Question

Williams Act of 1968

Sarbanes - Oxley Act of 2002

Why was the regulation brought into existence?

• What were the main provisions of the regulation? •

Was the regulation successful? •

Provide real-world examples related to this regulation (e.g.: Corporations or Executives found adhering/flouting these regulations)

Answer 1

Williams Act of 1968

Why brought into existence:

Williams Act, enacted in 1968, was a response to a wave of hostile coercive takeover attempts, primarily cash tender offers. At the time the Williams Act was passed, the vast majority of shares were owned by individual shareholders, a fragmented and ill-informed group unprepared to exert their rights as shareholders.

Cash tender offers posed the real risk of destroying value by forcing shareholders to tender their shares on a compressed timetable.

The Williams Act was designed to protect these investors, who faced serious dilemmas when “corporate raiders” launched attempts to take over companies in which they owned stock. It was intended to fill gaps in federal and state corporate law, as Federal securities laws already included disclosure requirements for proxy fights and share-for-share exchanges, while no laws applied to cash tender offers.

Main provisions of Williams Act

The Williams Act, which added Section 13(d) to the Securities Exchange Act of 1934, requires investors to file a disclosure statement within ten days of acquiring “beneficial ownership” of more than 5% of the equity of a public company.

Was the regulation successful?

Since 1960, it has impacted succesfully in 3 key ways:

1. Enactment of new federal and state corporate antitakeover laws and implementation of corporate defense mechanisms have effectively closed the legal gaps that existed and put an end to the coercive tender offers that the Williams Act sought to address. It is difficult today to find a publicly held company that is not shielded by a poison pill or antitakeover statute, or both, such that incumbent management now has the upper hand in corporate governance contests.
2. The composition of shareholders of public companies has changed significantly. In the 1960s, individual shareholders, who were widely dispersed and did not have the resources or the incentives to stay well-informed, held more than 80% of shares in U.S. corporations. Today, they account for only one-third of equity holdings. Most shares are owned by institutional investors who do have the resources and incentives to be engaged, hold larger concentrated blocks of stock, vote their interests more actively, and are far better informed. Because institutional investors are active participants in shareholder democracy it is nearly impossible today for a minority shareholder to individually dictate the outcome of a proxy contest or otherwise take control of a company through accumulations of a 10% (or even higher) position.
3. The third important development has been the emergence, over the last two decades, of a new breed of investors – active shareholders – who pursue investment strategies entirely different from the corporate raiders of the past. These engaged investors do not seek to acquire control of companies, but instead seek to bring about operational, strategic, governance, capital allocation or other changes in order to create value for both passive and active shareholders. In the process they undertake the transaction costs, reputational risks, and legal and economic liabilities necessary to effect corporate change. Engaged investors, therefore, provide a market-driven mechanism for positive change.

Sarbanes - Oxley Act of 2002

Why brought into existence:

After the corporate scandals of early 2001-2002, investor confidence in the financial intermediaries—accountants, auditors and accounting firms—was shaken. The US congress then passes the Sarbanes-Oxley Act to restore investor confidence and compel the accounting industry to adequately perform their fiduciary duties.

Main provisions

1. Chief Executives and Financial officers will be held resoponsible for company financial reports.

2. Executive officers and directors may not solicit or accept loans from their companies.

3. Insider trades are prohibited during pesion-fund blackout periods

4. Reporting of Insider trades more quickly.

5. Disclosure of executive compensation and profit is mandatory.

6. Internal Audits and review and certificationof audits by outside auditors are mandatory.

7. Audit firms may no longer provide acturial, legal or consulting services to firms they audit.

8. Criminal and civic penalties for securities violations.

Benefits:

1. A focus on the control environment helps ensure that the controls themselves are the second and third lines of defense, not the first.

2. Documentation activities consumed countless employee hours during the first year of Sarbanes-Oxley, as companies updated operations manuals, revised personnel policies, and recorded control processes. Some minds equate paperwork with busywork, but this labor-intensive effort, received gradually increasing support from the executive suite.

Example:

BlackRock, an investment firm with more than $450 billion in assets under management, took an exhaustive inventory of its written policies and procedures. During this exercise, executives learned that many job descriptions needed updating.

With the advent of Sarbanes-Oxley, they saw an opportunity to overhaul the job-description documentation. The benefits of doing so have been especially noticeable during employee absences and periods of high turnover, because the revised documentation has helped new recruits become acclimated more quickly.