FTC Staff Comment to the Hon. Raymond Lesniak Concerning New Jersey S.B. 1539 to Discourage Hostile Takeovers Financed by Junk Bonds

April 	29, 	1986
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New York, New York 1027S.4J
(212) 264-1200
The 	Honorable 	Raymond 	Lesniak, 	Chairman
Senate 	Labor, 	Industry 	and 	Professions 	Committee
New 	Jersey 	State 	Legislature
State 	House 	Annex 	CN-068
Trenton, 	New 	Jersey 	08625
Re: 	Senate 	Bill 	No. 	1539
Dear 	Senator 	Lesniak:
Thank 	you 	for 	your 	request 	of 	March 	11, 	1986, 	inviting 	our
comments 	on 	Senate 	Bill 	No. 	1539, 	RAN 	ACT 	concerning 	the 	protec-
tion 	of 	shareholder 	rights 	.•••R 	We 	appreciate 	the 	opportu-
nity 	to 	comment 	on 	this 	bill, 	and 	hope 	that 	our 	remarks 	will 	be
of 	assistance.
The 	Federal 	Trade 	Commission 	is 	charged 	by 	Congress 	with
preserving 	competition 	and 	pro~ecting consumers 	from 	deceptive
and 	unfair 	business 	practices. 	Accordingly, 	the 	Commission 	and
its 	staff 	provide 	comments 	to 	federal, 	state, 	and 	local
legislative 	and 	administrative 	bodies 	to 	assist 	decision-makers
in 	analyzing 	legislative 	and 	regu!ator y 	proposals 	that may 	affect
competition 	and 	consumer 	welfare.
Senate 	Bill 	No. 	1539 	(hereinafter 	referred 	to 	as 	"5. 	1539")
is 	intended 	to 	"discourage 	hostile, 	bust-up 	takeovers 	financed 	by
junk 	bonds 	in 	New 	Jersey.ft4 	Specifically, 	S. 	1539 	would 	prohibit
1 	This 	letter 	presents 	the 	comments 	of 	the 	Bureaus 	of
Competition, 	Economics, 	and 	Consumer 	Protection, 	and 	of 	the 	New
York 	Regional 	Office 	of 	the 	Federal 	Trade 	Commission. 	The 	views
expressed 	are 	not 	necessarily 	those 	of 	the 	Federal 	Trade
Commission 	or 	of 	any 	individual 	Commissioner, 	although 	the
Commission 	has 	authorized 	their 	presentation.
See 	15 	U.S.C. 	S 41 	et 	seq.
3 	For 	example, 	by 	letter 	of 	July 	22, 	1985, 	we 	provided 	Governor
Mario 	Cuomo 	with 	our 	comments 	concerning 	New 	York 	State 	Assembly
Bill 	No. 	6971--A, 	a 	bill 	designed 	to 	restrict 	corporate 	takeover
activity 	in 	New York.
4 "Statement" 	accompanying 	S. 	1539.

The 	Honorable 	Raymond 	Lesniak, 	Chairman 	- 	2 	-
any 	New 	Jersey 	resident 	corporationS 	from 	combining 6 	with 	an
acquirer 	of 	ten 	percent 	or 	more 	of 	itsavotin g 	stock,7 	within 	five
years 	of 	the 	"stock 	acquisition 	date," 	unless 	the 	combination
had 	be~n approved 	b~ 	the 	target 	company's 	board 	of 	directors
prior 	to 	that 	date. 	After 	the 	expiration 	of 	the 	five-year
moratorium, 	a 	business 	combination 	could 	be 	effected 	only 	if 	(1)
it 	is 	approved 	Sy 	the 	holders 	of 	two-thirds 	of 	disinterested
voting 	shares,l 	or 	(2) 	all 	shareholders 	are 	compensated 	f£f
their 	stock 	in 	accordance 	with 	various 	statutory 	criteria.
