Charlie Munger Testimony to the U.S. House of Representatives (1984)

298 adverse effects at all . Essentially , the revision of Section 16 of the Securities Act of 1934 which I propose in subparagraph ( i ) mod- estly changes the numbers and concepts in the present rules of a long- established statute , which now forces disgorgement of profit , after a ten- per- cent -of - shares - outstanding position is reached , on any sales of stock where the holding period is under six months. The law revision proposed in subparagraph ( ii ) above would go fur- ther and would be designed to take the virtually sure profit out of the commonpractice of first buying , on a totally secret basis , less than five per cent of a corporation's stock , then making or encourag- ing a take-over proposal which is outbid by some "white knight ," creating a profit realized as a direct result of threats posed by the investor , as distinguished from the normal profit realized pas- sively by the ordinary successful investor in stock . (3) In addition , I think there should be an absolute bar against any hos- tile tender offers except properly financed offers for all outstanding shares on an all - cash basis . [As the current law allows , any form of tender offer by or with the consent of the target corporation should be permitted so long as all shareholders were treated alike . ] With respect to the hostile - tender - offer situation , I join Martin Lipton in believing that the front - end- loaded , two- tier cash offer is inherently unfair to ordinary shareholders and tends to create excessive debt . 1 also believe that tender offers involving newly- issued securities are both ( i ) almost always inherently difficult to appraise properly under pressure , ( ii ) under certain conditions are likely to cause enormous undesirable concentrations of power in " chain letter " promotional opera- tions like those of many conglomerates in the 1960's , and (iii ) gener- ally assist book strap aggressiveness of a paper- shuffling type , which is negative in average socio - economic effect , and a tendency toward undesirable diminishment of pluralism in American business . If no changes in law are made as outlined above, I do not agree with the SEC's proposal for a total bar to corporate payment of " greenmail ," that is a bar to stock repurchases which are not made either at or below market prices or under registered tender offer available to all shareholders . Standing alone the SEC " anti - greenmail " proposal would tend to create even more successful hostile corporate take - overs and forced mergers with "white knights " than we see now, which , in turn , would tend to attract even more people into trying to make hostile take- overs , a result I think Congress should conclude is undesirable . In short , under current law , inelegant and unfair as many " greenmail " transactions appear , I think the hostile take- over attempts they avoid would be worse . However, assuming that the Lipton - amplified - by- Munger proposals were adopted into law , which I think would reduce " greenmail " transactions by about 95%, the question pre- sented by the SEC proposal becomesmore difficult . I see no clear preference , under such circumstances , for or against a total bar to corporate payment of " greermai 1" in the few instances of " greenmail " possibilities which would remain (for instance , on stock positions held for more than five years or of a size under five per cent of total shares outstanding ) . In favor of the SEC proposal for a general bar to " greemail ," I point out that I have lived with similar law for many years as a corporate manager with no serious