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Takeover Guide
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Richard Hall
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Contents Page
INTRODUCTION 1
IN THE BEGINNING 2
MERGER TRANSACTIONS 6
REGULATORY MATTERS 10
Broadly speaking, there are two methods for structuring a transaction in which an
acquirer seeks to purchase 100% of the outstanding common shares of a US public
company:
first, the acquirer can utilize the merger statutes available in every US jurisdiction
to acquire 100% of the outstanding common shares of the target through a
single-step merger that receives the approval of the requisite percentage of the
target common shareholders, or;
second, the acquirer may make a tender offer directly to target common
shareholders to purchase their shares and then follow the tender offer with a
second-step merger to eliminate minority shareholders.
The applicable regulatory framework is quite different for single-step merger transactions
as compared to tender offers. A single-step merger is primarily regulated under the
applicable state corporation law with respect to mergers, and secondarily by the federal
securities laws applicable to the solicitation of the approval of the shareholders of the
target company (the proxy rules). A tender offer is primarily regulated under the federal
securities laws relating to tender offers. In addition, both single-step mergers and tender
offer transactions may implicate the general fiduciary duty law of the state of incorporation
of the target company.
Whether the acquirer is proceeding by way of single-step merger or tender offer, other
than in connection with unsolicited (hostile) tender offers, it is almost universal for the
acquirer and the target company to enter into an agreement providing for the acquisition.
This agreement customarily sets forth the terms upon which the acquisition will be
completed, the structure of the transaction, the conditions to the acquirers obligation to
complete the acquisition, the commitment of the board of directors of the target company
to recommend the acquisition, representations and warranties and covenants restricting
the operation of the business of the target company between signing of the agreement
and consummation of the acquisition. This agreement will also include any provisions
agreed between the acquirer and the target company with respect to such matters as
restrictions on the ability of the target company to solicit competing proposals and the
payment by the target company to the acquirer of a termination fee in the event the
acquisition is not completed because a third party makes a competing offer.
It is worth noting at the outset that the patchwork of federal and state regulation of
acquisitions is not in general focused on the substantive question of regulating changes
of control of target companies. Rather, the focus of the US regulation is on disclosure
and on ensuring that target common shareholders are given the time and the information
to make a fully informed decision whether to accept the tender offer or vote in favour of a
single-step merger.
third, a single-step merger will always assure the acquirer that it will receive
100% of the shares of the target company if it purchases any of the shares. This
may be of significant benefit to the acquirer, particularly with respect to its
financing or with respect to assurance that it will be able to realize the benefits of
the proposed transaction; and
finally, there are frequently tax issues, particularly if the acquirer is using its
shares as consideration, that may support using a single-step merger structure
rather than a tender offer structure.
Taking all these issues together, the usual market practice is as follows:
transactions being done on an agreed (not hostile) basis that are likely to be
subject to substantial regulatory delay will normally be structured as single-step
mergers;
transactions being done on an agreed (not hostile) basis that involve the use of
acquirer shares as consideration will normally be structured as single-step
mergers; and
IN THE BEGINNING
Preliminary Discussions
There are two important restrictions with respect to the amount of shares that an acquirer
can purchase in advance of a transaction:
first, under Section 13(d) of the Securities Exchange Act of 1934 (the Exchange
Act), an acquirer that purchases more than 5% of the outstanding common
shares of a target company must, within 10 calendar days of exceeding the 5%
level, publicly file with the United States Securities and Exchange Commission
(the SEC) a disclosure statement on Schedule 13D. This disclosure statement
will include various information about the acquirer, including, most importantly, its
plans or proposals with respect to further acquisitions of shares of the target
company or any extraordinary transaction involving the target company; and
Disclosure
summary of the purposes of the tender offer, from the perspective of the acquirer,
and any plans or proposals that relate to or would result in an extraordinary
transaction involving the target company;
brief summary of the source and amount of funds to be used in payment of the
tender offer, including any material conditions to the financing;
financial statements for the acquirer must also be provided when its financial
condition is material to the decision by target security holders whether to sell,
tender or hold target common shares. Financial statements of the acquirer are
deemed not material if:
it is an all-cash transaction;
either (x) the offeror is a registrant under the Exchange Act or (y) the offer is
for all outstanding target common shares. If financial statements are required
and the acquirer is a foreign company, the financial statements must include a
reconciliation to US GAAP.
