File No. 70-9113
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
FORM U-1 APPLICATION/DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
CENTRAL AND SOUTH WEST CORPORATION
1616 Woodall Rodgers Freeway
Dallas, Texas 75202
(Name of company or companies filing this statement and
addresses of principal executive officers)
CENTRAL AND SOUTH WEST CORPORATION
(Name of top registered holding company parent)
Wendy G. Hargus
Treasurer
Central and South West Corporation
1616 Woodall Rodgers Freeway
Dallas, Texas 75202
(Names and addresses of agents for service)
With a copy to:
Ferd. C. Meyer, Jr., Esq. Wilbur C. Delp, Jr., Esq.
Senior Vice President and Sidley & Austin
General Counsel One First National Plaza
Central and South West Corporation Chicago, Illinois 60603
1616 Woodall Rodgers Freeway
Dallas, Texas 75202
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Item 6. Exhibits and Financial Statements
The following exhibits are made a part of this statement:
(1) Exhibits
B-1 - Legal Memorandum concerning Rights Plan
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SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act of 1935,
the undersigned company has duly caused this statement to be signed on its
behalf by the undersigned thereunto duly authorized.
CENTRAL AND SOUTH WEST CORPORATION
By:/s/ WENDY G. HARGUS
Wendy G. Hargus
Treasurer
Date: October 10, 1997
Exhibit B-1
October 10, 1997
Securities and Exchange Commission
Division of Investment Management
Office of Public Utility Regulation
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Share Purchase Rights Plans
Ladies and Gentlemen:
We represent Central and South West Corporation ("CSW"), which has
filed an application for approval on Form U-1 seeking authorization to implement
a share purchase rights plan. In response to your request, we are submitting
this letter discussing the background and basic structure of rights plans, their
benefit to stockholders, the fact that rights plans have become a commonplace
corporate governance tool to deter coercive takeover attempts and protect
stockholders' long-term value, and the legality of rights plans.
I. Background and Basic Structure of Rights Plans
Beginning in 1984, several companies adopted share purchase rights
plans absent any authoritative judicial decision upholding or questioning the
validity of such plans. The adoption of share purchase rights plans, commonly
known as "poison pills," was a response to unsolicited attempts by investors to
acquire public companies in circumstances requiring boards of directors and
stockholders to make very prompt decisions affecting the value, corporate
structure and continued existence of the companies. Many of these attempts
involved partial or two-tiered offers, the breakup of the corporate structure
and the sale of assets, or took the form of creeping acquisitions of stock that
deprived stockholders of participation in a control premium. Share purchase
rights plans allow companies to deal with takeover attempts within a more
reasonable time frame and with a greater probability for protecting the
long-term interests of all stockholders by forcing acquirors to negotiate with a
target's board of directors and extracting higher acquisition premiums from
acquirors. However, rights plans are not meant to entrench a target's board of
directors, are not designed to prevent a proxy contest and are not designed to
frustrate a corporate transaction which is in the best interests of
stockholders.
Rights plans are intended to be effective against "two-tiered"
acquisitions, acquisition attempts in which offers for less than all of the
stock of a target company are followed by a second-step merger in which the
remaining stockholders receive less consideration for their stock. Rights plans
also discourage partial tender offers with no second-step merger and
accumulations of more than a specified percentage of voting control, thereby
discouraging the acquisition of future control without an offer to acquire all
shares at an appropriate price. The key features of a rights plan -- "flip-in"
and "flip-over" provisions of the rights -- can impose unacceptable levels of
dilution on an acquiror. This potential for dilution, combined with the
authority of the target's board of directors to redeem the rights before they
are triggered, creates an incentive for potential acquirors to negotiate with a
target's board of directors prior to taking any unilateral action.
Most rights plans contain the same basic structure and features.
