CHAPTER 1

Practical Aspects of Tender Offers and Acquisitions

Chapter Contents

§ 1.01 General Perspectives [1] Deal Activity [2] Unsolicited Deals [3] Trends [4] Acquisition Financing [5] Fund Activism [6] Governance Activism [a] Proxy Access [b] Rights Plans [c] Staggered Boards [d] Majority Voting [7] Shareholder Litigation [8] Regulatory Trends in M&A Activity § 1.02 Regulation [1] The Williams Act [2] Other Federal Securities Laws [3] Margin Regulations: Financing an Acquisition [4] Regulatory Approvals [5] Notification Under the Hart-Scott Act [6] State Takeover Statutes § 1.03 The Acquiror’s Decision [1] Why Acquire by [2] Identifying the Takeover Target [3] Form of Offer [a] Cash Tender Offer [b] Exchange Offer [c] The Cash Transaction [i] Tax Considerations [ii] Structuring the Transaction [iii] Securities Law Questions 1-1 (Rel. 54) & FREEZEOUTS 1-2

§ 1.04 Preparing the Attack [1] Creation of a Team [2] Pre-Offer Confidentiality [3] Organizing for a Tender Offer § 1.05 Tender Offer Financing [1] Junk , Bust-Up, Bootstrap Takeovers [2] Bridge Financing [a] Investment Banker as “Bidder” [3] The Federal Reserve Board Ruling [4] The Policy Debate [5] Is There a Duty Owed to Bondholders? § 1.06 Takeover Approaches [1] Bear Hugs [a] Examples of the Bear Hug Approach [2] The Casual Pass [3] Multistep Transactions [4] Open Market Purchases and Street Sweeps [a] General [b] Secret Accumulations [c] Street Sweeps [d] Statutory Provisions Applicable to Pur- chases [i] Section 13(d) [ii] Definition of Tender Offer [iii] Best-Price Rule [iv] Hart-Scott Act [5] Purchases from Control Shareholders Followed by a Tender; Equal Opportunity Doctrine [6] Proxy Fights and Institutional Activism [a] Overview [b] Solicitations in Support of a Pending Ten- der Offer or Acquisition Proposal [i] Overview [ii] Examples [iii] Disclosure Issues [c] Solicitations to Promote Sale, Liquidation or Restructuring [i] Overview [ii] Examples [d] Solicitations to Change Management [i] Overview [ii] Examples 1-3 PRACTICAL ASPECTS OF TENDER OFFERS [e] Other Proxy Solicitations: Rule 14a-8 and Institutional Activism [i] Rule 14a-8 Proposals [A] Procedural Requirements [B] Grounds for Omission [C] Omissions Rejected [D] Omissions Accepted [E] Precatory Proposals [ii] Proposals to Change the Proxy Mechanism [f] Other Developments [i] Virginia Bankshares [ii] NCR [iii] Delaware Law Changes [A] Stockholder Proxies [B] Voting Procedures; Inspectors of Elections [7] Repurchases/”Greenmail” [a] Overview [b] Alternative Stock Repurchase Techniques [c] “Greenmail” Excise Tax [8] Substantial Shareholders Inviting a Takeover § 1.07 Takeover Negotiations [1] Disclosure of Merger Negotiations [a] Overview [b] Rule 10b-5 [2] Lock-up Options [a] Overview [b] Analysis of Cases [3] Merger Agreement “Exclusivity” Provisions [a] No-Shop Provisions [b] Fiduciary Out Provisions [c] Tortious Interference [4] Agreements in Principle § 1.08 Takeover Techniques [1] Two-Tier, Front-End Loaded Bids [2] Conditional Bids [a] Conditional Financing [b] Changes Requiring Extension of Offer [c] The Two-Price Bid [3] The Decreasing Bid [4] Joint Bids [5] Topping One’s Own Bid

(Rel. 54) TAKEOVERS & FREEZEOUTS 1-4

§ 1.09 Structuring the Offer [1] Who Should Be the Offeror [2] Impact of Institutional Investors and Arbitrage [3] Any and all Offers vs. Partial Offers [a] Advantages of the Any and All Offer [b] Advantages of the Partial Offer [4] Pricing the Offer/Premiums [5] Contractual Provisions [a] Nature of “Offer” and “Acceptance” [b] Conditions to Purchase and Payment [6] Conditions [a] Minimums and Limits [b] Non-Occurrence of Specified Events [c] Financing [d] Prior Regulatory Approval [e] Litigation or Antitrust [f] Approval by Shareholders of Offeror [7] Treatment of Rights Plans [8] Notice of Guaranteed Delivery [9] Mailing and Publishing [10] Special Accommodations [a] Buy-Out of Employee Stock Options [b] Long Offer Periods and Installment Purchases [c] Amendment to Alternate Form of Acquisition § 1.10 Structural Alternatives and Other Considerations in Business Combinations [1] Federal Income Tax Considerations [a] Direct Merger [b] Forward Triangular Merger [c] Reverse Triangular Merger [d] Section 351 “Double-Dummy” Transaction [e] Multi-Step Transaction [2] Acquisition Accounting [a] Purchase Accounting: Elimination of Pooling-of-Interests Accounting [b] Push Down Accounting [3] Corporate and Other Structural Factors [4] Tender Offers [a] Advantages of the Tender Offer Structure [b] Top-Up Options [c] The “All-Holders, Best-Price” Rule 1-5 PRACTICAL ASPECTS OF TENDER OFFERS [5] All-Cash Transactions [6] All-Stock Transactions [a] Pricing Formulae and Allocation of Market Risk [i] Fixed Exchange Ratio [ii] Fixed Value With Floating Exchange Ratio; Collars [iii] Fixed Exchange Ratio Within Price Collar [b] Walk-Aways [c] Finding the Appropriate Pricing Structure [7] Hybrid Transactions: Stock and Cash [a] Possible Cash-Stock Combinations [b] Allocation and Oversubscription [8] Contingent Value Rights [9] Mergers of Equals [a] The Advantages of an MOE Structure [b] Resolving the Key Governance Issues [c] Contractual, Fiduciary and Other Legal Issues Relating to MOEs § 1.11 Cross-Border Transactions [1] Overview [2] Special Considerations in Cross-Border Deals [a] Political and Regulatory Considerations [b] Integration Planning and Due Diligence [c] Competition Review and Action [d] Deal Techniques and Cross-Border Practice [e] U.S. Cross-Border Securities Regulation [3] Notable Developments [a] Sovereign Wealth Fund Activity [b] Harmonization of Accounting Standards [4] Deal Consideration and Transaction Structures [a] All-Cash [b] Equity Consideration [c] Stock, Depositary Receipts and Global Shares [d] “Dual Pillar” Structures § 1.12 Communication with Stockholders § 1.13 Implications of the Sarbanes-Oxley Act [1] General Implications of SOX for M&A [2] CEO/CFO Certifications: Acquirors Must Certify as to Targets Post-Closing

(Rel. 54) § 1.01 TAKEOVERS & FREEZEOUTS 1-6

[3] Disclosure of Non-GAAP Financial Measures: Selling the Deal to Shareholders [4] Disclosure of “Off-Balance Sheet Arrangements”: Some Targets May Be Less Attractive [5] Limits on Non-Audit Services: How (or Who) to Do Diligence After SOX [6] Auditor Independence: Acquiror’s Auditor and the Target [7] No Loans to Directors or Executive Officers: LBOs, Target Loans and Loan Forgiveness [8] Trading by Insiders: Technical Concerns with Blackout Periods [9] Beyond SOX—Other Recent Regulations and M&A

§ 1.01 General Perspectives Takeovers of public companies, both negotiated and contested, are a major facet of U.S. business activity and the preeminent mode of corporate expansion and diversification. Since the adoption of the Williams Act in 1968, the popularity and acceptability of takeover or “tender offer” bids has grown dramatically. During the past several decades, takeover battles have not only increased in number, but also in scope and intensity. Many of the large and more highly-publicized bids have involved vigorously contested struggles for corporate con- trol of a kind which has become a regular feature of the business landscape. As a result of this activity, there has been a proliferation of regulations, case law and commentary dealing with the various aspects of takeover bids. The takeover process is fundamentally a process of bargaining and negotiation. As bidders develop new and more aggressive techniques to make any a potential target and to increase their abili- ty to consummate the acquisitions they attempt, target counter with new defensive techniques designed for the most part to increase the bargaining position of the board of directors. No takeover defense technique (other than concentrating the voting securities in friendly hands) has ever made a corporation acquisition-proof. Defen- sive techniques have, however, increased the leverage of the board of directors in finding a better deal. 1-7 PRACTICAL ASPECTS OF TENDER OFFERS § 1.01 Takeover activity and the techniques used by companies to protect against hostile raids have changed dramatically in the last few decades. The most powerful takeover tactic used to be the unsolicit- ed all cash tender offer for the entire target company.1 With the advent of junk bond financing2 in the early 1980s, however, raids began to be structured coercively as partial two-tier offers with junk bonds imposed on shareholders in the second step squeeze-out trans- action. Then, with the enormous increase in the size and liquidity of the junk bond market, all cash deals were initiated by takeover entre- preneurs, financed by of junk bonds sold on the basis of the target’s cash flow and asset base. As an alternative to junk bond financed deals, investment banks put up enormous sums of their own money in order to finance all cash deals with the expectation that these “bridge loans” would later be refinanced by the sale of junk bonds.3 Investment banks have also taken equity positions in acquir- ing entities and operated as joint bidders. Over time, public perceptions changed, and by the late 1980s the cultural barrier to hostile bids had almost disappeared. Many compa- nies believed that if they were not taking over other companies and not increasing their size and leverage they too would become targets. In order to remain independent, companies became raiders. Managers took over companies through leveraged .4 With the huge amount of LBO capital available there was great momentum behind the LBO movement. Investors also changed their views and the mar- ket encouraged highly leveraged companies. Takeover premiums played a central role in boosting institutional stock portfolio returns and, as a result, institutional investors became activists in opposing takeover defenses, voting for corporate raiders in proxy fights and forcing companies to auction themselves to the high bidder.5 But in the early 1990s, many companies that borrowed heavily in the 1980s ended up filing for Chapter 11 or seeking to renegotiate its outstand- ing bank or public debt. The demise of the junk bond market as a source of acquisition financing and the related imposition by bank lenders of stringent credit standards on acquisition financing, along with disruption in the world financial markets caused by the Persian Gulf War and the recession in the United States, created an opportu- nity for companies to negotiate friendly merger transactions without

