As I noted in my post on Wednesday, I was at the Georgetown Conference commemorating the Williams Act this week.  The first panel on Thursday was entitled "Balancing Federal and State Takeover Regulation" and the panelists were John Olson, Michele Anderson (new head of the SEC’s office of mergers and acquisitions), R. Franklin Balotti, Professor Ed Rock, and Vice Chancellor Leo Strine.  As the title suggest, the panel focused on the interplay between state and federal regulation, and was an enlightening conversation about the ways in which the federal/state interplay could led to some unintended (and usually undesirable) consequences. 

The panelists focused on some examples of that interplay and their consequences.  One example was the way in which federal rules narrowed a bidder's prospective choices for acquiring a target's assets.  At first glance, there appears to be three choices for structuring such an acquisition--an asset purchase, a merger, and a stock purchase, i.e., the tender offer for a public company.  And yet, as panelists noted, for many companies, federal rules often narrowed these choices down to one.  On the one hand, tax laws made the asset deal unattractive.   And on the other hand, federal court's interpretation of the Best Price Rule (the SEC rule requiring that the amount paid to any stockholder be the highest price paid to any other stockholder) made the stock deal less attractive.  This is because federal courts had interpreted that Rule to apply to executive compensation paid in connection with a tender offer under the notion that such compensation was being paid as part of the consideration in a tender offer.  Of course the SEC has now altered the Rule to make clear that it does not apply to executive compensation.  When the question was raised regarding why it took the SEC so long to make such a clarification, it was observed that the SEC never intended the Rule to cover compensation arrangements, and thus did not think courts would interpret the rule in favor of such coverage.  When it was clear that courts were "getting it wrong," the SEC realized the need to step in. 

Another example focused on the impact of federal rules on the state requirement for annual meetings.  Indeed, federal proxy rules prohibit any proxy solicitation unless it is accompanied or preceded by an annual report including recent financial statements.  This means that federal law would prohibit a company that does not have current financial information from soliciting the proxies it would need for its annual meeting, making it difficult for companies to comply with the state law requirement of holding an annual meeting.  Several panelists noted that not only did the federal rule have unintended and undesirable consequences under state law, but it also had the peculiar impact of burdening a right that many corporations would rather not even exercise.  To paraphrase Vice Chancellor Strine (and I hope I am getting it right!)--it is a bit like telling your children that if they do not finish their homework, they will not have to eat their spinach.  In other words, given some companies reluctance to hold annual meetings (particularly when there is the potential for stockholder confrontation) the federal rule may give such companies an easy out.  And the companies most likely to get such an out are those companies experiencing some financial difficulties (hence the late filing), and thus the companies most likely to be confronted with shareholder discontent at the annual meeting.  Again, this phenomenon represents another example of the federal and state rules working at cross purposes.  Like the tender offer rules, the SEC recently amended its proxy solicitation rules to allow for exemptive relief from the provision regarding the type of information necessary for soliciting proxies.  Hence, the SEC has reacted.

In the end, the discussion demonstrated some of the pitfalls of having a dual system of regulation.  Moreover, it revealed that too often, even when many recognize fairly quickly the negative consequences of a particular rule, it often takes quite some time before that rule is altered.  So perhaps the discussion was yet another cautionary tale about federal regulation in general as well as an important reminder about the limits of state law.

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