Following adoption of the plan by the board of directors, rights pursuant to the
plan are distributed, as dividends, pro rata to stockholders. No stockholder
approval is required to effect such a plan. Each right, excluding those held by
an Acquiring Person (as defined below), entitles the holder thereof to purchase
a share or a fraction of a share of either common stock or a newly issued series
of preferred stock following the occurrence of a specified event, typically the
acquisition of a specified percentage of a company's voting stock, at a price
fixed at the time the rights are issued and subject to adjustment generally to
prevent dilution. The exercise price is typically at a significant premium over
the market price at the time the rights are issued and approximates, in the view
of the board of directors, the estimated long-term value of the common stock of
the company.
The rights may not be traded separately from the common stock prior to
a specified triggering event. The rights confer no voting power and typically
remain outstanding for ten years, unless earlier exercised or redeemed. The
rights are redeemable by the board of directors of a company for a nominal price
at any time prior to the acquisition by one person, or several persons acting as
a group, of beneficial ownership of a specified percentage of a company's voting
stock and for a fixed period thereafter.
The antitakeover features of a rights plan are triggered when the
rights begin to trade separately and become exercisable, which typically occurs
upon (1) the acquisition by any person or group ("Acquiring Person") of a
specified percentage of a company's voting stock, usually 10% to 15% (15% in the
case of CSW's rights plan) or (2) the commencement of a tender offer or exchange
offer for a number of shares that would result in any person or group becoming
an Acquiring Person. The "flip-in," feature provides that, upon any person or
group becoming an Acquiring Person, each right, excluding the rights held by the
Acquiring Person, will "flip-in," thereby entitling the holder to purchase, at
the exercise price, common stock of the company with a then-market value equal
to two times the exercise price. The flip-in feature dilutes the Acquiring
Person's investment and discourages creeping accumulations of voting control.
The "flip-over" feature provides that, if after the rights become exercisable, a
company is acquired through a second-step merger or other specified business
combination, each right, excluding the rights held by the Acquiring Person, will
"flip-over" and entitle the holder thereof to buy, for the exercise price,
common stock of the Acquiring Person with a then-market value equal to two times
the exercise price. This feature also would dilute an Acquiring Person's
investment.
II. Benefits to Stockholders
Rights plans are beneficial to the interests of stockholders because
they increase a target's bargaining power and generally lead to higher prices
for stockholders in the event of a takeover. A rights plan also maximizes
stockholder value by allowing boards of directors to consummate transactions
that they have determined to be part of a company's long-term plan for
maximization of shareholder value. Although rights plans are designed to protect
stockholders from coercive takeover devices, such as two-step mergers, market
sweeps and creeping acquisitions of control, they do so without entrenching
management or preventing tender offers or, ultimately, preventing a takeover
transaction. Because rights plans typically contain a redemption provision,
which permits the board of directors to redeem the rights at a nominal price at
any time before the rights become exercisable or within a short time thereafter,
an Acquiring Person can avoid dilution so long as the board of directors redeems
the rights. Even if the board of directors were initially to oppose a tender
offer, triggering the exercisability of the rights, a tender offer could still
succeed in several ways, including: (1) tendering with a condition that the
board redeem the rights; (2) tendering with a very high minimum condition of
shares and rights; or (3) soliciting proxies to remove the board and then
redeeming the rights. Thus, while not precluding hostile tender offers, a rights
plan does encourage a potential acquiror to negotiate with the board of
directors or the stockholders, rather than to act unilaterally.
In responding to a takeover attempt, the board of directors of the
target company is bound by its fiduciary duties (care, loyalty and candor) to
the target company's shareholders under applicable state corporate law (in the
case of CSW, Delaware corporate law). While the application of Delaware
corporate law with respect to issues of corporate governance are far beyond the
scope of this letter, it is important to note that the actions of the board of
directors of a Delaware corporation are informed and governed by well-developed
Delaware corporate law, including board action (or inaction) in connection with
takeover attempts, negotiating with potential acquirors and determining whether
or not to redeem outstanding rights.