1 See discussion of rules and regulations concerning tender offers at §§ 2.04 and 2.05 infra. 2 See discussion of junk bond financing at § 1.05[1] infra. 3 See discussion of bridge financing at § 1.05[2] infra. 4 See discussion of leveraged buyouts at §§ 5A.04 and 9.03[5] infra. 5 See discussion of proxy fights and institutional activism at § 1.06[6] infra.

(Rel. 54) § 1.01 TAKEOVERS & FREEZEOUTS 1-8 concern that their transaction will be upset by a financial player. The highly leveraged transaction was replaced by the strategic acquisition, hostile and negotiated, and the either in support of an acquisition proposal or in an effort to change the direction of the company. In addition, financial investors became active in support of strategic deals. At the same time, states became more active in the corporate governance arena, adopting various statutes addressing such issues as the duty of directors to shareholders and other constituen- cies, classified boards, rights plans, the transfer of “control” shares, the disgorgement of greenmail profits and the imposition of a mora- torium on hostile merger transactions.6 Not only did these developments lead to an increase in strategic, negotiated transactions in the early 1990s, but they created the oppor- tunity for so-called “White Squire” investments7 by the several White Squire funds. These funds were created in the late 1980s to make sig- nificant equity investments in selected companies, as well as poten- tial investment opportunities for so-called “vulture” funds, which invest in troubled situations. In the early 1990s, traditional funds also raised significant commitments for acquisition financing so that they could take advantage of opportunities. Moreover, acquisition activity, both friendly and hostile, became international in scope, with numerous cross-border transactions into and from the U.S. or in other jurisdictions involving companies with U.S. interests. The last several decades have witnessed a number of significant developments in both case law relating to corporate transactions and financial and strategic approaches to business combinations. Each of these developments added complexity to the legal issues that arise in connection with , tender offers and other major corporate transactions. Changes in stock market valuations, macroeconomic developments, the recent financial crisis and the domestic and international accounting and corporate governance crises of the post-decade have added their own complexities. The increased activism of institutional investors and the growth in hedge funds and private equity have also had a significant impact. The constantly evolving legal and market landscapes highlight the need for a board of directors to be fully informed of its fiduciary obligations and for a company to be proactive and prepared to capi- talize on business combination opportunities, respond to unsolicited

6 See discussion of state statutes at § 5.03[1] infra. 7 See discussion of White Squire arrangements at § 6.06[4] infra. 1-9 PRACTICAL ASPECTS OF TENDER OFFERS § 1.01[1] takeover offers and evaluate the impact of the current corporate gov- ernance debates. In the last several years, there have been significant court decisions relating to fiduciary issues and takeover defenses. In some cases, these decisions reinforce well-established principles of Delaware case law regarding directors’ responsibilities in the context of a sale of a company. In other instances, they raise questions about deal techniques or highlight areas where other states’ statutory provi- sions and case law may dictate a different outcome than would be obtained in Delaware or states that follow Delaware’s model. [1]—Deal Activity Merger and acquisition activity historically has been cyclical, and recent years have been no exception. Following the merger wave of the latter half of the 1990s, the new millennium has been marked by dramatic ebbs and flows of merger activity. At the beginning of the last decade, merger activity was frenetic, marked by headline-grab- bing deals such as Time Warner’s $165 billion business combination with AOL in 2000. The pace of mergers then slowed dramatically from 2001 to 2003 and, for a time, subsided. Nonetheless, merger activity did not grind to a complete stop, and the shrinking market capitalization of major companies heightened the need for advance takeover preparedness. Moreover, despite lingering concerns regard- ing deficits, terrorism and corporate governance, improving market conditions, and increased optimism regarding the U.S. economy, cre- ated a conducive macroeconomic environment for mergers during the 2004-2007 period, with the volume of announced transactions world- wide peaking in 2007. Indeed, this period saw a notable increase in deal activity, including a mix of strategic business combinations and -motivated transactions, in both friendly and hostile contexts. The rise in M&A activity also brought with it a resurgence of the mega-deal, with numerous instances of multi-billion dollar deals. Key enabling factors for this favorable deal-making environ- ment included: strong growth in corporate profits and available cash; return of confidence in the boardroom; benefits of consolidation in industries such as energy, financial services, mining and metals, healthcare and media; relatively low interest rates and inflation; antitrust and competition regulatory policies; and dispositions and spinoffs by companies focusing on core competencies. Also critical to the increase in deal activity were the growing pools of investment capital being deployed in takeover transactions by private equity funds and hedge funds, enhanced by readily available debt financing, the “club” approach to private equity deals and the availability of equity syndication, and receptivity to buyouts among companies deriving from, among other things, desire for relief from the expens- es and difficulties of being public. (Rel. 54) § 1.01[1] TAKEOVERS & FREEZEOUTS 1-10

Despite setting a new record in 2007, U.S. and global M&A vol- ume declined steeply beginning in August 2007. The collapse of the housing bubble and the drying up of liquidity severely constrained debt-fueled M&A activity, particularly private equity deals, which in 2007 accounted for approximately 25% of total M&A volume. Strate- gic transactions also declined, as companies hoarded cash in order to steer themselves through the gathering economic storm while also finding their stock to be an unattractive form of deal consideration. Even in potential stock-for-stock transactions, banks became unwill- ing to refinance credit arrangements at acquired companies. Another factor that slowed deal-making was the general uncertainty surround- ing the length and severity of the recent recession, as would-be acquirors found it difficult to predict with any reasonable confidence the future performance of would-be targets, making it more difficult for parties to reach agreement on . Although deal volumes dropped significantly in 2008 from their peak in 2007, the economic decline spurred a number of transactions involving distressed targets, many of them financial institutions. A number of such institutions raised capital, often from private equity firms and sovereign wealth funds (“SWFs”). Examples of such pri- vate investments in public equity (“PIPEs”) include Citigroup/Abu Dhabi Investment Authority, Morgan Stanley/China Investment Corp. and, later, Mitsubishi/UFJ Financial Group, Goldman Sachs/Berkshire Hathaway, MBIA/Warburg Pincus, and MoneyGram/T.H. Lee and Goldman Sachs. Some of these investments soured as the crisis inten- sified, leading private equity firms and SWFs to shy away from later rescue transactions, which were often undertaken by healthier finan- cial institutions, occasionally with government support. In some cases, no private sector solution could be found to save a financial institution, leading to its failure (as in the cases of Lehman Brothers and IndyMac Bank) or direct government investment to keep it afloat (as in the cases of AIG, Citigroup, Fannie Mae and Freddie Mac). Some financial institutions that were able to avoid being sold or col- lapsing converted to bank holding companies as a means of survival (as in the cases of Goldman Sachs, Morgan Stanley and GMAC). The global downturn spurred governments worldwide to intervene in private markets using a variety of tools, beginning in the U.S. most notably with the Troubled Asset Relief Program (“TARP”). Interna- tionally, governments remained active participants in the M&A mar- ket in 2009, with government investments accounting for 17% of overall M&A activity worldwide. The increased role of the U.S. gov- ernment as regulator of—and investor in—private institutions has led to changes in the M&A market and corporate governance. For example, private equity firms and other private investors have been 1-11 PRACTICAL ASPECTS OF TENDER OFFERS § 1.01[1] attracted by the possibility of acquiring assets and deposit franchises of failed banks with FDIC assistance. The governance structure of private investments in failed banks is evolving in parallel with evolv- ing FDIC guidance. There also are a number of potential legislative and regulatory reforms on the horizon that could affect public com- panies, covering topics ranging from shareholder proxy access to majority voting, independent board chairmanship, executive compen- sation and governance-related disclosure requirements. In addition, the investor community continues to focus on governance issues, par- ticularly in the area of executive compensation. Global M&A volume dropped 28% from 2008 to 2009, to the low- est level since 2004, with much of the deal activity in the middle mar- ket. Deal volumes began to increase, however, as economic condi- tions appeared to improve, particularly in the fourth quarter of 2009. Many of the large deals struck in 2009 and early 2010 involved opportunistic strategic acquirors, as evidenced by the Kraft/Cadbury, ExxonMobil/XTO Energy, Pfizer/Wyeth, Merck/Schering-Plough, Berkshire Hathaway/Burlington Northern Santa Fe and Consol Ener- gy/Dominion Resources transactions, a trend that is likely to contin- ue. Distressed M&A activity also is expected to remain a prominent feature of the landscape—the volume of U.S. target bankruptcy trans- actions (such as Section 363 asset sales and reorganizations) increased by more than 700% from 2008 to 2009, rising from 1% of total U.S. target M&A volume in 2008 to 10% in 2009—as compa- nies seek to pair up with stronger rivals in order to survive, and as companies and investors acquire businesses and assets out of bank- ruptcies. Private equity firms and SWFs, which remained largely on the sidelines of big-ticket M&A in 2009, may once again become more active participants in the M&A market in 2010, especially in smaller transactions. While global deal volume in 2011 increased 7% and U.S. deal vol- ume increased 31% as compared to 2010, 2011 was a tale of two halves. M&A activity surged in the first half of 2011, renewing opti- mism that markets were returning to strength. The first half of 2011 saw a number of significant strategic acquisitions and “mega deals,” including AT&T/T-Mobile (later withdrawn amid regulatory opposi- tion), Duke Energy/Progress Energy, Nippon Steel/Sumitomo Metal Industries, Johnson & Johnson/Synthes, AMB/ProLogis and Google/Motorola Mobility. Despite the announcement of some large deals in the second half of 2011 (for example, Kinder Morgan/El Paso, Express Scripts/Medco, United Technologies/Goodrich, Gilead/Pharmasset and BHP Billiton/Petrohawk), stock market volatility, fear of a “dou- ble dip” recession in the U.S., concerns in Europe with respect to

