On Petition for Review of an Order of the Securities and Exchange Commission
Before: Edwards and Henderson, Circuit Judges, and
Williams, Senior Circuit Judge.
The opinion of the court was delivered by: Williams, Senior Circuit Judge
The Securities and Exchange Commission found that WHX Corporation violated the All Holders Rule, SEC Rule 14d-10(a)(1), 17 C.F.R. § 240.14d-10(a)(1), and issued a cease-and-desist order prohibiting the company from committing or causing any future violations of that Rule. WHX petitioned for review. We find that the SEC's decision to issue a cease-and-desist order was arbitrary and capricious, and therefore vacate the order.
In March 1997 WHX decided to attempt a hostile takeover of Dynamics Corporation of America ("DCA"). But DCA's charter had a poison pill that allowed shareholders to purchase new shares at rock-bottom prices if any party acquired 20 percent of DCA's stock without the approval of DCA's board. Further, New York law (New York Business Corporation Law § 912(b)) forbids a New York corporation from entering into a "business combination" with any shareholder owning 20 percent of the corporation's stock until the shareholder has held the stock for at least five years, unless the shareholder first secures board approval. See Opinion of the Commission, In re WHX Corporation, Admin. Proc. File No. 3-9634, SEC Exchange Act Release No. 47980 (June 4, 2003) ("Opinion") 2-3.
To overcome the opposition of the incumbent board, WHX planned a two-stage takeover strategy. First, it would make a cash tender offer for 19.9 percent of DCA's common stock, offering $40 a share. Second, it would conduct a proxy contest seeking to oust the DCA board and replace it with a new one that would revoke the pill and approve a merger with WHX. Under the terms of this merger, WHX would purchase all remaining DCA shares for $40 cash. Opinion at 3.
The timing of WHX's planned tender offer posed an additional problem. The next annual DCA shareholder meeting was scheduled for May 2, 1997. But the record date for that meeting was March 14, 1997, which had already passed by the time WHX was ready to launch its offer. Because only holders of record (or holders of proxies from record holders) could vote at the shareholder meeting, an ordinary tender offer for common stock would yield WHX at least some (and possibly many) shares that couldn't vote at the May 2 meeting. As WHX's purpose was to maximize its voting power without running afoul of DCA's poison pill, it wanted to avoid buying shares that would be effectively useless. Opinion at 3.
WHX's solution triggered the SEC sanction at issue here. It proposed to include in its offer a condition under which the offer would extend only to those shareholders who were holders as of the March 14 record date, or who were able to obtain a valid proxy. WHX's attorney recognized that this condition might be thought to violate the so-called All Holders Rule, see Opinion at 4, which was promulgated under § 14(d) of the 1934 Securities Exchange Act, 15 U.S.C. 78n(d), and which provides:
(a) No bidder shall make a tender offer unless:
(1) The tender offer is open to all security holders of the class of securities subject to the tender offer.
17 C.F.R. § 240.14d-10(a)(1). The SEC adopted this rule in 1986 in response to concerns about "discriminatory tender offers" that would pressure "security holders who are excluded from the offer . . . to sell to those in the included class" in order to receive the premium price, but who "would not receive the information required by the Williams Act, would have their shares taken up on a first-come first-served basis and would have no withdrawal rights." Amendments to Tender Offer Rules: All-Holders and Best-Price, Exchange Act Release No. 34-23421, 51 Fed. Reg. 25873, 36 SEC Docket 131, 132 (July 17, 1986). Moreover, the SEC explained that, without this rule, the "equal treatment" provisions of the Exchange Act would easily be circumvented: an offeror could simply address an offer to "a privileged group of security holders who hold the desired number of shares" rather than purchasing the desired number of shares from all tenderers on a pro rata basis for the same consideration. Id. at 133. In adopting the All Holders Rule, the SEC appears to have been reacting in part to the decision in Unocal Corp. v. Pickens, 608 F. Supp. 1081 (C.D. Cal. 1985), which upheld as lawful a defensive self-tender that offered a high premium but excluded the shareholder attempting the takeover. See Proposed Amendments to Tender Offer Rules, Exchange Act Release No. 34-22198, 50 Fed. Reg. 27976, 27977 n.5 (July 9, 1985).
Seeking guidance, WHX faxed the SEC's Office of Mergers and Acquisitions a letter on March 24, asking for either a noaction letter or an exemption from the rule. The letter suggested several reasons why WHX thought the All Holders Rule should not apply to its proposed condition. First, it contrasted the condition with the highly discriminatory offers which precipitated the rule, such as that involved in Unocal, where shares tendered by or on behalf of the would-be acquirer were deliberately excluded from what in essence would be a dividend to the eligible shareholders. Under WHX's offer, by contrast, even a shareholder who had bought after the record date had some possibility of securing a proxy, and in any event would receive "the same per share price . . . in the cash merger following successful completion of the tender offer." Letter from Ilan Reich to Dixon Requesting an Exemption or No-Action Ruling (March 24, 1997) at 3.
Second, WHX argued that here the only "discrimination" reflected a virtually universal disenfranchisement of shareholders inherent in the practicalities of limiting voting to holders as of the record date. If it is legitimate to have a record date at all -- which by its nature deprives late purchasers of the right to vote at the annual meeting -- then why, WHX asked, should the All Holders Rule embrace all holders on the last day of the tender offer? Id.
A staffer with the SEC's Office of Mergers and Acquisitions called WHX's lawyer back the same day to inform him that the Commission did not issue no-action letters on All Holders Rule issues and that WHX should withdraw its noaction letter request. WHX did so that afternoon. Opinion at 4. Although the staffer said only that the SEC didn't give no action letters on that subject, not that it refused to give such a letter on these facts, and although WHX's lawyer found the staffer not at all clear, he interpreted the statement as an indication that the Office of Mergers and Acquisition staff informally believed that the proposed condition would violate the All Holders Rule. Opinion at 4; Transcript of Ilan K. Reich, In re WHX Corporation, File No. HO-3204 (Dec. 5, 1997) ("Transcript") 81, 85-86, 88-89. Nonetheless, in light of counsel's belief that there were strong arguments why the condition did not violate the All Holders Rule, and the lack of contrary Commission precedents, WHX decided to proceed. It announced its hostile tender offer, including the record ...