From PLI’s Course Handbook
Doing Deals 2006: Understanding the Nuts & Bolts of Transactional Practice
#8440
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CHOOSING A DEAL STRUCTURE,
POWERPOINT PRESENTATION
Igor Kirman
Wachtell, Lipton, Rosen & Katz
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Choosing a Deal Structure
Igor Kirman
891782_3.ppt
Acquisition Methods
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Broad Categories of Acquisition Agreements
I.
Investment Agreement
II.
Asset Purchase
Agreement
Private
III. Stock Purchase Agreement
Usually
Private
IV. Merger Agreement (one-step)
Generally
Public
V.
Public
Merger Agreement
(with tender offer)
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Purchase of Stock
After the closing:
Shareholders of
T
Purchaser
Former
Shareholders of
T
($50,000,000)
$50,000,000
100%
100%
100% of stock
of T
Purchaser
T
T
(factory)
(factory)
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Purchase of Assets
After the closing:
Former
Shareholders of
T
Shareholders of
T
100%
100%
$20,000,000
Purchaser
agreement by Purchaser
to assume $30,000,000
bank debt
T
Purchaser
T
(factory)
($20,000,000)
(factory)
factory and
bank debt
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Forward Merger
After the merger:
Former
Shareholders of
Shareholders of
T
T
($50,000,000)
$50,000,000
Purchaser
T merges into
Purchaser
100%
T
Purchaser
(factory)
(factory)
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“Forward Subsidiary” Merger
After the merger:
Purchaser
$50,000,000
Shareholders of
T
Purchaser
Former
Shareholders of
T
($50,000,000)
100%
Sub
T merges
into Sub
100%
100%
T
Sub
(factory)
(factory)
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“Reverse Subsidiary” Merger
After the merger:
Purchaser
$50,000,000
Shareholders of
T
Purchaser
Former
Shareholders of
T
($50,000,000)
100%
Sub
100%
Sub merges
into T
100%
T
T
(factory)
(factory)
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Deal Structure driven by many factors
Basic Questions about Target .................... (a) Public Company/Private Company
(b) State of Incorporation
(c) What is Acquiror buying?
Corporate Law
(a) Target shareholder approval
(b) Acquiror shareholder approval
(c) Appraisal Rights
Tax
Consideration is........................................... (a) Cash
(b) Stock
(c) Hybrid cash & stock/Other
Timing
Other............................................................ (a) Third Party/Other Consents
(b) State Statutes
(c) Optical/political considerations
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Acquiring a Public Company
Methods of Acquisition of a Public Company
Timing
 90%
Short Form
Merger
Filing of Articles of Merger
Acquisition
Completed
4-8 weeks
< 40 business days
100% Cash
< 90%
(but more
than 50%)
Tender Offer/
Share Exchange
Offer
 90%
Long Form
Merger
Short Form
Merger
> 50% vote
of all shareholders
Filing of Articles of Merger
Acquisition
Completed
3-5 months
Acquisition
Completed
5-12 weeks
Acquisition
Completed
3-6 months
Part Cash/
Part Stock
< 90%
(but more
than 50%)
SEC
Review
Post Proxy
Long Form
Merger
> 50% vote
of all shareholders
> 50% shareholder vote
Acquisition
Completed
2-3 months (all cash)
3-4 months (part/all stock)
Merger
(any form of
consideration)
No
SEC Review
Post Proxy
> 50% shareholder vote
Acquisition
Completed
1-2 months
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Issues
Issues
Tender/Share Exchange Offer
Long Form Merger
Timing
Shorter time to achieve control
Maybe shorter time to achieve 100% ownership
Complexity
Less complex than merger if 100% cash
offer
Simpler documentation if 100% cash
May be less complex than share exchange offer
and “back end” merger if offer is all/part shares
Detailed documentation proxy statement
requiring SEC pre-clearance
Achieve 100% ownership, or acquisition/merger
fails
Documentation
Success
Market practice
Regulatory clearance
Does not guarantee immediate
acquisition of 100% of target stock in
the tender offer
Generally achieve control of target after
20–40 business days
HSR waiting period is 15 days for a cash
tender
Achieve control after 2–4 months
(4 months for SEC review of stock deal)
HSR waiting period is 30 days for a merger
 Tender offers are frequently used as the first step in the acquisition of all of a Target’s common equity and are typically
followed by a “back-end” merger
 A “back-end” merger is where the Bidder squeezes out the remaining shareholders for the same consideration offered to
shareholders in the offer
– where at least 90% of Target’s stock is acquired, the Bidder can proceed to a short-form merger which only requires
a filing of articles of merger with the Secretary of state of incorporation (and a mailing of an Information Statement)
in order to squeeze out a minority interest; no shareholder vote is required
– where less than 90% is acquired, a >50% vote of the shareholders is required (a long-form merger)
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Illustrative Timelines
Announcement
Method of
Acquistion
1
Weeks from Announcement
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Cash Tender Offer
(minimum period)
(no subsequent
offering period)