The adoption of a rights plan will not negatively affect the economic
interests of a company's stockholders. Since the exercise price of a right is
significantly higher than the market price, the issuance of rights does not
cause a dilution of earnings per share and historically has not had any
materially negative impact on the market price of a company's stock. A March 5,
1986 study by the Office of the Chief Economist of the SEC (the "Jarrell Study")
concluded, based on an analysis of share prices two days after the adoption of a
rights plan, that there was no statistically significant reduction of market
prices for the entire survey of companies sampled. The SEC has stated that the
Jarrell Study "is not a sufficient basis on which to judge right or wrong in a
public policy context."
A study by Georgeson & Company, Inc. (the "Georgeson Study"),
a proxy solicitation firm, found that target companies with rights plans
received substantially higher premiums than target companies without rights
plans. The Georgeson Study analyzed hostile takeovers having a value of over
$100 million that were commenced after January 1, 1986 and completed by October
19, 1987. A further study by Georgeson in October 1988 purported to confirm the
findings of the earlier Georgeson Study using the same time period. The October
1988 study also examined the effect of adoption of rights plans by companies
which were not the subject of takeovers and concluded that such companies did
not experience a decrease in their stock valuations and that their stock
valuations did not diminish compared to companies which were not the subject of
takeovers and did not adopt rights plans.
A 1994 study by University of Rochester economists Robert
Comment and G. William Schwert, which replicated the analysis of the Jarrell
Study using a database of companies
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that was four times the size of the database used by the SEC, found (1)
that adoptions of rights plans have no meaningful effect on stock prices, and
(2) that rights plans "are reliably associated with higher premiums for selling
shareholders, both unconditionally and conditional on a successful takeover . .
. ."
Similarly, a December 1995 study conducted by JP Morgan found
that the median takeover premium received by companies protected by a rights
plan is nearly 16% higher than the median takeover premium received by companies
without a rights plan (51.4% vs. 35.5%). Significantly, JP Morgan found that the
discrepancy held true regardless of whether the transaction was hostile or
friendly, regardless of the size of the parties, and regardless of whether
stock, cash or a mixture was used as consideration for the transaction. It is
also worth noting that every major investment banking firm that studied the
subject has concluded that adoption of a rights plan has no effect on the stock
prices of companies that were not subject to takeover speculation.
III. Adoption Commonplace
The adoption of rights plans among public companies is commonplace.
Over 1,700 U.S. public companies have adopted rights plans, including more than
half of the Fortune 500, more than two-thirds of the Fortune 200, and at least
60 public utility companies. In addition, three registered public utility
holding companies have adopted with the SEC's authorization rights plans ("Prior
Rights Plans") which are very similar to CSW's proposed rights plan ("CSW
Plan"). See Consolidated Natural Gas Company, SEC Release No. 35-26434 (December
19, 1995); National Fuel Gas Company, SEC Release No. 35-26532 (June 12, 1996);
and New Century Energies, Inc., SEC Release No. 35-26751 (August 1, 1997). For
example, each of the Prior Rights Plans and the CSW Plan contain the following
provisions:
1. Rights are distributed, pro rata, to stockholders;
2. Each Right entitles the holder thereof, upon the
acquisition of a specified percentage of stock by any
person or group ("Exercisability Threshold"), to
purchase common stock of the issuing company at a 50%
discount;
3. The rights of an Acquiring Person become null and
void, thereby causing substantial dilution to such
Acquiring Person; and
4. The rights may be redeemed by the issuing company's board
of directors.
It should be noted that each of the Prior Rights Plans has an Exercisability
Threshold of 10%, while the CSW's Plan contains the more conservative
Exercisability Threshold of 15%.
To our knowledge, based upon the public record in the prior
applications, the Staff has not requested any other information from any of the
prior applicants, nor has the Commission set forth any policy considerations in
its prior orders regarding share purchase rights plans. As you are aware, share
purchase rights plans generally are a corporate governance issue and, like other
corporate governance issues, are governed by applicable state corporate law. For
most of the 1,700 U.S. public companies that have adopted rights plans, the only
involvement by the Commission is via the adopting company's filing of a
registration statement on Form 8-A under the Securities Exchange Act of 1934.