We 	do 	not 	believe 	that 	there 	is 	any 	demonstrated 	need 	for
this 	additional 	regulation 	of 	corporate 	takeovers. 	The 	Williams
Act, 	a 	federal 	statute 	designed 	to 	protect 	shareholder 	interests
5 	"Resident 	domestic 	corporation" 	means 	a 	company 	incorporated
in 	New 	Jersey 	with 	its 	principal 	executive 	offices 	and 	·signifi-
cant 	business 	operations" 	located 	in 	that 	state. 	S. 	1539 	S 	2m.
6 	"Business 	combination" 	is 	broadly 	defined 	to 	include, 	among
other 	things: 	(a) 	any 	merger 	or 	consolidation 	of 	a 	resident 	cor-
poration 	with 	an 	interested 	stockholder1 	(b) 	any 	sale, 	lease,
exchange, 	mortgage, 	pledge, 	transfer 	or 	other 	disposition, 	whether
in 	one 	or 	more 	transactions, 	to 	or 	with 	an 	interested 	stockholder 	of
assets 	of 	a 	resident 	corporation 	(i) 	having 	an 	aggregate 	market
value 	equal 	to 	ten 	percent 	or 	more 	of 	the 	aggregate 	market 	value 	of
all 	the 	assets 	or 	outstanding 	stock 	of 	that 	resident 	corporation, 	or
(ii) 	representing 	ten 	percent 	or 	more 	of 	the 	earning 	power 	or 	income
of 	that 	resident 	corporation; 	(c) 	the 	issuance 	or 	transfer 	to 	an
interested 	stockholder 	by 	a 	resident 	corporation 	of 	any 	stock 	of
that 	resident 	corporation 	that 	has 	an 	aggregate 	market 	value 	equal
to 	five 	percent 	or 	more 	of 	the 	aggregate 	market 	value 	of 	all 	the
outstanding 	stock 	of 	that 	resident 	corporation1 	and 	(d) 	the 	adoption
of 	any 	plan 	for 	the 	liquidation 	or 	dissolution 	of 	a 	resident
corporation 	proposed 	by 	or 	on 	behalf 	of 	an 	interested 	stOCkholder.
S. 	1539 	§ 	2e.
7 	The 	beneficial 	owner 	of 	ten 	percent 	or 	more 	of 	the 	voting
power 	of 	the 	outstanding 	voting 	stock 	of 	the 	resident 	corporation
is 	deemed 	an 	"interested 	stockholder." 	S. 	1539 	S 	2j.
a 	"Stock 	acquisition 	date" 	means 	the 	date 	on 	which 	a 	person
first 	becomes 	an 	interested 	stOCkholder. 	S. 	1539 	S 	20.
9
10
11
S. 	1539 	§ 	3.
S. 	1539 	§ 	4b.
S. 	1539 	S 	4c.

The 	Honorable 	Raymond 	Lesniak, 	Chairman 	- 	3 	-
in 	the 	takepver 	process, 	already 	provides 	stockholders 	with 	time
and 	information 	to 	evaluate 	cash 	and 	non-caf9 	tender 	offers,
including 	so-called 	-junk 	bond- 	financings. 	Absent 	some 	well-
defined, 	specific 	pUblic 	harm 	that 	would 	be 	addressed 	by 	the
proposed 	legislation, 	we 	do 	not 	believe 	further 	regulation 	of 	the
takeover 	process 	is 	justified.
Investors 	in 	high 	yield 	takeover 	bonds 	are 	in 	most 	cases
highly 	sophisticated 	financiers 	who 	hold 	these 	securities 	as 	part
of 	a 	well-diversified 	portfolio 	and 	who 	are 	fUlly 	able 	to 	negoti-
ate 	for 	a 	compensatory 	interest 	rate 	and 	whatever 	other
guarantees 	are 	necessary 	and 	appropriate 	to 	protect 	them 	against
the 	risk 	of 	default 	associated 	with 	the 	debt 	of 	a 	highly 	lever-
aged 	firm. 	Takeover 	bond 	financing 	of 	acquisitions 	does 	substi-
tute 	debt 	for 	equity. 	But 	we 	are 	aware 	of 	no 	evidence 	that 	this
increase 	in 	debt 	is 	contrary 	to 	the 	interests 	of 	the 	shareholders
of 	the 	iss~~ng firm 	or 	to 	the 	firm's 	long- 	or 	short-term
prospects.