Schedule TO
and 14-D-9
mailed
HSR
waiting
period
expires
Short-form
or Long-form
merger
Tender offer
expires (shares
acquired)
Share Exchange
Offer
Exchange
offer mailed
and
submitted to
SEC for
review
SEC review
of S-4
SEC
comments
Offer
closed
Short-form
or Long-form
merger
Additional info
circulated
(if necessary)
Merger (Long Form)
Documents
drafted
Draft S-4
submitted
to SEC
SEC review
of S-4
SEC
comments
Incorporate
Proxy
SEC
Statement/
comments Prospectus
mailed
Shareholder
vote
Transaction
completes
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Benefits of a Tender Offer vs. a One-Step Merger
 No Pre-Clearance. SEC pre-clearance of cash tender offer
materials is not required.
 Speed. A cash tender offer can be completed relatively quickly —
20 business days in the case of a friendly deal not involving any
regulatory issues.
 Direct. A tender offer is made directly to shareholders and does not
require a shareholder meeting or board approval.
 Freeze Out. A tender offer between parent/subsidiary can avoid
entire fairness heightened review so long as certain conditions (e.g.,
majority of minority) are met.
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Benefits of a One-Step Merger vs. a Tender Offer
 100% Ownership. A merger accomplishes 100% ownership in a single step,
which may be important for financing the transaction. A tender offer will
require a second-step merger to acquire 100% of a public company.
 Possible Timing Advantage. If regulatory approvals or other conditions
delay consummation of a tender offer for more than approximately three to
four months, a one-step merger can be completed more quickly than a twostep tender offer/merger that does not obtain tenders sufficient for a shortterm merger.
 Acquisition of Target Shares in the Market. A bidder is prohibited from
acquiring shares outside of a tender offer. An acquiror not making a tender
offer may acquire target shares during the pendency of its proposal subject
to any applicable legal or contractual restrictions.
 Best Price Litigation Risk. Bidders may be subject to litigation seeking
extraordinary monetary damages for alleged violations of the “Best Price
Rule.” SEC has recently proposed rule that would offer protection (includes
safe harbor for determinations by target company committee that
compensation type arrangements should be outside the rule).
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The Impact of the Tender Offer
Rules
OVERVIEW OF THE WILLIAMS ACT
Section 13(d):
Requires disclosure by persons or groups who acquire beneficial ownership of more than
5% of any publicly traded equity securities.
Section 13(e):
Regulates purchases by an issuer of its own publicly traded securities, including purchases
subsequent to commencement of a tender offer or a self-tender offer.
Section 13(f):
Requires disclosure by institutional investment managers exercising investment discretion
with respect to accounts holding Section 13(f) securities if the aggregate fair market value
of such account exceeds $100 million.
Section 13(g):
Requires disclosure by institutional investors who acquire beneficial ownership of more
than 5% of any publicly traded equity securities and elect to file a Schedule 13G in lieu of a
Schedule 13D.
Section 14(d):
Regulates substantive aspects of, and requires disclosure in connection with, tender offers
by bidders who, upon consummation of the tender offer, would beneficially own 5% or more
of a publicly traded equity security.
Section 14(e):
Prohibits fraud and certain other practices in connection with a tender offer; including
establishing specific time periods for, and a target company’s disclosure obligations with
respect to, a tender offer.
Section 14(f):
Requires disclosure if, other than at a shareholder meeting, majority control of a target
company’s board of directors is to be changed subsequent to a transaction subject to
Section 14(d) or 13(d).
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Schedule 13D
 Any person who acquires beneficial ownership of 5 percent or more of a class of equity
securities registered under Section 12 of the Exchange Act must file with the SEC a
Schedule 13D within ten days.
 A person “beneficially owns” any registered security if he either has or shares direct or
indirect power to vote, sell, or determine the disposition of that security. A person
is also deemed the beneficial owner of any securities that such person has the right to
acquire within sixty days, e.g., upon exercise of an option or conversion or exchange
of another security.
 Section 13(d)’s filing requirements also apply to any “group” who beneficially owns 5
percent or more of a class of an issuer’s equity securities. A group is formed when two
or more persons agree to act together to acquire, hold, vote, or dispose of securities.
 The Schedule 13D must disclose information about: identity and background of each
filing person; number of shares of the target company that it beneficially owns; its
purpose in acquiring those shares; any plans or proposals with respect to the issuer or
its shares, etc.
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What is a Tender Offer?

