BUREAU OF COMPETITION
June 2, 1981
Lewis A. Kaplan, Esquire
Paul, Weiss, Rifkind, Wharton & Garrison
345 Park Avenue
New York, New York 10154
Re: Sun Company, Inc. 10-3/4% Subordinated Exchangeable Debentures Due 2006
Dear Mr. Kaplan:
This letter responds to your letter of April 8, 1981, and constitutes a formal interpretation under § 803.30 of the Commission's premerger notification rules, 16 C.F.R. § 803.30, in which the Assistant Attorney General in charge of the Antitrust Division of the Department of Justice has concurred.
Your letter requests a formal interpretation stating that the above referenced subordinated exchangeable debentures are voting securities of Becton, Dickinson and Company within the meaning of Section 7A(b)(3)(A) of the Clayton Act, 15 U.S.C. § 18a (b)(3)(A), and § 801.1(f)(1) of the premerger notification rules, 16 C.F.R. § 801.1(f)(1).
Section 7A(b)(3)(A) of the Clayton Act states:
The term "voting securities" means any securities which at present or upon conversion entitle the owner or holder thereof to vote for the election of directors of the issuer
. . . .
Section 801.1(f)(1) of the premerger notification rules states:
Voting securities. The term "voting securities" means any securities which at present or upon conversion entitle the owner or holder thereof to vote for the election of directors of the issuer, or of an entity included within the same person as the issuer
. . . .
As we understand it, the above referenced debentures are a debt obligation of Sun Company, Inc., which are convertible into common stock of Becton, Dickinson and Company and allow the owner or holder to direct the manner in which a proportionate number of the underlying Becton, Dickinson shares shall be voted for the election of directors of Becton, Dickinson. The question of interpretation which arises under the premerger notification rules stems from the fact that Sun Company is technically the issuer of the debentures, and the present voting rights which attach to those debentures relate to the election of directors of Becton, Dickinson, which is not technically "the issuer, or . . . an entity included within the same person as the issuer."
We have no doubt that Congress, in enacting Title II of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, intended that the antitrust enforcement agencies have an opportunity to review any antitrust issues arising out of the acquisition of securities with present voting rights such as those which attach to the Sun Company subordinated exchangeable debentures, provided that the statutory size-of-person and size-of-transaction tests are met. In drafting and promulgating § 801.1(f)(1) of the premerger notification rules, the Commission and the Assistant Attorney General did not consider the possibility that, in an unusual case, one company might issue securities which conferred on the owner or holder the right to vote for election of directors of a company that was not controlled by the issuer.
The Commission, in issuing the final premerger notification rules, did state, however:
"Voting securities" are securities that at present or upon conversion entitle the owner or holder to vote for directors of any issuer . . . . [Statement of Basis and Purpose to § 801.1(f)(1), 43 Federal Register at 33462 (July 31, 1978) (emphasis supplied)]
It was not intended that the definition of "voting securities" be limited to securities which give the owner or holder a right to vote for "directors" of a specific "issuer"; rather, that definition contains reference to an "issuer" so that the "acquired person" can be identified.
The fact that a purchaser of these subordinated exchangeable debentures acquires a present right to designate how the votes of the underlying Becton, Dickinson common shares will be cast for directors of Becton, Dickinson means that such a purchaser would, in this respect, be in the same position as a purchaser of an equivalent number of Becton, Dickinson shares. While we do not believe that circumstances such as these arise sufficiently often to justify a change in the Commission's premerger notification rules, we believe it appropriate under those rules to regard these subordinated exchangeable debentures as "voting securities" within the meaning of § 7A(b)(3)(A) of the Clayton Act and § 801.1(f)(1) of the rules. We also believe it appropriate and in keeping with the intent of the Act and the rules to regard Becton, Dickinson and Company as the "issuer" of those debentures under the Act and the premerger notification rules.
Therefore, any purchase of these subordinated exchangeable debentures is a transaction which is subject to the reporting and waiting period requirements of § 7A of the Clayton Act, provided the statutory size-of-person and size-of-transaction tests (in § 7A(a)(2) and (a)(3)) are met. If such a purchase is reportable under § 7A, the acquired person would be Becton, Dickinson and Company, and all other provisions of the Act and the rules would be applied in the normal fashion.