12 	15 	U.S.C. 	SS 	781(i), 	78m(d) 	and 	(e), 	and 	78n(d) 	through 	(f)
(1982). 	The 	Williams 	Act 	requires 	purchasers 	of 	more 	than 	five
percent 	of 	a 	corporation's 	shares 	to 	make 	specified 	public 	disclo-
sures 	and 	provides 	that 	a 	tender 	offer 	must 	remain 	open 	for 	not
fewer 	than 	20 	business 	days. 	Some 	economists 	and 	legal 	scholars
have 	criticized 	these 	provisions 	of 	the 	Williams 	Act 	on 	the 	ground
that 	they 	provide 	too 	much 	time 	for 	stockholder 	evaluation 	of
tender 	offers, 	thereby 	making 	takeovers 	unnecessarily 	expensive
and 	favoring 	incumbent 	managements 	in 	takeover 	contests. 	See
Fischel, 	-Efficient 	Capital 	Market 	Theory, 	the 	Market 	for---
Corporate 	Control, 	and 	the 	Regulation 	of 	Cash 	Tender 	Offers,- 	47
Texas 	Law 	Review 	1 	(1978); 	Grossman 	& Hart, 	-Takeover 	Bids, 	the
Free-Rider 	Problem 	and 	the 	Theory 	of 	the 	Corporation,- 	11 	Bell
Journal 	of 	Economics 	42 	(1980); 	Jarrell 	& Bradley, 	"The 	Economic
Effects 	of 	Federal 	and 	State 	Regulations 	of 	Cash 	Tender 	Offers,"
23 	Journal 	of 	Law 	and 	Economics 	317 	(1980); 	and 	Smiley, 	-The
Effect 	of 	the 	Williams 	Amendment 	and 	Other 	Factors 	on 	Transaction
Costs 	in 	Tender 	Offers,- 	3 	Industrial 	Organization 	Review 	138
(1975).
The 	Williams 	Act 	also 	mandates 	that 	tendered 	shares 	be
purchased 	on 	a 	pro 	rata 	(rather 	than 	first 	shares 	tendered) 	basis
and 	grants 	target 	management 	and 	stockholders 	standing 	to 	sue
pursuant 	to 	its 	antifraud 	provisions.
13 	Moreover, 	the 	Federal 	Reserve 	Board 	has 	issued 	an 	interpreta-
tion 	of 	its 	margin 	rule 	-- 	Regulation 	G -- 	that 	would, 	in 	effect,
prohibit 	a 	corporation 	set 	up 	to 	facilitate 	a 	tender 	offer 	from
issuing 	takeover 	bonds 	to 	finance 	more 	than 	50 	percent 	of 	the 	cost
of 	an 	acquisition.

The 	Honorable 	Raymond 	Lesniak~ Chairman 	- 	4 	-
Moreover, 	this 	bill 	goes 	far 	beyond 	its 	stated 	goal 	of
discouraging 	"hostile, 	bust-up 	takeovers 	financed 	by 	junk
bonds." 	Instead, 	the 	bill 	will 	make 	any 	hostile 	tender 	offer
regardless 	of 	how 	it 	is 	financed 	-- 	prohibitively 	more
difficult. 	If 	enacted, 	S. 	1539 	would 	have 	the 	probable 	effect 	of
discouraging 	all 	tender 	offers 	that 	had 	not 	already 	met 	with 	the
approval 	of 	the 	target 	company's 	board 	of 	directors. 	This 	could
impede 	the 	operation 	of 	the 	market 	for 	corporate 	control 	that
generally 	serves 	to 	benefit 	New 	Jersey 	shareholders, 	improve 	the
management 	performance 	of 	New 	Jersey 	corporations, 	and 	ensure
that 	economic 	resources 	under 	the 	control 	of 	New 	Jersey
corporations 	be 	transferred 	to 	their 	highest 	valued 	use.
