Lexplug logoLexplug

MAI Basic Four, Inc., and Choice Corporation v. Prime Computer, Inc., et al.

United States Court of Appeals, First Circuit
871 F.2d 212 (1989)
ELI5:

Rule of Law:

An investment bank or financial advisor may be classified as a 'bidder' under the Williams Act if it is a central, active participant in initiating, planning, and financing a tender offer, even if it lacks formal control over the acquiring entity. The determination is based on a flexible, fact-based analysis of the entity's overall role rather than a bright-line test based on control or equity ownership.


Facts:

  • A group of companies led by Bennett LeBow and William Weksel, collectively called Basic, initiated a cash tender offer to acquire all shares of Prime Computer, Inc. (Prime).
  • Basic retained Drexel Burnham Lambert, Inc. (Drexel) as its financial advisor to arrange $875 million in financing through high-yield 'junk bonds'.
  • Drexel had a long-standing business relationship with Basic's principals and was involved in planning the Prime acquisition from an early stage.
  • Drexel held a significant equity stake in Basic's affiliated entities, including a potential 14% interest in MAI Basic Four, and initially had the right to appoint a director with veto power to the board of a key parent company.
  • Drexel stood to earn over $65 million in fees from the transaction, and one of Basic's principals testified he believed Drexel would provide the financing itself if it could not place the bonds.
  • During the tender offer period, Drexel agreed to plead guilty to six felony counts of mail, wire, and securities fraud and pay $650 million in fines and compensation, raising public questions about its financial stability.

Procedural Posture:

  • Basic filed a complaint in federal district court challenging Massachusetts anti-takeover statutes.
  • Prime filed a counterclaim alleging Basic violated the Williams Act by failing to provide adequate disclosures about its financial advisor, Drexel.
  • Prime moved for a preliminary injunction to halt Basic's tender offer, which the district court granted.
  • Basic filed supplemental disclosures and moved to vacate the injunction.
  • The district court found some disclosures adequate but continued the injunction, ruling that disclosures regarding Drexel's financial condition and ability to finance the offer were insufficient.
  • Basic, the appellant, appealed the district court’s order continuing the preliminary injunction to the U.S. Court of Appeals for the First Circuit.

Locked

Premium Content

Subscribe to Lexplug to view the complete brief

You're viewing a preview with Rule of Law, Facts, and Procedural Posture

Issue:

Is an investment bank that acts as an advisor, underwriter, and financier for a tender offer, and holds a significant equity interest in the acquiring entities, considered a 'bidder' under the Williams Act, thereby requiring disclosure of its financial condition?


Opinions:

Majority - Coffin, Senior Circuit Judge

Yes, an investment bank with such a pervasive role is considered a 'bidder' under the Williams Act. The court rejected a rigid, bright-line test for bidder status, opting instead for a flexible, fact-intensive inquiry. The court reasoned that the Williams Act's definition of 'person' includes a 'group' acting in concert, and the SEC's use of 'bidder' incorporates this concept. Drexel was far more than a mere advisor; it was a 'principal participant' and the 'indispensable key to the offer's success' due to its early and deep involvement in planning, its equity interests, its prior board representation in a key entity, and its crucial role in financing. The court distinguished this case from 'Interco', where the financier's role was less integral. Drexel's financial condition was deemed material information for Prime's shareholders, as it would help them assess the likelihood of the offer's success and decide whether to tender their shares, hold out for a higher price, or sell on the open market.



Analysis:

This decision significantly broadens the definition of a 'bidder' under the Williams Act by rejecting the Third Circuit's more formalistic, control-based test from 'Interco'. It establishes that an entity's functional role and deep involvement in a tender offer can trigger bidder status and its associated disclosure obligations, regardless of formal titles or lack of majority ownership. This creates more uncertainty for financial institutions structuring takeover bids but enhances shareholder protection by ensuring that key players behind an offer cannot shield their financial information from the target's investors. The ruling puts active deal financiers on notice that extensive participation may subject them to the same level of scrutiny as the named acquirer.

G

Gunnerbot

AI-powered case assistant

Loaded: MAI Basic Four, Inc., and Choice Corporation v. Prime Computer, Inc., et al. (1989)

Try: "What was the holding?" or "Explain the dissent"