LECTURE NOTES

THE LEGAL / REGULATORY FRAMEWORK

HARVEY PONIACHEK, Ph.D.

MERGERS & ACQUISITIONS
SPRING 2015

THE LEGAL / REGULATORY FRAMEWORK

THE M&A LEGAL ENVIRONMENT IS COMPLEX, IT EVOLVED
OVER EXTENDED TIME PERIODS AT DIFFERENT LEVELS
OF GOVERNMENT, AND ITS DESIGNED TO ACHIEVE
VARIOUS OBJECTIVES
THE SECURITIES ACT OF 1933--REGULATES THE SALE OF
SECURITIES TO THE PUBLIC, AND REQUIRES
REGISTRATION OF PUBLIC OFFERINGS
THE SECURITIES EXCHANGE ACT OF 1934 ESTABLISHED
THE SEC TO ADMINISTER THE SECURITIES LAWS AND TO
REGULATE SECURITIES PRACTICES
WILLIAMS ACT OF 1968 [AS AMENDED IN 1980]
REGULATES TENDER OFFERS

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LEGAL / REGULATORY FRAMEWORKCONT.

ANTITRUST REGULATIONS--SHERMAN ACT

1890, CLAYTON ACT 1914, FEDERAL TRADE
COMMISSION (FTC) 1914,CELLER-KEFAUVER
ACT 1950, HART-SCOTT-RODINO (HSR) ACT
OF 1976 (AMENDED IN 2001)
STATE CORPORATION LAWS, ANTI
TAKEOVER LAWS, ANTITRUST LAWS
CORPORATE CHARTER, AND CORPORATE BYLAWS
CORPORATE GOVERNANCE

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WILLIAMS ACT--TENDER OFFER REGULATIONS

REGULATES TENDER OFFERS [BUT

WHAT IS A TENDER OFFER? THERE ARE VARIOUS

DEFINITIONS THAT COURTS HAVE ESTABLISHED]

PROVIDES PROCEDURES &

DISCLOSURE REQUIREMENTS FOR
ACQUISITIONS
PROVIDES SHs WITH TIME TO DECIDE
WHETHER TO TENDER THEIR
SHARES

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WILLIAMS ACTCONT.
SEC 13 D--REGULATES SUBSTANTIAL SHARE
ACQUISITIONS, WHETHER PUBLIC OR PRIVATE;
5% OWNERSHIP REQUIRES FILING A SCHEDULE 13
D WITH THE SEC WITHIN 10 DAYSTHUS
PROVIDING SHs AND MANAGEMENT WITH AN
EARLY WARNING SYSTEM
SEC 14 D-- REGULATES (SMALL AND LARGE)
PUBLIC TENDER OFFERS AND REQUIRES
DISCLOSURE BY FILING SCHEDULE 14 D WITH
THE ESC WITHIN 5 DAYS OF AN ANNOUNCEMENT

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WILLIAMS ACTCONT.
SEC 14 DTHE TARGET MUST REPLY
WITHIN 10 DAYSBY RECOMMENDING
ACCEPTANCE, REJECTION, OR NO POSITION
A TENDER OFFER IS OPEN FOR 20 DAYS
AND THE ACQUIRER MUST PURCHASE
SHARES ON A PRO RATA BASIS AND PER
THE BEST PRICE RULE
TWO TIERED TENDER OFFER--EACH
SUBJECT TO THE 20 DAY WAITING PERIOD

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SECURITIES LAWS IMPLICATIONS ON
TRANSACTIONS
FRIENDLY MERGER-- CASH FOR STOCK ACQUIRER NEEDS
TO ISSUE A PROXY STATEMENT TO THE SEC FOR APPROVAL,
AND FORWARD IT TO TARGET SHs, INCLUDING A VOTING
SHEET THAT SHs COMPLETE AND RETURN TO THE PROXY
SERVICE COMPANY; SHs COULD VOTE ON THE OFFER EITHER
THROUGH PROXY VOTES OR IN PERSON AT A SHAREHOLDERS
MEETING [MOST SHs VOTE THROUGH PROXY]
FRIENDLY MERGER-- STOCK FOR STOCK--ACQUIRER WHO
PLANS ON ISSUING NEW SHARES FILES WITH THE SEC A
REGISTRATION FORM AND PROXY STATEMENT [THESE FORMS
ARE USUALLY COMBINED AS WE NOTED IN THE CASE OF CASTERLING AND INTEL-LEVEL ONE], SHAREHOLDERS OF
TARGET VOTE ON THE OFFER VIA PROXIES OR AT A SHs
MEETING

