Academic journal article St. John's Law Review

The New Face of Implied Right to Sue Jurisprudence and the Sec's Best-Price Rule

Academic journal article St. John's Law Review

The New Face of Implied Right to Sue Jurisprudence and the Sec's Best-Price Rule

Article excerpt

INTRODUCTION

One common takeover method in corporate finance is the tender offer. The term "tender offer" refers to a public offer by an acquiring company to all stockholders of a publicly traded corporation. The acquiring entity usually offers a price above market value to induce the stockholders to tender their shares, and the offer is contingent on a fixed number of shares being tendered. The shareholders make a profit on their holdings, while the bidder aims for control of the corporation and, consequently, its assets.1 Any acquiring party who will own more than five percent of the target corporation is subject to a number of requirements set out in the Securities Exchange Act.2

An increase in the use of the tender offer as a takeover mechanism in the 1960s raised concerns about shareholder protection.3 Investors facing a tender offer had to make difficult choices based on poor information about the bidding party. In response, Congress passed the Williams Act in 1968 to provide more adequate disclosure mechanisms for shareholders.4 One of the provisions of the Williams Act restricted bidders from offering a certain price at the beginning of a tender offer and later increasing the price to encourage more shareholders to tender their shares. This limitation is known as the "best-price" rule. The best-price rule is actually a combination of a statute and a regulation. Section 78n(d)(7) of the Securities Exchange Act-originally section 14(d)(7) of the Williams Act5-states that a bidder who increases the amount of a tender offer after the initial offering must pay that increase to holders who have already tendered their shares.6 Enacted in 1986, regulation 14d10 also prohibits the bidder from decreasing the price of the tender offer after the initial offering due to the fact that the price decrease became a popular takeover tactic.7

Shareholders facing a bidder's violation of the best-price rule have traditionally been able to bring their own lawsuits for damages. While there is no specific private right to sue explicitly written into section 14(d)(7), federal courts have read into this section of the Act an implied private cause of action for aggrieved shareholders.8 The Ninth Circuit recognized such a right in Epstein v. MCA, Inc.9 On appeal, however, the Supreme Court reversed and remanded the case on different grounds.10 In dicta, the Court expressly declined to rule as to whether section 14(d)(7) afforded plaintiffs a private cause of action.11 This nonruling, along with a decades-long shift in the Court's jurisprudence on reading implied private causes of action into statutes, has left serious doubt as to whether plaintiffs should still be able to bring a claim under the best-price rule. While aggrieved shareholders have administrative remedies at their disposal, concluding that they lack a private cause of action for tender offer violations would have a dramatic impact on corporate practices. Despite the relative efficiency of the tender offer as a takeover mechanism (as compared to longer statutory mergers), the potential for protracted litigation and billion dollar damage claims has made this otherwise practical merger tool disfavored.12 Indeed, often the mere threat of large securities class action lawsuits can push companies into settlement negotiations.13

This Note argues that an implied right to sue under the bestprice doctrine should no longer be recognized, based on the Court's current attitude toward reading private causes of action into statutes. The Court's present method of finding implied rights to sue is primarily a matter of straightforward statutory interpretation.14 That being the case, this Note suggests that there is nothing in a plain reading of section 14(d)(7) that gives private parties a right to sue for violations of that section. A thorough analysis of the statute in light of the Court's current stance on implied causes of action has been lacking in judicial opinions involving the best-price rule. …

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