If 	shareholders 	desire 	increased 	protection 	from 	so-called
"corporate 	raiders," 	they 	can 	arrange 	it 	themselves. 	For
example, 	shareholders 	can 	discourage 	unwanted 	suitors 	by 	adopting
by-laws 	that 	stagger 	the 	terms 	of 	directors 	or 	that 	condition 	the
consummation 	of 	a 	tender 	~!fer 	upon 	its 	acceptance 	by 	a 	super-
majority 	of 	shareholders. 	On 	the 	other 	hand, 	shareholders 	can
decline 	to 	insulate 	incumbent management 	by 	refusing 	to 	enact
such 	by-laws. 	If 	shareholders 	want 	to 	include 	pro- 	or 	anti-
takeover 	devices 	in 	their 	corporate 	charters, 	that 	should 	be
their 	prerogative. 	No 	single 	rule 	of 	corporate 	governance 	is
likely 	to 	be 	suitable 	for 	all 	corporations. 	S. 	1539 	fails, 	for
14 	For 	example, 	The 	Wall 	Street 	Journal 	of 	March 	14, 	1986,
reported 	that 	"Dow 	Jones 	& Co. 	said 	it 	will 	seek 	shareholder
approval 	of 	several 	anti-takeover 	measures 	at 	its 	annual
meeting 	• 	• 	•• 	Dow 	Jones 	is 	proposing 	staggered 	terms 	for 	board
members, 	which 	would 	prevent 	a 	majority 	of 	directors 	from 	being
elected 	at 	an 	annual 	meeting; 	a 	'fair 	price' 	provision 	that 	would
require 	a 	prospective 	purchaser 	to 	make 	the 	same 	offer 	to 	all
stockholders; 	and 	a 	requirement 	that 	the 	board 	consider 	non-
economic 	factors 	in 	evaluating 	any 	takeover 	bid." 	According 	to
The 	Wall 	Street 	Journal 	of 	March 	20, 	1986, 	as 	of 	the 	close 	of
1985, 	well 	over 	300 	of 	the 	Standard 	& Poor's 	500 	companies 	had
passed 	some 	sort 	of 	anti-takeover 	measure.

The 	Honorable 	Raymond 	Lesniak, 	Chairman 	- 	5 	-
the 	most 	part, 	to 	take 	this 	into 	account. 15 	The 	result may 	be
that 	the 	bill 	unduly 	intrudes 	upon 	what 	the 	U.S. 	Council 	of
Economic 	Advisers 	has 	recognized 	as 	-essentially 	a 	private
contractual 	relaftonShip 	between 	a 	corporation's 	stockholders 	and
its 	management.- 	.
Insofar 	as 	S. 	1539 	is 	unnecessary 	for 	the 	protection 	of
shareholder 	interests, 	its 	potentially 	harmful 	effects 	should 	be
critically 	examined.
We 	believe 	that 	takeover 	activity 	is 	generally 	beneficial 	to
corporate 	shareholders. 	Takeovers 	typically 	increase 	the 	wealth
of 	shareholders 	of 	firms 	that 	are 	acquired. 	Target 	firm
shareholders 	on 	average 	earn 	premiums 	of 	abo~7 thirty 	percent 	in
tender 	offers 	and 	twenty 	percent 	in 	mergers. 	By 	discouraging
hostile 	takeovers, 	S. 	1539 	likely 	would 	reduce 	the 	expected
profitability 	of 	hostile 	takeovers. 	This 	would 	result 	in 	a
reduction 	of 	the 	expected 	wealth 	of 	all 	shareholders 	because 	the
expected 	value 	of 	corporations 	as 	future 	acquisitions 	would 	be
less. 	These 	prospective 	benefits, 	which 	are 	reflected 	in 	the
value 	paid 	for 	the 	shares 	of 	companies 	that 	are 	acquired, 	would
decline 	along 	with 	share 	prices 	as 	takeover 	activity 	lessened.
