Homework: History, Legal Framework, & Merger Strategy
Assignment
1. Discuss the Williams Act and the implications it places on mergers and acquisitions.
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. (M&C Partners) The Williams Act came as a response to the hostile
takeovers happening by large companies where shareholders and executives were at risk.
Tender offers would be made for the stocks of target companies which gave a short time
for acceptance. Shareholders were at a disadvantage because they were forced to make
quick decisions about their stockholding because of the pressure of time. The Williams
Act changed that. According to Gaughan, the 4 objectives of The Williams Act are the
following: 1) regulate tender offers. 2) provide procedures and disclosure requirements
for acquisitions, 3) provide shareholders with time to make informed decisions regarding
tender offers, and 4) increase confidence in securities markets. Under The Williams Act,
it is required companies making a tender offer that is 15% to 20% above the current
market price to disclose details of the offer to the Securities and Exchange Commission.
(CFI Team)
2. Describe and discuss why the time period of a commencement offer is crucial in an
offer.
The date an offer is made is important because it gives the time frame of when the
required materials should be turned in. When there is publication of the tender,
advertisement of the tender offer or submittal of the tender offer materials, the tender
offer begins at 12:01 a.m. (Gaughan, 2018) After an offer is announced, the bidder is
given 5 days to disperse the offer materials. The takeover becomes null and void if the
required materials are not in within the specified time frame.
3. Discuss the implications of Wellman v. Dickinson in the U. S. District Court for
mergers and acquisitions.
Being that The Williams Act did not clearly define what a tender offer is, Wellman v.
Dickinson the U.S. District Court for the Second Circuit brought about the 8-factor test.
The factors include the following: 1) there is an active and widespread solicitation of
public shareholders, 2) solicitation is made for a substantial percentage of the issuer’s
securities, 3) the offer is made at a premium over the prevailing market price, 4) terms of
the offer are firm rather than negotiable, 5) offer is contingent upon the tender of a fixed
number of shares and maybe specifications for a maximum number of shares, 6) offer is
open for a limited period of time, 7) offerees are subjected to pressure to sell stock, and
8) public announcements of a purchasing program that precedes or are coincident with a
rapid accumulation of shares. The 8th factor has no relevance to Wellman v. Dickinson
and was derived from an earlier ruling. The tender offer does not need all 8 factors as the
court did not want the factors to create the automation of a litmus test for a tender offer.
4. Choose two of the U. S. State Corporation laws defined in your text. What
implications do these laws or legal principles create for the buyer and seller?
The business judgment rule is the standard by which directors of corporations are judged
when they exercise their fiduciary duties in the course and an attempted takeover.
(Gaughan, 2018) This rule presumes that directors are acting in accordance with their
fiduciary obligations to shareholders. In other words, acting in their best interest while
exercising due care and having justification for the decisions made and actions taken.
(Gordon, 2021) Speaking mergers and acquisitions, the target company’s directors should
be informed about the value of their company and the specifics of the offer being
presented as opposed to reacting to any bid that comes down. (Gaughan, 2018)
The Revlon duties also incorporate a fiduciary duty of care to the corporate boards of
directors when facing hostile takeovers and mergers. (Board Governance) The board of
directors have the goal to sell for the highest price possible. The Board Governance
expresses that before the Revlon duties, directors were under scrutiny based on the
business judgment rule that extended a low bar by which the actions of a board would be
upheld.
5. Why are state antitakeover laws important? Who are these laws designed to
protect?
Antitakeover laws are important because they increase protection to a company who is
potentially being viewed for a takeover. Even though they conflict with federal laws, the
state laws govern corporate charters and their bylaws. (Gaughan, 2018) In M&A, the
antitakeover laws protect against a hostile bid.
6. Discuss SEC Rule 10b-5. How does this rule protect shareholders who incur losses?
According to Brown, Neri, Smith & Khan, the SEC Rule 10b-5, states that it is illegal for
any person to defraud or deceive someone, including through the misrepresentation of
material information, with respect to the sale or purchase of a security. Violations of Rule
10b-5 are grounds for a lawsuit. If an individual misappropriates confidential information
on a merger or acquisition and uses it as the basis for trade, Rule 10b-5 will apply.
