When it comes to Mergers and Acquisitions in the United States (and in any country for that matter), there are several law regulations, like we also discussed in previous article “Type of Merger- Short-form Merger“. These laws are there to govern the merger and acquisition process. Today, there are three main groups of laws: securities laws, state corporation laws, and antitrust laws. In this article, we will focus more on securities laws, more specifically the Williams Act.
These laws were put in place or both target companies and acquiring firms. Some target companies use some of these laws as a defensive tactic when there is a chance of takeover. Because of this, an acquiring firm must take careful notes of legal considerations.
Securities Laws
In the field of M&As, there are a wide variety of important securities laws. The Williams Act is one of these statutes. If you haven’t heard about William’s Act or are generally curious about this law, we will discuss it in detail in this article.
The Williams Act
In 1968, the Williams Act was passed, and to this day, it remains one of the most important pieces when it comes to securities regulations in the field of mergers and acquisitions. This law had a major impact on merger activities between the 1970s and 1980s.
Before the Williams Act
In the 1960s, tender offers were largely unchecked. It simply wasn’t a major concern before the 60s because there were only a small number of tender offers made.
However, the 60s came and tender offers became more popular in the field of M&As. It was a famous way to take control of corporations. Tender offers were also a way to ousting entrenched management, and so plenty of corporations started using it.
The disclosure requirement of the Securities Act of 1933 provided some regulation (albeit limited) in tender offers that used securities as the consideration. However, no such regulation was found in cash offers.
Clearly, there was a gap in the law, the SEC sought to fill this gap. This is where Senator Harrison Williams came in. As the chairman of the Senate Banking Committee at the time, Senator Williams proposed legislation for that specific purpose in 1967.
By July 1968, the bill won congressional approval and so the Willaims Act was born. This law provided an amendment to the Securities Exchange Act of 1934 which is a legal cornerstone of securities regulations.
The government’s concern for greater regulation of the securities market inspired the combination of the Securities Act of 1933 and the Williams Act. As a result, both acts eliminate some of the abuses that a lot of people believe contributed to the stock market crash of October 1929.
Both these laws also provide greater disclosure of information by firms that issue securities to the public. For instance, under the Securities Act of 1933, companies that go public are required to file a detailed disclosure statement. Additionally, the same act proscribed certain activities of the securities industry. This includes wash sales and the churning of customer accounts.
Moreover, the Act provided an enforcement agency, specifically the SEC. The SEC was established to enforce federal securities laws. The Williams Act added five new subsections to the law. This is in an amendment to the Securities Exchange Act of 1934.
The Four Major Objectives of the Williams Act
Upon passing the Williams Act, it had four major objectives which are stated below. These objectives have played a crucial role in the field of mergers and acquisitions. Read more about these objectives below:
To regulate tender offers
Stockholders of target companies were rushed into tendering their shares before the Williams Act was passed. They were stampeded to do so to avoid receiving less advantageous terms.
To provide procedures and disclosure requirements for acquisitions
Thanks to the Williams Act, there is now greater disclosure. This allows stockholders to make more enlightened decisions when it comes to the value of a takeover offer. With greater disclosures, the target shareholders gain more knowledge of the potential acquiring company.
For instance, in a stock-for-stock exchange, the target company stockholders would become stockholders in the acquiring firm.
To provide shareholders time to make informed decisions with regards to tender offers
Target company stockholders still need some time to analyze the data even if the necessary information is available. Through the Williams Act, they are now allowed to make more informed decisions.
To increase confidence in the securities market
The Williams Act also increases investor confidence. As a result, securities markets can attract more capital. Thanks to this Act, investors will be less worried about being placed in a position of incurring losses when they make decisions based on limited information.
Section 13(d) of the Williams Act
Thanks to the Williams Act, specifically Section 13(d), stockholders and target management have an early warning system. This system alerts them to the possibility that a threat to control may soon occur.
Additionally, when these holdings reach 5% of the target market’s firm total common stock outstanding, this section also provides for disclosure of a buyer’s stock holdings. Stockholders and target management can see if a buyer has come from open-market purchases, tender offers or private purchases.
The threshold level was original 10% when the law was first passed. However, changes were made because the 10% was later considered to be too high. And so, it embraced the more moderate 5 percent.
Even when there is no tender offer, under the rules of Section 13(d), the disclosure of the required information is still necessary. It is necessary for the buyer to disclose the required information if he or she intends to take control of a corporation. This follows the attainment of 5% holding in the target.
The buyer is required to file a Schedule 13D to make this disclosure. Even though no one individual or firm actually owns 5% of another firm’s stock, filing of Schedule 13D may still be necessary. Additionally, if a group of investors acts in concert, their combined stockholdings are considered as one group under this law.
© image credits to Anni Roenkae