Preliminary deliberations

3.1. Introduction. The American stock market, which is the world’s largest, provides for the trading of volumes of shares that cannot be com­

pared to the Danish stock market.

W hile D enm ark has only 1 stock exchange, the Copenhagen Stock Exchange, and a small over-the-counter (OTC) market, there are 10 stock exchanges in the United States, o f which the New York Stock Exchange (NYSE) is the largest and the most prominent. H owever, a considerable part o f the trading in securities takes place over the counter and in particular via the NASDAQ-system . NA S­

DAQ is an abbreviation o f the National Association o f Securities D ealers Auto­

m ated Quotation System. In 1984, N A SD A Q ’s share volum e am ounted to two- thirds o f the share volume o f NYSE and nearly ten times the volume o f the A merican Stock Exchange (Amex), see Deborah A. De M ott, Comparative D i­

m ensions o f Takeover Regulation, in Knights, Raiders and Targets p. 398 ff. at 425, note 9.

Generally speaking, regulation of a “thin” market with limited trading volumes and a small number of listed companies cannot carry the burden of very extensive regulation which may be suited for a market with vast volumes of trading and a large number of listed companies. It is, in other words, important to avoid a regulatory framework which impedes in­

vestments in the market because investors perceive that it is too burden­

some to invest or trade compared to the prospects offered by the market.

Nevertheless, there is a basis for making certain preliminary assump­

tions with respect to the need for further regulation, and, in this

connec-42 In N ewm ont M ining Corp. v. Pickens (1987-1988 transfer binder) Fed.Sec.L.Rep.

(CCH) 93,519 (9th Cir. N ovem ber 6, 1987), the court stated that an acquiror may m ake a tender offer even if the financing o f the acquisition is not in place at the tim e o f the offer. See also Cities Service Co. v. M esa Petroleum Co., 541 F.

Supp. 1220 (D. Del. 1982).

43 As will be seen under VIII.2.1., rule 4 o f the Danish Stock Exchange Rules of Ethics im poses on an acquiror an obligation to make an offer to all the other shareholders in such a situation.

VII. Stock acquisitions

don, the need to consider the impact of private (negotiated) purchases ver­

sus public (tender) offers.

From a purely economic viewpoint it can be argued that any further regulation of stock acquisitions will increase transaction costs and thus constitute a barrier to efficiency, cf. the discussion under IV.3.4. This may not be quite correct, however, since adequate regulation is likely to be perceived by investors as an advantage with the result, ceteris paribus, that larger quantities of funds flow into the stock market, thereby making financing cheaper for companies.

In addition, it should be considered if – save the efficiency aspect – a desire for equity or equality suggests that certain aspects of takeovers need to be further regulated.

3.2. Disclosure obligations. As opposed to Danish law, the Williams Act’s provisions on disclosure obligations are very extensive and aim at creating a high degree of “transparency”.

In this connection it is noteworthy that the disclosure obligations under the Williams Act are not limited to identifying the acquiror and the com­

pany in which he holds shares as well as the number of shares held by him. The Act contains very detailed requirements that give the public in­

formation about the fashion in which the acquiror has financed his acqui­

sition, his plans with respect to the target-company and its incumbent management, and any kind of relationship and cooperation between the acquiror and others regarding the shares in question.

Much has been said about the rationale for mandating disclosure in con­

nection with corporate transactions.44 One can say that there are two rea­

sons for imposing disclosure obligations. First, that it is desirable to have a stock market which is as transparent as is required to achieve maximum efficiency. The more knowledge investors have about the market and the securities in the market, the more likely it is that capital will be allocated to uses whereby the maximum value is obtained. On the other hand, if disclosure obligations are too elaborate and extensive, transaction costs will reach a level where the net effect will be counter-efficiency. The other reason is a desire to ensure that all investors receive what is considered to

44 See e.g. W illiam H. Beaver, The Nature o f M andated D isclosure, Report o f the Advisory Com m ittee on Corporate Disclosure to the SEC, 95th Congress 1st Session 618-656 (House Comm. Print 95-29, 1977) and Hom er Kripke, Can The SEC M ake D isclosure Policy M eaningful?, Journal of Portfolio M anagem ent, Vol. 2, No. 4, p. 32 ff. (1976).

VII. Stock acquisitions

be an “equal” treatment. If disclosure is made selective, some investors will benefit at the expense of others.

§§1 0 and 11 of the Danish Stock Exchange Act, that contain the major principles for the stock exchange’s operations, reflect a desire to achieve efficiency as well as equality.