(Gaughan, 2018)
7. The Sherman Antitrust Act of 1890 provides the foundation of antitrust law.
Discuss at least two of the other Acts that pertain to antitrust.
The Clayton Act came about to strengthen the Sherman Act. It made it clear what
business practices unfairly restrain trade and reduce competition. Section 7 of the Clayton
Act prevents companies from merging or acquiring other smaller entities with the goal of
gaining too much power that lessens competition. (CFI Team, 2020)
Just as the Clayton Act strengthened the Sherman Act, the Federal Trade Commission
Act played a part in the enforcement of the Clayton Act. The main antitrust provision of
the Act is section 5 which states "Unfair methods of competition in or affecting
commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby
declared unlawful."(Safane, 2022)
8. Acquisition is a popular growth strategy, why?
Having an acquisition strategy doesn’t just gain size and reinforce cash flow, it also adds
substantially to the value offering in ways that are complementary to the core growth
strategy of a business. According to Safane, acquisitions increase market share, develop
new geographical markets, aid in diversification, and adds products and/or services to the
portfolio.
9. How does the synergistic effect influence mergers and acquisitions?
Synergy is thought to combine something to make it better. Gaughan expresses that in
mergers, 2+2+5 would equate to the ability of a corporate combination to be more
profitable than the individual parts of the firms that were combined. There are 2 types of
synergy, operating and financial. Operating synergy associates with enhancing revenues
or lowering costs and financial synergy associates with the costs of capital to the
acquiring firm or the merging partners.
10. Discuss diversification as it relates and drives corporate strategy.
When a company decides to diversify, they are making a means to grow outside their
current industry. A company may want to enter into a more profitable industry which is
one reason for diversification. The drawback is the knowing of if it is a good and
profitable move for the company. Even though there are some unknowns, it was found
that diversified companies had higher profit margin and lower costs which implies that
diversified acquirers are better able to implement postdeal efficiency improvements
compared to more focused bidders. (Gaughn, 2018)
When it comes to mergers and acquisitions, there are various laws and rules that one must be
aware of. James 1:5 says, “If any of you lacks wisdom, let him ask God, who gives generously to
all without reproach, and it will be given him.” The bible also speaks on getting wisdom and
getting understanding. It is important to understand the fine print when one is considering a
merger or acquisition.
References
Board Governance. (2019). The Revlon Rule, Simplified – All Stakeholders. Retrieved from
https://revlonduties.com/board-governance/revlon-rule/
Brown, Neri, Smith & Khan, LLP. (2021). The Guide to Securities Fraud Elements and SEC
Rule 10b-5. Retrieved from https://bnsklaw.com/the-guide-to-securities-fraud-elements-
and-sec-rule-10b-5/
CFI Team. (2020a). Clayton Antitrust Act. Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/finance/clayton-antitrust-act/
CFI Team. (2020). Williams Act. Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/finance/williams-act/
Cradock, C. (2020). Growth by Acquisition: Why Follow the Path of Growth through Acquisition
in the First Place. Retrieved from https://www.victanis.com/blog/organic-growth-vs-
merger-acquisition
English Standard Version Bible. (2001). ESV Online. https://esv.literalword.com/
Gaughan, Patrick A. (2018).JMergers,+Acquisitions, and Corporate Restructurings. 7th ed.,
Hoboken, NJ: John Wiley & Sons. ISBN: 9781119380764.
Gordon, J. (2021). Business Judgment Rule - Explained. Retrieved from
https://thebusinessprofessor.com/en_US/business-governance/what-is-the-business-
judgment-rule
M&C Partners. (2020). Williams Act. Retrieved from https://mecpartners.it/en/williams-act/
Safane, J. (2022). The Federal Trade Commission Act sets the guidelines underpinning the
FTC’s consumer-protection enforcement. Retrieved from
https://www.businessinsider.com/personal-finance/federal-trade-commission-act?
international=true&r=US&IR=T
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