Greg Golding of King & Wood Mallesons in a recent piece on this site  characterizes the law on whether David Jones Limited was required to make immediate disclosure of a questionable takeover bid as a “hair trigger.”   As I have previously written it is likely that David Jones would never have issued the press releases it did if it were governed by U.S. law.  How could the two countries’ laws be so different, particularly when, as you will see, the wording of some of the operative regulations is so similar?  This is a complex question.

The U.S. does not fundamentally differentiate between disclosure of an unsolicited takeover proposal of the type received by David Jones and any other material corporate development.  Whether disclosure is required is a function of whether there is a duty to make disclosure of the development and whether it is material.

The Duty (or Lack Thereof) to Make Disclosure under U.S. Securities Laws

Under the U.S. disclosure regime promulgated by the U.S. Securities and Exchange Commission, there is no duty to make disclosure of material information unless it is called for in a required filing, the issuer has permitted the information to leak out, insiders intend to trade while in possession of that information, or disclosure is necessary to make some other statement of the issuer not misleading. 

A limited number of matters require relatively prompt disclosure (generally within four business days) on a Current Report on Form 8-K.  These include entry into or termination of a material contract, replacement of auditors, and resignations of executive officers and directors.  It is quite clear that receipt of an unsolicited takeover bid is not in this category. 

Although U.S. issuers are required to file fairly extensive Quarterly Reports on Form 10-Q, most practitioners are comfortable not disclosing merger negotiations even if they are very close to being completed, subject to the exceptions mentioned above. 

One of the leading M&A treatises summarizes the law on this as follows:

The general rule is that in the absence of bad faith, insider trading, leaks or previous inaccurate disclosures, the courts will allow issuers to use their own judgment in choosing the time to make affirmative disclosure.  In general, except for public filings otherwise required by the SEC, neither the SEC nor the courts impose an affirmative duty of disclosure on issuers.  However, the cases evidence a strong preference for a disclosure at an early (although not premature) time. [footnotes omitted]

Kling and Nugent, Negotiated Acquisitions of Companies, Subsidiaries and Divisions, §7.01[1] (Law Journal Press 2011).  It is important to point out most of the cases that permit the deferral of disclosure find a good business purpose for the decision. 

It is also generally permissible under the securities laws to not respond to rumors (and maintain a firm policy on being unwilling to comment on them) as long as the issuer was not the source of a leak which created the rumor.

This doesn’t quite complete the analysis of disclosure obligations, because as is frequently the case in the U.S., there is another layer of regulation: the stock exchanges. 

Stock Exchange Requirements

Here is where at least the wording of the requirements will look familiar to Australian practitioners.  I focus on the New York Stock Exchange Rules although Nasdaq has similar requirements. 

Section 202.05 of the NYSE Listed Company Manual says in part:

Timely Disclosure of Material News Developments

A listed company is expected to release quickly to the public any news or information which might reasonably be expected to materially affect the market for its securities. This is one of the most important and fundamental purposes of the listing agreement which the company enters into with the Exchange.

A listed company should also act promptly to dispel unfounded rumors which result in unusual market activity or price variations.

This does not sound a lot different from Section 3.1 of the ASX Listing rules which provides:

Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.

However, the exceptions (referenced as to the ASX in Greg Golding’s article) are more permissive in the U.S.  Here is an excerpt from Section 202.06 of the NYSE Listed Company Manual:

It should be a company's primary concern to assure that news will be handled in proper perspective. This necessitates appropriate restraint, good judgment, and careful adherence to the facts…

Judgment must be exercised as to the timing of a public release on those corporate developments where the immediate release policy is not involved or where disclosure would endanger the company's goals or provide information helpful to a competitor. In these cases, the company should weigh the fairness to both present and potential shareholders who at any given moment may be considering buying or selling the company's stock.

Clever lawyers can and do make good use of these provisions.