(Rel. 54) § 1.01[1] TAKEOVERS & FREEZEOUTS 1-12 sovereign debt, the future of the Euro and the European Union more broadly and other weakening economic indicators, as well as uncer- tainty with respect to governmental policies, contributed to a signifi- cant decline in strategic M&A activity as 2011 progressed. Private equity firms and other financial sponsors also continued to largely remain on the sidelines due in part to challenging credit markets. Similarly, sovereign wealth funds (“SWFs”) did not rejoin the fray with the force expected by some observers, and although their aggre- gate assets under management continued to grow in 2011, SWFs were hindered by continuing capital withdrawals by their respective gov- ernments to cover fiscal shortfalls. Although overall deal activity in 2011 was relatively flat compared to 2010, one type of transaction in particular—the spin-off—became increasingly popular. A spin-off can create shareholder value when a company’s businesses may command higher valuations if owned and managed separately, rather than as part of the same enterprise. These increased valuations can arise from capital markets factors, such as the attraction of investors who want to focus on a particular sector or growth strategy, and from more focused management and corporate initiatives that clarify the business’s vision and mission. In addition to the potential for value enhancement, spin-offs also can be accom- plished in a manner that is tax-free to both the parent and its share- holders. Spin-off volume reached an aggregate of $230 billion in 2011, which was six times the level for such transactions in 2010. Significant spin-off and similar break-up transactions in 2011 were seen in a broad range of industry sectors, with high-profile examples including Tyco International’s three-way split involving spin-offs of its ADT North America residential business and its flow con- trol businesses, Ralcorp’s plan to spin off Post Foods, Cono- coPhillips’ plan to spin off its refining and marketing business, Kraft’s spin off of its North American grocery business, ITT’s split into three public companies, Abbott Laboratories’ plan to spin off its branded drug business and Expedia’s spinoff of TripAdvisor. Distressed M&A activity, which was a prominent feature of the landscape in the aftermath of the financial crisis as companies sought to pair up with stronger rivals and companies and investors sought to acquire businesses and assets out of bankruptcy, slowed considerably in 2010 and 2011 as the economy improved and distressed acquisi- tion opportunities diminished. As indicated by the discussion above, a number of factors can affect the level of merger activity over time. First, it is recognized that mergers are an integral part of market capitalism, including the types that are practiced in China, India and Russia. Mergers are an agent of the Schumpeterian creation and destruction that characterizes market capitalism. 1-12.1 PRACTICAL ASPECTS OF TENDER OFFERS § 1.01[1] Second, the autogenous factors, not in the order of importance, are relatively few and straight forward:

• Increasing revenue by product or geographic expansion or by increasing market power. • Reducing costs by eliminating excess capacity and/or labor. • Confidence of the management and the board of directors of the acquiring company that it can effectively integrate the acquired business. • Ego and the desire for size and diversity without regard to prof- itability. • Sense of responsibility to all stakeholders, i.e., employees, cus- tomers, suppliers, creditors, and communities, as well as share- holders.

Third, the exogenous factors, not in the order of importance, are:

• Availability of accounting conventions (principally those relat- ing to depreciation and amortization) that enhance, or at least do not detract from, profitability. • Pressure from activist hedge funds and lack of support from institutional investors to remain an independent seeking long-term creation of value. • Government antitrust and competition policies. • Availability of arbitrage to facilitate liquidity for securities that result from mergers. • Foreign exchange fluctuations that make one currency “cheap” and the other more favorable as merger consideration. • Regulation and deregulation and privatization and nationaliza- tion by governments. • National policies to encourage “global champions” or to dis- courage foreign investment. • The availability of experts in merger technology and in the cre- ation of special merger currencies, such as contingent value rights and pay-in-kind debentures. • Recognition of the legitimacy of hostile takeover bids and proxy fights and the availability of experts in the defense and waging of hostile efforts to achieve a merger. • Labor unions, government labor policies and the political and popular power of labor generally. • The existence of private equity funds and the amount of funds that they have available for acquisitions. • The state of the equity and debt markets and the receptivity of the markets and banks to merger activity.

(Rel. 54) § 1.01[2] TAKEOVERS & FREEZEOUTS 1-12.2

• Litigation, shareholder and class actions designed to enjoin mergers or increase the cost. • Taxes, tax policies and potential changes therein. • Demographic changes. • General business and political conditions. • Technological developments, especially breakthroughs. • Military research, military procurement and military policies with respect to suppliers and contracting. • Trade treaties and the creation of trade and currency blocs of nations.

Lastly, it is recognized that the interrelation of all or some of these factors creates the permutations and combinations of issues that at any given time make it impossible to predict the level of future merg- er activity. [2]—Unsolicited Deals While friendly mergers continue to predominate over unsolicited takeover activity, hostile activity returned as a significant factor in the M&A landscape, particularly with some activity and, with depressed equity prices and some strategic buyers having conserved significant amounts of cash from belt-tightening in the downturn and with cer- tain industries hitting cyclical lows. In 2008, there was a sharp uptick in unfriendly deals (due in part to opportunities presented to hostile bidders by shrinking market cap- italizations), with these transactions representing approximately 24% of all announced deals involving U.S. public companies. This was the highest percentage in the five-year period ending in 2008, with the next-highest percentage being 14% in 2006. U.S. hostile activity remained at elevated levels in 2009, although the percentage dropped to 18%. Notable unsolicited offers included Air Products’ pending bid for Airgas, Kraft’s bid for Cadbury (ultimately successful), PepsiCo’s offers for its two largest bottlers, Pepsi Bottling Group and Pepsi- Americas (resulting in agreements with both firms), InBev N.V.’s offer for Anheuser-Busch (ultimately successful), BHP Billiton’s offer for Rio Tinto (ultimately abandoned), Microsoft’s offer for Yahoo! (ultimately abandoned), Astellas Pharma’s offer for CV Therapeutics (rejected in favor of a friendly agreement for Gilead Sciences to acquire CV), and Roche’s offer to acquire the portion of Genentech that it did not already own (ultimately successful). This percentage has declined since 2008, although it has remained at a relatively high level (approximately 18% in 2011). 2011 was characterized by several high-profile hostile deals (including some by 1-12.3 PRACTICAL ASPECTS OF TENDER OFFERS § 1.01[3] activist shareholders), most notably Icahn’s bid for Clorox (ultimate- ly withdrawn), International Paper’s bid for Temple-Inland (resulting in a negotiated acquisition agreement), Martin Marietta’s bid for Vul- can Materials (pending), SAB Miller’s bid for Foster’s (resulting in a negotiated acquisition agreement) and Air Products’ bid for Airgas (ultimately unsuccessful). In addition, strategic mergers are not immune from third-party attempts to acquire one of the prospective merger partners, known as an “overbid.” This has been demonstrated by situations such as the17- month bidding war between Hertz and Avis for Dollar Thrifty, in which the Dollar Thrifty board initially rejected a topping bid by Avis in favor of what the board viewed as a more certain deal with Hertz (Hertz and Avis both ultimately withdrew their bids); the battle between Dell and Hewlett-Packard for 3Par, which culminated in Hewlett-Packard’s successful overbid for 3Par; and the bid (later withdrawn) by Nasdaq/ICE for NYSE Euronext following the announcement of an agreement between NYSE Euronext and Deutsche Börse AG (which was itself later terminated). [3]—Private Equity Trends Private equity’s role in the market for corporate control reached dizzying heights in 2006 and the first half of 2007, with approxi- mately 25% of all global M&A volume during the first half of 2007 attributable to such deals. Then, over the summer of 2007, credit mar- kets tightened and traditional financing sources dried up, buyouts came to an abrupt halt and previously signed but uncompleted trans- actions were tested. Total worldwide private equity deal volume dropped in 2008 and again in 2009, to the lowest level since 2002. In 2010, there was a marked increase in the number of deals versus 2009, and the size of deals also continued to grow. The value of private equity-backed M&A deals almost doubled, accounting for 9% of global M&A activ- ity in 2010. While investing in distressed “loan-to-own” strategies diminished greatly in 2010 (without disappearing entirely), the tradi- tional private equity acquisition returned with some new twists. As interest rates remained low throughout 2010 and leading into 2011, deal volume continued to increase; however, exogenous shocks such as the European debt crises created challenges in the latter half of 2011 in high yield and bank credit markets. Obtaining “clean” commitments and traditional private equity-levels of leverage remained challenging, especially for transactions in excess of $2 bil- lion. Mega-deals continued to remain largely absent, and the larger transactions that did get announced often involved companies with