In the case of an all-cash transaction, although the Schedule TO must be filed with the
SEC, it is not subject to any pre-clearance process within the SEC. Accordingly, the
acquirer may (and customarily does) commence the tender offer and distribute the offer
to purchase to target common shareholders before receiving comments, if any, from the
SEC on the Schedule TO. Comments, if any, from the SEC on the Schedule TO will
usually be dealt with through amendments to the Schedule TO.
The acquirer is required to promptly amend the Schedule TO if there is any material
change in the information provided. However, the acquirer is not in general required to
distribute to target common shareholders any supplement or similar document in the
event of an amendment to the Schedule TO (even amendments in response to SEC
comments).
Traffic Rules
a tender offer must be open for acceptance for at least 20 US business days from
commencement. In addition, it must be kept open for at least 10 US business
days following any change in price or a change in the percentage of the class of
target securities sought. The acquirer may be subject to other mandatory
extensions if there are material changes in information. There is not any
maximum limit on the duration of a tender offer;
there is not any requirement under the United States tender offer rules for an
acquirer to bid for a minimum or a maximum percentage of the target common
shares. As noted above, however, an acquirer may be subject to an obligation to
extend its tender offer if it changes the percentage sought;
partial bidsin which the acquirer is seeking less than 100% of the target
common sharesare permitted. In this situation, the acquirer must pro-rate
acceptances on the basis of a single pool of all shares tendered during the tender
offer;
the acquirer must not purchase any target shares, other than pursuant to the
tender offer, from the first public announcement by the acquirer of its intention to
make the tender offer through to the expiration of the tender offer. This
prohibition applies whether or not the acquirer is purchasing shares outside the
tender offer at a price lower than that being made available in the tender offer;
and
the acquirer must extend the tender offer to all holders of the target common
shares and offer the same consideration to all holders.
There is no restriction on the acquirer receiving advance binding commitments from major
shareholders of the target company to support the tender offer, even if these
commitments are irrevocable. It may be a violation of the acquirers obligation to offer the
same consideration to all holders if the acquirer agrees to offer different consideration to
a major shareholder who commits to support the transaction.
Notwithstanding the obligation to offer the same consideration to all holders of target
common shares, it usually will be possible for the acquirer to offer employment-based
compensation to executives of the target company, even if they are shareholders.
In addition to the SECs rules with respect to the conduct of a tender offer, an acquirer
should expect that any definitive agreement between the acquirer and the target
company will contain further contractual restrictions on the conduct of the tender offer.
Common restrictions in these agreements are limitations on the ability of the acquirer to
extend the offer and on the ability of the acquirer to amend any minimum acceptance
condition.
As a general matter, the acquirer may amend the terms of a tender offer without
restriction, at least if any of the conditions to the tender offer remain unsatisfied. The
SEC may object to an amendment to the terms of a tender offer that is adverse to holders
of target common shares at a time when all conditions to the offer have been met.
As noted above, certain amendments to the terms of a tender offer may subject the
offeror to an obligation to extend the tender offer. In the event of an amendment, the
acquirer will be required to file an amendment to its Schedule TO. In addition, any
definitive agreement between the acquirer and the target company providing for the
acquisition will normally contain contractual limits on the ability of the acquirer to amend
the tender offer.
Although the SEC has a general regulatory oversight of the rules applicable to tender
offers, it has historically regulated tender offers with a fairly light hand. As discussed
above, the SEC is likely to review the tender offer disclosure statement on Schedule TO,
but it will endeavour to do so consistent with the 20 business day timetable. An acquirer
does not need to have SEC approval of the tender offer or of any of its terms or
amendments, although most acquirers will seek to respond constructively to SEC
comments on the Schedule TO.
