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Hanson Trust PLC v. SCM Corporation

United States Court of Appeals, Second Circuit
774 F.2d 47 (1985)
ELI5:

Rule of Law:

A series of privately negotiated and open market stock purchases does not constitute a 'tender offer' under the Williams Act if the sellers are sophisticated investors who are not subjected to the pressures the Act was designed to prevent, such as a lack of information and an inability to negotiate.


Facts:

  • On August 21, 1985, Hanson Trust PLC (Hanson) announced a public cash tender offer to purchase any and all shares of SCM Corporation (SCM) for $60 per share.
  • In response, SCM's management and Merrill Lynch announced a leveraged buyout proposal at $70 per share.
  • Hanson then increased its tender offer to $72 per share.
  • SCM and Merrill Lynch countered with a revised $74 per share leveraged buyout offer, which included a 'lock-up' or 'poison pill' option granting Merrill the right to buy SCM's two most profitable businesses at a low price if any third party acquired more than one-third of SCM's stock.
  • On September 11, believing the lock-up option made its tender offer untenable, Hanson publicly announced at 12:38 P.M. that it was terminating its offer.
  • Between approximately 2:30 P.M. and 4:35 P.M. on the same day, Hanson made five privately negotiated purchases and one open-market purchase of SCM stock.
  • These six transactions, primarily with sophisticated arbitrageurs and institutional investors, resulted in Hanson acquiring 3.1 million shares, or 25% of SCM's outstanding stock.
  • The sellers in the private transactions were not solicited by a widespread public announcement, and the purchase price was negotiated, not a fixed, take-it-or-leave-it offer.

Procedural Posture:

  • SCM Corporation filed a lawsuit against Hanson Trust PLC in the U.S. District Court for the Southern District of New York.
  • SCM sought and obtained a temporary restraining order, and subsequently moved for a preliminary injunction to bar Hanson from acquiring more SCM stock.
  • The district court granted the preliminary injunction, concluding that SCM had demonstrated a likelihood of success on its claim that Hanson's purchases constituted an illegal tender offer.
  • Hanson Trust PLC, as appellant, appealed the district court's grant of the preliminary injunction to the U.S. Court of Appeals for the Second Circuit; SCM Corporation was the appellee.

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Issue:

Does a company's rapid acquisition of 25% of a target company's stock through a series of privately negotiated and open market purchases, immediately after terminating a formal tender offer, constitute a 'tender offer' subject to the regulations of Section 14(d) of the Williams Act?


Opinions:

Majority - Judge Mansfield

No, Hanson's stock acquisitions did not constitute a 'tender offer' under the Williams Act. The primary purpose of the Williams Act is to protect ill-informed shareholders who are pressured to sell their stock without adequate information. The court rejected applying a rigid eight-factor 'litmus test' to define a tender offer. Instead, it adopted a totality of the circumstances test focused on whether the specific class of sellers needed the Act's protections. Here, the sellers were a small number of highly sophisticated professionals (arbitrageurs and institutional investors) who were well-informed about the bidding contest and could 'fend for themselves.' They were not pressured by Hanson but by market forces, they negotiated the terms of the sale, there was no widespread public solicitation, and the price paid was only a slight premium over the market price. Because these sophisticated sellers did not need the protections of Section 14(d), Hanson's actions were not a de facto tender offer and did not violate the Williams Act.



Analysis:

This decision significantly narrowed the definition of a 'tender offer' under the Williams Act, moving away from a rigid, factor-based test toward a more flexible, purpose-driven analysis. It established that large-scale, rapid stock acquisitions from sophisticated investors through private negotiations fall outside the scope of tender offer regulations. This provides a strategic advantage to corporate acquirers, allowing them to gain substantial or controlling stakes in a target company without adhering to the costly and time-consuming disclosure and procedural requirements of Section 14(d). The ruling reinforces the distinction between regulated public tender offers aimed at average investors and unregulated private transactions between sophisticated market participants, thereby sanctioning certain 'hardball' takeover tactics.

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