Agency Relationships, Securities Exchange Act, Tender Offer, Safe Harbor
The structure of agency relationships in a transaction should have no bearing on the outcome when the only difference between two hypothetical transactions is solely the facial structure. In the same vein, investor protection is at the forefront of the securities laws; commonly used limiting language for market announcements should not be enough to absolve a company from fraudulent disclosures, e.g., “preliminary results.”
In Walleye Trading LLC v. AbbVie, Inc., a Seventh Circuit decision, the Court did the opposite and found that, based on pleadings at the motion to dismiss stage, an issuer is not liable for the misstatements of an outside agent in preliminary Dutch auction tender offer results. This finding is even more shocking when taking into account that the issuer had access to the raw data suitable to find and correct the misstatement.
The ruling created an effective safe harbor for dissemination of hastily prepared information. Alone, the typical market practice of releasing preliminary tender offer results seems innocuous; but when paired with the reactionary nature of the market, it can guess artificial changes in stock pricing, and therefore harm investors, on an artificial basis. Insert bad actors, and the safe harbor allows them to utilize the artificial changes in pricing to game the market.
The safe harbor needs to be closed. The rise in retail investor market participation evidences a need for greater investor protections. Without this change, the market is set to lose investor confidence, which is especially important as retail investing reaches all-time highs.
Peter Rosenberg, The Seventh Circuit Missed the Bullseye in Walleye, 26 FORDHAM J. CORP. & FIN. L. 416 (2021).