The Williams Act does not define the term “tender offer.”

The courts have used two tests to determine whether a series of purchases or offers constitutes a
“tender offer” within the meaning of the Williams Act:
•
Eight Factor Test — No single factor dispositive and you need not have all eight factors.
–
–
–
–
–
–
–
–
active and widespread solicitation of public shareholders;
solicitation for a substantial percentage of target’s stock;
offer made at a premium over the prevailing market price;
terms are firm rather than negotiable;
offer contingent on the tender of a minimum number of shares;
offer open for a limited period of time;
offeree subjected to pressure to sell stock; and
public announcements precede or accompany rapid accumulation of large
amounts of target’s stock.
• Totality of Circumstances Test
Some circuits focus on the totality of the circumstances to determine whether there is a
likelihood that, unless Section 14(d) is complied with, there will be a substantial risk that
shareholders will lack information needed to make a carefully considered appraisal of the
bidder’s proposal/offer.
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Exchange Offers
Rules now permit third-party exchange offers to commence upon
filing of the registration statement. To commence offer early
(before effectiveness), the bidder must:
– file a registration statement including a preliminary prospectus
containing all information (including price) necessary to allow
holders to make an informed investment decision;
– disseminate the preliminary prospectus to all security holders;
and
– file a tender offer statement (Schedule TO) with the SEC.
Any securities tendered in the offer may not be purchased until
after the registration statement becomes effective and the minimum
20 business day tender offer period (from commencement) has
expired.
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Minimum & Subsequent Offering Period

Rule 14e-1(a) requires that a tender offer be held open to receive tenders for not less than 20 business days from
the date it is first published or sent or given to security holders. There is no maximum offering period.

Rule 14e-1(d) provides that the only way a bidder may extend its offer is by issuing a public notice of extension,
including disclosure of the approximate number of securities tendered to date, no later than 9:00 a.m., Eastern
time (or if the class of subject securities is listed on any national securities exchange, the opening of trading on
such exchange) on the next business day after the scheduled expiration date of the offer.

New Rule 14d-11 permits a bidder to provide an optional subsequent offering period after completion of a tender
offer during which security holders may tender their shares without withdrawal rights (similar to extended offering
period under U.K. law).

The requirements for a subsequent offering period:
•
Initial tender offer must be for all outstanding shares.
•
Bidder must announce results of initial offering period (shares tendered) and must accept and
promptly pay for all securities tendered during the initial offering period at the closing of such period.
•
The subsequent offering period is at the option of the bidder and, if provided, must be open at least 3
business days and not more than 20 business days. Bidder is not required to state in its initial tender
offer whether or not it will provide a subsequent offering period.
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Announcement of Target’s Position

“Stop, Look and Listen” Communication - requests that shareholders defer making any
determination whether to accept or reject the tender offer until they have been advised of the
target company’s position with respect to the offer.

Rule 14e-2(a) requires the target, no later than 10 business days from date of commencement, to
disclose its position with respect to the offer on Schedule 14D-9.

This applies whether the tender offer is friendly or hostile. However, it is customary in friendly
deals for the target’s response to be filed and mailed simultaneously with the bidder’s materials.

The target board has four options:
•
it may affirmatively recommend acceptance of the offer;
•
it may affirmatively recommend rejection of the offer;
•
it may state that it is expressing no opinion and is remaining neutral; or
•
it may state (if such is the case) that it is unable to take a position.

