WHX Corp. v. Securities & Exchange Commission

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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued March 12, 2004 Decided April 6, 2004

No. 03–1196

WHX CORPORATION,
PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT

On Petition for Review of an Order of the
Securities and Exchange Commission

Charles R. Mills argued the cause for petitioner. With him
on the briefs was Dylan B. Carp. Paul Gonson entered an
appearance.
Giovanni P. Prezioso, General Counsel, Securities and
Exchange Commission, argued the cause for respondent.

Bills of costs must be filed within 14 days after entry of judgment.
The court looks with disfavor upon motions to file bills of costs out
of time.
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With him on the brief were Eric Summergrad, Deputy
Solicitor, and Hope H. Augustini, Senior Litigation Counsel.
Before: EDWARDS and HENDERSON, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
Opinion for the Court filed by Senior Circuit Judge
WILLIAMS.
WILLIAMS, Senior Circuit Judge: The Securities and Ex-
change Commission found that WHX Corporation violated the
All Holders Rule, SEC Rule 14d–10(a)(1), 17 C.F.R.
§ 240.14d–10(a)(1), and issued a cease-and-desist order pro-
hibiting the company from committing or causing any future
violations of that Rule. WHX petitioned for review. We find
that the SEC’s decision to issue a cease-and-desist order was
arbitrary and capricious, and therefore vacate the order.

***
In March 1997 WHX decided to attempt a hostile takeover
of Dynamics Corporation of America (‘‘DCA’’). But DCA’s
charter had a poison pill that allowed shareholders to pur-
chase new shares at rock-bottom prices if any party acquired
20 percent of DCA’s stock without the approval of DCA’s
board. Further, New York law (New York Business Corpo-
ration Law § 912(b)) forbids a New York corporation from
entering into a ‘‘business combination’’ with any shareholder
owning 20 percent of the corporation’s stock until the share-
holder has held the stock for at least five years, unless the
shareholder first secures board approval. See Opinion of the
Commission, In re WHX Corporation, Admin. Proc. File No.
3–9634, SEC Exchange Act Release No. 47980 (June 4, 2003)
(‘‘Opinion’’) 2–3.
To overcome the opposition of the incumbent board, WHX
planned a two-stage takeover strategy. First, it would make
a cash tender offer for 19.9 percent of DCA’s common stock,
offering $40 a share. Second, it would conduct a proxy
contest seeking to oust the DCA board and replace it with a
new one that would revoke the pill and approve a merger
with WHX. Under the terms of this merger, WHX would
 3

purchase all remaining DCA shares for $40 cash. Opinion at
3.
The timing of WHX’s planned tender offer posed an addi-
tional problem. The next annual DCA shareholder meeting
was scheduled for May 2, 1997. But the record date for that
meeting was March 14, 1997, which had already passed by the
time WHX was ready to launch its offer. Because only
holders of record (or holders of proxies from record holders)
could vote at the shareholder meeting, an ordinary tender
offer for common stock would yield WHX at least some (and
possibly many) shares that couldn’t vote at the May 2 meet-
ing. As WHX’s purpose was to maximize its voting power
without running afoul of DCA’s poison pill, it wanted to avoid
buying shares that would be effectively useless. Opinion at 3.
WHX’s solution triggered the SEC sanction at issue here.
It proposed to include in its offer a condition under which the
offer would extend only to those shareholders who were
holders as of the March 14 record date, or who were able to
obtain a valid proxy. WHX’s attorney recognized that this
condition might be thought to violate the so-called All Holders
Rule, see Opinion at 4, which was promulgated under § 14(d)
of the 1934 Securities Exchange Act, 15 U.S.C. 78n(d), and
which provides:
(a) No bidder shall make a tender offer unless:
(1) The tender offer is open to all security holders of
the class of securities subject to the tender offer.
17 C.F.R. § 240.14d–10(a)(1). The SEC adopted this rule in
1986 in response to concerns about ‘‘discriminatory tender
offers’’ that would pressure ‘‘security holders who are exclud-
ed from the offer TTT to sell to those in the included class’’ in
order to receive the premium price, but who ‘‘would not
receive the information required by the Williams Act, would
have their shares taken up on a first-come first-served basis
and would have no withdrawal rights.’’ Amendments to
Tender Offer Rules: All–Holders and Best–Price, Exchange
 4

