The Williams Act is a piece of legislation proposed by Senator Harrison A. Williams of New Jersey in 1968. It refers to amendments to the Securities Exchange Act of 1934 regarding tender offers. Specifically, the act requires any person or institution making a cash tender offer for a publicly traded target corporation (that is required to be registered under federal law), to register with the Securities and Exchange Commission (SEC). This registration shall disclose details of the offer including the following information
- any purpose for which the offer is made
- the plans the purchaser might have if successful
- the terms of a tender offer
- the source of the funds used in the offer
- and any contracts or understandings concerning the target corporation
In addition to registering with the SEC, the acquirer must also file disclosures with all national security exchanges where their securities are traded. These requirements apply to institutions AND individuals that acquire more than 5% of the target company’s outstanding shares.
Reasons for the Williams Act
Throughout the 1960s, acquiring companies had a distinct preference for the tender offer as a means for acquiring a target firm. This was opposed to engaging in a drawn out and potentially expensive proxy fight in order to wins seats on the board of directors. A tender offer by comparison could be completed quite quickly. This led to abuse of the practice by larger firms and corporate raiders making hostile takeover approaches. Tender offers were made for the stocks of target companies with very short timelines for acceptance. This was a huge disadvantage to target stockholders. Investment decisions had to be made without sufficient time to obtain the necessary information. Evaluating the offer terms, the response from management and the outlook for the target firm would be considered a vital part of the investment process.
This behavior gave to much power to the acquirers. The risk posed to shareholders and company executives necessitated the enactment of the Williams Act in 1968 to protect vulnerable stockholders. The acquirer and target management are given equal opportunity to present their own arguments to shareholders.
The act also protected the shareholders from false, incomplete, or misleading statements that acquirers might be tempted to give in the absence of regulation. By requiring full and fair disclosure for the benefit of stockholders, the Williams Act increases transparency in the market, especially in the event of a hostile takeover. The SEC enforced the Williams Act through Rule 13d and Rule 14d.
Objectives of the Act
The act is designed to strike a balance between shareholders and managers in mergers & acquisitions. In passing the legislation, Congress wanted to protect shareholders without making takeover attempts overly difficult. Corporate governance is achieved by giving shareholders timely information with which to make their investment decisions whilst allowing the acquiring firm to convince the shareholders to sell. Making the information public helps shareholders and investors of the target company know what to expect when the acquisition is initiated. Mergers & acquisitions are a natural part of the business cycle that can benefit shareholders and managers. This is especially true when the company runs into financial difficulties or requires new management.
