AMES L TOLLEY VICE PHE DENT PUBLIC AFFAIRS February 21, 1984 CHRYSLER Honorable Timothy E. Wirth Dear Congressman wirth: Mr. Lee Iacocca has asked me to reply to your January 6, 1984 letter regarding your Subcommittee's review of the adequacy of current federal regulation of tender offers. We appreciate having the opportunity to make our views known on this important subject. We have a few general comments on the recommendations of the SEC Advisory Committee on Tender Offers. We believe that the use of credit to finance takeovers could cause some distortion in the credit markets. When potential car buyers are unable to borrow money to buy cars, while at the same time billions of dollars are being borrowed to finance a corporate acquisition, it seems to us that the normal credit market is out of balance.. Any regulation affecting takeovers should be designed to insure that the efficiency of the capital markets is maintained. Such regulation should neither promote nor deter takeovers. We would not be in favor of giving the Federal Reserve Board standby authority to approve bank loans in excess of specified amounts used in mergers. On the other hand, we would agree that federal law and regulation, rather than state law and regulation, should govern takeover of companies other than local companies. Federal regulation of takeovers should take a balanced approach favoring neither the acquiring nor the target company, but should provide for adequate disclosure to all interested parties and be designed to protect small investors. A takeover bid should remain open for a reasonable period of time to permit all parties to evaluate the bid. Determining a fair price in a tender offer is difficult. We would, however, strongly oppose any suggestion that arbitration or other third party intervention be used to decide on a fair price. The open market is the best forum within which to establish values. We believe that the business judgment rule should govern management decisions that may affect the likelihood of a takeover. If shareholders oppose such decisions, or are fearful that management will not act in their best interests, the shareholders have remedies to protect their interests. We do not agree that legislation or regulation is needed to prohibit charter or by-law provisions which erect barriers against takeovers. The board of directors serves in a fiduciary capacity to act in the best interests of the corporation and its shareholders. The free operation of this system affords sufficient protection to affected parties. If a tender offer is started, we believe that shareholders should be able to respond with minimal regulatory interference. So long as adequate time is permitted to review the details of a tender offer, and small investors are not disadvantaged, the operation of the free market offers the required safeguards. We agree that any regulation of takeovers should not impede or otherwise make the administration of anti-trust legislation slower or less efficient than it now is. If you have any questions regarding the above, please let me hear from you. We thank you for inviting us to share our views with you. I am pleased to respond to your letter of December 5 to John K. Armstrong requesting the views of CIGNA Corporation ("CIGNA") on the adequacy of current federal regulation of tender offers with particular attention to the recommendations of the SEC Advisory Committee on Tender Offers (the "Committee"). We appreciate the opportunity to comment on a subject having such broad societal consequences as well as overriding importance to the business and financial communities. CIGNA was formed in connection with the 1982 business combination of Connecticut General Corporation and INA Corporation. Through its subsidiaries, CIGNA is a major provider of insurance and related financial services, including employee benefits, individual financial services, property and casualty insurance, asset management and health care services. In general, we are in agreement with the philosophy on which the Committee's recommendations were based, as summarized in the cover letter from the Chairman of the Committee to John S. R. Shad which accompanied the Committee's report: "The Committee respects the free market forces in the operation of the U.S. securities markets. Academic evidence is widespread that the takeover process is at least not demonstrably harmful to shareholders and some evidence points to its systematic benefits. We would be reluctant to restrict a process which seems to work reasonably well with the possiblility that we might incur some unintended harm....Our instincts led us to rely upon competitive markets as the ultimate regulator for the unforeseen specifics that may affect security holders. Our recommendations should promote private investment systems rather than hamper capital flows by heavy reliance upon rule making." The acceptance of the view expressed by the Committee that the financial markets should be the "ultimate regulator" of takeover bids necessarily and, in our view, correctly, leads to the conclusion that the regulatory system should be essentially neutral towards the actions taken by the boards of both bidding and target companies. We believe that the business judgment rule should remain the governing standard by which such actions are measured and that the rule is sufficiently broad in its scope and application by the courts to adequately address abuses in the takeover area. The variety of innovative techniques which have arisen in this area to date, and the certainty that innovations will continue in the future, suggests that judicial resolution of problems on a case-by-case basis is preferable to legislative attempts to anticipate and respond to the myriad of problems which may arise. Our comments on specific recommendations by the Committee are as follows: 1. In our view, corporate takeovers are, in general, a valid method of capital allocation which promote efficient corporate operations and which have not restricted the availability of credit or otherwise adversely affected the business and financial markets. They should be treated as a fact of corporate life, to be neither encouraged nor discouraged by the regulatory system that governs them. For those reasons, we concur with Committee Recommendations 1, 2 and 3. 