The committee's recommendations seem motivated by a desire to be "fair" to the management of both sides. However, it is wrong to base regulations on this principle because the interests of target company management and shareholders can diverge, and the Committee recognized that its "mandate was to consider the process in terms of the best interests of all shareholders." (p.xvi) To defend the Committee's support for the business judgment rule on the grounds that it is existing law casts doubt on the value and thoroughness of the study. We had hoped the panel would conduct some empirical research in order to reach conclusions. We see no evidence in the report that defensive tactics increase shareholder wealth, aside from anecdotal comments and broad generalizations.* Many of the panel members have a wealth of experience with tender offers from which to make genralizations. But it is precisely because of their experience that we must question the value of their recommendations when offered without any documentation. *We agree with panel members Easterbrook and Jarrell in criticising the majority for failing to provide any quantitative or empirical evidence and for making recommendations in a "vacuum." However, we note here that Easterbrook and Jarrell have failed to convince us that this fault -- or the evidence they offer -logically leads to a recommendation that the Williams Act should be eliminated because, in the absence of evidence to the contrary, regulation is costly and decreases shareholder value. First, E & J have failed to distinguish in their criticism between the majority's desire to insure that regulations create "fairness" between investors and fairness between bidder and target management. E & J assert fairness should not be the basis for regulation, as long as aggregate values are increased. We have noted our view that a concern for fairness between target and bidder management is inappropriate where it results in permitting actions which are contrary to shareholder interests. But fairness between shareholders is an appropriate basis for policy. E & J make the rather carefree assertion that a concern for fairness among investors is "180 degrees at odds with the philosophy underlying" the securities laws. We find this perculiar: Section 2 of the Securities Exchange Act states one of the statute's goals is to insure "fair and honest markets." Fairness among investors is central to the 1934 Act because that Act addresses past-distribution trading, unlike the concern with the disclosure of information in the distribution of securities in the 1933 Act. The 1934 Act's provisions regulating the exchange and over-the-counter markets, and prohibiting fraud, insider trading, and manipulation underscores this concern. Finally, it would be odd if E and J want to repeal the Williams Act on the grounds that it is "at odds" with the philosophy of the securities statutes since it is a securities statute. We also find E & J 's position, in the end, implausible because it strives to minimize "regulation" rather than mazimize shareholder wealth. E & J may see these goals as equivalent; we do not. Their ideal system calls for the elimination of regulation of bidders (e.g., the Williams Act) and of targets. But defensive tactics must be judged by some standard, even if it is one which denies shareholders the right of action to bring a lawsuit. We favor rules which try to maximize the professed benefits of tender offers-- provide for efficient capital allocation via market decisions--and minimize waste and transaction costs. Professor Easterbrook's position is particularly odd since he used to favor regulating target management even more heavily than we proposed in order to maximize shareholder gains. He advocated requiring target managers to be practically passive in responding to tender offers. See Easterbrook and Fischel, "The Proper Role of a Target's Management in Responding to a Tender Offer," 94 Harvard Law Review 1161, April 1981. Many members have a personal, financial stake in devising and conducting offensive s well as defensive tactics in tender offers. Lawyers and investment bankers engaged in these transactions benefit from a regulatory structure that allows acquirors and targets to "duke it out" in protracted contests involving complicated strategies; correspondingly, they may suffer if regulations operate to decrease the time, money and brainpower spent on facilitating or blocking these transactions. We should recognize the difference between spending energy to decide whether a merger is efficient and spending it on devising the battering rams or blockades needed to obtain or thwart a merger. With all due respect for the abilities of the panel members, we believe it is inappropriate to entrust the responsibility of evaluating the rules in the interests of shareholders to a group a majority of whom have conflicting self-interests. It strikes us as similar to asking bookies to evaluate the betting rules so as to maximize the interests of the bettors. Most of the panel members were similarly unqualified to evaluate the public interests that are implicated in the regulation of tender offers--much as bookies would not be