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SECURITIES

FULL DISCLOSURE OF CORPORATE EQUITY OWNERSHIP

[S. 510] [Public Law 90-439, approved July 29, 1968] Providing for full disclosure of corporate equity ownership of securities under the

Securities Exchange Act of 1934
HISTORY OF LEGISLATION

S. 510 was introduced by Senator Williams of New Jersey for himself and Senator Kuchel on January 18, 1967. Hearings were held by the Subcommittee on Securities of the Senate Banking and Currency Committee on March 21, 22, and April 4, 1967. The bill was reported to the Senate by Senator Williams of New Jersey on August 29, 1967 (S. Rept. 550). S. 510 passed the Senate on August 30, 1967.

A hearing was held on this legislation by the House Committee on Interstate and Foreign Commerce on July 1, 1968. S. 510 was reported with amendments on July 12, 1968, by the House Committee on Interstate and Foreign Commerce (H. Rept. 1711). S. 510 was passed with amendments by the House on July 15, 1968. On July 18, 1968, the Senate concurred in the amendments made by the House to S. 510. The bill was signed by the President on July 29, 1968, becoming Public Law 90-439.

DIGEST OF STATUTE Public Law 90–439 amends the Securities Exchange Act of 1934 as follows:

Section 1Bank securities.-Section 12(i) of the Securities Exchange Act of 1934 is amended to make it clear that the authority and responsibility to administer and enforce the new disclosure provisions added to the Securities Exchange Act of 1934 by this bill, insofar as they apply to the securities of banks, will be vested in the various Federal banking agencies rather than in the Securities and Exchange Commission.

This amendment is consistent with the provisions of the Securities Acts Amendments of 1964, which vested in the Federal banking agencies the authority and responsibility to administer the disclosure provisions of the Exchange Act as they apply to bank securities. Under this section the Federal bank regulatory agencies are authorized to adopt rules and forms differing from those of the Securities and Exchange Commission whenever the bank regulatory agencies deem it appropriate.

Section 2-Acquisition of more than 10 percent of a class of registered securities. --Section 13 of the Securities Exchange Act of 1934 is

amended by adding a new subsection (d). This subsection requires the filing of a statement by any person who acquires the beneficial ownership of any equity, or issue issued by a closed-end registered investment company, security registered under section 12° of the Securities Exchange Act if after such acquisition he beneficially owns more than 10 percent of the securities of that class. The statement would be sent to the issuer of the security at its principal executive office by registered or certified mail, sent to each exchange where the security is traded, and filed with the Securities and Exchange Commission within 10 days after the acquisition.

Subsection (d) applies to persons who beneficially own more than 10 percent of the class before such acquisition as well as to persons who become the beneficial owner of more than 10 percent of the class as a result of such acquisition.'

The purpose of section 13(d) is to require disclosure of information by persons who have acquired a substantial interest, or increased their interest in the equity securities of a company by a substantial amount, within a relatively short period of time.

Paragraph (1) of subsection (d) outlines certain items of information which the Securities and Exchange Commission could require to be disclosed in the statement, including the identity and background of the purchasers, the source and amount of the consideration paid, and any borrowing made to acquire the securities where funds are borrowed from a bank in the ordinary course of business. The name of the bank is to be treated confidentially.

Under paragraph (1), if the purpose of the purchase is to acquire control, the Securities and Exchange Commission could require disclosure of any plans or proposals to liquidate the issuer or to sell its assets or to merge it with another company or to make any other major changes in the company's business or corporate structure. Disclosure of the number of shares beneficially owned, including the number of shares for which options are outstanding, and information relating to any contracts, arrangements or understandings with any person regarding the securities of an issuer could also be required.

The Securities and Exchange Commission would also have the authority, by rules and regulations, to modify the disclosure requirements set forth in the bill and to require disclosure of additional information where necessary or appropriate in the public interest or for the protection of investors.

