Dennis McCarthy – (213) 222-8260 – firstname.lastname@example.org –
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
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
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.
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:
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.
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.
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.