Structuring Transactions outside All Holders/best Price Rule

Article excerpt

INTRODUCTION

Two-tier, front-loaded, all-cash, first-come, first-serve tender offer for 51% of stock, with a subsequent junk bonds squeeze-out of the second-step merger was a popular tactic for making a tender offer in the laissez-faire, caveat emptor era before the regulations of tender offers were introduced.1 This outrageously unfair, nevertheless lawful, method of coercing shareholders to tender their shares was finally prohibited by Congress in the Williams Act and by the subsequent rules of the Securities and Exchange Commission (SEC).2 However, the broad application of the established rules infringes on many lawful and frequently necessary transactions, exposing acquiring companies to liability and unexpected expenses.3

Such transactions, usually consummated at the time or around the time of the tender offer, include retaining the target company's management, securing non-competition promises from the target company's departing employees, purchasing the target company's patent and licensing rights and other similar agreements, necessary for successful operation of the acquired business.4 Those transactions create additional payments outside of the tender offer and may violate sec Rule 14d-10, known as the all Holders/Best Price Rule.5 The Rule provides that a tender offer must be open to all holders of the security and that each holder must be paid the "highest consideration paid to any other security holder during such tender offer."6 Under the broad application of Rule 14d-10, a side transaction would be included in the tender offer, which could increase the price offered to specific shareholders who are parties to the side agreement.7 This would constitute a violation of Rule 14d-10 and significantly increase the amount of the tender offer, causing additional expenses to the acquirer.8

While the provisions of Rule 14d-10 addressed the original purpose of protecting security holders from coercive tender offers, within the past decade, Rule 14d-10 has been invoked as a sword to invalidate agreements made in conjunction with tender offers, or make the agreements a part of the tender offers.9 These agreements, although frequently conferring various benefits upon key employees and management, who are usually large security holders, nevertheless do not constitute a greater consideration for the tendered securities.10 The courts, however, have entertained allegations that such agreements violate Rule 14d-10 and created controversy in interpreting payments and promises made near, or in relation to, tender offers.11

The courts, when examining tender offers with side agreements that potentially violate Rule 14d-10 have come to varying conclusions, and use various methods to differentiate between the lawful and unlawful transactions.12 This legal uncertainty makes the option of a tender offer less attractive, eventually harms the security holders, acquirer and target companies and ultimately frustrates the concepts of efficient free market economy and rational allocation of resources.13 Clearly, in order to engage in tender offers in the future, companies will require precise guidelines as to what conduct and transactions made during a tender offer will not violate Rule 14d-10.14

The first section of this paper will examine the range of transactions that acquirers enter with key employees, executives and other large security holders of target companies, the varying factual and legal circumstances surrounding these transactions and the treatment of such transactions before and around the time Rule 14d-10 was promulgated. The second part will focus on recent court decisions examining transactions made in connection with tender offers, illuminate the tests that courts established to interpret such agreements, distinguish the different approaches that the courts employed and discuss the effects of these decisions on the practice of tender offers. Finally, the last part of this paper will recommend some guidelines for companies to structure future transactions to avoid potential violations of Rule 14d-10. …