15 	Section 	5c 	of 	the 	bill 	does 	provide 	the 	board 	of 	directors 	a
limited 	opportunity 	to 	amend 	the 	by-laws 	of 	a 	corporation 	so 	that
any 	attempt 	to 	take 	over 	the 	corporation 	will 	not 	be 	subject 	to
the 	act. 	Under 	the 	bill, 	the 	board 	must 	amend 	the 	corporation's
by-laws 	within 	45 	days 	of 	the 	bill's 	passage. 	However, 	it 	seems
unlikely 	that 	the 	board 	would 	ever 	undertake 	such 	action 	except 	in
response 	to 	shareholder 	pressure. 	The 	45-day 	time 	limit 	makes 	it
unlikely 	that 	shareholders 	will 	have 	adequate 	time 	to 	understand
the 	bill 	and, 	if 	they 	believe 	the 	bill 	is 	harmful 	to 	their
interests, 	to 	petition 	their 	directors 	to 	disavail 	themselves 	of
it. 	The 	bill 	does 	contain 	some 	other 	exceptions 	to 	its
coverage. 	See 	S. 	1539 	S 	5.
16 	U.S. 	Council 	of 	Economic 	Advisers, 	Economic 	Report 	of 	the
President 	at 	213 	(1985).
17 	In 	contrast, 	share 	values 	tend 	to 	decline 	following 	an 	unsuc-
cessful 	tender 	offer. 	For 	a 	thorough 	survey 	of 	the 	numerous
studies 	that 	demonstrate 	net 	stockholder 	benefit 	from 	takeover
activity, 	see 	Jensen 	& Ruback, 	·The 	Market 	for 	Corporate 	Control:
The 	Scientific 	Evidence,· 	11 	Journal 	of 	Financial 	Economics 	5
(1983); 	Jensen, 	-Takeovers: 	Folklore 	and 	Science,- 	62 	Harvard
Business 	Review 	109 	(1984).

The 	Honorable 	Raymond 	Lesniak, 	Chairman 	- 	6 	-
Moreover, 	hostile 	tender 	offers, 	the 	specific 	target 	of 	S.
1539's 	regulatory 	scheme, 	may 	also 	produce 	significant 	gains 	to
the 	nation's 	economy. 	Corporate 	acquisitions, 	including 	those
resulting 	from 	"hostile" 	tender 	offers, 	can 	serve 	to 	shift 	assets
to 	higher-valued 	uses, 	allow 	firms 	to 	realize 	ecofgmies 	of 	scale
and 	distribution, 	and 	spur 	managerial 	excellence. 	For 	example,
companies 	whose 	markets 	are 	no 	longer 	expanding 	often 	generate
more 	cash 	flow 	than 	can 	be 	reinvested 	productively 	in 	their
traditional 	businesses. 	Rather 	than 	distribute 	this 	cash 	to
shareholders, 	some 	corporate 	executives 	make 	unprofitable
investments 	in 	mature 	markets 	or 	diversify 	into 	businesses 	y~th
which 	they 	are 	unfamiliar 	and 	in 	which 	they 	perform 	poorly.
This 	creates 	profit 	opportunities 	that 	could 	be 	realized 	by 	means
of 	hostile 	takeovers 	aimed 	at 	acquiring 	control 	of 	such 	firms 	and
eliminating 	these 	inefficiencies. 	S. 	1539 	would 	reduce 	the
incentive 	to 	cure 	such 	inefficiencies.
Under 	S. 	1539, 	even 	after 	the 	expiration 	of 	the 	five-year
moratorium, 	a 	business 	combination 	between 	a 	resident 	corporation
and 	an 	interested 	stockholder 	could 	be 	effected 	only 	if 	one 	of
two 	somewhat 	problematic 	conditions 	were 	satisfied. 	First, 	the
business 	combination 	could 	be 	consummated 	if 	approved 	by 	holders
of 	two-thirds 	of 	the 	disinterested 	shares. 	However, 	this 	would
allow 	disinterested 	stockholders 	to 	hold 	up 	controlling 	parties,
even 	beyond 	the 	five-year 	moratorium 	prescribed 	in 	the 	bill. 	For
example, 	consider 	a 	firm 	that 	acquires 	ninety 	percent 	of 	the
voting 	shares 	of 	another 	company. 	As 	we 	understand 	it, 	such 	an
acquirer 	would 	be 	an 	"interested 	stockholder" 	and 	unable 	to 	vote
its 	shares 	with 	respect 	to 	a 	merger 	of 	the 	companies. 	If 	just
four 	percent 	of 	the 	voting 	shares 	of 	the 	acquired 	firm 	remained
in 	the 	hands 	of 	persons 	hostile 	to 	the 	merger 	-- 	incumbent
18 	See 	U.S. 	Council 	of 	Economic 	Advisers, 	supra 	note 	16, 	at 	198,
199; 	see 	also 	Jensen 	& Ruback, 	supra 	note 	17. 	But 	see
D. 	Ravenscraft 	& F. 	Scherer, 	"The 	Profitability 	of 	Mergers," 	FTC
Bureau 	of 	Economics 	Working 	Paper 	No. 	136 	(1986).