Act Release No. 34–23421, 51 Fed. Reg. 25873, 36 SEC
Docket 131, 132 (July 17, 1986). Moreover, the SEC ex-
plained that, without this rule, the ‘‘equal treatment’’ provi-
sions of the Exchange Act would easily be circumvented: an
offeror could simply address an offer to ‘‘a privileged group of
security holders who hold the desired number of shares’’
rather than purchasing the desired number of shares from all
tenderers on a pro rata basis for the same consideration. Id.
at 133. In adopting the All Holders Rule, the SEC appears
to have been reacting in part to the decision in Unocal Corp.
v. Pickens, 608 F. Supp. 1081 (C.D. Cal. 1985), which upheld
as lawful a defensive self-tender that offered a high premium
but excluded the shareholder attempting the takeover. See
Proposed Amendments to Tender Offer Rules, Exchange Act
Release No. 34–22198, 50 Fed. Reg. 27976, 27977 n.5 (July 9,
1985).
Seeking guidance, WHX faxed the SEC’s Office of Mergers
and Acquisitions a letter on March 24, asking for either a no-
action letter or an exemption from the rule. The letter
suggested several reasons why WHX thought the All Holders
Rule should not apply to its proposed condition. First, it
contrasted the condition with the highly discriminatory offers
which precipitated the rule, such as that involved in Unocal,
where shares tendered by or on behalf of the would-be
acquirer were deliberately excluded from what in essence
would be a dividend to the eligible shareholders. Under
WHX’s offer, by contrast, even a shareholder who had bought
after the record date had some possibility of securing a proxy,
and in any event would receive ‘‘the same per share price TTT
in the cash merger following successful completion of the
tender offer.’’ Letter from Ilan Reich to Dixon Requesting
an Exemption or No–Action Ruling (March 24, 1997) at 3.
Second, WHX argued that here the only ‘‘discrimination’’
reflected a virtually universal disenfranchisement of share-
holders inherent in the practicalities of limiting voting to
holders as of the record date. If it is legitimate to have a
record date at all—which by its nature deprives late purchas-
ers of the right to vote at the annual meeting—then why,
 5

WHX asked, should the All Holders Rule embrace all holders
on the last day of the tender offer? Id.
A staffer with the SEC’s Office of Mergers and Acquisi-
tions called WHX’s lawyer back the same day to inform him
that the Commission did not issue no-action letters on All
Holders Rule issues and that WHX should withdraw its no-
action letter request. WHX did so that afternoon. Opinion
at 4. Although the staffer said only that the SEC didn’t give
no action letters on that subject, not that it refused to give
such a letter on these facts, and although WHX’s lawyer
found the staffer not at all clear, he interpreted the statement
as an indication that the Office of Mergers and Acquisition
staff informally believed that the proposed condition would
violate the All Holders Rule. Opinion at 4; Transcript of Ilan
K. Reich, In re WHX Corporation, File No. HO–3204 (Dec. 5,
1997) (‘‘Transcript’’) 81, 85–86, 88–89. Nonetheless, in light
of counsel’s belief that there were strong arguments why the
condition did not violate the All Holders Rule, and the lack of
contrary Commission precedents, WHX decided to proceed.
It announced its hostile tender offer, including the record
holder condition, on March 31, 1997. The tender offer letter
noted that the SEC staff had ‘‘informally advised’’ WHX that
the record holder condition might offend the All Holders
Rule, but explained that WHX believed ‘‘special circum-
stances’’ justified the condition. Opinion at 4.
On April 4, 1997 staff of the Office of Mergers and Acquisi-
tions contacted WHX to say that the staff believed that the
condition violated the All Holders Rule and was prepared to
recommend enforcement action to enjoin the tender offer
unless WHX withdrew the condition. In response, WHX’s
counsel wrote to the SEC Commissioners ‘‘to explain the
rationale for [the record holder provision] and to respectfully
suggest that no remedial relief is necessary based on the
unusual circumstances at hand.’’ Letter to Hon. Arthur
Levitt from Ilan Reich Regarding Tender Offer by SB Acqui-
sition Corporation (April 4, 1997) at 2. The letter went on to
argue that the All Holders Rule was adopted to prevent
tender offers that discriminated against particular identifiable
shareholders, and that WHX’s condition did no such thing.
 6