(Rel. 54) § 1.01[3] TAKEOVERS & FREEZEOUTS 1-12.4 built-in leverage, or with which the sponsor had a historical relation- ship. There was also continued participation of other financial play- ers, such as sponsor-controlled mezzanine funds, credit funds, and other alternative lenders such as hedge funds. In addition, equity con- tributions continued to represent a significant portion of deal financ- ing, and the completed deals were marked by an ability to come to market at precisely the right time and a willingness to commit greater equity to close the deal as a bridge to future refinancings. Whether buying or selling, the challenges of more limited leverage will likely lead to the continued rarity of robust auctions. Strong rela- tionships with financing sources and the willingness to explore inno- vative ways to finance transactions may continue to differentiate sponsors. Financing commitments continue to be more conditional than in the peak years, although this conditionality often can be nego- tiated to an acceptable level. Although debt markets have been volatile, financing continues to be available for well-established pri- vate equity firms. Market volatility has made it difficult to negotiate with sellers who may still be clinging to pre-financial crisis expectations for valuation. Volatility has been high, and the windows for obtaining financing opened and closed quickly across various geographic areas. Howev- er, the market has been active with sales of divisions and subsidiaries, where valuation metrics are more malleable, and sellers can more readily accept creative deal terms such as earn-outs, vendor financing and retained equity ownership. Because of the slowdown in deal activity, vintage 2006-2007 funds are sitting on significant amounts of uncalled capital precisely when their investment periods are coming to a close. As such, these firms are faced with either having to solicit investor consent to extend investment periods or launch new funds in a difficult fundraising mar- ket. The drop off in fundraising from the all-time high in 2007 was steep, with the trend continuing into 2011. Investors meanwhile have been far more selective, choosing established sponsors with proven track records with whom to lock up capital for the long term. The slowdown in fundraising has also put pressure on overall assets under management, which has caused some private equity sponsors to diversify into liquid strategies, either organically or by purchasing sponsors who can readily exit investment positions. Despite these developments, investors remain committed to private equity, and while they may have less capital on hand, their overall allocation to private equity has remained stable. Large diversified sponsors in par- ticular are benefiting from this trend, as institutional investors have been far more willing to write them sizeable checks. 1-12.5 PRACTICAL ASPECTS OF TENDER OFFERS § 1.01[4] The Dodd-Frank Wall Street Reform and Consumer Protection Act.8 effective July 21, 2011, brought significant changes to the industry and represents a paradigm shift for many fund managers and investors. By March 30, 2012, advisors to private equity funds with at least $150 million in assets under management were required to register with the SEC and be subject to regulatory inspections. Reg- istration requires the filing of a publicly available disclosure docu- ment (Form ADV) describing the advisor, its business and the private funds that it manages. In addition, registration imposes significant administrative burdens on the advisor, as the advisor will become subject to substantive rules under the Investment Advisers Act,9 as well as ongoing reporting obligations, and will be required to imple- ment a comprehensive compliance program. Beginning in 2013, reg- istered private fund advisors are required to file detailed information (on Form PF) about their managed funds with the SEC, on a confi- dential basis, to assist the SEC and other federal regulators in assess- ing systemic risk to the U.S. financial system. Proposed rules man- dated by the Dodd-Frank Act may also impose disclosure and other obligations on incentive-based compensation for certain large private equity managers. In order to manage the obligations imposed on reg- istered advisers, fund groups have been required to expend consider- able time on compliance matters and are engaging additional service providers to assist them. As for private equity operations owned by banks, the “Volcker Rule” established by the Dodd-Frank Act, severe- ly limits the ability of banks to own or sponsor private equity funds, which is resulting in banks restructuring or selling private equity funds to be in compliance with the rule. [4]—Acquisition Financing Starting about 2011, acquisition financing has been a mixed story, with consistent strength for low-levered companies and spotty win- dows of opportunity for highly leveraged transactions. High-grade issuers have generally been able to obtain committed bridge financing for M&A deals. A few examples are the 18-month commitment for a one-year unsecured bridge term facility underwrit- ten by J.P. Morgan for $20 billion to fund AT&T’s (now abandoned) acquisition of T-Mobile, the $15 billion acquisition facility to finance Sanofi-Aventis SA’s offer for Genzyme and the $15 billion bridge facility to finance United Technology’s acquisition of Goodrich. To

8 The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111- 203, H.R. 4173). 9 The Investment Advisers Act of 1940, codified at 15 U.S.C. § 80b-1 through 15 U.S.C. § 80b-21. (Rel. 54) § 1.01[5] TAKEOVERS & FREEZEOUTS 1-12.6 take advantage of strong markets, and to avoid the risk of a down- turn, acquirors often have gone to market quickly after a deal is signed, as was the case with Sanofi-Aventis SA, which sold $7 bil- lion worth of bonds to partly finance its acquisition of Genzyme in advance of closing the acquisition. In the non-investment grade space, issuers at the high-end of the range have had success in financing deals. For example, the acquisi- tion by Kinder Morgan of El Paso is backed by $13 billion of com- mitted acquisition financing underwritten by Barclays Capital. How- ever, the non-investment grade markets have from time-to-time experienced setbacks and were particularly rough in the second half of 2011. As a result, the banks making commitments to fund higher- leverage deals generally have trended throughout the year to be less borrower-friendly and more expensive and have required some pro- tection against market changes, such as the ability to increase pricing and change other terms, if needed, to complete a syndication. Banks also have dealt with the open-and-shut nature of the markets by favor- ing deals and deal structures (such as tender offers) that can be com- pleted quickly, as well as by negotiating for the right to require bond offerings to be done into escrow pre-closing, or on the closing date, to reduce the likelihood that a bridge loan would be funded. [5]— Activism Since about 2010, there has been a resurgence of raider-like activ- ity by activist hedge funds, often aimed at forcing the adoption of policies to stimulate increasing -term stock prices, such as increases in dividends or share buybacks, the sale or spin-off of one or more businesses of a company or the sale of the entire company. Hedge fund activists have also pushed governance changes and occa- sionally have run proxy contests, usually for a short slate of directors. Activists have also worked to block proposed M&A transactions, mostly on the target side but also on the acquiror side. Activist hedge funds have had to cope with changes to the legal environment that pose new challenges to their agendas, with a signif- icant federal court decision taking a broad view of funds’ Schedule 13D disclosure obligations,10 a Delaware court decision reaffirming the principle that voting power and economic interests should be aligned and not decoupled11 and proposed legislative and regulatory reforms, in particular stemming from the Dodd-Frank Act and an SEC

