SEC Enforcement Action Serves as Reminder of Exchange Act Rule 14e-8
April 7, 2003
On March 31, 2003, the U.S. Securities and Exchange Commission (SEC) commenced an enforcement action that alleges violations of Rule 14e-8 promulgated by the SEC under the Securities Exchange Act of 1934. The rule requires, among other things, that a party may not announce an intention to commence a tender offer unless it has the “reasonable belief” that it will have the means to purchase securities to complete the offer.
In a complaint filed in the U.S. District Court for the Southern District of New York, the SEC alleges that Global Airlines Corporation, by and through Emil Bernard, its sole shareholder, employee and officer, violated Rule 14e-8 by making public announcements of its intent to commence tender offers for Trans World Airlines, Inc. and US Airways Group, Inc. when it did not have the financial ability to consummate an acquisition of either company. Post-announcement movements in stock prices indicate the announcements were accepted as bona fide by the market, in part due to other allegedly fraudulent conduct by Global and Mr. Bernard designed to give them credibility.
The SEC has described Rule 14e-8 as being designed to “encourage only bona fide tender offers to be publicly announced.” Accordingly, the rule prohibits the announcement of a tender offer which has not yet commenced if the acquirer:
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Does not intend “to commence the offer within a reasonable time and complete the offer;”
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Intends for the announcement to manipulate the market price of its stock or the stock of the target company; or
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Does not have the “reasonable belief” that it “will have the means to purchase securities to complete the offer.”
The rule was adopted in 2000 to replace the “five business day rule,” which had in effect required that a tender offer be commenced no later than five business days after it was announced.
The SEC alleges that the announcements made by Global violated Rule 14e-8 as Global was a shell corporation that did not have sufficient assets or resources to consummate a tender offer for either TWA or US Airways, did not have access to outside financing and, therefore, could not have had the “reasonable belief” that it would have the means to complete either offer.
While the Global complaint alleges a particularly egregious violation of rule 14e-8, it should serve as a reminder to all market participants of the existence of the rule and the SEC’s willingness to enforce it. While the rule does not require that financing be committed prior to the announcement of a tender offer, it does require the would-be acquirer to have the reasonable belief that financing will be obtained.