WHX reiterated its commitment to buy all outstanding shares
at the tender offer price if its takeover bid should succeed.
Id. at 4.
After receiving its copy of WHX’s letter, the SEC staff
phoned WHX on April 7 to say that it would that day ask the
Commission for authority to seek injunctive relief against the
offer. WHX responded with an April 7 letter to the Commis-
sion, arguing that its record holder condition was ‘‘in fact no
different from a standard condition in virtually every single
contested tender offer: namely, that valid tenders will only be
accepted from holders of rights issued under a target’s poison
pill plan.’’ Letter to Hon. Arthur Levitt from Ilan Reich
Regarding Tender Offer by SB Acquisition Corporation (April
7, 1997) at 2.
WHX’s pleas were unavailing. On April 8, the Commission
authorized an enforcement action to enjoin the tender offer.
WHX immediately withdrew the record holder condition.
This withdrawal eliminated any occasion for injunctive action,
and WHX proceeded with its takeover bid, which ultimately
failed because of a competing bid by a ‘‘white knight.’’ Opin-
ion at 5 & n.5.
On June 25, 1998, over a year later, the SEC started cease-
and-desist proceedings against WHX under Section 21C of
the Exchange Act, 15 U.S.C. 78u–3. An Administrative Law
Judge found no violation of the All Holders Rule. In re
WHX Corporation, Initial Decision Release No. 173, Adminis-
trative Proceeding File No. 3–9634 (Oct. 6, 2000) (‘‘ALJ
Decision’’) at 24. Although finding that as a practical matter
it would be very difficult for those who purchased shares
between March 14 and March 31 to obtain voting rights, and
that therefore it was ‘‘questionable’’ whether the offer was
really open to these shareholders, the ALJ reasoned that the
kinds of offers that had given rise to the rule had pressured
ineligible shareholders to sell to eligible ones, and that no
such pressure could arise here. Id. at n.19.
The ALJ also stressed WHX’s good faith arguments for the
innocence of its condition under the All Holders Rule, its
reliance on counsel’s prediction that its interpretation would
 7

be upheld, and its immediate removal of the condition after
the SEC authorized an enforcement action. Moreover, the
ALJ observed that ‘‘[n]o harm was done by the few days the
offer was arguably out of compliance,’’ and that a sanction
would be ‘‘counterproductive’’ because ‘‘[t]o impose a sanction
after WHX changed its offer to conform to the Commission’s
instructions is a disincentive for similarly situated parties to
comply with the Commission’s views in the future.’’ ALJ
Decision at 24.
The SEC reversed the ALJ and imposed an order requir-
ing WHX to ‘‘cease and desist from committing or causing
any violations or future violations of Section 14(d)(4) of the
Securities Exchange Act of 1934 or Rule 14d–10(a)(1) there-
under.’’ Order Imposing Remedial Sanction, In re WHX
Corporation, Admin. Proc. File No. 3–9634, SEC Exchange
Act Release No. 47980 (June 4, 2003). The Commission first
found that the record holder condition violated the All Hold-
ers Rule, rejecting WHX’s arguments to the contrary. Opin-
ion at 6–15. It found that a violation of the All Holders Rule
required neither scienter or negligence, Opinion at 15–18, nor
a finding of harm, Opinion at 18–19. Insofar as its opinion
addressed WHX’s arguments distinguishing its condition
from the cases giving rise to the All Holders Rule, the SEC
offered only a conclusory statement that the condition ‘‘un-
fairly disadvantaged shareholders who bought DCA stock
between March 14 and March 31 because TTT [they] would
not have been able to obtain proxies and could not participate
in the tender offer.’’ Id. at 11.
Before us WHX argues that (1) the SEC lacked statutory
authority to promulgate the All Holders Rule in the first
place; (2) even if the All Holders Rule is lawful under the
statute, the SEC’s interpretation of that rule as covering
these facts was arbitrary and capricious; (3) even if the SEC
could lawfully find that WHX’s record holder condition violat-
ed the All Holders Rule, the Commission failed to provide fair
notice of its interpretation to WHX, and therefore cannot
impose a sanction without offending the Due Process Clause,
see General Electric Co. v. EPA, 53 F.3d 1324 (D.C. Cir.
1995); and (4) even if each of the first three defenses failed,
 8

