Tender Offer Rule Fix

Dennis McCarthy – (213) 222-8260 – dennis@mbsecurities.com –

Delaware is pro-actively modifying the rules for friendly tender offers for public companies to streamline the process.

The proposed rule change would eliminate the need for a formal second step merger vote if the tender offer achieves the corporation’s merger threshold but doesn’t get to 90%, the squeeze out threshold.

Under current rules, the company must hold a time-consuming formal merger vote, which is a “fait accompli” because passage is certain, the buyer has the votes.

Elimination of the time-consuming formal second step merger vote will help financial and other buyers that use debt financing supported by the acquired company.

There still remains a technical timing issue that makes it difficult to hold a same day closing of the tender offer and second step merger.

This rule change, however, is a definite improvement.  It is expected to be effective in August of this year.

I’ve included several helpful articles in my post at Capital Market Alerts for more background on this topic.

Please contact me to help your company to complete an M&A transaction or any capital markets project.

Background articles and links are included below:

Harvard Law School Forum

Proposed Amendments to Delaware Law Would Facilitate Tender Offer Structures

Posted by Igor Kirman, Wachtell, Lipton, Rosen & Katz, on Thursday April 4, 2013 at9:25 am
Editor’s Note: Igor Kirman is a partner in the Corporate Department at Wachtell, Lipton, Rosen & Katz, where he focuses on mergers and acquisitions, corporate governance, and general corporate and securities law matters. This post is based on a Wachtell Lipton firm memorandum by Mr. Kirman, Victor Goldfeld, and Edward J. Lee. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Delaware bar has recently proposed an amendment to the Delaware General Corporation Law that is likely to facilitate the use of tender offer structures, especially in private equity deals. The new proposed Section 251(h), which is expected to be approved by the legislature and governor with an effective date of August 1, would permit inclusion of a provision in a merger agreement eliminating the need for a stockholder meeting to approve a second-step merger following a tender offer, so long as the buyer acquires sufficient shares in the tender offer to approve the merger (i.e., 50% of the outstanding shares, unless the company’s charter provides a higher threshold).

Currently, a two-step merger in which the buyer acquires less than 90% of the target’s shares in the first step tender offer (which would allow it to close the merger almost immediately by the use of Delaware’s short-form merger statute) necessitates stockholder approval of the merger, with its attendant delays and a “fait accompli” stockholder vote. As such possible delays have proved to be a significant deterrent to many tender offers, especially those with private equity buyers who need to close on the first and second steps concurrently in order to facilitate their acquisition financing, the market has evolved a workaround in the form of a “top-up” option. When included in a merger agreement, a top-up option permits the buyer to “top-up” its stake with newly issued shares to reach the required 90% short-form threshold. However, due to the extremely dilutive effect of the top-up issuance, a target company may lack sufficient authorized but unissued shares to ensure that the buyer reaches the needed 90% threshold, thus adding deal uncertainty. To deal with such circumstances, buyers and targets have resorted to other imperfect workarounds, for example a “dual-track” structure in which the parties file a proxy statement while the tender offer is pending (in order to start the clock on SEC review of the proxy statement), and switch to the merger process if the tender offer fails.

The proposed amendment simplifies this landscape by eliminating the need for top-up options and “dual-track” structures in most cases, and also would diminish the use of subsequent offering periods. Although there may be questions about whether the new mechanism will provide incentives for some deal opponents to not tender, since there would be no comparative “cost” to doing so on account of there being no delay in receiving the merger consideration, the changes are expected to facilitate tender offers. The proposed amendment also illustrates the State of Delaware’s commitment to revise its corporate laws to ensure they remain state-of-the-art as inefficiencies are identified through an evolving deal landscape.

Link to Harvard Law School Forum: http://blogs.law.harvard.edu/corpgov/2013/04/04/proposed-amendments-to-delaware-law-would-facilitate-tender-offer-structures/#more-43166

King & Spalding’s Public Company Practice Group, May 30, 2013

King & Spalding’s Public Company Practice Group periodically publishes the Public Company Advisor to provide practical insights into current corporate governance, securities compliance and other topics of interest to public company counsel.

Recent M&A Developments

1.   Tender Offers

Due largely to their timing advantages, tender offers have been used by strategic and
financial buyers in numerous transactions to acquire control of public companies.   It is unclear, however, whether tender offers will continue to be a popular transaction structure, at least when debt financing is required.   On the one hand, recent developments in Delaware law with respect to “top-up options” should simplify tender offers and promote their use.   On the other hand, a renewed focus by the U.S. Securities and Exchange Commission (the “SEC”) on financing conditions in tender offers may make these structures more complex when an acquirer needs to obtain financing to complete a transaction.

a. Top-Up Options

Top-up options (which permit a purchaser to acquire newly issued shares of a target in
order to consummate a “short form” merger without a shareholder vote immediately after the completion of a tender offer) have been used in most tender offers in recent years.   Although top-up options have been upheld by the Delaware courts and are an effective way to shorten a transaction timeline, they have been described by practitioners as a “clunky workaround” that introduce an undue amount of complexity to address what is largely a mechanical matter.