the best persons to evaluate whether betting is good or bad, excessive or not, or a cause or effect of other problems which deserve attention. Where they explicitly considered the public interests, we find their analysis incomplete and their recommendations unpersuasive. For example, they recommend that states be prohibited from regulating tender offers in almost all respects. We recognize conflicts can exist between state and federal regulatory systems. However, there may be important state interests which could be effectuated through regulation of tender offers that are of greater public importance than their marginal cost to the efficiency of the securities markets. Whether or not such interests exist, we doubt the committee would have found them. The report goes well past the Supreme Court's holding in Edgar v. Mite which found that a state law violated the Commerce Clause because it unduly burdened takeovers without a corresponding benefit. The committee recommends prohibiting all state laws "regardless of their form" which restrict the ability of a company to make or respond to a tender offer, unless the laws pertain to state regulated industries or strictly local companies, and then only for certain objectives (See Recommendations 9, 34). The report does not offer any evidence for this recommendation; it simply asserts a conclusion that state laws "interfere" with takeovers (p.34). The panel members claim to have "balanced" the competing interests (p.34), but they apparently heard little evidence in regard to state interests. No state attorney general or state official was a member of the panel. No testimony was apparently received from any state official, with the exception of the counsel to the Massachusetts Securities Division who, along with three attorneys from private law firms, testified at the June 2 meeting in regard to the role of the states.* *The committee said it would limit its review to whether there was a need for coordination between state and other regulatory systems on the one hand and federal securities laws on the other, and not consider the "substantive issues" of the other systems (p.54) But the committee would obviously affect substantive state interests when it recommends eliminating state laws in order to achieve "coordination." Even where the Committee acknowledged that states have valid interests concerning certain regulated industries, they recommend that such laws be made "procedurally compatible" with the Williams Act. They recommend eliminating state requirements of hearings prior to tender offers, which might be opportunities to evaluate whether vital state interest will be served without having to halt or unscramble a merger later on. We do not have the evidence to support or oppose this recommendation. We merely wonder if the committee considered whether the stae regulatory interests are greater than the costs to securities transactions so as to warrant changing the Williams Act to make it "procedurally compatible" with state regulation. What are the public interests affected by tender offer regulation that are distinct from shareholder interests? The report seems to minimize them, by noting that tender offers simply a method of capital allocation that is not much different in substance from other mergers and acquisitions. We agree with this, to an extent, but the public concern and criticism of tender offers should not be dismissed as "hogwash", as some members advocate (p.73). We think the concern bespeaks two fundamentally important questions: First, are tender offers a product of a more pervasive problem? We suggest they might be in part a result of the fact that management of American companies and market professionals spend far too much time and energy trying to maximize short term profits rather than on strategies for long term investment and the creation of jobs and wealth. If that problem exists--as has been suggested by numerous commentators, such as professors Robert H. Hayes and the late William J. Abernathy of the Harvard Business School --then we should consider whether tender offer regulation can be designed so as to achieve beneficial allocation decisions with minimal transaction cost and waste. The public may be right that tender offers as presently conducted are unproductive or less productive than they could be. Perhaps regulations can encourage managers and professionals to focus on tasks that are of more value to society than the creation of poison pills, shark repellants, green mail, or lock ups. The rebuttal that such costs are "minimal" compared to the value of the transaction says nothing: it could justify paying $1000 for a taxi to deliver a target's response to a billion-dollar bid. The question is whether the costs can be lowered while still achieving the benefits. Needless to say, had the committee made a more critical asessment of the value of tender offers, and particularly of the value of defensive tactics, such an analysis might be possible. Second, have tender offers provoked such public criticism because they have produced, aggravated, or at least illuminated other problems that deserve attention? These might include a decline in antitrust enforcement