the imposition of a cease-and-desist order was arbitrary and
capricious given the circumstances of WHX’s violation. Be-
cause we agree with WHX’s last claim, we need not reach its
other arguments.
We accord great deference to the SEC’s decisions as to
choice of sanction, inquiring only whether a sanction ‘‘was
arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law.’’ KPMG, LLP v. SEC, 289 F.3d 109,
121 (D.C. Cir. 2002). But review does include verifying
whether the Commission complied with its own standard for
issuing a cease-and-desist order. Id. at 124. It is on that
requirement that the Commission’s action founders.
The Commission noted that there ‘‘must be a showing of
‘some risk’ of future violation,’’ though not necessarily a very
great risk. Opinion at 19. It believed the risk of future
violation by WHX to be ‘‘much greater’’ than needed, and it
went on to say that in exercising its discretion it applied a
‘‘range of traditional factors,’’ including
the seriousness of the violation, the isolated or recurrent
nature of the violation, the respondent’s state of mind,
the sincerity of the respondent’s assurances against fu-
ture violations, the respondent’s recognition of the
wrongful nature of his or her conduct, and the respon-
dent’s opportunity to commit future violations. In addi-
tion, we consider whether the violation is recent, the
degree of harm to investors or the marketplace resulting
from the violation, and the remedial function to be served
by the cease-and-desist order in the context of any other
sanctions being sought in the same proceedings.
Opinion at 20, citing In re KPMG Peat Marwick, LLP, 74
S.E.C. Dkt. 357, 2001 WL 47245 at *26 (Jan. 19, 2001). No
one criterion, it said, was dispositive. Id.
The Commission’s discussion, however, failed to explain
how any reasonable application of these factors could support
the imposition of a cease-and-desist order. First, the Com-
mission stressed that there was a sufficient risk of a future
violation because ‘‘WHX has made a career of establishing
 9

and promoting public companies and will be presented with
opportunities to violate the law in the future.’’ Opinion at 19–
20. Under this view, apparently, the ‘‘risk of future violation’’
element is satisfied if (1) a party has committed a violation of
a rule, and (2) that party has not exited the market or in
some other way disabled itself from recommission of the
offense. Given that the first condition is satisfied in every
case where the Commission seeks a cease-and-desist order on
the basis of past conduct, and the second condition is satisfied
in almost every such case, this can hardly be a significant
factor in determining when a cease-and-desist order is war-
ranted. The Commission itself has disclaimed any notion that
a cease-and-desist order is ‘‘automatic’’ on the basis of such
an almost inevitably inferred risk of future violation. See
KPMG, 289 F.3d at 124–25.
The Commission urges that the ‘‘seriousness of the viola-
tion’’ factor weighs heavily in favor of imposing a cease-and-
desist order here. The Commission’s assertion that WHX’s
violation was ‘‘serious’’ is premised on two claims: first, that
the All Holders Rule is clear and unambiguous, so that
WHX’s violation indicates willful and deliberate disregard of
the rule; and second, that WHX ignored SEC staff warnings
that its conduct violated the rule, and so proceeded at its
peril. Neither claim passes even a weak rationality standard.
We see no basis for the Commission’s idea that the plain
language of the All Holders Rule clearly and unambiguously
applies to WHX’s record holder condition. Nothing on the
face of the regulation indicates its applicability to such a
condition, and WHX made a number of reasonable, good faith
arguments to the SEC as to why the rule was in fact
inapplicable. The Commission thought otherwise, and its
interpretation of an ambiguous regulation is generally enti-
tled to substantial deference. See Thomas Jefferson Univ. v.
Shalala, 512 U.S. 504, 512 (1994); Bowles v. Seminole Rock &
Sand Co., 325 U.S. 410, 414 (1945). But if the Commission
had endorsed WHX’s interpretation of the All Holders Rule,
we could not have rejected that alternative interpretation as
‘‘plainly inconsistent’’ with the rule—an observation which
suggests that WHX’s position did not contravene the rule’s
unambiguous meaning. Cf. Satellite Broadcasting Co. v.
 10