10 See CSX Corp. v. Children’s Investment Fund Management (UK) LLP, 562 F. Supp.2d 511 (S.D.N.Y.), aff’d 292 F.App’x 133 (2d Cir. 2008). 11 See Crown Emak Partners, LLC v. Kurz, 992 A.2d 377 (Del. 2010). 1-12.7 PRACTICAL ASPECTS OF TENDER OFFERS § 1.01[6] concept release on proxy plumbing that focuses on increased disclo- sure of derivative positions and empty voting issues. In addition, as part of a December 2011 pledge to conduct a broad review of the cur- rent beneficial ownership reporting regime, the SEC promised to issue another concept release relating to the Schedule 13D rules sometime in 2012. Many companies have also adopted changes to their governing documents, including amendments to their advance notice bylaws (and, in some cases, shareholder rights plans) that cap- ture equity swaps and other derivatives as well as director qualifica- tion bylaws that, among other things, may require a nominee to dis- close background information, including about activist shareholders supporting such nominee, and affirm that he or she has no agreement or understanding to vote a certain way and that he or she will abide by confidentiality and various governance policies applicable to direc- tors. Nonetheless, these developments have not always dissuaded activists, and activists continue to use “synthetic” share ownership in novel ways and to take advantage of Schedule 13D’s 10-day report- ing window, as evidenced by Carl Icahn’s initial disclosure in Janu- ary 2011 that he acquired a 14.5% stake in CVR Energy Inc., Persh- ing Square and Vornado Realty Trust’s surprise announcement that they had accumulated a combined 27% stake in J.C. Penney in 2010, and Louis Vuitton’s acquisition of a previously undisclosed stake in excess of 14% in Hermès in 2010. Hedge funds remain an active part of the corporate landscape and can be expected to seize on what they regard as catalyst opportunities. In this environment of hedge fund activism, including activism against some of the largest and most well-known U.S. companies, advance takeover preparedness is critical to improve a company’s ability to deter coercive or inadequate bids, secure a high premium in the event of a sale of control of the corporation and otherwise ensure that the company is adequately protected against novel takeover tac- tics. Furthermore, advanced preparation for defending against a takeover may also be critical to the success of a preferred transaction that a company has determined to be part of its long-term plan. [6]—Governance Activism There has been a sharp increase in shareholder-sponsored proxy proposals and a high level of support for such proposals. Although the total number of shareholder governance proposals dipped to a new post-Enron low in 2011—a drop that can be primarily attributed to the “say-on-pay” rules under the Dodd-Frank Act that make share- holder proposals on this topic unnecessary—the prevalence and force- fulness of shareholder proposals in some key areas have continued to

(Rel. 54) § 1.01[6] TAKEOVERS & FREEZEOUTS 1-12.8 escalate and majority support is increasingly common, especially for proposals targeting anti-takeover defenses. For instance, in 2011, sup- port for shareholder proposals seeking board declassification and majority voting increased compared to 2010. One of the explanations for such shareholder support is the shift away from case-by-case voting by institutional shareholders. Today, institutional shareholders typically subscribe to shareholder advisory services, such as ISS and Glass Lewis, to provide analysis or advice with respect to shareholder votes. These shareholder advisory services publish proxy voting guides setting forth voting policies on a variety of common issues that are frequent subjects of shareholder proposals. By outsourcing judgment to consultants or otherwise adopting blan- ket voting policies on various governance issues, institutional share- holders increasingly do not review individual shareholder proposals on a company-by-company basis and are thereby ignoring an indi- vidual company’s performance or governance fundamentals. As a result, many shareholder votes may be preordained by a blanket vot- ing policy that is applied to all companies without reference to the particulars of a given company’s situation. One notable exception to this general trend involves BlackRock, which in early 2012 sent a let- ter to 600 companies advising them to engage with BlackRock to address potential governance issues prior to engaging with proxy advisory firms. The letter noted that BlackRock reaches its proxy vot- ing decisions independently of proxy advisory firms and on the basis of internal guidelines that are pragmatically applied. It remains to be seen, however, how BlackRock executes on this approach and whether other investors will follow its lead.12 A board of directors has no legal obligation under state or federal law to accept or act upon precatory shareholder proposals that receive the vote of a majority of the outstanding shares entitled to vote. To the contrary, the board should carefully evaluate such proposals while considering all the relevant facts, and it should act only if it deter- mines that doing so is in the best interests of the company and its shareholders. So long as a board acts on a fully informed basis, any

12 In February 2012, the California State Teachers’ Retirement System (“Cal- STRS”) released a report commenting on corporate pay practices and the say-on-pay vote during the 2011 proxy season. The report makes clear that CalSTRS assumes responsibility for deciding how to respond to the say-on-pay vote of the companies in which it invests. This is another example of a major investor taking direct respon- sibility for voting proxies, rather than simply outsourcing that decision to non- investor proxy advisory firms. The CalSTRS report identifies the review of pay prac- tices as an “important fiduciary duty” of institutional investors. 1-12.9 PRACTICAL ASPECTS OF TENDER OFFERS § 1.01[6] determinations in this area should be protected by the business judg- ment rule and should not be subject to any heightened or extraordi- nary level of judicial review. However, a board that refrains from accepting or acting upon a precatory shareholder proposal receiving majority support faces the possibility of a “withhold the vote” cam- paign, which can be particularly significant if the company has adopt- ed some form of majority voting (as discussed below). [a]—Proxy Access One issue that has become a major focal point for public compa- nies is shareholder access to a company’s proxy materials. The SEC originally proposed a shareholder access rule in 2003, which was later abandoned. In June 2009, after a series of court decisions and SEC actions,13 the SEC again proposed amendments to the proxy rules providing for shareholder proxy access. Then, in August 2010, the SEC adopted a new Rule 14a-11, providing for the inclusion of share- holder nominees in company proxy statements, which was similar to the 2009 proposal. Rule 14a-11 would have required most public companies to include in their proxy materials certain shareholders’ eligible nominees for up to 25% of the company’s entire board.

13 In American Federation of State, County & Municipal Employees v. American International Group, Inc., 462 F.3d 121 (2d Cir. 2006), AFSCME had submitted a proposal for inclusion in AIG’s proxy statement that would require AIG to publish the names of shareholder-nominated director candidates in its proxy statement in cer- tain circumstances. AIG excluded the proposal, and AFSCME sued to compel AIG to include the proposal in its next proxy statement. A district court dismissed the complaint, but the Second Circuit reversed and remanded, finding that Exchange Act Rule 14a-8(i)(8) allows exclusion only of “shareholder proposals that relate to a par- ticular election and not [of] proposals that, like AFSCME’s, would establish the pro- cedural rules governing elections generally.” In the wake of AFSCME, several pen- sion funds submitted similar proposals to other public companies. In December 2007, to the chagrin of shareholder activists, the SEC adopted a proposal to codify the SEC’s existing position that shareholder proposals on proxy statement access for board nominations are categorically excludable under Exchange Act Rule 14a-8(i)(8), see Shareholder Proposals Relating to the Election of Directors, Exchange Act Release No. 34-56914, 92 SEC Docket 256 (Dec. 6, 2007), and did not adopt an alternative proposal to allow shareholders (or a group of shareholders) owning 5% or more of a company’s voting shares to include in the company’s proxy materials, under Rule 14a-8, a proposal for an amendment to the company’s bylaws that would mandate procedures to allow shareholders to nominate board of director candidates to the extent permissible under the laws of the company’s state of incorporation as well as the company’s charter and bylaws. In CA, Inc. v. AFSCME Employees Pen- sion Plan, 953 A.2d 227 (Del. 2008), the Delaware Supreme Court held that a share- holder proposal by AFSCME proposing a bylaw amendment that would require CA, Inc.’s board of directors to reimburse shareholders for the reasonable expenses of a successful short-slate proxy solicitation was invalid as a matter of Delaware law.

(Rel. 54) § 1.01[6] TAKEOVERS & FREEZEOUTS 1-12.10

Shareholders (or groups of shareholders) that owned 3% of the com- pany’s voting securities for a period of three years would be eligible for such proxy access. In a July 2011 decision, the U.S. Court of Appeals for the D.C. Circuit vacated Rule 14a-11 as an “arbitrary and capricious” exercise of the SEC’s authority, before the rule had become effective.14 The SEC indicated that it would not seek review of that decision, but it did go forward with amendments to Rule 14a- 8 that permit shareholders to make proposals under that rule for com- pany-specific proxy access regimes (subject to the other exclusions in Rule 14a-8). The amendments to Rule 14a-8, together with a 2009 amendment to the Delaware General Corporation Law (the “DGCL”) that expressly authorized Delaware corporations to adopt bylaws implementing shareholder proxy access for director nominations, pro- vide shareholders an opportunity to seek proxy access eligibility stan- dards on a company-by-company basis for Delaware companies. The 2012 proxy season, the first following the SEC’s adoption of amendments to Rule 14a-8, saw a number of proxy access proposals introduced by several types of shareholders. More than a dozen share- holder proposals introducing mandatory proxy access were filed, including proposals brought by both institutional and individual shareholders. A number of proposals include ownership and holding period requirements that would be even lower than the standards that would have applied under Rule 14a-11 and would permit a larger number of nominees than would have applied under Rule 14a-11. Several issuers have submitted no-action requests to the SEC seeking to exclude these proposals, and in March 2012, the SEC responded to several of these requests, providing the first significant guidance on the subject. Notably, it appears that the SEC may be unwilling to per- mit exclusion of shareholder proxy access proposals on the basis of substantial implementation under Rule 14a-8(i)(10), where a compa- ny has adopted its own version of proxy access that differs in a sig- nificant respect from that proposed by the shareholder.15 However, a number of exclusions were permitted by the SEC on other grounds, including vagueness under Rule 14a-8(i)(3) and improper submission of multiple proposals under Rule 14a-8(c). The SEC’s response to these early no-action requests will likely influence the approach taken by proxy access proponents and the response to such proposals by issuers.

