2d Sess. 11 (1970). He introduced a memorandum that noted that one problem not dealt with by existing law was that “[t]he person who makes a tender offer may not have in hand the funds to pay for the securities he offers to purchase ... or a legally enforceable commitment to borrow such funds from [a] responsible person.” Id. at 12. Budge testified that the SEC had enjoined a solicitation for shares when the bidders “did not have the funds to pay for the stock that they were asking people to deposit.” Id. at 11. IU in the present case argues, as did the dissent in Newmont Mining, that Budge’s testimony on this point is of great moment. See Newmont Mining, 831 F.2d at 1453-56 (Pregerson, J., dissenting).

We agree with the Newmont Mining majority and do not find Budge’s testimony persuasive on the relevant issue. First, the testimony related to instances of fraud. Though not stated, the SEC may have had cause to enjoin the offer for fraudulent practices other than the mere lack of a lending commitment. Second, the SEC has never promulgated a regulation requiring a threshold level of certainty as to financing. Those two factors negate any notion that the SEC viewed lack of certainty in financing as fraudulent in and of itself.

The difference between fraud and the potential for fraud also distinguishes the Budge testimony, and supports our construction of the Williams Act. We agree that manipulations of the acquisition and disclosure of financing terms can be fraudulent. The SEC, at some point, might adopt the prophylactic measure of requiring disclosure of “expected sources and expected terms” or even require firm financing commitments prior to initiation of a tender offer. However, in the absence of an SEC action, we do not read the Williams Act to include such a requirement. Like the Newmont Mining decision, our decision is in accord with the only known decisions of other courts dealing with the issue. See Newmont Mining, 831 F.2d 1448 (9th Cir.1987) (citing Plaza Securities Co. v. Fruehauf Corp., 643 F.Supp. 1535 (E.D.Mich.1986); Warnaco, Inc. v. Galef, Civ. No. B-86-146 (PCD) (D.Conn. April 3, 1986), aff'd mem., 800 F.2d 1129 (2d Cir.1986)). We read the Act to require disclosure of what exits. No argument has been made that NX has not disclosed all it knows. We therefore affirm.

AFFIRMED.

1 . While it is highly unlikely that a bidder would not have its financing firmed up and disclosed prior to expiration of the tender offer, it is possible, and target shareholders might be forced to decide to tender without financing information. That is the chief harm raised by IU in opposition to our construction. There is, however, a countervailing interest: the interest of shareholders so willing to sell at the offering price that he or she is willing to be locked in for a few days while the would be purchaser (here NX) uses its best efforts to firm up financing.