Paragraph (2) of subsection (d) authorizes the Securities and Exchange Commission to adopt rules and regulations with respect to amendments to the statement filed in the event that material changes occur in the facts required to be set forth therein. Under this paragraph the Securities and Exchange Commission could adopt rules and regulations governing the form and content of the amendment and specify the time period during which such amendment is to be transmitted to the issuer and the exchange and filed with the Securities and Exchange Commission.

Paragraph (3) of subsection (d) defines "person" as follows: "when two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing

1 Subsec. (d)(5) (B) of the bill would exempt any acquisition which, together with all other acquisitions by the same person during the preceding 12 months, does not exceed 2 percent of the class.

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of securities of an issuer, such syndicate or group shall be deemed a 'person’ for the purposes of this subsection.” This provision would prevent a group of persons who seek to pool their voting or other interests in the securities of an issuer from evading the provisions of the statute because no one individual owns more than 10 percent of the securities. The group would be deemed to have become the beneficial owner, directly or indirectly, of more than 10 percent of a class of securities at the time they agreed to act in concert. Consequently, the group would be required to file the information called for in section 13(d)(1) within 10 days after they agree to act together, whether or not any member of the group had acquired any securities at that time. This provision is designed to obtain full disclosure of the identity of any person or group obtaining the benefits of ownership of securities by reason of any contract, understanding, relationship, agreement or other arrangement.

Paragraph (4) of subsection (d) defines a "class” to consist of the amount of outstanding securities of such class less any such securities held by or for the account of the issuer or a subsidiary of the issuer.

Paragraph (5) of subsection (d) sets forth certain exemptions from the filing requirements of subsection (d)(1), including any acquisition made by means of a registration statement pursuant

to the Securities Act of 1933, any acquisition which, together with all other acquisitions by the same person during the preceding 12 months, does not exceed 2 percent of the class, and any acquisition by an issuer of its own securities. In addition, the Securities and Exchange Commission could exempt from filing any acquisition or proposed acquisition which was not intended to or did not have the effect of changing or influencing the control of the issuer or otherwise is not comprehended within the purposes of subsection (d).

Subsection (e)-Purchases by an issuer of its own securities. This subsection authorizes the Securities and Exchange Commission to adopt such rules and regulations with respect to purchases by an issuer of equity securities registered under section 12 of the act or by registered closed-end investment company, of its own securities as it may deem necessary or appropriate in the public interest or for the protection of investors, to define such acts and practices as are fraudulent, deceptive, or manipulative and to prescribe means reasonably designed to prevent such acts and practices. Subsection (e) also specified certain information which could be required to be disclosed: the reasons for such purchase, the source of funds, the number of shares to be purchased, the price to be paid for such securities, and the method of purchase. The Securities and Exchange Commission could also require disclosure of additional or other informatin which it deems to be necessary or appropriate in the public interest or for the protection of investors, or material to a determination whether security should be sold.

Subsection (e) (2) provides that a purchase by or for a person in a control relationship with the issuer, by or for a pension or profitsharing or similar plan of the issuer administered by a person in a control relationship with the issuer, or a purchase by a person on behalf of the issuer to be a purchase by the issuer. Such a purchase would require compliance with the rules and regulations to be adopted by the Securities and Exchange Commission under subsection (e).

Section 3— Tender offers.—Three subsections are added to section 14 of the Securities Exchange Act of 1934.

Subsection (d)(1) requires the filing of a statement by any person who makes a tender offer for any class of securities registered under section 12 of the act or any equity security issued by a registered closed-end investment company, if, after consummation of the offers, he would be the beneficial owner of more than 10 percent of the class. The statement would be filed with the Securities and Exchange Commission, and a copy sent to the issuer, at the time that the tender offer is first made public. The statement would contain such of the information prescribed in section 13(d)(1) and such additional information as the Securities and Exchange Commission might require as necessary or appropriate in the public interest or for the protection of investors. All advertisements and written material used in connection with the solicitation would have to be filed as part of the statement and contain such of the information included in the statement as the Securities and Exchange Commission may prescribe. Copies of additional soliciting material would have to be filed not later than the time the material was made public and contain such information as the Securities and Exchange Commission may prescribe.