2. The overriding goal of the regulatory system should be to ensure that shareholders and financial markets have accurate and timely information on which to base a reasonable decision concerning the merits of a takeover bid, and we thus support the broad policy guidelines set forth in Recommendation 7. Within those confines, the analysis of the merits of a given bid and the decision whether to accept it should be left exclusively to the shareholders and the markets and should not be the subject of governmental intervention except as may be justified under antitrust law. We are therefore in accord with Recommendation 24 that a "fairness" review of the terms of an offer is not warranted, and on similar grounds we would advise against the imposition of a "public interest" test. 3. We are in full agreement with the Committee's affirmation (Recommendation 33) of the business judgment rule as the governing standard for decisions made by a company in connection with takeovers. The continued vitality of the business judgment rule leads us to disagree with the Recommendations which would restrict the implementation of certain charter and by-law provisions (Recommendations 35 and 36) and mandating non-binding shareholder advisory votes with respect to other internal corporate matters pertaining to takeovers (Recommendations 37 and 38). In our view, all of these matters are within the domain of the Board of Directors, acting as the duly elected representatives of the shareholders, and should not be the subject of federally imposed restrictions. There are adequate safeguards already in place to guard against abuses in these areas, notably the business judgment rule, state laws imposing fiduciary responsibilities on directors and management, and the right of shareholders to vote to either direct the implementation of a given action through a formal shareholder proposal or to refuse to elect directors who are not responsive to shareholder concerns. The legal effect of an advisory vote is unclear, and such a mechanism carries with it the clear potential for substantially disrupting the present system of internal corporate governance. CIGNA For those reasons, we cannot endorse Recommendations 35, 36, 37 or 38. Conversely, we support the Committee in not attempting to supercede the present corporate governance system with respect to the matters set forth in Recommendations 31, 39, and 42. 4. We agree with the Committee that the business judgment rule is the standard against which the use of counter tender offers (Recommendation 40) and contracts to sell stock to preferred acquirors (Recommendation 41) should be measured. However, the limitations suggested by the Committee with respect to those actions would undercut the vitality of that standard, and should be rejected. 5. We concur with the portions of Recommendations 9 and 34 recognizing the preeminent role of the states with respect to certain "regulated" industries, including insurance companies, banks and utilities. We believe that most careful consideration and study must take place before imposing federal standards which will override the states' role in regulating these industries. The Committee's suggestion in Recommendation 34 that, under certain circumstances, a regulated business could be placed "in trust" pending the outcome of state regulatory proceedings might raise substantial and complex questions as to responsibility for operating the business during that period, especially in the insurance and banking fields. In the absence of compelling evidence that state regulatory systems concerning these industries unduly restrict takeover bids to the detriment of shareholders, our view is that the completion of such bids should await final approval by the appropriate state agency. 6. In order to ensure that material information regarding takeovers reaches the market in a timely fashion, we support Recommendation 13 requiring 48 hours notice to the SEC before a person may acquire more than 5% of a class of equity securities.* In order to enhance that goal, consideration should be given to specifying a deadline by which additional purchases, together with any change in the purchaser's intention, must be reported. Such a deadline would be preferable to the current standard requiring only that such purchases be reported "promptly". 7. We agree with Recommendations 19 and 20 as methods of ensuring that the information to be received by shareholders in connection with takeover bids is as clear and concise as possible. In addition, in order to reduce the possibility that time pressure becomes a factor in determining the outcome of a takeover bid, we favor the increase in the mimimum offering periods set forth in Recommendation 17. 9. As indicated earlier in this letter, it is our view that the regulatory system should treat takeovers as a fact of corporate life without encouraging or discouraging them. Similarly, that system should not differentiate between tender offers on the basis of the type of consideration used to consummate such transactions. We therefore support Recommendations 5, 11 and 12 which would put cash tender offers and stock tender offers on essentially equal regulatory footing. In sum, we believe that the Committee has done an excellent job in raising many of the major questions in the takeover area and in spurring constructive discussion on those issues. We hope that the views expressed in this letter will contribute to that discussion. If you have any questions concerning CIGNA's views, please do not hesitate to call me. We assume that this requirement would only apply to persons required to file on Schedule 130, and would not include the limited class of institutional investors currently eligible to file a short form statement on Schedule 136. |