From pli’s Course Handbook

From PLI’s Course Handbook

• From PLI’s Course Handbook
• Doing Deals 2006: Understanding the Nuts & Bolts of Transactional Practice

• #8440

• 1

• CHOOSING A DEAL STRUCTURE,

• POWERPOINT PRESENTATION

• Igor Kirman

• Wachtell, Lipton, Rosen & Katz

Choosing a Deal Structure

• Igor Kirman

Acquisition Methods

Broad Categories of Acquisition Agreements

Purchase of Stock

Purchase of Assets

Forward Merger

“Forward Subsidiary” Merger

“Reverse Subsidiary” Merger

Deal Structure driven by many factors

Acquiring a Public Company

Illustrative Timelines

Benefits of a Tender Offer vs. a One-Step Merger

• No Pre-Clearance. SEC pre-clearance of cash tender offer materials is not required.

• Speed. A cash tender offer can be completed relatively quickly — 20 business days in the case of a friendly deal not involving any regulatory issues.

• Direct. A tender offer is made directly to shareholders and does not require a shareholder meeting or board approval.

• Freeze Out. A tender offer between parent/subsidiary can avoid entire fairness heightened review so long as certain conditions (e.g., majority of minority) are met.

Benefits of a One-Step Merger vs. a Tender Offer

• 100% Ownership. A merger accomplishes 100% ownership in a single step, which may be important for financing the transaction. A tender offer will require a second-step merger to acquire 100% of a public company.

• Possible Timing Advantage. If regulatory approvals or other conditions delay consummation of a tender offer for more than approximately three to four months, a one-step merger can be completed more quickly than a two-step tender offer/merger that does not obtain tenders sufficient for a short-term merger.

• Acquisition of Target Shares in the Market. A bidder is prohibited from acquiring shares outside of a tender offer. An acquiror not making a tender offer may acquire target shares during the pendency of its proposal subject to any applicable legal or contractual restrictions.

• Best Price Litigation Risk. Bidders may be subject to litigation seeking extraordinary monetary damages for alleged violations of the “Best Price Rule.” SEC has recently proposed rule that would offer protection (includes safe harbor for determinations by target company committee that compensation type arrangements should be outside the rule).

The Impact of the Tender Offer Rules

OVERVIEW OF THE WILLIAMS ACT

Schedule 13D

• Any person who acquires beneficial ownership of 5 percent or more of a class of equity securities registered under Section 12 of the Exchange Act must file with the SEC a Schedule 13D within ten days.

• A person “beneficially owns” any registered security if he either has or shares direct or indirect power to vote, sell, or determine the disposition of that security. A person is also deemed the beneficial owner of any securities that such person has the right to acquire within sixty days, e.g., upon exercise of an option or conversion or exchange of another security.

• Section 13(d)’s filing requirements also apply to any “group” who beneficially owns 5 percent or more of a class of an issuer’s equity securities. A group is formed when two or more persons agree to act together to acquire, hold, vote, or dispose of securities.

• The Schedule 13D must disclose information about: identity and background of each filing person; number of shares of the target company that it beneficially owns; its purpose in acquiring those shares; any plans or proposals with respect to the issuer or its shares, etc.

What is a Tender Offer?

• The Williams Act does not define the term “tender offer.”

• The courts have used two tests to determine whether a series of purchases or offers constitutes a “tender offer” within the meaning of the Williams Act:

• Eight Factor Test — No single factor dispositive and you need not have all eight factors.
• active and widespread solicitation of public shareholders;
• solicitation for a substantial percentage of target’s stock;
• offer made at a premium over the prevailing market price;
• terms are firm rather than negotiable;
• offer contingent on the tender of a minimum number of shares;
• offer open for a limited period of time;
• offeree subjected to pressure to sell stock; and
• public announcements precede or accompany rapid accumulation of large amounts of target’s stock.
• Totality of Circumstances Test
• Some circuits focus on the totality of the circumstances to determine whether there is a likelihood that, unless Section 14(d) is complied with, there will be a substantial risk that shareholders will lack information needed to make a carefully considered appraisal of the bidder’s proposal/offer.

Exchange Offers

• Rules now permit third-party exchange offers to commence upon filing of the registration statement. To commence offer early (before effectiveness), the bidder must:
• file a registration statement including a preliminary prospectus containing all information (including price) necessary to allow holders to make an informed investment decision;
• disseminate the preliminary prospectus to all security holders; and
• file a tender offer statement (Schedule TO) with the SEC.
• Any securities tendered in the offer may not be purchased until after the registration statement becomes effective and the minimum 20 business day tender offer period (from commencement) has expired.

Minimum & Subsequent Offering Period

• Rule 14e-1(a) requires that a tender offer be held open to receive tenders for not less than 20 business days from the date it is first published or sent or given to security holders. There is no maximum offering period.

• Rule 14e-1(d) provides that the only way a bidder may extend its offer is by issuing a public notice of extension, including disclosure of the approximate number of securities tendered to date, no later than 9:00 a.m., Eastern time (or if the class of subject securities is listed on any national securities exchange, the opening of trading on such exchange) on the next business day after the scheduled expiration date of the offer.

• New Rule 14d-11 permits a bidder to provide an optional subsequent offering period after completion of a tender offer during which security holders may tender their shares without withdrawal rights (similar to extended offering period under U.K. law).

