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Securities and Exchange Commission v. Carter Hawley Hale Stores, Inc.

United States Court of Appeals, Ninth Circuit
760 F.2d 945 (1985)
ELI5:

Rule of Law:

A target company's large-scale, rapid, open-market repurchase of its own stock intended to defeat a hostile takeover does not constitute a "tender offer" under the Williams Act if it lacks the traditional indicia of a tender offer, such as active solicitation, a premium over the current market price, and fixed, non-negotiable terms that create undue pressure on shareholders.


Facts:

  • On April 4, 1984, The Limited, Inc. commenced a cash tender offer for 55% of Carter Hawley Hale Stores, Inc. (CHH) common stock at $30 per share, a premium over the pre-offer market price of approximately $23.78.
  • In response, on April 16, 1984, CHH's board announced its opposition to the offer and implemented a defensive strategy.
  • As part of this strategy, CHH sold one million shares of convertible preferred stock to General Cinema Corporation, giving it a 22% voting block.
  • CHH also publicly announced its plan to repurchase up to 15 million shares of its own common stock on the open market to defeat The Limited's offer.
  • Over the next seven trading days, CHH purchased approximately 17.5 million of its own shares on the open market, representing over 50% of its outstanding common stock.
  • The purchases were made at prevailing market prices, which had risen due to The Limited's offer but were not at a premium above the market price at the time of purchase.
  • Following CHH's massive repurchase, The Limited withdrew its tender offer.

Procedural Posture:

  • The Securities and Exchange Commission (SEC) filed a suit for injunctive relief against Carter Hawley Hale Stores, Inc. (CHH) in the U.S. District Court for the Central District of California.
  • The SEC alleged that CHH's stock repurchase program constituted a tender offer conducted in violation of Section 13(e) of the Securities Exchange Act of 1934.
  • The district court, applying the eight-factor Wellman test, denied the SEC's motion for a preliminary injunction, concluding that CHH's program was not a tender offer.
  • The SEC (appellant) appealed the district court's denial of the preliminary injunction to the U.S. Court of Appeals for the Ninth Circuit, with CHH as the appellee.

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Issue:

Does a target company's large-scale, open-market repurchase of its own shares, intended to defeat a third-party tender offer, constitute a 'tender offer' subject to the regulations of the Williams Act?


Opinions:

Majority - Skopil, J.

No, a target company's defensive, large-scale open-market stock repurchase program is not a tender offer if it does not exhibit the characteristics that create the kind of shareholder pressure the Williams Act was designed to prevent. The court's determination is guided by the eight-factor test established in Wellman v. Dickinson. Applying that test, the court found CHH’s program was not a tender offer because it did not involve active and widespread solicitation of shareholders, the purchases were made at the prevailing market price rather than at a premium, the terms were not firm, the offer was not contingent on a minimum number of shares, and it was not open for only a limited time. Although shareholders may have felt pressure, this was ordinary market pressure resulting from The Limited's offer, not the type of coercive pressure created by a traditional tender offer with a fixed deadline and premium price. The court explicitly rejected the broader, two-part S-G Securities test as being too vague and subjective.



Analysis:

This decision solidifies the eight-factor Wellman test as the dominant standard for defining an unconventional tender offer in the Ninth Circuit. By finding that CHH's massive and aggressive open-market self-tender was not a regulated "tender offer," the court provided corporations with a powerful and flexible defensive tool against hostile takeovers. This precedent allows target companies to rapidly acquire a controlling block of their own stock to fend off a bidder without having to comply with the burdensome disclosure, timing, and pro-rata requirements of the Williams Act's tender offer rules (Rule 13e-4), as long as they purchase at market prices and avoid direct solicitation or fixed terms.

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