To address these issues, the State of Delaware is expected to approve an amendment to the Delaware General Corporation Law (the “DGCL”) that would permit a so called “medium form” merger with respect to merger agreements entered into on or after August 1, 2013.   This new rule would permit an acquirer in a tender offer to consummate a merger without a shareholder vote if the following conditions are met:

         the target company is a public company;

         the tender offer is for “any and all” of the target’s outstanding voting stock;

         after the completion of the tender offer, the acquirer owns at least the percentage of stock (and, if applicable, of each class or series of stock) that would otherwise be

required to adopt the merger agreement pursuant to the DGCL and the target’s charter

(i.e., generally over 50%, unless the charter provision requires a supermajority);

         all target shares not acquired in the front end tender offer must be converted in the

merger into the same type and amount of consideration as such shares were acquired

for in the offer;

         no party to the merger agreement may be an “interested stockholder” under the DGCL at the time the target board approves the merger agreement; and

         the merger agreement expressly provides that the merger will be governed by this new section of the DGCL (i.e., the short form merger can only be used in non-hostile

transactions).

b. Financing Conditions

In recent tender offers that contain a financing condition, the SEC Staff has emphasized what it views to be a longstanding Staff position regarding the satisfaction of such financing condition and the closing of the tender offer.

This SEC Staff position provides that, when an offer is not financed or when a bidder’s ability to obtain financing is uncertain, a material change will occur in the information previously disclosed when the offer becomes fully financed (e.g., when financing is obtained or the financing condition is otherwise satisfied).   Accordingly, once a financing condition is satisfied, the tender offer must remain open for at least five business days following this change, which is problematic for transactions that are attempting to close with the back-end merger on the same day (which is typically required by the financing for a variety of reasons).

In responses to SEC Staff comments, some purchasers have argued that this position is inapplicable to their offers by attempting to distinguish a “financing condition” (i.e., a condition relating to the ability of the purchaser to obtain committed financing) from a “funding condition” (i.e., a condition relating only to the receipt of proceeds from committed financing). The SEC Staff, however, has refused to recognize this distinction.

In response to this position, the following are two approaches acquirers can take:

         The bidder could waive the financing condition five business days in advance of the expiration of the tender offer.

         The bidder could mirror in the tender offer conditions those conditions that are set forth in the financing papers.

Both of these approaches are less than ideal for bidders, however, as they leave

purchasers with the risk of having to accept shares tendered in the face of a failure of a

financing source to fund its commitment.   Accordingly, it remains to be seen how future tender offers that involve financing will address this issue.

About King & Spalding’s Public Company Practice Group

King & Spalding’s Public Company Practice Group is a leader in advising public companies and their boards of directors in all aspects of corporate governance, securities offerings, mergers and acquisitions and regulatory compliance and disclosure.

About King & Spalding

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The Public Company Advisor provides a general summary of recent legal developments. It is not intended to be and should not be relied upon as legal advice.   For more information on this issue of the Public Company Advisor, please contact:

C. William Baxley           Robert J. Leclerc

(404) 572-3580                 (212) 556-2204

bbaxley@kslaw.com      rleclerc@kslaw.com

Link to King & Spaulding Article: http://www.jdsupra.com/legalnews/public-company-adviser-may-2013recent-25228/

 

NY Times Article Oct. 14, 2009

The Peculiarities of Tender Offers

The return of the tender offer to deal-making is changing the way that transactions are

accomplished. The list of recent deals using tender offers includes ASP / Gentek, Johnson & Johnson / Omrix, Bankrate / Apax and Parallel Petroleum/Apollo. According to MergerMetrics, 26.15 percent of acquisitions so far this year were structured as tender offers, compared with 16.28 percent in 2007 and 23.34 percent in 2008.

The rise of the tender offer will ultimately spell faster transactions. Tender offers complete in a quicker timetable of a minimum of 20 business days, compared with the two to three months required for a merger. The longer period for a merger is a result of the time needed to file and clear a proxy statement with the Securities and Exchange Commission and stock exchange and state minimum notice requirements for such a vote.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the legal aspects of mergers, private equity and corporate governance. A former corporate lawyer at Shearman & Sterling, he is a professor at the University of Connecticut School of Law. He is the author of a new book, “Gods at War: Shotgun Takeovers, Government by Deal and the Private Equity Implosion,” that explores modern-day deals and deal-making.

The tender offer, however, creates certain issues that do not arise in the merger context. These quirks arise mainly because of the two-step nature of the tender offer. In a merger, the shareholders approve the transaction by a 50 percent majority of the shares and the transaction can close immediately thereafter (assuming satisfaction of all other conditions), with the acquirer taking full control and ownership of 100 percent of the target stock.

In a tender offer, however, the acquirer completes the tender offer and purchases majority but not full control. There are always some shares that do not tender into the offer.

To purchase these remaining shares, the acquirer must perform a merger. If the tender offer reaches more than the 90 percent threshold, then under the laws of most states and Delaware no shareholder vote is needed and the merger can occur immediately after the tender offer completion. However, if the acquirer purchases less than 90 percent of the outstanding shares, a shareholder vote must be held to complete this merger. This means that the proxy statement to be filed and cleared and, for a shareholder vote to occur, must run again.