• The requirements for a subsequent offering period:

• Initial tender offer must be for all outstanding shares.
• Bidder must announce results of initial offering period (shares tendered) and must accept and promptly pay for all securities tendered during the initial offering period at the closing of such period.
• The subsequent offering period is at the option of the bidder and, if provided, must be open at least 3 business days and not more than 20 business days. Bidder is not required to state in its initial tender offer whether or not it will provide a subsequent offering period.

Announcement of Target’s Position

• “Stop, Look and Listen” Communication - requests that shareholders defer making any determination whether to accept or reject the tender offer until they have been advised of the target company’s position with respect to the offer.

• Rule 14e-2(a) requires the target, no later than 10 business days from date of commencement, to disclose its position with respect to the offer on Schedule 14D-9.

• This applies whether the tender offer is friendly or hostile. However, it is customary in friendly deals for the target’s response to be filed and mailed simultaneously with the bidder’s materials.

• The target board has four options:

• it may affirmatively recommend acceptance of the offer;
• it may affirmatively recommend rejection of the offer;
• it may state that it is expressing no opinion and is remaining neutral; or
• it may state (if such is the case) that it is unable to take a position.

• The target is prohibited from making a recommendation or solicitation in response to the commencement of the tender offer unless it files its Schedule 14D-9 on the date of such communication.

Best Price Rule – Rule 14d-10

• The Best Price Rule: Rule 14d-10(a)(2) provides that “No bidder shall make a tender offer unless ... [t]he consideration paid to any security holder pursuant to the tender offer is the highest consideration paid to any other security holder during such tender offer.”

• Courts have differed over interpretations of what consideration is “pursuant to the tender offer” and as to the meaning of “during such tender offer.”

• Judicial Approaches

• Strict temporal standard
• “Integral part of the offer” standard

• If bidder violates the Best Price Rule, plaintiffs allege that bidder is required to pay the “higher” price to all shareholders.

• For example, if employee owns 10,000 shares, and receives a payment (e.g. consulting payment) of $1,000,000, plaintiffs allege that all shareholders should receive $100 per share.

Rule 14d-10 Timing Considerations

• Defining the time frame of the tender offer:

• “Tender Offer” is not defined in the Federal securities laws.
• Date of Commencement - Under Rule 14d-2(a), a tender offer commences for purposes of the Best Price Rule “at 12:01 a.m. on the date when the bidder has first published, sent or given the means to tender to security holders.”
• Under Rule 14e-5, the prohibition on purchases outside the tender offer begins upon public announcement, not commencement.
• There is no rule that specifies when a tender offer will be deemed to have ended. Although tender offers are required to be kept open for 20 business days under Rule 14e-l, courts have declined to hold that the expiration date constitutes the end of the tender offer for purposes of the Best Price Rule.

Rule 14d-10 – Selected Cases

• Lerro v. Quaker Oats (Seventh Circuit 1996):

• Court accepts a bright line rule as to the timing of tender offers for purposes of the Best Price Rule:
• A beverage distributor agreement with the controlling shareholder, executed prior to commencement of the tender offer but subject to the successful completion of the tender offer, was not subject to the Best Price Rule.

• Epstein v. MCA (Ninth Circuit 1995, reversed on other grounds):

• A privately negotiated sale was deemed to be an integral part of the offer because the terms of the privately negotiated sale were “in several material respects conditioned on the terms of the public tender offer.”

• In re Digital Island Securities Litigation (Third Circuit 2004):

• Court adopts hybrid approach requiring courts to examine purpose of employment payments.
• Acquirer agreed to pay directors for their options and shares and CEO of the target entered into an employment agreement prior to the commencement of the tender offer. Court stated that plaintiffs must allege facts showing fraudulent intent to provide a premium to the directors and executives, in violation of the Best Price Rule.

Rule 14d-10 - Selected Cases

• In a number of instances, payments have not created Best Price Rule violations:

• Bidder’s failure to object to change in control and accelerated vesting agreements entered into three months before commencement of tender offer
• Agreement to pay retention bonuses after completion of merger
• Agreement to cash out recently granted options
• New employment agreements

• Payments considered acceptable in one judicial circuit not necessarily acceptable in another judicial circuit, and neither bidders nor targets can effectively control the judicial circuit that will hear the case.

• Inability to know in advance that complaint will be dismissed without a trial is a major practical problem.

• SEC has promised relief, but has indicated that relief will not provide bright line test (as in Lerro v. Quaker Oats).

SEC Has Proposed 14d-10 Reform

• Clarify that the best-price rule applies only to the consideration paid for securities in a tender offer and that there is no time restriction on the rule’s application.

• Include a specific exemption from Rule 14d-10 for the negotiation, execution or amendment of an employment, compensation, severance or other employee benefit arrangement if the amounts payable under the arrangement relate solely to past or future services or future services to be refrained from and are not based on the number of shares the executive owns or tenders.

• In order to effectuate the above, the amendments would include a safe harbor for Rule 14d-10 to allow the compensation committee or other committee of the target’s or bidder’s board (depending on whether the target or the bidder is the party to the arrangement) to approve an employment, severance or other employee benefit arrangement and thereby have it deemed to satisfy the exemption described above.