Merger Proxy Statements and Exchange Prospectuses—Suggestions for Reform

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Merger proxy is a generic term I and others use to refer to certain documents issued pursuant to Section 14 of the Securities Exchange Act of 1934, as amended. Corporations issue these documents in connection with seeking stockholder approval for certain actions: (a) requiring all stockholders to give up the securities they now hold for other securities or cash and/or (b) changing the character of the business in which the shareholders had invested. In a meaningful sense, the latter action is the equivalent from the stockholder's point of view to asking him to give up one security for another. Thus a merger proxy statement is issued when shareholder votes are sought, not only in connection with mergers, but also in connection with consolidations, recapitalizations, liquidations, as well as bulk purchases and sales of assets. A distinguishing characteristic of merger proxy statement situations is that the requisite affirmative vote of shareholders, say 50 per cent or two-thirds -depending on state law and the particular corporation's articles and bylaws binds all shareholders, whether they vote for the proposals or not. The shareholders who vote against frequently obtain rights of dissent but, as a practical matter, such rights are rarely useful. Because of this force out aspect of merger proxy statement situations, there is a requirement in Section 14 that the terms of the proposal or proposals being voted upon be fair. An exchange prospectus is a document issued pursuant to the Securities Act of 1933, as amended, that solicits shareholders to give up the securities they now hold for other securities. In the case of a non-exchange prospectus, the person or institution solicited is asked to give up cash in exchange for securities. In an exchange prospectus situation, the person or institution solicited is asked to give up the securities held in exchange for other securities. An exchange prospectus is distinguishable from a merger proxy statement in that the individual shareholder voluntarily gives up his securities. No shareholder is bound by the actions of the other shareholders. In a merger proxy statement situation, on the other hand, an affirmative Martin J. Whitman, C.F.A., is associated with Stanley Marks & Co., members of the New York Stock Exchange. He is also a part-time lecturer at Yale University, jointly conducting with Professor Martin Shubik a seminar entitled, Money and Financial Institutions.