FCC, 824 F.2d 1, 3–4 (D.C. Cir. 1987). Although WHX
received informal indications that its provision violated the
staff’s understanding of the rule (on which more below), there
was no formal Commission precedent or official interpretive
guideline on point. In sum, the Commission had no basis for
treating WHX’s violation as ‘‘serious’’ because of the alleged
clarity of the All Holders Rule.
The Commission’s second argument for the seriousness of
the violation rests on the view that WHX ‘‘acted at its peril in
following counsel’s recommendation to refuse to remove the
Record Holder Condition in the face of the staff’s warning’’
that the condition violated the All Holders Rule. Opinion at
21. Presumably, the Commission was referring to the staff
warnings on April 4 and April 7 that it would recommend
enforcement action if WHX did not remove the record holder
condition, since in the March 24 exchange the staff had
merely said that the Commission ‘‘did not issue’’ no-action
letters on All Holders Rule matters, a statement that on its
face did not address the merits.
It is difficult to understand why WHX’s persistence after
the staff said it would recommend an enforcement action
should establish that WHX’s violation was ‘‘serious’’ or ‘‘will-
ful.’’ True, at that point WHX had a clear idea where the
Office of Mergers and Acquisitions stood on the matter. But
under SEC rules parties at risk of enforcement actions are
entitled to make ‘‘Wells submissions’’ to the Commissioners,
presenting arguments why the Commissioners should reject
the staff’s recommendation for enforcement, see 17 C.F.R.
§ 202.5(c), an entitlement obviously based on recognition that
staff advice is not authoritative. See In re: Initial Public
Offering Securities Litigation, 2004 WL 60290 at *1 (S.D.N.Y
2004); see also Christensen v. Harris County, 529 U.S. 576,
587 (2000) (informal staff opinions lack force of law); Bd. of
Trade of Chicago v. SEC, 883 F.2d 525, 529–30 (7th Cir. 1989)
(statements by SEC staff that they will recommend enforce-
ment are not authoritative agency actions). That procedure
appears to be precisely what WHX followed in this case. In
fact, the SEC staffer who informed WHX’s counsel that the
staff would recommend enforcement not only acknowledged
the propriety of WHX’s making a Wells submission under 17
 11

C.F.R. § 202.5(c), but actually told counsel ‘‘to go to the
Commission if he wanted to put something in the nature of a
Wells Submission, that he should feel free to do so.’’ See
Transcript at 131–32. Finding a violation ‘‘serious’’ and ‘‘will-
ful’’ simply because of a failure to comply immediately with
the staff’s interpretation effectively punishes parties who
make Wells submissions that are ultimately unsuccessful. To
do so is arbitrary and capricious, at least in the absence of a
more compelling explanation than the SEC offered in its
Opinion. We further note that SEC counsel at oral argument
acknowledged that there was no other way for WHX to
secure a Commission view in time for a real-world decision.
Thus the SEC’s stated bases for the cease-and-desist order
fall apart. The ‘‘risk of future violation’’ cannot be the sole
basis for its imposition of the order, as the SEC’s standard
for finding such a risk is so weak that it would be met in
(almost) every case; and the finding that the violation was
serious depends on the mistakenly assumed clarity of the rule
and on WHX’s good faith use of procedures made available by
the Commission expressly for parties in WHX’s position.
There is no indication that the other factors the SEC says
it evaluates when considering a cease-and-deist order would
assist it in this case. Other than a brief and underdeveloped
argument, Opinion at 18 n.45, the Commission fails to estab-
lish any serious harm to shareholders or the marketplace
caused by the record holder condition. At no point does it
consider the possibility that allowing conditions such as
WHX’s might actually have benefited all DCA shareholders,
including those excluded by WHX’s condition, by increasing
the chances that a lucrative merger would succeed, or might
benefit shareholders generally by increasing the capacity of
the market for corporate control to discipline management.
See generally Edgar v. MITE Corp., 457 U.S. 624, 633–34
(1982). Moreover, though the Commission may be right in its
view that harm is not an element of a violation of the All
Holders Rule (a position we assume but do not decide), so
that the ALJ’s (unreversed) finding of no harm may not
undermine the finding of a violation, it is clearly a factor the
Commission claims to consider when deciding whether to
 12

impose a cease-and-desist order. Opinion at 19 n.48. Yet the
section of its order on the appropriateness of the sanction
omits any discussion of harm to shareholders—beyond bland
assertions that the All Holders Rule is important.
WHX committed (at most) a single, isolated violation of the
rule, it immediately withdrew the offending condition once the
Commission had made its official position clear, and the
Commission has offered no reason to doubt WHX’s assur-
ances that it will not violate the rule in the future. In light of
these factors, none of which the Commission seems to have
considered seriously, the imposition of the cease-and-desist
order seems all the more gratuitous.

***
The Commission erred in imposing a cease-and-desist order
without a rational explanation of why such a sanction was
appropriate under the Commission’s own standards. We
vacate the Order Imposing Remedial Sanctions and the por-
tion of the Opinion finding the cease-and-desist order justi-
fied.
So ordered.