It is theoretically possible that the subsequent conversion or exchange of these debentures for common stock of Becton, Dickinson would give rise to another filing and waiting period obligation under § 7A, since under § 801.32 of the rules a conversion is an acquisition within the meaning of § 7A. It appears unlikely, however, that such a conversion would increase the acquiring person's percentage of Becton, Dickinson's outstanding voting securities above the percentage represented by the subordinated exchangeable debentures held prior to conversion. The conversion is therefore likely to be exempt from reporting and waiting period requirements under § 7A(c)(10).
Note that, while these subordinated exchangeable debentures are "voting securities" under § 7A of the Clayton Act and the Commission's premerger notification rules, they are not "convertible voting securities" under § 801.1(f)(2) of the rules, because they carry a present right to vote. Acquisition of these debentures is therefore not exempt from reporting and waiting period obligations under § 802.31, which exempts acquisitions of convertible voting securities.
Malcolm R. Pfunder
Assistant Director for
[Paul, Weiss, Rifkind, Wharton & Garrison letterhead]
345 Park Avenue
New York, NY 10154
April 8, 1981
Malcolm P. Pfunder, Esq.
Assistant Director, Evaluation
and Premerger Notification
Bureau of Competition
Attention: John Weber, Esq.
Federal Trade Commission
Sixth Street and Pennsylvania Avenue, N.W.
Washington, D. C. 20580
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:
"The term 'voting securities' means any securities which at present or upon conversion entitle the owner or holder thereof to vote for the election of directors of the issuer . . . "
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.
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 the owner 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:
"The House bill covered acquisitions of assets and 'voting securities' -- any debt or equity instrument entitling the holder to elect directors of a corporation. Nonvoting securities were completely exempt from the House-passed bill. However, nonvoting securities that can be converted into voting securities were covered 'upon conversion,' and compliance with the bill's notification and waiting requirements would thus have been required prior to conversion. In contrast, the Senate bill covered acquisitions of assets; voting securities; nonvoting but convertible securities; and, apparently, nonvoting, nonconvertible equity securities. Nonvoting, nonconvertible debt securities were completely exempt from the Senate bill under subsection (b)(4)(B)(ii). The compromise bill completely exempts acquisitions of nonvoting, nonconvertible debt or equity securities. Further, the compromise bill covers nonvoting but convertible securities upon acquisition, not conversion. Finally, the compromise bill covers acquisitions of voting securities in all instances, except in the case of de minimus [sic] 'solely for purpose of investment' acquisitions expressly exempted by the bill." 122 Cong. Rec. H 10294 (Sept. 16, 1976) (emphasis added).
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"
Even If The Act Is Read Literally
The same result may be reached by another route.
The Act defines "voting securities" as securities that
entitle the owner or holder thereof to vote for the election of directors of "the issuer." If both BD and Sun are deemed to be "issuers" of the Sun Debentures, then the Sun Debentures are "voting securities" under the literal terms of the Act.
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:
"The term 'issuer' means every person who issues or proposes to issue any security except that with respect to certificates of deposit, voting-trust certificates, or collateral-trust certificates, or with respect to certificates of interest or shares in an unincorporated investment trust not having a board of directors (or persons performing similar functions) or of the fixed, restricted management, or unit type, the term 'issuer' means the person or persons performing the acts and assuming the duties of depositor or manager pursuant to the provisions of the trust or other agreement or instrument under which such securities are issued; except that in the case of an unincorporated association which provides by its articles for limited liability of any or all of its members, or in the case of a trust, committee, or other legal entity, the trustees or members thereof shall not be individually liable as issuers of any security issued by the association, trust, committee, or other legal entity; except that with respect to equipment-trust certificates or like securities, the term 'issuer' means the person by whom the equipment or property is or is to be used; and except that with respect to fractional undivided interests in oil, ' , A gas, or other mineral rights, the term 'issuer' means the owner of any such right or of any interest in such right (whether whole or fractional who creates fractional interests therein for the purpose of public offering." (Emphasis added)
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
Lewis A. Kaplan
References to the preliminary prospectus are indicated by "PP" followed by the page number.