Disclosure Requirements
Because the execution of a single-step merger will require the approval of the
shareholders of the target company, a single-step merger implicates the securities laws
(known as the proxy rules) that are applicable to a United States public company
whenever it seeks the approval of its shareholders for any matter. The proxy rules
require that the target company (not the acquirer) must prepare and file with the SEC a
proxy statement. After the SEC has reviewed the proxy statement, the target company
must mail it to its shareholders in connection with the holding of the meeting of
shareholders to approve the single-step merger. If there is any material change in the
information in the proxy statement after it has been mailed to the target common
shareholders, the target company may be required to make a supplemental mailing,
depending on the materiality of the information. Some of the key disclosure requirements
are:
summary of the reasons why the board of directors of the target company has
approved and is recommending the proposed merger;
financial information for the acquirer may be required if financing for the
transaction is not assured.
Substantive Requirements
Other than disclosure rules, virtually none of the federal securities laws apply to
transactions that are structured as single-step mergers. Accordingly, the only substantive
restrictions are as follows:
under the laws of the jurisdiction of incorporation of the target company, there
may be restrictions on the ability of the acquirer to treat different holders of target
common shares differently.
pro forma financial statements for the acquirer after giving effect to the
transaction.
The use of share consideration will significantly delay any transaction. The SEC review
process will normally be more time-consuming, and the comments likely to be received
from the staff of the SEC with respect to the disclosure document will likely be more
extensive.
The fiduciary duties of the board of directors of the target company also include the
obligation to speak with candour when giving recommendations to shareholders with
respect to accepting a tender offer or voting in favour of a single-step merger. For this
reason, the board of directors of the target company will normally retain the flexibility to
The fiduciary duties of boards of directors are interpreted with some flexibility, to permit
the board of directors to do what is appropriate in these circumstances in any particular
transaction. For this reason, the courts will give the board of directors great discretion
with respect to whether or not to accept a takeover proposal, the terms of the merger
agreement and whether to resist an unsolicited takeover proposal.
Disclosure Requirements
The federal securities laws impose specific disclosure obligations with respect to tender
offers and single-step mergers. With respect to a tender offer, the board of directors of
the target company must, within 10 business days of commencement of the tender offer,
issue a formal recommendation statement in response to the tender offer. This document
must contain, among other disclosures:
a summary of the interests of the directors and senior management in the tender
offer;
In addition, although not strictly required, the recommendation statement will normally
contain a summary and a description of any fairness opinion received by the board of
directors of the target company with respect to the tender offer.
As with the Schedule TO disclosure requirements, the board of directors of the target
company is required promptly to amend its recommendation statement if there is any
material change in the information. The initial recommendation statement need not be
(but normally is) mailed to shareholders, and there is no obligation to mail amendments to
shareholders. These are normally disclosed through public filing with the SEC.
First, if the acquirer completes the tender offer and at that time holds 90% of the target
common shares (in some states, this percentage is as low as 85%), the acquirer can
implement a short-form merger, without the approval of any other shareholder of the
target company, and through that short-form merger acquire all remaining target common
shares. Other than the possible applicability of the SECs going private rule (Rule 13e-
3), discussed below, there are no disclosure requirements imposed by the federal
securities laws with respect to the short-form merger.
Third, under Section 251(h) of the Delaware general corporation law, if:
the acquirer makes a tender offer for all shares of the target company pursuant to
an agreement approved by the target company board of directors and
following consummation of the tender offer the acquirer owns enough shares of
the target company that the acquirer could approve a long-form merger without
the approval of any other target shareholder and
then the acquirer can implement a merger transaction (known as a 251(h) merger) under
which the acquirer will acquire the remaining target common shares for the same
consideration as the acquirer paid in the tender offer. Holders of target common shares
that are acquired in a 251(h) merger will have the right to seek appraisal if they meet the
procedural requirements. Other than Rule 13e-3 (if applicable), there are no disclosure
requirements imposed by the federal securities laws with respect to the 251(h) merger.
