[Paul, Weiss, Rifkind, Wharton & Garrison letterhead] 345 Park Avenue April 8, 1981 Malcolm P. Pfunder, Esq. Attention: John Weber, Esq. Gentlemen: We represent Becton, Dickinson and Company ("BD"). The purpose of this letter is to request public issuance of a formal interpretation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "Act") stating that certain subordinated exchangeable debentures of Sun Company, Inc. ("Sun Debentures") are "voting securities" of BD within the meaning of Section 7A(b)(2)(A) of the Act and 17 C.F.R. ' 803.1(f)(1) (1980). Put more generally, we ask that the term "voting securities" be construed to include any security which at present entitles the owner or holder thereof to vote for the election of directors of any corporation. Briefly stated, the significance of this request is that the Sun Debentures, upon issuance, will carry the aggregate right to cast 32% of the votes for election of directors of BD and are exchangeable into shares of BD common stock ("BD Shares") totaling the same proportion of the total number of shares issued and outstanding. Thus, acquisition of Sun Debentures, in our view, is equivalent to acquisition of BD Shares for Hart-Scott-Rodino purposes. The Act's legislative history shows clearly that the purpose of the Act was to provide advance notification of large acquisitions to the antitrust authorities in order to permit effective action to be taken against those acquisitions that may violate the Clayton Act. E.g., H.R. Rep. No. 94-1373, 94th Cong., 2d Sess. (1976). Acquisition of Sun Debentures entails precisely the risk that Congress sought to protect against in adopting the Act. Because the Sun Debentures carry the right to vote for directors of BD immediately upon issuance, the potential exists for another company to obtain effective control of BD by acquiring Sun Debentures. Accordingly, the policy of the Act, we submit, surely requires its application to an acquisition of Sun Debentures. Despite this clear legislative purpose, the wording of the Act and the Regulations (which track the language of the statute on this point) create some uncertainty with respect to whether the Act would apply to an acquisition of Sun Debentures. The background of the relationship between BD and Sun, which explains the reason for the issuance of the Sun Debentures, is set forth at pages 21-22 of the preliminary prospectus for the Sun Debentures, dated March 24, 1981, which is contained in Sun's registration statement on Form S-16, a copy of which is enclosed. * Hart-Scott-Rodino Treatment of The Acquisition Of Sun Debentures Sun now owns 6,485,493 BD Shares, which is approximately 32% of all BD Shares issued and outstanding. (PP 12, 21) Sun will issue Sun Debentures that are exchangeable for the BD Shares it now owns. (PP 12) After issuance and sale of the Sun Debentures and prior to their exchange for BD Shares, Sun's BD Shares are to be voted in accordance with and in proportion to (by principal amount) the instructions given by those holders of Sun Debentures who give instructions. (PP 20) Thus, a Sun Debenture in substance will entitle the owner or holder thereof to vote for the election of directors of BD immediately upon issuance. Assuming Sun Debentures are acquired in a transaction in which the "commerce," "size of person," and "size of transaction" tests are satisfied, the acquisition is subject to the report and wait provisions of the Act if Sun Debentures are "voting securities" within the meaning of the Act. Section 7A(b)(2)(A) of the Act, 15 U.S.C. ' l8A(b)(2)(A), insofar as is relevant here, states:
If Sun is deemed to be "the issuer" of the Sun Debentures, Section 7A(b)(2)(A), if read literally, might indicate that the Sun Debentures are not "voting securities" for Hart-Scott-Rodino purposes because they do not entitle the owner or holder thereof to vote for the election of directors of Sun, which could be considered to be "the issuer." In that event, an acquirer of Sun Debentures could acquire the equivalent of 32% of BD without compliance with the report and wait provisions of the Act. If, on the other hand, Section 7A(b)(2)(A) is read to define "voting securities" as any security entitling the owner or holder to vote for the election of directors of any corporation, then Sun Debentures are "voting securities." In that event, an acquisition of Sun Debentures subject to the Act would have to comply with the report and wait provisions. This result, we submit, is mandated by the legislative history and the policy of the Act. Legislative History The legislative history of the Act shows that Congress intended that a security entitling its owner or holder to vote for the election of directors of any corporation is a "voting security." S. 1284, 94th Cong., 2d Sess., was the first of the premerger notification bills to be reported out of committee in Congress. S. 1284 applied to acquisitions of "stock or assets", and the term "voting security" was not directly relevant to coverage. The bill, however, would have exempted certain transactions, some of which were defined with reference to "voting security." ' 7A(b)(4)(B). "Voting security" was defined for purposes of the exemptions as "any security presently entitling theowner or holder thereof to vote for the election of directors of a company . . . " ' 7A(b)(4)(C). Thus, S. 1284 plainly would have treated the Sun Debentures as "voting securities" because they entitle the owner "to vote for the election of directors of a company . . . . " The same language appeared ln H.R. 8532, which passed the Senate on June 10, 1976. The House version of the premerger notification bill, which initially passed the House on August 2, 1976, took a similar approach to this issue. It covered the acquisition of any "voting securities or assets . . . " Section 2 of H.R. 14580, 94th Cong., 2d Sess. (1976) [in a clause denominated 7A(b)(3)(B)] defined the term "voting securities" as "any stock or other share capital presently entitling the owner or holder thereof to vote for the election of directors of a corporation." 