14 Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011). 15 For example, KSW, Inc.’s request to exclude a shareholder proposal on the basis of substantial implementation was rejected by the SEC, which noted that the ownership threshold in the proxy access mechanism adopted by KSW management (5%) was higher than that included in the shareholder proposal (2%). 1-12.11 PRACTICAL ASPECTS OF TENDER OFFERS § 1.01[6] [b]—Rights Plans Activist institutional shareholders, like TIAA-CREF, have spon- sored precatory resolutions attacking shareholder rights plans, also known as “poison pills.” Today, many institutions routinely vote for such resolutions. Shareholders commonly support precatory share- holder proposals to submit rights plans for shareholder approval. Shareholder proposals relating to rights plans remain a fertile ground for shareholder proponents seeking governance topics that uniformly attract large institutional support, even at companies that do not have rights plans. This has been facilitated in part by changing ISS voting policies16 and SEC Staff no-action positions, making it difficult to stay one step ahead of shareholder gadflies, even for companies seek- ing to stake out the corporate governance high ground. One result of this activism has been a declining proportion of large public compa- nies that have rights plans in place, and an increase in the number of companies choosing instead to have “on-the-shelf” rights plans ready to be adopted promptly following a specific takeover threat. Accord- ing to SharkRepellent.net, at year-end 2011, 10% of S&P 500 com- panies had a in effect, down from approxi- mately 45% as recently as the end of 2005. A number of companies have adopted rights plans with 4.9% triggers intended to protect valu- able tax assets.17 [c]—Staggered Boards Similarly, shareholder proposals requesting companies to repeal staggered boards continue to be popular, and such proposals since the passage of the Sarbanes-Oxley Act in 2002 have on average received the support of 65% of the votes cast. According to an analysis per- formed by the Conference Board, of the companies that moved to de- stagger their boards between the years 2003 and 2010, 60% did so in response to some form of shareholder pressure. Moreover, a large number of companies have initiated their own proposals to repeal staggered boards. At year-end 2011, less than 25% of S&P 500 com- panies had a staggered board, according to SharkRepellent.net fig- ures, down from 47% as recently as 2005. [d]—Majority Voting Beginning principally in 2004, in the face of stalled efforts to pro- vide investors with “proxy access,” shareholder activists began to agi- tate against the traditional plurality voting standard, under which the

16 See § 6.03[4] infra. 17 See id. (Rel. 54) § 1.01[6] TAKEOVERS & FREEZEOUTS 1-12.12 director nominees receiving the highest number of votes are elected as directors, without regard to votes “against” or “withheld.” Share- holder activists called on companies to instead adopt majority voting, under which a director nominee is elected only if the votes for his or her election exceed votes against or withheld from his or her election. In 2005, Pfizer Inc. became the first company to amend its corpo- rate governance guidelines to require that any director who receives a majority of withheld votes submit his or her resignation to the board, thus leaving the outcome in the hands of the board; many com- panies followed suit. In 2011, ISS clarified its position as being that shareholders are best served by companies adopting a “true majority-vote” standard in the election of directors (i.e., a binding majority of the votes cast requirement for uncontested elections with a plurality standard carve- out in uncontested elections). Under ISS voting guidelines, ISS rec- ommends that shareholders vote “for” any proposal to adopt a major- ity of the votes cast standard for directors in uncontested elections but to vote “against” such proposal if it does not contain a carve-out for a plurality standard in contested elections. ISS states that a lack of a true majority vote standard, although not dispositive, is among the factors that it considers in assessing whether a board purportedly lacks sufficient accountability and should therefore be voted against. Not only has ISS expressed its support for a true majority-vote standard, but it also lobbied for the standard to supplant the default corporate law rule that an incumbent director who fails to get elect- ed nevertheless holds over until a successor is elected, so that such incumbent directors would only be held over to the extent necessary to ensure that the board continues to be composed of a majority of independent directors and to maintain a minimum of three indepen- dent directors.18 With majority voting remaining a shareholder activist concern, hundreds of public companies have adopted a true majority voting standard for the election of directors in uncontested elections and a resignation policy for directors receiving less than a majority vote (often contained in the bylaws), marking a departure from the earlier trend toward adopting a director resignation guideline. Majority vot- ing is well on the path to becoming universal among large companies. Indeed, close to 80% of S&P 500 companies currently have a major- ity voting or “plurality plus” standard (the latter being essentially a

18 See Institutional Shareholder Services, Majority Elections: Questions and Answers on ISS 2006 Voting Policy (Dec. 2005). 1-12.13 PRACTICAL ASPECTS OF TENDER OFFERS § 1.01[7] plurality requirement for director elections plus a Pfizer-type director resignation policy). In response to the heightened focus on the issue, several states have adopted legislation to facilitate majority voting. For example, in 2006, the DGCL was amended to facilitate director resignation poli- cies and to provide that a shareholder-adopted bylaw amendment specifying the required vote for the election of directors cannot be amended or repealed by the company’s directors.19 The Delaware Court of Chancery has held that a board’s exercise of discretion to reject director resignations, in itself, is not a “credi- ble basis” to suspect wrongdoing—described by the Court as “the lowest possible burden of proof in Delaware jurisprudence”—suffi- cient to permit a shareholder to inspect a corporation’s books and records under Section 220 of the DGCL.20 Given ISS’ position in favor of majority voting, companies should also give serious consid- eration to adopting a majority voting and director qualification bylaw to implement a reasonable form of majority voting in uncontested elections while providing for protection against abuse. Companies that do adopt majority voting should ensure that once the determina- tion is made that an election is “contested,” triggering the plurality voting requirement, the plurality standard should remain in place even if there is no competing slate at the time of the shareholders’ meet- ing (in order to avoid a situation, as occurred in the Office Depot proxy fight, in which a dissident drops his proxy contest and contends that the vote standard therefore reverts to majority, enabling a with- hold vote campaign that could result in the failure of directors to be elected). [7]—Shareholder Litigation Shareholder litigation has become routine in M&A transactions in the U.S. and generally should not by itself be viewed as a sign of trouble. The M&A plaintiffs’ bar has become increasingly aggressive over the past several years, with lawsuits filed against roughly 85% of deals with a transaction value greater than $100 million in 2010 compared to just 39% in 2005.21 This regularity is underscored by the

19 See: Del. Code Ann. tit. 8, §§ 141(b), 216. See also, e.g., Cal. Corp. Code § 708.5. 20 See City of Westland Police & Fire Retirement System v. Axcelis Technolo- gies, Inc., C.A. No. 4473-VCN, 2009 WL 3086537, at *4-6 (Del. Ch. Sept. 28, 2009) (quoting Melzer v. CNET Networks, Inc., 934 A.2d 912, 917 n.19 (Del. Ch. 2007)). 21 See Cain & Davidoff, “A Great Game: The Dynamics of State Competition and Litigation,” p. 4 (2012), available at http://ssrn.com/abstract=1984758 (last visited May 8, 2012). (Rel. 54) § 1.01[7] TAKEOVERS & FREEZEOUTS 1-12.14 speed with which most lawsuits are filed (over 65% of lawsuits regarding deals announced in 2010 and 2011 were filed within four- teen days of deal announcement) and settled (over 65% of such law- suits were settled within sixty days of filing).22 Historically, companies have often been able to settle these share- holder lawsuits by revising the deal-related proxy disclosures and paying plaintiffs’ attorneys’ fees. While many shareholder lawsuits challenging M&A transactions continue to be settled for additional disclosures, the Delaware Court of Chancery has placed increased scrutiny on such settlements, focusing on whether plaintiffs have done sufficient investigation prior to compromising shareholders’ claims. One noteworthy settlement in late 2011, although including modest additional disclosures, had at its heart a renegotiation and softening of deal protection devices in a merger agreement that the Court found to be both “novel” and aggressively buyer-friendly.23 Other developments in shareholder litigation include the $89.4 mil- lion settlement in connection with KKR’s buyout of Del Monte Foods and the $285 million attorneys fee award in In re Southern Peru Cop- per Corp. Shareholder Derivative Litigation.24 Significant settlements and fee awards such as these, however, remain the exception rather than the rule. Sophisticated counsel can usually guide transaction par- ticipants through the deal process in an appropriate manner that min- imizes litigation risk. A notable trend is the increasing adoption by Delaware corpora- tions of charter or bylaw provisions requiring shareholders to bring suit in Delaware. Indeed, according to one study, the number of Delaware corporations that have adopted or proposed adopting such provisions more than doubled from 82 in April 2011 to 195 as of December 31, 2011. In January 2011, a federal district court in Cali- fornia, applying federal law, denied a motion by Oracle Corporation to dismiss shareholder derivative claims on the basis of a bylaw requiring derivative actions to be brought in the Delaware Court of Chancery.25 The Delaware courts have not, however, definitively ruled on the validity of forum selection clauses, though a number of