which permits excessively large concentrations of capital; credit allocation systems or incentives which make available sufficient capital for billion dollar mergers but not for economic development in poorer areas or housing; million-dollar golden parachutes for displaced management while displaced workers receive inadequate or nonexistent relocation and training assistance or unemployment compensation; concern that regulations provide shareholders with sufficient time and information to evaluate and respond to a tender offer and a refusal to enact plant closing laws which would notify workers because they interfere with "business judgment." These problems may be beyond the scope of this report or the abilities of the panel members; but they still exist. We think the popular criticisms of tender offers will resound or persist in part because people experience these cruel ironies. It may be inappropriate to "blame" tender offers for these problems; but it would be arrogant to ignore them. *Their seminal article, "Managing Our Way to Economic Decline", Harvard Business Review, July/August, 1980, analyzes "merger mania" as a product of the preoccupation with short-term cash management. "Mergers are obviously an exciting game; they tend to produce fairly quick and decisive results, and they offer the kind of public recognition that helps careers along... Being called a "gunslinger", "white knight", or "raider" can quicken anyone's blood... [but] the great bulk of this merger activity appears to have been absolutely wasted in terms of generating economic benefits for stockholders" (pp 75-76). CHINISTS 15 AND INTERNATIONAL ASSOCIATION of MACHINISTS and AEROSPACE WORKERS MACHINISTS BUILDING, 1300 CONNECTICUT AVENUE, WASHINGTON, D. C. 20036 Office of the INTERNATIONAL PRESIDENT March 9, 1984 Area Code 202 857-5200 The Honorable Timothy E. Wirth Chairman, Subcommittee on Telecommunications, Consumer Protection and Finance Committee on Energy and Commerce Washington, D. C. 20515 Dear Mr. Chairman: I appreciate the opportunity to respond to your January 11 letter requesting my comments on issues related to "tender offers". The entire area of corporate acquisitions, mergers, and the like, is important to me and my constituents, because it directly affects the employees of the firms involved in such transactions. It affects them directly as employees and as investors in those firms, as well as less directly through the capital markets more generally. We hold specific views on all aspects, both individually and institutionally as a labor union. I prefer, however, not to use this opportunity to review all of those views, but to focus a very significant area that has received inadequate attention: the relationship of tender offers to employee stock ownership and to retirement plan funds. This area is very complex. It raises significant issues of fiduciary responsibility, adequate disclosure, valuation, and fundamental fairness. It has received inadequate attention, perhaps because many of the techniques have been applied only in the relative recent period and/or because aspects fall within the jurisdiction of several agencies, including the SEC and the Department of Labor. Many aspects have fallen through cracks of the jurisdictions of the several agencies or are beyond their historical expertise. Others represent new areas and techniques, with which the jurisdictions will catch up in the future or will respond to only after specific transactions the result egregious damage to employees. I propose that you expand your agenda to include this area, because it involves the basic aim of tender offer regulation; investor protection. Furthermore, you might consider separate hearings on the subject, coordinated with the labor committees. Its import extends beyond investor protection, to the protection of careers and pension and retirement funds, which generally are irreplaceable. Attached is a schedule of several of the key issues. I am also enclosing a copy of the ground breaking Federal District Court decision in the Bierwirth case and the action of the Department of Labor in the Raymond International tender by management. It clearly focuses a number of the issues. You may note that DOL engaged as its financial advisor to review the Raymond transaction Brian M. Freemun, who is also our investment banker. Accordingly, we are very sensitive to the issues and knowledgeable about them. I would be delighted to develop my views further on the issues, if you decide to include this area within the scope of your hearings. Lolidarity House 8000 EAST JEFFERSON AVE DETROIT MICHIGAN 48214 PHONE 13131 926-5000 INTERNATIONAL UNION, UNITED AUTOMOBILE, AEROSPACE & AGRICULTURAL IMPLEMENT WORKERS OF AMERICA-UAW RAYMOND E. MAJERUS, SECRETARY-TREASURER Thank you This is in response to your recent letter to UAW President Owen Bieber. Tender offers, and mergers/acquisitions in a more general sense, raise the very issues We therefore disagree totally with the SEC Advisory Committee's two primary These and other recommendations of the Advisory Committee are so narrowly focused Such protections could be put in motion by requiring "public impact statements" that |