The target is prohibited from making a recommendation or solicitation in response to the
commencement of the tender offer unless it files its Schedule 14D-9 on the date of such
communication.
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Best Price Rule – Rule 14d-10
 The Best Price Rule: Rule 14d-10(a)(2) provides that “No bidder shall make
a tender offer unless ... [t]he consideration paid to any security holder
pursuant to the tender offer is the highest consideration paid to any other
security holder during such tender offer.”
 Courts have differed over interpretations of what consideration is “pursuant
to the tender offer” and as to the meaning of “during such tender offer.”
 Judicial Approaches
•
•
Strict temporal standard
“Integral part of the offer” standard
 If bidder violates the Best Price Rule, plaintiffs allege that bidder is required
to pay the “higher” price to all shareholders.
•
For example, if employee owns 10,000 shares, and receives a payment (e.g.
consulting payment) of $1,000,000, plaintiffs allege that all shareholders should
receive $100 per share.
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Rule 14d-10 Timing Considerations
 Defining the time frame of the tender offer:
• “Tender Offer” is not defined in the Federal securities laws.
• Date of Commencement - Under Rule 14d-2(a), a tender offer
commences for purposes of the Best Price Rule “at 12:01 a.m. on the
date when the bidder has first published, sent or given the means to
tender to security holders.”
• Under Rule 14e-5, the prohibition on purchases outside the tender offer
begins upon public announcement, not commencement.
• There is no rule that specifies when a tender offer will be deemed to
have ended. Although tender offers are required to be kept open for 20
business days under Rule 14e-l, courts have declined to hold that the
expiration date constitutes the end of the tender offer for purposes of
the Best Price Rule.
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Rule 14d-10 – Selected Cases
 Lerro v. Quaker Oats (Seventh Circuit 1996):
•
Court accepts a bright line rule as to the timing of tender offers for purposes of the Best
Price Rule:
– A beverage distributor agreement with the controlling shareholder, executed prior to
commencement of the tender offer but subject to the successful completion of the tender offer,
was not subject to the Best Price Rule.
 Epstein v. MCA (Ninth Circuit 1995, reversed on other grounds):
•
A privately negotiated sale was deemed to be an integral part of the offer because the
terms of the privately negotiated sale were “in several material respects conditioned on
the terms of the public tender offer.”
 In re Digital Island Securities Litigation (Third Circuit 2004):
•
Court adopts hybrid approach requiring courts to examine purpose of employment
payments.
– Acquirer agreed to pay directors for their options and shares and CEO of the target entered into
an employment agreement prior to the commencement of the tender offer. Court stated that
plaintiffs must allege facts showing fraudulent intent to provide a premium to the directors and
executives, in violation of the Best Price Rule.
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Rule 14d-10 Selected Cases
 In a number of instances, payments have not created Best Price Rule
violations:
•
•
•
•
Bidder’s failure to object to change in control and accelerated vesting
agreements entered into three months before commencement of tender offer
Agreement to pay retention bonuses after completion of merger
Agreement to cash out recently granted options
New employment agreements
 Payments considered acceptable in one judicial circuit not necessarily
acceptable in another judicial circuit, and neither bidders nor targets can
effectively control the judicial circuit that will hear the case.
 Inability to know in advance that complaint will be dismissed without a trial is
a major practical problem.
 SEC has promised relief, but has indicated that relief will not provide bright
line test (as in Lerro v. Quaker Oats).
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SEC Has Proposed 14d-10 Reform
 Clarify that the best-price rule applies only to the consideration paid
for securities in a tender offer and that there is no time restriction on
the rule’s application.
 Include a specific exemption from Rule 14d-10 for the negotiation,
execution or amendment of an employment, compensation,
severance or other employee benefit arrangement if the amounts
payable under the arrangement relate solely to past or future
services or future services to be refrained from and are not based on
the number of shares the executive owns or tenders.
 In order to effectuate the above, the amendments would include a
safe harbor for Rule 14d-10 to allow the compensation committee or
other committee of the target’s or bidder’s board (depending on
whether the target or the bidder is the party to the arrangement) to
approve an employment, severance or other employee benefit
arrangement and thereby have it deemed to satisfy the exemption
described above.
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