19 	The 	apparent 	shift 	toward 	greater 	reliance 	on 	debt 	financing
may 	well 	be 	a 	market 	response 	to 	this 	phenomenon. 	Unlike 	common
stock, 	on 	which 	dividends 	can 	be 	withheld 	at 	management's
discretion, 	debt 	instruments 	call 	for 	regular 	periodic 	interest
payments. 	This 	constrains 	management's 	discretion 	with 	regard 	to
the 	firm's 	cash 	flow 	and 	its 	ability 	to 	continue 	to 	use 	retained
earnings 	to 	pursue 	unprofitable 	growth 	or 	diversification
strategies. 	Thus, 	apart 	from 	the 	utility 	of 	takeover 	bonds 	as 	a
means 	of 	financing 	acquisitions, 	these 	considerations 	portend
significant 	efficiency 	gains 	from 	the 	increased 	use 	of 	debt
financing, 	in 	and 	of 	itself.

The 	Honorable 	Raymond 	Lesniak l 	Cbai:rman 	- 	7 -
managers, 	for 	example 	-- 	the 	merger 	could 	not 	be 	ilcc:omplishEcl'.
The 	mere 	threat 	of 	such 	a 	hold 	up 	could 	significantly 	imped~
beneficial 	merger 	and 	takeover 	activity~ 	It 	also 	impairs 	tEe
efficiency 	with 	which 	capital 	markets 	rearrange 	asset 	owner~~~p.
and 	frustrates 	the 	preferences 	of 	the 	vast 	majority 	of 	the 	~~~~et
firm's 	shareholders, 	90 	percent 	in 	our 	example, 	who would 	li~e ¢o
tender 	their 	shares.
Alternatively, 	the 	business 	combination 	could 	be 	consuDmeted
if 	the 	interested 	stockholder 	redeemed 	all 	outst~)ding share~ ~f
the 	resident 	corpor~8ion for 	consideration 	having 	~e 	higheL~ of
several 	valuations. 	This 	purchase 	option, 	how€qer~ could
greatly 	-- 	perhaps 	prohibitively 	-- 	increase 	the 	cost 	of 	ho£;·~j,]€
takeovers, 	and 	to 	an 	amount 	that 	co~!d not 	be 	dete:nmined 	in
advance 	of 	an 	ini tial 	tender 	offer. 	It 	could 	.a~so discoJ.1:t..~~
the 	taking 	of 	substantial 	investment 	positions 	ql;;.d.'te 	apart 	fz~ a
fixed 	intent 	to 	gain 	control. 	As 	a 	consequence, 	.f:ir:ms 	could !JI'Alve
difficulty 	in 	obtaining 	capital 	for 	product 	develop;went,
refurbishment 	of 	physical 	plant, 	expamsion, 	and 	the 	]ike, 	tJtJif;n:E'1by
possibly 	affecting 	their 	viability.