22 See Cornerstone Research, Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions , pp. 4, 9 (2012). 23 See In re Compellent Technologies Inc. Shareholder Litigation, C.A. No. 6084- VCL, 2011 WL 6382523 (Del. Ch. Dec. 9, 2011). 24 In re Southern Peru Copper Corp. Shareholder Derivative Litigation, 30 A.3d 60 (Del. Ch. 2011, involved a conflict transaction between the corporation and its controlling shareholder in which the Delaware Court of Chancery found, on a full record after trial, damages of approximately $1.3 billion. 25 Galavis v. Berg, 763 F. Supp.2d 1170 (N.D. Cal. 2011). 1-12.15 PRACTICAL ASPECTS OF TENDER OFFERS § 1.01[8] lawsuits were filed in Delaware in early 2012 challenging such pro- visions. [8]—Regulatory Trends in M&A Activity The U.S. antitrust agencies remain active in enforcement. The U.S. Department of Justice (“DOJ”) successfully litigated a challenge to H&R Block’s proposed acquisition of TaxAct’s parent company. This case represents the DOJ’s first litigated challenge to a merger trans- action since its failed attempt to block the Oracle/PeopleSoft deal in 2004. In addition, there have been several proposed transactions aban- doned prior to full-blown litigation in the face of threatened action by the DOJ, most notably AT&T’s proposed acquisition of T-Mobile and NASDAQ’s unsolicited bid for NYSE Euronext. The DOJ also imposed consent remedies modifying several trans- actions in 2011, including in Deutsche Börse’s proposed (later aban- doned) acquisition of NYSE Euronext (divestiture of interest in Direct Edge); the Exelon/Constellation merger (divestiture of three Maryland power plants); First Niagara’s purchase of HSBC’s upstate New York branches (divestiture of twenty-six branches in Buffalo); and the acquisition by Grupo Bimbo and others of Sara Lee’s fresh bakery business (brand divestitures). The U.S. Federal Trade Commission (“FTC”) has similarly been active, obtaining injunctions against three hospital and medical labo- ratory mergers and consent agreements modifying six other transac- tions in 2011. The FTC claims that five other transactions were aban- doned, modified without a consent or restructured as a result of threatened action. State attorneys general also continue to play a role in certain high- profile merger reviews, raising both strictly local as well as national concerns. In addition, in regulated industries (e.g., energy, public util- ities, gaming, insurance, telecommunications, financial institutions and defense contracting), state and federal regulatory agencies have separate jurisdiction to review transactions. The U.S. competition authorities also continue to enforce vigor- ously breaches in compliance with the pre-merger notification and waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 197626 (the “HSR Act”), including so-called “gun-jumping” violations. For example, the FTC brought a complaint against Com- cast’s CEO for the acquisition of Comcast shares as part of his com- pensation package. The complaint was settled with a relatively low

26 15 U.S.C. § 18a.

(Rel. 54) § 1.01[8] TAKEOVERS & FREEZEOUTS 1-12.16 fine, undoubtedly reflecting substantial mitigating circumstances, but nonetheless stands as an example of the FTC’s willingness to allege less significant HSR violations. Another case by the DOJ against Smithfield Foods in 2010 charged that Smithfield exercised opera- tional control over the target’s hog procurement business before the expiration of the statutory pre-merger waiting period, thereby prema- turely assuming beneficial ownership in violation of the HSR Act. Smithfield agreed to pay a $900,000 fine to settle the case. In con- trast to its 2006 settlement in connection with Qualcomm’s acquisi- tion of Flarion Technologies, the DOJ did not allege that the interim covenants contained in the Smithfield/Premium Standard merger agreement themselves violated the antitrust laws. The settlement with Smithfield serves as a stark reminder that parties must not to engage in conduct that the antitrust agencies may perceive as a premature transfer of beneficial ownership. Even short of such formal actions, investigations into “gun jumping” violations present a costly and delaying distraction during a substantive merger investigation. With appropriate covenants and suitable controls, however, integration planning and pre-merger contacts will not run afoul of the antitrust laws. The U.S. is not alone in its careful review of M&A transactions; notably, the NYSE/Deutsche Börse merger was withdrawn in 2012 after the European Commission announced that it would block the deal on antitrust grounds. Furthermore, with pre-merger notification regimes in over seventy jurisdictions, it is not unusual for a multina- tional transaction to require over a dozen notifications. In large trans- actions, competition authorities in the U.S., Europe and Canada fre- quently coordinate their investigations of transactions, and even the remedies they might require from the transaction parties. The Cana- dian Competition Bureau’s enforcement action and revision of its guidelines may signal more expansive merger reviews. Among the major competition authorities, there is a high level of substantive con- vergence in the analysis of horizontal aspects of mergers. In addition, China has a pre-merger notification system and has been active in its review and enforcement activities, including having prohibited in 2009 Coca-Cola’s proposed acquisition of China Huiyuan Juice Group, a leading Chinese juice maker. In March 2011, the Indian Ministry of Corporate Affairs released its competition merger review provisions, which became effective in June 2011. Thus, both of these important emerging jurisdictions are likely to become more active in the pre-merger review of transactions. 1-12.17 PRACTICAL ASPECTS OF TENDER OFFERS § 1.01[8] Parties involved in multinational acquisitions should prepare for a global competition review, taking into account the divergence both in market conditions and substantive antitrust analysis that can exist among the various jurisdictions that may review a particular transac- tion. Company documents, transactional data and the views of cus- tomers are important inputs during the review process. In addition, transactions in certain politically sensitive industries, such as petrole- um, have faced heightened scrutiny for a number of years. Antitrust enforcement can be a major stumbling block to consummation of a transaction and strategies for allocating and addressing regulatory risk (including timing) should be assessed pre-announcement, particularly given the potentially dire consequences to the parties that a prolonged investigation may have.

(Rel. 54) § 1.02[1] TAKEOVERS & FREEZEOUTS 1-12.18

§ 1.02 Takeover Regulation [1]—The Williams Act Sections 14(d) and (e) of the Securities and Exchange Act of 1934 (the “1934 Act”) regulate tender offers, Section 13(d) requires dis- closure of substantial acquisitions of equity securities, Section 13(e) regulates acquisitions of stock by the issuer, and Section 14(f) regu- lates changes in the composition of the board of directors pursuant to substantial stock acquisitions or tender offers without a shareholders meeting.1 [2]—Other Federal Securities Laws Rule 14b-5 (formerly Rule 10b-13) under the 1934 Act prohibits an offeror from purchasing target securities, directly or indirectly, in the open market or otherwise outside its tender offer, from the time of announcement or commencement of the offer until its termination.2 Rule 10b-4 prohibits short tendering (tendering shares that are not owned). The rule does, however, allow tendering by a person who owns a security convertible into or exchangeable for, or an option or for or right to purchase, the tendered security—if he intends to acquire the security by conversion or exercise thereof and does in fact acquire such security by conversion or exercise upon acceptance of his tender.3 Regulation M (which includes former Rule 10b-6) gen- erally prohibits a company from making purchases of any of its secu- rities or securities immediately exchangeable for or convertible into such securities while it is engaged in a distribution of such securities.4 [3]—Margin Regulations: Financing an Acquisition Regulation U restricts the amount of bank credit which may be used for the purpose of purchasing or carrying “margin securities” where such credit is collateralized, directly or indirectly, by any margin stock.5 More specifically, Regulation U is violated when a bank makes a loan for the purpose of purchasing any margin securities, in an amount exceeding the maximum loan value of the securities used as collateral as prescribed by the Federal Reserve Board (at present, fifty percent of current market value), if the loan is directly or indirectly secured by margin stock, Negative covenants restricting the borrower’s right to use

(Text continued on page 1-13)

1 These provisions of the Williams Act are discussed at §§ 2.01 to 2.09 infra. 2 Rule 14e-5 is discussed at § 2.10[1] infra. 3 Rule 10b-4 is discussed at § 2.10[3] infra. 4 Regulation M is discussed at § 2.10[2] infra. 5 See § 2.12[1] infra.

1-109 PRACTICAL ASPECTS OF TENDER OFFERS § 1.09[10] about 4,825,000 shares extend the offer so that it expires on May 22, 1978 and otherwise reflect the revised transaction. We would be pleased to meet with you or a committee of your members with respect to our merger proposal at your earliest convenience.

Where there is a possibility that a hostile offer may be amended to a cash option merger or other form of friendly acquisition, specific reference thereto should be made, and the Offer to Purchase should contain a condition allowing the offeror to amend or terminate the offer if, at any time prior to the purchase of any tendered shares pur- suant to the Offer, the offeror enters into a merger agreement or announces an agreement in principle with the target.55

55 See the Offer to Purchase, dated September 8, 1987, for Newmont Mining Cor- poration by Ivanhoe Acquisition Corporation.

