Key Provision Limits Open Market Stock Purchases : Senators Back Bill to Curb Tender Bids

The Senate Banking Committee approved a bill Wednesday that would impose some restrictions on corporate raiders by tightening key provisions of laws governing stock tender offers.

After a day-long session, the committee voted 14-6 to approve the measure, which would require quicker public disclosure of significant stock holdings and for the first time restrict the purchase of large amounts of stock.

But the bill, the Tender Offer Disclosure and Fairness Act of 1987, faces an uncertain future. It is not likely to be considered by the full Senate until the House Energy and Commerce Committee, which is considering similar legislation, has drafted a bill, a committee aide said.

“It’s very uncertain where this bill will go. Any bill that passes (the full Senate) will be a limited bill,” the aide said.

A key provision in the package, which proposes a wide range of detailed changes, would bar any investor or group from buying more than 25% of a company’s stock in the open market.

A tender offer is an offer to buy a company’s stock, normally at an above-market price, direct from the stockholders. It is usually done as part of a hostile takeover bid.

Any stock purchases above 25% of a company’s total outstanding common stock would have to be made through a formal tender offer, which gives other shareholders time to decide whether to sell.

The provision is aimed at preventing so-called creeping tender offers, or “street sweeps,” in which corporate raiders amass large amounts of stock in the open market, often with the help of Wall Street speculators.

The bill would also lengthen the period during which a tender offer must remain open to 35 days from the current 20 days, giving shareholders more time to assess the offer.

One of the few measures in the bill supported by the Securities and Exchange Commission is a reduction in the current 10-day “window” during which investors with 5% or more of a company’s stock must disclose their holdings.

The bill requires that once an investor amasses a 5% stake in a company, he cannot buy any more of its stock until he notifies the SEC, which must be done within five trading days.

Committee members, who were widely split on many of the issues contained in the bill, sidestepped the controversial states’ rights issue, which had been part of the original proposal offered by panel Chairman William Proxmire (D-Wis.).

Proxmire offered to delete a provision that would have allowed state anti-takeover laws to prevail over conflicting federal securities laws.

SEC Chairman David Ruder has said he favors legislation that would allow federal law to override state law.

The panel also rejected a “one share, one vote” proposal by Sen. Richard Shelby (D-Ala.), which would have prevented any company that issues more than one class of common stock with unequal voting rights from being traded on a stock exchange.

The SEC is currently considering a similar measure.

Companies are increasingly issuing dual-class common stock as a weapon against hostile takeovers, since it can give more voting power to friendly stockholders.