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SECURITIES LAWS IMPLICATIONS ON
TRANSACTIONSCONT.
HOSTILE TAKEOVER USING CASH FOR STOCK-TENDER OFFER IS SUBJECT TO THE WILLIAMS
ACT; 5% ACQUISITION FILING WITHIN 5 DAYS; 20
WORKING DAYS; BIDDER ISSUES A PROSPECTUS
TO SHs SOLICITING THEIR SHARES (WITHOUT
OBTAINING SEC COMMENTS DUE TO TIME
CONSTRAINT]
HOSTILE STOCK FOR STOCK TENDERREQUIRES
SEC STOCK REGISTRATION WHICH NEEDS TO BE
APPROVED, AND THEN THE EXCHANGE OFFER IS
DISSEMINATED TO SHs

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HIGHLIGHTS OF

FEDERAL ANTITRUST REGULATIONS

SHERMAN ANTITRUST ACT 1890
CLAYTON ACT--FURTHER DEFINITION OF ANTITRUST
FEDERAL TRADE COMMISSION (FTC) 1914RE ENFORCEMENT
OF THE CLAYTON ACT
CELLER-KEFAUVER ACT OF 1950AMENDED AND REINFORCED
THE CLAYTON ACTS
HART-SCOTT-RODINO (HSR) ACT OF 1976--PRE MERGER
NOTIFICATION TO DOJ & FTC
DOJ LAW SUITS, FTC--ADMIN LAW JUDGE, COMMISSION
REVIEW, FEDERAL APPEAL COURT
1992 DOJ & FTC MERGER GUIDELINES--QUALITATIVE &
QUANTITATIVE, 5 STEP PROCESS, INCLUDING: HERFINDAHLHIRSCHMAN INDEX (HHI), 5% PRICE EFFECT
NEW APPROACHESAPPLIED IN 1997

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Perfect Competition &
Monopolistic Behavior
Antitrust legislation was designed to prohibit mergers &
acquisitions that may reduce competition or tend to create
monopoly (restrain output and raise prices)
Perfect competition is reflected by numerous firms, easy entry
and exit, and output maximization at the market determined
price
Monopolistic behavior is reflected in a single firm dominating
the market, with lower output and higher prices than in a
competitive market
Oligopolistic competition characterized by several
competitors, product and price differentials (e.g., auto
industry)

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Antitrust Statues
Sherman Antitrust Act, 1890: Sec 1Prohibits restraint of
trade, Sec 2-prohibits attempts to monopolize an industry;
Clayton Act, 1914: Prohibited mergers & acquisitions
involving stocks (but not assets), Sec 2-prohibited price
discrimination among customers, unless justified on the basis
of cost differentials, Sec 3-prohibits tying contracts, Sec 7prohibits acquisition of shares in competing firms, Sec 8interlocking directorates was prohibited when the directors
sat on board of competing firms
Federal Trade Commission Act, 1914: established an
antitrust enforcement agency, could issue Cease and Desist
orders to firms engaged in unfair trade

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Antitrust Statuescont.
Celler-Kefauver Act, 1950: Sec 7-Amended the Clayton Act
by defining mergers through stock and assets, define line of
commerce not necessary a particular industry, addressed
regional geographic basis rather than the entire country
Hart-Scott-Rodino Act, 1975: requires that FTC and DOJ be
notified and pre approve proposed mergers, acquirers and
targets must file with the govt and seek approval, review
period lasts 15 days and could be extended an extra 10 days
for all cash deals, and 30 days and possible extension of 20
extra days for securities offers AMENDMENT???
In the 1990s, approx % of M&As required enforcement
action under the Act

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Antitrust Guidelines for Horizontal Mergers
Degree of concentrationits importance &
quantificationevolved over time
Market share of the 4 largest firms (1968)
Herfindahl-Hirschman Index (HHI) (1982);
HHI=sum of S square, S=market share of each firm
The merger guidelines concentratiuon levsl:
HHI<1,000 industry is not concentrated, no
challenge; HHI= 1,000 to 1,800 and d HHI=100,
investigate; HHI>1,800 and d HHI=50, challenge