While the notion of efficiency is not defined in the Act, the general un­

derstanding of the word is perhaps the one described under 1.2.2.

It is more troublesome to determine the exact meaning of the principle of equality set forth in § 11. In the disclosure context it is, however, likely that it has been the intention of the legislature to create a “level playing field” in the sense that all investors who invest in the stock market receive, or have equal access to, identical information about the companies listed on the exchange and their securities. It is probably right to determine the category of persons who must be treated alike as all investors because they all act on the basis of information available and are equally harmed if in­

formation is conveyed selectively or manipulations are made. This con­

struction is supported by § 39 of the Act dealing with insider trading which states that purchase or sale of listed securities may not be effected by anybody in possession of non-public information, provided that such information must be assumed to be material for the pricing of the securi­

ties involved.45

Against this background it is fair to conclude that adequate disclosure obligations are of vital importance to efficiency as well as equality. When evaluating the Danish disclosure obligations, the focus should, therefore, be on these two purposes.

3.3. The need for separate regulation of public offers. The American model suggests that public (tender) offers should be made subject to more rigid and extensive regulation than “private” stock purchases.

Public offers addressed to all or a large number of shareholders of a company will, by their very nature, involve shareholders with very varied backgrounds. Some shareholders may be large institutional investors or sophisticated and professional individuals who are in a strong position to evaluate a public offer. Others may be persons whose knowledge and de­

gree of sophistication are limited. The categories of shareholders, in other words, represent a heterogeneous group of people, some of which need more protection than others. A public offer made to all or a large number of shareholders does not give some shareholders special treatment but

of-45 See also § 3 o f the Information Obligations for Issuers o f Listed Securities.

VII. Stock acquisitions

fers to any and all shareholders the same terms and conditions on a “take- it-or-leave- it”-basis.

The same demand for protection does not exist if the shareholders in­

volved in a transaction are a limited number of sophisticated and/or pro­

fessional investors, who are themselves able to assess the value of their shares and negotiate for the sale of the same.

Put differently, the two different concepts of share acquisition raise dif­

ferent questions.

In this connection it should be noted that shareholders who are parties to a negotiated sale of their shares are, on average, likely to be in a stronger position than the average shareholder who receives a public offer. Typi­

cally, negotiated transactions involve blocks of shares that are not insignif­

icant, for which reason it should be expected that the selling shareholder, even though he may not always be sophisticated and professional himself, has access to the advice of professional advisors and, therefore, does not need the same kind of protection as smaller shareholders. Assuming that this line of thought is correct, it is right to assume that shareholders who sell their shares pursuant to a privately negotiated agreement, generally speaking, need less protection than shareholders who receive a public offer for their shares. It is, in other words, more important to ensure that the terms and conditions of a public offer are acceptable than it is to focus on the process and contents of a privately negotiated transaction.

It is not possible, on a general basis, to give an answer to the question if a distinction between various types of stock acquisitions and the existence of special requirements pertaining to public offers can be reconciled with the notion of maximum efficiency. Obviously, the answer depends on the special requirements made with respect to public offers. Some require­

ments may obstruct while others would promote efficiency. For the pur­

poses of our analysis I will, however, at this point consider such a distinc­

tion “neutral” in terms of efficiency.

W hile the plurality in E dgar v. M ite Corp. (457 U.S. 624 (1982)), arguably, con­

sidered the American W illiams Act to be “neutral” as regards the relationship between acquirors and target-com panies, several financial econom ists disagree, see e.g. Daniel Fischel, Efficient Capital M arket Theory, the M arket fo r Corpo­

rate Control, and the Regulation o f Cash Tender Offers, 57 Texas Law Review 1 (1978) and Jarrell & Bradley, The Econom ic Effects o f Federal and State Regulations o f Cash Tender Offers, 23 Journal o f Law & Econom ics 371 (1980).

It is a fact that the W illiam s Act im poses on acquirors disclosure obligations and also establishes minim um acceptance periods for public offers, for which reason there seems to be little basis for arguing that the W illiams Act is neutral.

VII. Stock acquisitions

Establishing two different “classes” of acquisitions can easily be recon­

ciled with the equal treatment standard set forth in § 11 of the Stock Ex­

change Act since shareholders in identical situations would be treated alike.

3.4. Minority protection issues. There is another aspect on which the American experience as outlined has not shed light and that is the impact on other shareholders of a change of control of a company resulting from one or a few negotiated stock transactions or from a partial bid. This issue is tied to the notion of minority protection, and will be further discussed under VIII.