A tender offer is thus a quicker means to control but not necessarily full ownership. With that primer in mind here are some of the issues that are arising as the tender offer becomes ubiquitous:

Financing

If an acquirer is financing the acquisition with the target’s cash on hand or debt secured by the target’s assets, the lack of a full ownership “gap” in a tender offer can create problems. The acquirer cannot simply arrange for the target to dividend out any cash, since that dividend would be paid to the still-remaining shareholder who are waiting to be squeezed out.

One way to deal with this issue is to have the target simply loan the acquirer the money from cash on hand or new borrowings. For example, in the recently announced $411 million tender offer by American Securities for GenTek, there is a condition to the obligations of American Securities (or AS) to complete the acquisition that:

(g) GenTek Holding, LLC has not entered into agreements or arrangements on terms acceptable to [AS] providing that, subject to and as promptly as possible following the receipt of funds by GenTek Holding, LLC pursuant to the Debt Financing, GenTek Holding, LLC will loan to [AS], by no later than the date determined by the [AS], all or a portion of such funds in excess of the amount used to repay the existing indebtedness of GenTek, the specific amount of which shall be determined by [AS]…

If an acquirer cannot arrange for a target loan, it can alternatively borrow the money and use the shares purchased as security. However, the margin rules, Regulations U and X, limit a lender’s ability to lend money on margin stock. “Margin stock” includes any publicly traded security (e.g., GenTek stock). A company that wants to do a debt-financed tender offer can get around this problem by structuring the deal to comply with these margin rules and limit the amount of its borrowing to 50 percent of the value of the collateral pledged to secure the loan (i.e., GenTek). But this obviously places a limit on borrowing.

The rise of the tender offer may thus lead to a preference for all-equity financed tender offers with any debt arranged after completion. This trend may be enhanced in middle-market transactions as a result of mistrust of private equity firms by targets to close transactions with debt financing and an accompanying reverse termination fee. Evidence of this comes from the Parallel and Bankrate private equity acquisitions; both used this all-equity model for their tender offers.

Index Funds

Deal lawyers need to be aware that with respect to a tender offer, an index fund may have a policy not tender into an offer if the share price is trading above the offer price no matter the reason.

This sounds like a quaint point, but this is a real issue in a world of active arbitrage. Stocks can trade above the offer price briefly because of this activity, pushing back tender offer expiration dates. Alternatively, because of short-sale settling, stocks can trade above the offer price after the close of the initial offer period and in the subsequent offer period as arbitragers purchase stock to settle short positions. For example, if too many index funds hold your stock, and you are at 89.8 percent, you may have to persuade the funds to sell the stock to get over the hump.

In pharmaceutical deals with contingent value rights, or C..V.R.’s, it can get even more complicated because the market price is almost always above cash offer price because of discounted value of the C.V.R. reflected in market price. This issue is further complicated by the fact that most funds cannot hold C.V.R.’s, so they are stuck between two policies — one telling them they cannot sell while stock is in index or offer price is below market price and the other policy saying they cannot hold C.V.R.’s.

The solution to all of this is recommended in a recent client note David Fox, Daniel Wolf and Susan Zachman of Kirkland & Ellis. They highlight the need to assess index fund ownership early in the tender offer process and work with the funds to arrange a market sale prior to the offer expiration date if their ownership is going to be a problem.

Minimum Conditions

The disconnect between control and full ownership in tender offers has spurred the rise of the top-up. This is an option issued by the target which allows the acquirer to purchase shares from the target after the closing of the tender offer. The top-up typically allows the acquirer to purchase sufficient shares to put the acquirer over the 90 percent level forgoing the need for a shareholder vote if the acquirer only acquires say 60 percent of the shares. According to MergerMetrics, more than 90 percent of tender offers so far this year included a top-up option. You can read more about top-ups in my prior post.

In a recent tender offer, Dainippon Sumitomo Pharma’s offer for Sepracor, a top-up option was provided that was set off when the acquirer achieved only a bare majority of the outstanding shares. This option provided Dainippon the right to purchase that number of shares to maintain a majority of the outstanding shares. The option effectively allowed Dainippon to consummate the merger if it acquired 50 percent of the outstanding shares rather than the more normal formulation of 50 percent of a fully diluted majority (i.e., including options and other rights convertible into common stock).

This meant that Dainippon could obtain full ownership by purchasing less than a full majority of the stock. Nonetheless, this situation was averted when the Dainippon tender offer closed on Tuesday night and Dainippon purchased 78.2 percent of the outstanding Serpacor shares.

There is some talk over whether this type of top-up option is appropriate since it allows acquirers to theoretically gain control when they do not actually have it. I for one feel uncomfortable about it. However, absent some egregious facts and given independent and arms-length bargaining, I am not sure this is a legal issue, at least in Delaware under its standards. The same threshold of a bare majority of outstanding shares applies in mergers. This is merely putting tender offers on parity with mergers. I expect this type of option to spread and become more common in tender offers.

Click to go to the original article: http://dealbook.nytimes.com/2009/10/14/the-peculiarities-of-tender-offers/