Sections 14(d) (2) and 14d)(3) with respect to the terms "person" and "class” of any security are identical to the provisions of sections 13(d) (3) and 13(d) (4).

Section 14(d) (4) authorizes the Securities and Exchange Commission to adopt rules and regulations with respect to solicitations or recommendations to accept or reject tender offers or requests or invitations for tenders. Under this provision the Securities and Exchange Commission could specify the information to be included in any recommendation by management or others in favor of or in opposition to a tender offer and could regulate the solicitation of investors by brokers and dealers who are often compensated for shares tendered as a result of their activities. It would also enable the Securities and Exchange Commission to regulate the activities of persons who make competing tender offers or seek to influence the investor's decision on a tender offer.

Section 14(d)(5) provides that persons who have tendered shares be allowed to withdraw them at any time within 7 days after the tender offer is made or at any time after 60 days from the date of the original offer, unless the Securities and Exchange Commission prescribes otherwise. This subsection would give shareholders who tender their shares immediately after the offer is made a short period within which to reconsider. At the other end of the spectrum, it would prevent tendered securities from being tied up indefinitely awaiting a decision by the person making the offer as to whether or not he will purchase them. The Securities and Exchange Commission would be authorized to vary the duration of either withdrawal period to provide for special situations. For example, the circulation of correcting material might in some instances be required and shareholders might need more than the initial 7-day period to assess the corrected information. In other instances, consummation of the tender offer might require the approval of a regulatory authority before the shares could be accepted and such approval might not be obtainable within 60 days from the commencement of the tender offer.

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Section 14(d)(6) provides that where a greater number of securities are deposited within the first 10 days after a tender offer is made public then the person making that tender offer is bound or willing to take up, the securities deposited must be taken up pro rata according to the number of securities deposited by each depositor. If the person making the tender offer increases the consideration, a new 10-day pro rata period would be required allowing all shareholders a fair opportunity to participate in the offer. In the event that the consideration is increased, all shares deposited before the increase would be required to be taken up before any shares deposited thereafter, unless all shares deposited pursuant to the tender offer were taken up on a pro rata basis.

Section 14(d)(7) provides that where a person making a tender offer increases the consideration offered to shareholders before the expiration of the tender offer, he must pay the increased consideration to those who tendered their securities prior to the increase in the price, whether or not he had taken up any of the securities before the increase in consideration was announced. The purpose of this provision is to assure fair treatment of those persons who tender their shares at the beginning of the tender period, and to assure equality of treatment among all shareholders who tender their shares.

Section 14(d) (8) exempts from section 14(d) any offer made by means of a registration statement under the Securities Act of 1933, or made by the issuer of the security, or which the Securities and Exchange Commission exempts by rules or regulations or by order as not entered into for the purpose of, and not having the effect of changing or influencing the control of the issuer or otherwise as not comprehended within the purposes of section 14(d). In addition, the offer, request, or invitation would be exempt from section 14(d) if the shares to be taken up, together with all other shares of the same class acquired by the same person during the preceding 12 months, would not exceed 2 percent of that class.

Subsection (e)-Fraudulent transactions. Subsection (e) prohibits any misstatement or omission of a material fact, or any fraudulent or manipulative acts or practices, in connection with any tender offer, whether for cash, securities or other consideration, or in connection with any solicitation of security holders in opposition to or in favor of of any tender offer. This provision would affirm the fact that persons engaged in making or opposing tender offers or otherwise seeking to influence the decision of investors or the outcome of the tender offer are under an obligation to make full disclosure of material information to those with whom they deal.

Subsection (f)-Changes in boards of directors.--Subsection (f) provides that if any persons are to be elected directors of the issuer without a vote of the shareholders, pursuant to any arrangement with persons acquiring securities in a transaction subject to proposed sections 13(d) or 14(d), and the persons so designated would constitute a majority of the board of directors, the issuer must file with the Securities and Exchange Commission and transmit to all shareholders information substantially equivalent to the information which would be required by sections 14(a) or 14(c) of the Securities Exchange Act, if such persons were to be elected directors at a meeting of shareholders.

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