On a real time basis, issuers are generally left to their own decision as to whether to disclose an unsolicited proposal under the stock exchange rules.  This is probably largely a function of the fact that the primary remedy stock exchanges have for violation of their rules is to terminate a company’s listing.  This is a very rare event for a healthy large company.  Case law suggests that there is not private right of action for a breach of a stock exchange’s rules. See e.g., Craighead v. E. F. Hutton & Co., 899 F. 2d 485 (6^th Cir. 1990).  Private securities litigation is the principal deterrent under the U.S. securities law (outside of the criminal statutes).  As a result, listed companies can, on occasion, be aggressive in interpreting stock exchange rules.

However, when a rumor circulates and affects trading, the dynamics with the NYSE become more complex.  First, the NYSE has an additional rule on rumors (which may also sound familiar to Australian practitioners):

The market activity of a company's securities should be closely watched at a time when consideration is being given to significant corporate matters. If rumors or unusual market activity indicate that information on impending developments has leaked out, a frank and explicit announcement is clearly required. If rumors are in fact false or inaccurate, they should be promptly denied or clarified. A statement to the effect that the company knows of no corporate developments to account for the unusual market activity can have a salutary effect. It is obvious that if such a public statement is contemplated, management should be checked prior to any public comment so as to avoid any embarrassment or potential criticism. If rumors are correct or there are developments, an immediate candid statement to the public as to the state of negotiations or of development of corporate plans in the rumored area must be made directly and openly. Such statements are essential despite the business inconvenience which may be caused and even though the matter may not as yet have been presented to the company's Board of Directors for consideration. [emphasis added]

Section 202.03 of the NYSE Company Manual.  As indicated above, if the company is the source of the leak, then disclosure is required in response a rumor under the securities laws.  However, if the issuer is innocent, when a rumor is picked up by an exchange’s market surveillance unit, it can begin a complex dance between the exchange listing representative and the listed company.  In many cases a company will try to stick strictly to its policy of not commenting on market rumors.

Definition of Materiality

The seminal case on the materiality of M&A preliminary approaches or negotiations is the Supreme Court case of Basic, Inc. v. Levenson, 485 U.S. 224 (1988).  That case built on several prior important cases on materiality to hold:

Materiality in the merger context depends on the probability that the transaction will be consummated, and its significance to the issuer of the securities. Materiality depends on the facts, and thus is to be determined on a case-by-case basis [ 485 U.S. at 250].

Based upon what we know about the EB Private Equity proposal (the numbers didn’t add up, there was no clarity on financing, and EB was unknown) it is hard to see how David Jones could have concluded that there was any significant probability of the proposal being consummated.  In the U.S., this would have been a basis for foregoing any announcement.  Nevertheless, it is important to note that we do not know what David Jones knew about EB Private Equity’s proposal when David Jones made its disclosures. 

Who Pays for a Bad Call?

There is one other huge difference between U.S. and Australian law on the dynamics of disclosure.  In the U.S., disclosure is made in the name of the issuer and not the directors.  Unless there is bad faith or insider trading (or there is a registered public offering of securities), directors are generally not held liable for a disclosure decision in the U.S.  See Section 20(a), Securities Exchange Act of 1934, as amended.  Good governance would call for consultation with directors, or at least a committee of directors, if time permits, but frequently these decisions occur in real time and need to be made by management. 

Even if there is a violation of the law by the company, in the absence of egregious conduct (or a registered securities offering), the SEC is unlikely to seek sanctions for a bad call from directors or the officers nor would they have exposure for damages in private litigation.  For this reason, even though regulators may encourage a hair trigger, issuers tend to be able to resist it when strong business reasons compel deferral of disclosure.

In short, U.S. securities lawyers are used to advising clients to keep a stiff upper lip when business reasons compel not making a disclosure of an unsolicited acquisition approach.  A combination of not believing in the likelihood of a deal (and therefore that a suspicious offer by definition may not be material) and the lack of affirmative disclosure obligation makes avoiding a press release in David Jones situation relatively easy. 

Of course, a bidder is free to make an announcement (as long as it is not misleading or intending to manipulate the market) but one has to wonder if EB Private Equity had tried that whether it would have had anything like the same effect as David Jones’ announcements.  And it likely would have sent the regulators immediately looking for the mysterious EB Private Equity.