The Williams Act was enacted in 1968 in response to a series of hostile takeovers by large companies, which posed a risk to shareholders and company executives. The corporate raiders made tender offers for the stocks of target companies, giving very short timelines for acceptance. Such types of hostile takeovers disadvantaged shareholders who were forced to make decisions about their stockholding under unreasonable time pressure.
Tender offers represent a proposal to buy shares of a company for cash or other consideration. Acquiring companies abused cash tender offers, attracting regulation by the US Congress.
Enactment of the Williams Act
New Jersey politician Harrison Williams introduced the legislation in the US Congress to regulate corporate raiders who abused cash tender offers. Williams proposed that companies should be required to make mandatory disclosures of takeover bids for the benefit of stockholders.
The legislator also proposed that, before implementing a takeover bid, the acquiring company must file the tender offer with the Securities and Exchange Commission (SEC), as well as with the target company. The filing document should provide information on the terms of the offer, source of capital, and its plans for the target company post-acquisition. The proposed law was enacted in 1968, passed as an amendment to the Securities and Exchange Act of 1934.
How the Williams Act Works
When a company is looking to acquire another company, it may make a tender offer to the target company’s stockholders. A company may also use a proxy campaign, where the company acquires enough votes to gain control of the board of directors of the target company. In the 1960s, companies preferred the tender offer option rather than a proxy campaign since it gave them more power to acquire control of a company within a short time frame. It also provided large companies with the leeway to abuse the act, to the disadvantage of stockholders of the target company. Such a practice necessitated the enactment of the Williams Act to protect vulnerable stockholders.
When an acquiring company makes an offer, it is required to provide information about the tender offer to the shareholders of the target company and to the financial regulators. The Williams Act requires that companies making a tender offer that is 15% to 20% above the current market price to disclose details of the offer to the Securities and Exchange Commission.
The requirements also apply to individuals or institutions that acquire more than 5% of the target company’s outstanding shares. The acquirer must file the disclosures with all national security exchanges where their securities are traded. Making the information public helps shareholders and investors of the target company know what to expect when the acquisition is initiated.
Importance of the Williams Act
The requirement to make full and fair disclosures of an intended acquisition aims to strike a balance between the interests of the shareholders of the target company and the managers of the acquiring company. The disclosures are provided to the shareholders before the acquisition is effected. This allows them time to evaluate the tender offer and make an informed decision on whether to accept or reject the terms of the offer.
Before the act was implemented, shareholders were often under time pressure to accept the offer without having enough time to evaluate the terms of the offer and the future outlook of the company if they accepted the offer. The act protected the shareholders from false, incomplete, or misleading statements that acquirers might be tempted to give in the absence of regulation.
Also, the acquirer’s managers are given an opportunity to win the shareholders of the target company publicly. Since the documents are available for the public to evaluate, the managers will try to present the best offer possible, so that shareholders and investors will accept. That makes the acquisition less difficult, as compared to using other alternative methods of acquisition.
In addition, making full disclosures about the intended acquisition and making the information publicly available gives the acquirer a positive image in the eyes of the investors. If a company has a good history of turning around acquired companies, shareholders of the target company will more likely have confidence in the intended merger or acquisition.
Review of the Williams Act
Most players in the financial industry support a review of the Williams Act to make it relevant in the 21st century. Since its passage into law over 50 years ago, there have been many changes in the industry that make certain provisions of the act obsolete. Shareholders have become more knowledgeable about mergers and acquisitions. Information about mergers and acquisitions has become more readily available to both shareholders and potential investors.
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