## Facts

- WHX Corporation pursued a hostile, two-stage acquisition of Dynamics Corporation of America (DCA) in 1997 through (1) a cash tender offer for 19.9% of DCA shares at $40 per share and (2) a proxy contest to replace DCA’s board and later acquire the remaining shares at the same price.
- Because the record date for DCA’s upcoming annual meeting had already passed, WHX sought to limit participation in the tender offer to shareholders eligible to vote in the proxy contest.
- WHX included a condition limiting the tender offer to shareholders who were holders on the record date or who acquired a valid proxy from such holders.
- SEC staff advised WHX that this “proxy-eligible holders” condition violated the All Holders Rule (Rule 14d-10(a)(1)) and stated staff was prepared to recommend an enforcement action to enjoin the offer unless the condition was withdrawn.
- WHX promptly withdrew the condition; the tender offer was not completed and the takeover failed.
- About eighteen months later, the SEC initiated an administrative cease-and-desist proceeding under Exchange Act § 21C.
- An Administrative Law Judge found no violation and declined to impose relief, but the Commission reversed, found a violation of the All Holders Rule, and issued a cease-and-desist order barring WHX from committing or causing future violations.

## Issues

1. Whether the SEC acted arbitrarily and capriciously by issuing a cease-and-desist order without showing either some danger of future violations or that the underlying violation was sufficiently serious to warrant such relief.

## Decision

- The court granted WHX’s petition for review and vacated the SEC’s cease-and-desist order.
- The court held the order was arbitrary and capricious because the Commission did not adequately justify prophylactic relief under its own articulated standards.
- The record did not support a finding of a meaningful risk of future violations given WHX’s immediate withdrawal of the condition and lack of repeated misconduct.
- The Commission also failed to show the alleged violation was sufficiently serious, standing alone, to warrant a cease-and-desist order.

## Legal Principles

- When the SEC seeks a cease-and-desist order under Exchange Act § 21C, it must apply and explain its own standards for imposing such relief.
- A cease-and-desist order is improper where the agency does not provide a reasoned basis showing either (1) at least some danger of future violations or (2) seriousness of the past violation sufficient to justify forward-looking relief absent future-risk.
- Rule 14d-10(a)(1) (the All Holders Rule) requires a tender offer to be open to all holders of the class of securities subject to the offer and targets discriminatory tender offer structures.

## Conclusion

The D.C. Circuit vacated the SEC’s cease-and-desist order because the Commission did not reasonably apply its own criteria for imposing prophylactic relief and failed to show either a meaningful likelihood of future violations or sufficiently serious past misconduct based on the record.


WHX Corp. v. SEC, 362 F.3d 854 (D.C. Cir. 2004)