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Antitrust GuidelinesCONT.
Commercial banks have usually considerably higher
HHIs
Qualitative data (1984):efficiency, financial viability,
foreign markets, price effect5% effect of a merger
Merger guidelines (1992): 1. concentration (HHI) in
relevant market, 2. price effect (5%), 3. barrier to
enter, 4. offsetting efficiency, 5. risk of failure
Net effect of merger: benefit and cost (1997)
Non-horizontal mergers (vertical and conglomerate)
are subject to different guidelines

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Price Effect
Demand Elasticities & Market Power
If in the post merger prices increase by 5%--what
are the implications for market power and
consumers?
Consumer price elasticity--if e>1 price elastic, e=1
unitary elastic, e<1 inelastic
Definition of e = [ch q/q] / [ch p/p]
If price is inelastic over the 5% price range, then the
post merged firms could exercise market power
and consumers would be adversely affected by the
merger

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Applications & Case Law: Some Examples
Cases before DOJ and FTC: Ride Aid
Tender Offer for Revco (W textbook, p.
29)
Microsoft-Intuitrejected by DOJ/FTC
Staples bid for Office Depotrejected by
DOJ / FTC

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ANTITRUST IN THE EU
THE PROPOSED ACQUISITION OF
HONEYWELL BY GE

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Electronic References: Antitrust Mergers
http://www.abanet.org/antitrust/pubs.html
http://www.lamlaw.com/DOJvsMicrosoft/C
opernic98Search.htm
http://www.alstonbird.com/docs/Articles/19
9709/2910158.HTM

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STATE ANTI TAKEOVER LAWS
THE INDIANA ACTWAS DEEMED
CONSTITUTIONAL BY THE SUPREME COURT IN
1987STIPULATES THAT THE TRANSFER OF
VOTING RIGHTS TO A BIDDER IN A TENDER OFFER
IS SUBJECT TO APPROVAL BY A MAJORITY SHs,
EXCLUDING THE BIDDER AND INSIDER
DIRECTORS AND MANAGEMENT
NEW YORK AND NEW JERSEY LAWS APPLY A FIVEYEAR MORATORIUM PREVENTING HOSTILE
BIDDERS FROM DOING A SECOND STEP
TRANSACTION

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STATE ANTI TAKEOVERCONT.
THE WISCONSIN ANTI TAKEOVER LAW--REQUIRES
THE BIDDER WITH 10% OR MORE OF THE TARGET
SHARES TO OBTAIN APPROVAL FROM OTHER
SHAREHOLDERS TO PROCEED WITH THE
MERGER, OR WAIT 3 YEARS TO COMPLETE THE
TRANSACTION
PENNSYLVANIA HAS THE STRONGEST ANTI
TAKEOVER LAW IN THE U.S. THAT WAS PASSED IN
1990. IT RESTRICTS THE VOTING RIGHTS OF ANY
GROUP OR INVESTOR THAT PURCHASES 20% OR
MORE OF A TARGETS SHARES

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STATE ANTI TAKEOVERCONT.
DELAWARE IS HOME TO 56% OF FORTUNE 500, 180,000 COS,
AND 20% OF STATE BUDGET IS DERIVED FROM
REGISTRATION FEES. THEREFORE, THE STATE DEVELOPED
EXPERTISE TO SERVICE THESE FIRMS AND ITS
CORPORATION LAWS HAVE BECOME THE BENCHMARK FOR
OTHERS
THE DELAWARE ANTITRUST LAWAN UNWANTED BIDDER
(HOSTILE BIDDER) WHO ACQUIRES MORE THAN 15% OF THE
TARGET MAY HAVE TO WAIT 3 YEARS, UNLESS SEVERAL
OTHER CONDITIONS ARE SATISFIED (ACQUIRES 85%
OUTSTANDING SHARES, 66% OF SHAREHOLDERS APPROVE
THE ACQUISITION, THE BOARD AND SHAREHOLDERS WAVE
THE ANTI TAKEOVER LAW)

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STATE ANTITRUST LAWS
STATE ANTITRUST REGULATIONSWHICH ARE
INCONSISTENTWERE FIRST DEVELOPED IN THE
1960S AND 1970S, EMERGED IN RESPONSE TO
PRESSURE TO PROTECT HOME COS UNDER
TAKEOVER THREATS

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CORPORATE GOVERNANCE AND M&As

ADDRESSED IN SEPARATE CLASS NOTES UNDER CORPORATE

GOVERNANCE & M&A