Catherine Yeager Livingston, Mara H. Rogers, Darrell R. Windham, James R. Griffin and Jeffrey Michael Peterson
August 10, 2010
As the use of a two-step acquisition structure, such as a front-end tender offer followed by a merger, continues to rise steadily in the United States public company M&A market this year, it is worthwhile for companies considering acquisition activity to consider the benefits and potential pitfalls of the tender offer in today's market.
The popularity of tender offers increased after the Securities and Exchange Commission's amendments to the "all holders/best price rule" in 2007, and the increased use of tender offers continues through 2010. Undoubtedly, the reason buyers and sellers are giving tender offers more consideration and are often choosing this structure for their deals is related to one of the tender offer's most significant advantages over a traditional one-step merger – the ability to close the deal more quickly and provide more deal certainty to both buyers and sellers. These days, deal certainty is critical to both buyers and sellers and, despite some of the potential challenges if the tender offer is financed, the advantages often outweigh the perceived drawbacks.
Speed is the advantage that seems to align the buyers' and sellers' interest most closely. A tender offer can be completed in as few as 20 business days from the launch of the tender offer. This is three to four times faster than a traditional merger could be completed after filing and receiving comments from the SEC on the proxy materials for stockholders, complying with the Hart-Scott-Rodino waiting period (note that the HSR waiting period is only 15 days for cash tender offers as compared to 30 days for a traditional one-step merger) and soliciting and obtaining stockholder approval. As a practical reality, the longer a deal is pending, the more that deal is in jeopardy. Between signing and closing a traditional merger, the sellers are more exposed to market risk, as well as the risk of any material adverse event affecting the seller, potentially giving the buyer an "out" under the terms of the agreement. With a longer time period between signing and closing, buyers are more at risk of being out-bid by a third party, and both parties must consider other risks, such as the potential loss of seller's employers, customers and other relationships. The ability to close the transaction quickly is a central focus of both parties.
To ensure that this key advantage of the tender offer is not lost, the parties should evaluate certain characteristics of their particular transaction and consider the tools allowed under a tender offer structure. First, if the parties involved are in a heavily regulated industry that will require governmental approvals, if the parties believe that an antitrust review is likely or if third-party consents are required to consummate the transaction, the time it takes to receive regulatory or antitrust approvals and/or obtain the necessary consents may eliminate the transaction advantage of speed of a tender offer. Companies in regulated industries typically avoid the tender offer, as its primary advantages of speed and deal certainty are lost due to the timeframe that is dictated by the agency or authority regulating the company.
A tender offer is only a path to a fast closing if the buyer is successful in receiving enough tendered shares in the tender offer to allow for a short-form merger (a merger that does not require stockholder approval), which, under Delaware law, requires that the buyer would hold at least ninety percent (90%) of the outstanding shares of the target. If the buyer is unable to acquire at least ninety percent (90%) of the outstanding shares, a stockholder vote must be held to complete the back-end merger. This means that completion of the acquisition will be delayed until a proxy statement or information statement is filed and cleared with the SEC. Despite the delay, closing the transaction at this point is all but a certainty given that the buyer would likely have conditioned the tender offer on acquiring over 50% of the shares of the target and thus would have sufficient ownership of the shares of the target to approve the transaction by itself at the stockholders' meeting.
One avenue buyers use to address the issue of acquiring less than 90% ownership in the tender offer is the "top up" option. The "top up" option allows a buyer to purchase a portion of the target's newly issued stock in the case that the buyer does not receive enough tendered shares in their tender offer to allow for a short-form merger under applicable state law. With the use of the "top-up" option, buyers can secure ownership of the requisite amount (usually 90%) of the target's stock to complete a short-form merger, and the tender offer and short-form merger can often be closed on the same day or within a few days. Note, however, that a number of lawsuits have been filed recently by plaintiffs in Delaware raising both substantive objections to the use of top-up options in two-step mergers and objections to the disclosure surrounding the effect of these top-up options. The buyer and its counsel should carefully consider the outcome and guidance provided by the courts in structuring the top-up option and describing the top-up option in its SEC filings.
Another advantage of the tender offer related to speed is that the target is exposed for a shorter period of time to market and business risks that could lead the buyer to utilize one of its "outs" with respect to consummating the transaction, such as the material adverse change out. From the buyer's perspective, the buyer is exposed to a third-party topping bid for a shorter amount of time because the tender offer and short-form merger happen faster than the typical process required to respond to proxy material comments from the SEC and follow the procedures required to get stockholder approval, including mailing, soliciting and holding the stockholders' meeting.
Complications can arise with respect to the tender offer if the tender offer will be financed. Financing can be more difficult in a tender offer because the buyer generally does not have access to the target's balance sheet to support the tender offer financing to purchase the tendered shares, and use of the target's stock is limited because the Federal Reserve Board's margin rules do not allow borrowings secured by public company stock above fifty percent (50%) of its market value. These financing issues are more related to timing, as the buyer may need to have interim financing in place to purchase the shares tendered in the offer and then close on the permanent financing shortly thereafter. Also, there are some creative ways to finance a tender offer and often, in this environment, the draw of a speedy closing can motivate buyers and sellers alike to work together to find a solution. One solution, especially in the private equity context, is an unsecured bridge loan for up to the entire debt financed portion of the purchase price of the target company.
When a tender offer is financed, it is important to keep in mind that when the buyer has satisfied the financing condition to its tender offer described in its SEC filings (whether it be when the buyer enters into a definitive credit agreement pursuant to a financing commitment, when the buyer receives the proceeds from the financing or otherwise), a material change will be deemed to have occurred in the information previously disclosed. In fact, all conditions other than regulatory approvals must be waived or satisfied prior to expiration of the tender offer and when an offer condition is triggered by events that occur during the offer period and before the expiration of the offer, the buyer/bidder must promptly inform the holders of the target's securities how they intend to proceed. Under the tender offer rules, an offeror is required to amend its Schedule TO promptly to disclose a material change, including the securing of financing or the satisfaction of the financing condition. At least five business days must remain in the offer following disclosure of the material change or the offeror must extend the offer so that at least five business days remain in the offer after the disclosure is made. Though not a significant delay, parties considering a tender offer because of its speed should note that the required updated disclosure can prolong the tender offer timeframe, and parties should take this into account in terms of timing depending on the structure of the financing of the offer and any other conditions of the offer.
Though tender offers are becoming increasingly popular, many public companies considering acquisitions are not as familiar with the structure, requirements and benefits of the tender offer. Though tender offers are not right for every transaction and the extra tender offer step can lead to additional expense for the buyer, in today's market, where both the buyers and sellers are motivated to consummate the deal in a timely manner, the two-step acquisition process is worth exploring.
This article was prepared by Catherine Y. Livingston (firstname.lastname@example.org or 512 536 5297), Mara H. Rogers (email@example.com or 212 318 3206), Darrell R. Windham, James R. Griffin (214 855 8255) or Jeffrey M. Peterson (214 855 7425) from Fulbright's Mergers & Acquisitions Practice Group.
Catherine Yeager Livingston
Mara H. Rogers
Darrell R. Windham
James R. Griffin
Jeffrey Michael Peterson