122 Cong. Rec. H 8137 (Aug. 2, 1976). Thus, under the House version of the bill, the Sun Debentures clearly would have been "voting securities" because they "presently [entitle] the owner or holder thereof to vote for the election of directors of a corporation." Following the passage of H.R. 14580 by the House on August 2, 1976 and of H.R. 8532 by the Senate on June 10, 1976, the House asked for a conference. The conference proved impossible to hold, however, in light of the press of adjournment and the threat of filibusters in the Senate. Accordingly, informal negotiations were held between Senators Kennedy, Abourezk and Scott and Chairman Rodino and other members of the House. 122 Cong. Rec. S. 14888 (Aug. 27, 1976). This culminated in an agreement on an amended version of H.R. 8532 which the Senate passed by motion on September 8, 1976. 122 Cong. Rec. S 15420. The compromise bill, of course, contained the definition of "voting securities" that now appears in Section 7A(b)(2)(A) of the Act. (The text of the compromise bill appears at 122 Cong. Rec. S 14867-72 [Aug. 27, 1976].) On September 16, 1976, the date on which the compromise bill was passed by the House, Chairman Rodino explained the differences between the prior versions of the bill and the final bill. With respect to the definition of "voting securities", Chairman Rodino stated:
Thus, according to Chairman Rodino's explanation, the original House-passed bill would have covered the Sun Debentures because they entitled the holder to vote to elect directors of a corporation. The Senate bill also would have covered them because they were "voting securities" as Chairman Rodino used that term. Moreover, there is no suggestion in his comprehensive explanation of the compromise bill that the change in language between (a) the Act as finally passed and (b) the House and Senate bills was intended to alter the substance of the definition of voting securities insofar as is relevant here. Indeed, the Senate floor debate suggests that the change was purely stylistic and not substantive. 122 Cong. Rec. S 14873-88 (Aug. 27, 1976) (Senator Allen). Accordingly, we submit that the Sun Debentures are "voting securities" within the meaning of the Act because they entitle the owner or holder thereof to vote for the election of directors of BD. The Sun Debentures are "Voting Securities" The same result may be reached by another route. The Act defines "voting securities" as securities that
The term "issuer" is not defined in the Act or the Regulations. It therefore might well be construed in light of the lengthy history of its use in the Securities Act of 1933 ("1933 Act") and Securities Exchange Act of 1934. That history, we suggest, shows that both BD and Sun are "issuers" here. Section 2(4) of the 1933 Act, 15 U.S.C. ' 77b(4), provides:
Thus, the term "issuer" under the 1933 Act includes "the person or persons performing the acts and assuming the duties of . . . managers" pursuant to a voting trust or other such agreement under which the certificates are issued. The Sun Debentures are to be issued pursuant to the settlement agreement in the Sun-BD litigation. (PP 22) The BD Shares for which the Sun Debentures are exchangeable are to be deposited in escrow pending their exchange for Sun Debentures. (PP 12, 22) The voting of the BD Shares is to be governed by a voting agreement. The purchase of a Sun Debenture carries with it not only the debt obligation of Sun, but, in substance, the right to vote the BD Shares for which the Debenture is exchangeable. Accordingly, for present purposes, a Sun Debenture may be viewed both as a debt obligation of Sun and as a voting trust certificate governing the voting of BD Shares. Moreover, because the Sun Debentures are to be issued and the BD Shares are to be voted pursuant to agreements to which both Sun and BD are parties, both Sun and BD should be viewed as managers of what amounts to a voting trust containing BD Shares. In consequence, both should be viewed as "issuers" for purposes of Section 7A(b)(2)(A) of the Act. The Need For Issuance of A Formal Interpretation We believe that the Sun Debentures are "voting securities" within the meaning of the Act, particularly when Section 7A(b)(2)(A) is considered in light of the Act's purpose and its legislative history. We acknowledge, however, that this conclusion is not necessarily self-evident solely from a literal reading of the language of the statute. Accordingly, one acquiring Sun Debentures might fail to report and wait, as required by the Act, in good faith. In these circumstances, there is no unquestionably effective remedy for dealing after the fact with a failure to report and wait. There is no private clause of action under the Act. There is little likelihood that the civil penalty provisions of section 7A(g)(l) of the Act would be invoked against a firm claiming that it had acted in good faith. And while the Commission could proceed under section 7A(g)(2) against an acquirer of Sun Debentures, it is unclear whether a district court would prevent the voting of the BD Shares pending compliance with the Act if the failure to comply was inadvertent. Hence, an acquisition of Sun Debentures in violation of the Act could well leave the offender free to vote a 32% interest in BD. The Commission may readily avoid these potential problems by publicly issuing a formal interpretation of the Act pursuant to Section 803.30 of the Regulations, 17 C.F.R. ' 803.30 (1980). Such action would place all potential acquirers of Sun Debentures on notice that the acquisition of those debentures is subject to the Act. This almost surely would avoid the need for any enforcement action by assuring voluntary compliance with the statute. This, we submit, is in the public interest and is exactly what Congress intended in adopting the Act. Indeed, Congress explicitly contemplated such action by empowering the Commission to define terms used in the Act. 15 U.S.C. ' 18A(d)(2)(A) We are ready to provide you with any additional information that may be necessary in connection with this request. In addition, I would appreciate an opportunity to meet with you or your staff to discuss this matter. Very truly yours [signature] Lewis A. Kaplan * References to the preliminary prospectus are indicated by "PP" followed by the page number. |
Federal Trade Commission Formal Interpretation of Subordinated Exchangeable Debentures under the Pre-merger Notification Rules
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