Therefore, the Commission has historically not substantively reviewed or
promulgated policy positions regarding rights plans. In the case of CSW and
other public utility holding companies, the Commission has jurisdiction because
rights plans involve, among other things, the issuance and, potentially, changes
in the terms of or redemption of, securities.
We also would refer you to the Company's Application on Form U-1 (No.
70-9113), in particular the rationale included under the caption "Item-I
Description of Proposed Transaction - Reasons for Rights Agreement and
Distribution of Rights."
IV. Legal Authority
The Delaware Supreme Court has held that the adoption of stockholders
rights plans is authorized by the provisions of the Delaware General Corporation
Law and protected by the "business judgment rule." Moran v. Household
International, Inc., 500 A.2d 1346 (Del. Supr. 1985). In its decision, the court
examined the provisions of the stockholders rights plan adopted by Household
International Inc., a Delaware corporation, and concluded that the plan provided
reasonable protection in relation to the threat posed by coercive acquisition
techniques. In response to suggestions that prospective defensive measures are
unwarranted, the Delaware court stated: "To the contrary, pre-planning for the
contingency of a hostile takeover might reduce the risk that, under the pressure
of a takeover bid, management will fail to exercise reasonable judgment.
Therefore, in reviewing a pre-planned defensive mechanism it seems even more
appropriate to apply the business judgment rule."
A number of courts in several states have addressed the validity of
flip-ins, which provide that the rights held by the Acquiring Person become null
and void upon the occurrence of a triggering event. In Delaware, several
decisions that have refused to order the board of directors to redeem flip-in
rights did so without addressing the validity of the discriminatory feature of
the plan. See, e.g., Doskocil Cos. v. Griggy, No. 10095 (Del. Ch. 1988); Facet
Enters. Inc. v. Prospect Group, Inc., No. 9746 (Del. Ch. 1988). Moreover, in
some circumstances Delaware law permits stockholders, as distinguished from
shares, to be treated unequally. See, e.g., Harvard Indus. Inc. v. Tyson,
(1986-1987 Transfer Binder) Fed. Sec. L. Rep. (CCH) at 95,294. Thus, although
there has been no direct ruling on the issue by a Delaware court (the Household
rights plan did not have such a provision), it appears that flip-ins are valid
under Delaware law.
Most recent decisions have recognized that a rights plan may be used
to protect the stockholders from coercive or inadequate offers. See, e.g.,
Desert Partners, L.P. v. USG Corp., 686 F. Supp. 1289 (N.D. Ill. 1988) (refusing
to require the board to redeem rights in the context of coercive, two-tiered
offer); In re Damon Corp. Stockholders Litig., (1988-89 Transfer Binder) Fed.
Sec. L Rep. (CCH) Paragraph 94,040 (Del. Ch. 1988) (refusing to require board to
redeem rights in the face of an all-cash, all shares tender offer at $24 per
share where the shares were valued at $30 per share). Cases have also recognized
that a rights plan may be used to advance short-term stockholder values,
including to run an auction for the sale of the company. See, e.g., CRTF Corp.
v. Federated Dep't Stores, Inc., 683 F. Supp. 422 (S. D. N. Y. 1988) (citing
Delaware law in refusing to order the board to redeem the rights in the face of
a pending tender offer before the auction process had been completed and noting
that a rights plan "provides the directors with a shield to fend off coercive
offers and with a gavel to run an auction"); Facet Enters. Inc. v. Koppers Co.,
683 F. Supp. 458 (D. Del. 1988) (permitting the rights plan to remain in place
while the board considered a recapitalization plan as an alternative to the
unsolicited tender offer).
V. Conclusion
Central and South West Corporation is seeking the Securities and
Exchange Commission's authorization to implement a rights plan because a rights
plan is an effective measure that allows a board of directors to take additional
time to negotiate with potential acquirors and to enhance the probability of
competing bids, resulting in increased value for stockholders. The adoption of
rights plans is commonplace among public companies, is generally viewed as a
traditional corporate governance instrument and their legality in Delaware is
unquestioned.
Sidley & Austin
