The buying back of shares by a company is governed by both the laws of the state where the company is incorporated and by federal laws pertaining to buybacks. During the 1980s, erstwhile corporate raiders would purchase shares of a company and basically threaten a hostile takeover if their buyback terms were not met. For a variety of reasons, the target company would oftentimes repurchase the acquired shares for a substantial premium. Known as greenmail, the blackmailing of corporate management in this manner became a profitable business for such corporate raiders. Today, a variation on the greenmail theme has arisen whereby hedge fund activists who seek to effect change in a company acquire a significant number of shares and then proceed to make their demands. Is this tactic kosher under federal and state buyback laws?
Federal Buyback Statutes
Section 14(e) Securities Exchange Act of 1934 and its accompanying Regulation 14E regulate the buyback of shares in connection with a tender offer. Among the restrictions pertaining to such purchases is the requirement that tender offers must be open to all shareholders for at least 20 business days, a tender offer statement must be filed with the SEC, public announcements and other communications must be disclosed, and the consideration paid to any shareholder for securities tendered in the tender offer must be the highest consideration paid to any other shareholder. Open-market repurchase campaigns, on the other hand, are regulated by Rule 10b-18 of the Exchange Act, which provides an issuer with a “safe harbor” from liability for manipulation based on the timing, price, volume, and other particulars of the repurchases. Notwithstanding these and other restrictions on buybacks, activist managers still manage to exploit their holdings in order to achieve their activist goals.
Disruption and Disparagement
About 30 years ago, a major U.S. car manufacturer offered to buy back the shares owned by an activist investorat an attractive above-market pricein exchange for his ceasing disparagement of the companys management. The value to the companys brand and reputation can motivate management to pay such hush mail as a sound business decision in exchange for the activists non-disparagement agreement. Threats of a proxy fight over board members and management by an activist investor might also motivate management to make an offer that cant be refused. Alternatively, or in concert with a buyback offer, the activist may be offered a seat on the board as appeasement.
Activist Demands on the Rise
As hedge fund activism continues to riserecent statistics show that activist hedge fund managers gained 6.5% so far in 2014publicly traded companies need to remain vigilant over the agitation for change being garnered by such activists.
David draws on 20+ years’ experience in both legal practice and in business services delivery since his own call to the Bar in 1989. With several years in the startup environment, including as a co-founder in the legal tech space specifically, he brings a unique and timely perspective on the role of data, automation and artificial intelligence in the modern and efficient delivery of services for legal consumers. Having been both a corporate buyer of legal services and a services provider, he identifies the greater efficiency and value that can be achieved in legal operations for corporate buyers especially.
An attorney, David worked for law firms Pinsent Masons and Linklaters in London before moving to New York to join Credit Suisse. As CAO, he helped negotiate & execute the relocation of Credit Suisse into its new NYC global HQ. Subsequently, David directed major global outsourcing, shared sourcing, HR operations & process efficiency initiatives including the digitization of records, the global roll-out of PeopleSoft HRMS & Y2K. David has worked extensively in the UK, US, Philippines, India and China markets in the areas of data management, human resources and business process outsourcing.
Most recently, David has been successfully investing in and serving as an advisory board member of several legal services start-ups including a cloud-based solution for legal process automation and e-filing; and a technology solution for large-scale capture of court and other public data used for litigation analysis, among others.
David graduated from the University of Manchester with Honors in Law and Bar School (College of Legal Education) in London, and has been a member of Middle Temple since 1989. He is the founder and former Chairman of The Global Sourcing Council.
Member: Bar of England & Wales, ABA, NYCBA, ACC, DRI