Taken 	together, 	the 	requirements 	of 	S. 	1539 	c~~l~ depri~~
shareholders 	of 	the 	gains 	they 	might 	otnerwise 	realize 	throu9Jlt
tender 	of 	shares 	to 	an 	acquirer. 	The 	costs 	of 	efficiency-e~c
ing 	acquisitions 	could 	be 	artificially 	inflated 	and product)~~~y
gains 	that 	could 	be 	realized 	in 	an 	open 	and 	competit-ive 	marlto.~tr in
20 	E.g., 	the 	higher 	of 	"(a) 	the 	highest 	per 	share 	price
(including 	any 	brokerage 	commissions, 	transfer 	tax,e.$ 	and 	so2i.,~iit
ing 	dealers' 	fees) 	paid 	by 	that 	inter~5ted stockholrl~r for 	~~'
shares 	... 	acquired 	by 	it 	(i) 	within 	the 	five-y.ealI· 	period
immediately 	prior 	to 	the 	announcement 	date 	with 	respect 	to 	~~~
business 	combination, 	or 	(ii) 	within 	the 	five-year. 	period
immediately 	prior 	to, 	or 	in, 	th€ 	transaction 	in 	wbic~ 	that
interested 	stockholder 	became 	an 	interested 	stockK"ioli.dler, 	wh:ic!:l;ever
is 	higher 	... 	; 	and 	(b) 	the 	market 	value 	per 	stl.at:-e (of 	cOTllITl1>m;
stock 	on 	the 	announcement 	date 	with 	respect 	to 	that 	businesE
combination 	or 	on 	that 	interested 	stockholder's 	stock 	acquisi~ion
date, 	whichever 	is 	higher 	...•" 	S. 	1539 	SS 	4c(1~(a) 	and 	~~».
21 	The 	valuation 	provisions 	of 	S. 	1539 	would 	indJJ.ce 	stockhmJlders
to 	engage 	in 	opportunistic 	behavior 	rather 	than 	ta· 	tender 	sJrO.:r-es
in 	a 	prompt 	manner: 	if 	the 	price 	of 	shares 	on 	the 	OF~n marie~
increased 	after 	the 	interested 	stOCkholder's 	acquisition 	of 	a 	ten
percent 	position, 	other 	stOCkholders 	could 	tender 	at 	the 	ma~~~t
price; 	if 	the 	price 	of 	shares 	on 	the 	open 	market 	fell 	after 	'Ll+:1e
interested 	stockholder's 	stock 	acquisition 	date, 	te-ndering 	s1:(w:k-
holders 	could 	demand 	a 	hi9her 	them 	market 	pr ice :pursuant 	to
Sec tion 	4 c (1) 	of 	t:h:-e 	bill.

The 	Honorable 	Raymond 	Lesniak, 	Chairman 	- 	8 -
corporate 	assets 	and 	control 	could 	be 	greatly 	lessened. 	These
costs, 	both 	to 	shareholders 	and 	to 	society 	at 	large, 	are
justified 	only 	if 	the 	proposed 	regulation 	is 	necessary 	to 	avoid 	a
well-defined 	and 	significant 	public 	harm. 	As 	the 	Council 	of
Economic 	Advisers 	has 	cautioned:
Public 	policy 	should 	not 	. 	. 	. 	be 	based 	on
the 	outcomes 	of 	individual 	transactions,
because 	it 	is 	impossible 	to 	predict 	in
advance 	which 	transactions 	will 	succeed 	and
which 	will 	fail. 	Public 	policy 	therefore
must 	be 	based 	on 	aggregate 	trends
describing 	the 	consequences 	of 	takeovers 	as
a 	whole. 	On 	this 	criterion, 	there 	is 	no
economic 	basis 	for 	regulations 	that 	would
further 	2~strict the 	merger 	and 	acquisition
process.
The 	need 	for 	further 	regulation 	of 	corporate 	takeover
activity 	has 	not 	been 	establi~hed. 	Existing 	legislation 	governing
corporate 	takeovers 	and 	internal 	shareholder 	governance 	adequately
protect 	shareholders 	and 	the 	public 	interest 	in 	a 	fair, 	open, 	and
competitive 	market 	for 	corporate 	assets 	and 	control.
We 	hope 	these 	comments 	are 	helpful 	to 	you. 	Please 	do 	not
hesitate 	to 	contact 	us 	if 	you 	have 	any 	questions 	or 	would 	like
further 	information.
Edward 	Manno 	Shumsky
Regional 	Director
22 u.S. 	Council 	of 	Economic 	Advisers, 	supra 	note 	16, 	at 	196.