Any second-step merger transaction (short-form, long-form or 251(h)) will also be subject
to Rule 13e-3 unless the acquirer implements the second-step merger within one year of
the date of termination of the tender offer, offers consideration in the second-step merger
at least equal to the highest consideration offered during the tender offer and fully
discloses in the Schedule TO its intention to implement the second-step merger. Even if
Rule 13e-3 is applicable, however, the acquirer is simply subject to enhanced disclosure
and not to any substantive rule prohibiting the implementation of the second-step merger
or mandating the payment of any particular price.
The SEC imposes enhanced disclosure obligations on transactions that fall within its
going-private rule (Rule 13e-3). Rule 13e-3 generally is applicable to any transaction
undertaken by an affiliate of a US public company that will result in a public company no
longer being a public company. There are a number of exceptions, however the two most
important exceptions are that Rule 13e-3 does not apply to a transaction in which the
affiliate is offering its own common stock as consideration (and not cash) and also does
not apply to a transaction undertaken by an entity that became an affiliate by virtue of
completion of a tender offer, so long as the transaction meets the three requirements
described above.
a statement by the affiliate and the target company as to whether the transaction
is fair to unaffiliated security holders. The statement must include a detailed
description of the reason for their view and is usually supported by an opinion
from an independent financial advisor as to the fairness to the unaffiliated target
common shareholders; and
a summary of all reports and opinions received by the opinion and the target
company materially related to the transaction. This includes preliminary reports
and advice received by the affiliate or the target company from its own financial
advisors.
REGULATORY MATTERS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act), an acquirer
will normally be required to make a filing with the United States antitrust authorities prior
to completing the acquisition. Generally speaking, notification under the HSR Act is
required if the size of the transaction exceeds approximately $70 million (adjusted
annually for inflation). After the filing is made, the acquirer must wait for the expiration of
a waiting period prior to completing the transaction. The waiting period is 30 calendar
days for transactions other than cash tender offers and 15 calendar days for cash tender
offers.
The antitrust agencies have the authority to shorten the waiting period by granting early
termination. During the waiting period, either antitrust agency may issue a second
request for additional information concerning the transaction, which will result in the
waiting period being extended. The extended waiting period expires 30 days (10 days in
the case of a cash tender offer) from the date of receipt by the antitrust authorities of the
requested additional information. A transaction cannot be completed until the end of the
original waiting period or extension, whichever is later. At the expiration of the waiting
period or extension, however, the parties are free to complete the transaction unless the
antitrust agencies obtain a court order enjoining the consummation of the transaction.
The United States does not have a general statutory review process with respect to
foreign investment in the United States. Under the Exon-Florio Act, however the
President, through the Committee on Foreign Investment in the United States (CFIUS)
has the right to investigate and if thought fit, seek to prohibit or unwind transactions
involving controlling investments by non-United States entities that threaten to impair the
national security. Under the Exon-Florio Act, the President (through CFIUS) must
investigate controlling investments by state-owned acquirers that could affect the national
security of the United States.
In addition to the HSR Act and the Exon-Florio Act, there are many statutes that operate
on an industry-by-industry basis requiring advance notification to relevant government
Although this outline focuses on US target companies, it should be noted that the US
tender offer regime technically applies to any company (whether or not incorporated
under the laws of the United States) that has its common shares registered under the
Exchange Act. The SEC has long recognized that the application of the US tender offer
rules in this situation may conflict with rules applicable to the target company under the
laws of its own jurisdiction. Accordingly, the SEC has adopted a series of exemptions
designed to facilitate the coordination of the US tender offer rules and home jurisdiction
rules:
under the Tier I exemptions, if less than 10% of the target common shares are
held in the United States the acquirer and the target company will receive
exemptions from virtually all applicable US tender offer rules;
under the Tier II exemptions, if between 10% and 40% of the target common
shares are held in the United States, the acquirer and the target company will
receive limited exemptions. In addition, if the home jurisdiction rules so permit,
the offerer can make one offer for the US holders of the target common shares,
which will be subject to the US tender offer rules, and another offer for the non-
US holders of the target common shares, to which the US tender offer rules will
not apply; and
if the home jurisdiction laws so permit, the offerer may completely exclude all US
holders from the tender offer.