(Rel. 54) § 1.10[1] TAKEOVERS & FREEZEOUTS 1-110

§ 1.10 Structural Alternatives and Other Considerations in Business Combinations [1]—Federal Income Tax Considerations As a result of both an acquiror’s need to conserve cash and the desire of shareholders of the target to have the opportunity for tax deferral, the consideration paid by the acquiror in many mergers includes acquiror stock that is intended to be received on a tax-free basis by the target shareholders. For tax-free treatment to apply, a number of requirements must be met, as described below. The requirements vary depending on the form of the transaction. For all forms of transaction (other than the so-called “double-dummy” struc- ture) a specified minimum portion of the consideration must consist of acquiror stock.1 [a]—Direct Merger In this structure, the target merges with and into the acquiror. It is also possible for the target to merge into a wholly owned limited lia- bility company that is a direct subsidiary of the acquiror. This will generally be nontaxable to the target, the acquiror and the target’s shareholders who receive only stock of the surviving corporation (excluding “nonqualified ” described below), provided that stock constitutes at least 40% of the total consideration. For these purposes, stock includes voting and nonvoting stock, both common and preferred. Target shareholders will be taxed on the receipt of any cash or “other property” in an amount equal to the lesser of (x) the amount of cash or other property received and (y) the amount of gain realized in the exchange, i.e., the excess of the total value of the con- sideration received over the shareholder’s adjusted tax basis in the target stock surrendered. For this purpose, “other property” includes preferred stock (referred to as nonqualified preferred stock) that does not participate in corporate growth to any significant extent and: (1) is puttable by the holder within 20 years; (2) is subject to mandatory redemption within 20 years; (3) is callable by the issuer within 20 years and, at issuance, is more likely than not to be called; or (4) pays a variable rate dividend, unless the acquiror nonqualified preferred stock is received in exchange for target nonqualified preferred stock. Any gain recognized will generally be capital gain, although it can under certain circumstances be taxed as dividend income. Historically, the requirement that acquiror stock constitute at least 40% of the total consideration was, in all cases, determined by refer- ence to the fair market value of the acquiror stock issued in the

1 See generally, § 10.02[2] infra. 1-111 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[1] merger (i.e., on the closing date). Final regulations issued by the IRS in December of 2011 (which are consistent with regulations previ- ously issued by the IRS in 2005 and 2007) permit the parties, in cir- cumstances where the consideration is “fixed,” to determine whether this requirement is met by reference to the fair market value of the acquiror stock at signing rather than at closing, adding flexibility and certainty on an issue essential to achieving tax-free treatment. Pro- posed regulations issued by the IRS on the same date would extend the signing date rule to certain variable consideration transactions with collars. [b]—Forward Triangular Merger In this structure, the target merges with and into an at least 80% owned (and usually wholly owned) direct subsidiary of the acquiror. The requirements for tax-free treatment and the taxation of non-stock consideration (including nonqualified preferred stock) are the same as with a direct merger. However, in order for the merger to be tax-free, there are two additional requirements. First, no stock of the merger subsidiary can be issued in the transaction. Thus, target preferred stock may not be assumed in the merger but must be reissued at the acquiror level or redeemed prior to the merger. Second, the merger subsidiary must acquire “substantially all” of the assets of the target, generally 90% of net assets and 70% of gross assets. This requirement must be taken into account when considering distributions, redemp- tions or spin-offs before or after a merger. [c]—Reverse Triangular Merger In this structure, a merger subsidiary formed by the acquiror merges with and into the target. In order for this transaction to be tax free, the acquiror must acquire, in the transaction, at least 80% of all of target’s voting stock and 80% of every other class of target stock in exchange for the acquiror’s voting stock. Thus, target nonvoting preferred stock must either be given a vote at the target level and left outstanding at that level, exchanged for acquiror voting stock or redeemed prior to the merger. In addition, the target must retain “sub- stantially all” of its assets after the merger. [d]—Section 351 “Double-Dummy” Transaction An alternative structure is for both the acquiror and the target to be acquired by a new holding company in a transaction intended to qual- ify as a tax-free exchange under Section 351 of the Internal Revenue Code. As a corporate matter, this would be achieved by the holding company creating two subsidiaries, one of which would merge with

(Rel. 54) § 1.10[2] TAKEOVERS & FREEZEOUTS 1-112 and into the acquiror and the other would merge with and into the tar- get in two simultaneous reverse triangular mergers. Shareholders of the acquiror and the target would receive tax free treatment to the extent that they received holding company stock, which may be com- mon or preferred (other than nonqualified preferred stock), voting or nonvoting, provided that the shareholders of the acquiror and the tar- get, in the aggregate, own at least 80% of the voting stock and 80% of each other class of stock of the holding company immediately after the transaction. Unlike the other forms of transaction, there is no limit on the amount of cash that may be used in the transaction as long as the 80% ownership test described above is satisfied. Cash and non- qualified preferred stock received will be taxable up to the amount of gain realized in the transaction. [e]—Multi-Step Transaction A multi-step transaction may also qualify as wholly or partially tax-free. Often, an acquiror will launch an exchange offer or tender offer for target stock to be followed by a merger that forces out tar- get shareholders who do not tender into the offer. Because the pur- chases under the tender offer or exchange offer and the merger are part of an overall plan to make an integrated acquisition, the tax law views them as one overall transaction. Accordingly, such multi-step transactions can qualify for tax-free treatment if the rules described above are satisfied. For example, an exchange offer in which a sub- sidiary of the acquiror acquires target stock for acquiror voting stock followed by a merger of the subsidiary into the target may qualify for tax-free treatment under the “Reverse Triangular Merger” rules described above. These multi-step transactions provide an opportuni- ty to get consideration to target shareholders more quickly than would occur in single step transactions, while also providing tax-free treat- ment to target shareholders on their receipt of acquiror stock. [2]—Accounting Issues in Business Combinations [a]—Acquisition Accounting Until 2001, the parties to a merger were required to decide whether to structure it, for accounting purposes, as a purchase of one compa- ny by the other or, assuming certain criteria were met, as a pooling of interests of the two companies. The pooling-of-interests account- ing method assumed that the combining companies had been merged from their inception, and their balance sheets were simply added together with no accounting for the purchase price paid. However, the Financial Accounting Standards Board issued Statement No. 141, 1-113 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[2] Business Combinations (“SFAS 141”), which eliminated pooling of interests as an accounting method altogether, so that all business com- binations initiated after June 30, 2001 have been accounted for as purchases. Under the purchase accounting method, subsequently renamed the “acquisition method,” the acquiror recognizes the acquired assets and assumed liabilities at their fair value (generally their market value) instead of their book value. The excess of the purchase price paid over the sum of the net values assigned to identifiable assets acquired and liabilities assumed is recognized as . Concurrently with SFAS 141, FASB also issued Statement No. 142, Goodwill and Other Intangible Assets, which requires that goodwill be tested for impair- ment on an annual basis (as well as when certain triggering events occur), with any resulting impairment being expensed against earn- ings. SFAS 141 was revised in 2007 (“SFAS 141R”) to provide addi- tional guidance on the application of the acquisition method. SFAS 141R also established additional accounting rules in the context of acquisitions, including the requirement that contingent consideration be classified as an asset or liability at its fair value and marked-to- market until the contingency is resolved. In addition, SFAS 141R reversed the previous practice of capitalizing acquisition-related costs, such as legal and financial advisor fees, instead requiring that these costs be expensed as they occur. [b]—Push Down Accounting An accounting technique that sometimes has a significant effect on mergers accounted for by the acquisition method is the use of “push down accounting.” Push down accounting is the establishment of a new basis of accounting in the separate financial statements of a sub- sidiary company as a result of a change of control. Under push down accounting, when a company is acquired by a purchase or a series of purchases, yet retains its separate corporate existence, the assets and liabilities of the acquired company are restated to their fair values as of the acquisition date. These values, including any goodwill, are reflected in the separate financial statements of the acquired compa- ny as well as in any consolidated financial statements of the compa- ny’s parent. SEC registrants generally are required to use push-down accounting when the acquired company will become a substantially wholly owned subsidiary and has no substantial publicly held debt of preferred stock outstanding. Some private equity acquisitions have been structured to avoid push-down accounting and retain the acquired company’s historical

(Rel. 54) § 1.10[3] TAKEOVERS & FREEZEOUTS 1-114 cost basis in its assets and liabilities. Avoiding push-down accounting often results in higher GAAP earnings, as acquirors do not have to write up acquired assets and then depreciate or amortize them, and private equity acquirors may find that higher GAAP incomes are attractive for a public-offering exit. Private equity sponsors may avoid push-down accounting by structuring the transaction for accounting purposes as a , which generally requires either that outside investors who are not part of a “collaborative group” with the sponsors retain some significant part (a rule of thumb is more than 5%) of the target’s equity, or that a quantitatively and qualitatively significant amount of pre-transaction public debt remains outstanding following the acquisition. Recapitalization accounting introduces significant structuring com- plexity into an acquisition transaction. Several deals during the LBO boom, including the acquisitions of UICI (now HealthMarkets, Inc.) and HCA Inc. by private equity consortiums, illustrate possible approaches for achieving recapitalization accounting treatment. Although the use of recapitalization accounting is less common today, acquirors should work closely with their accountants and legal advi- sors to determine whether and how this technique can be used to avoid push-down accounting. [3]—Corporate and Other Structural Factors In addition to the tax and accounting issues central to any major corporate transaction, transaction structure will be influenced by con- siderations relating to corporate and securities laws and rules common to all mergers and acquisitions, general reg- ulatory concerns (such as antitrust) and industry-specific regulations (such as FCC rules and Federal Reserve Board rules, as applicable) and existing contractual commitments.2 Alternative structures are sometimes designed to address concerns about state law stockholder approval requirements or to avoid class votes by certain classes of securityholders. While triangular mergers often reduce the need to seek debtholder or other third-party approvals, they may be consid- ered cosmetically undesirable in certain circumstances where, for example, a transaction is being characterized as a merger of equals.3

2 As just one example, debt covenants will need to be reviewed to determine whether a particular structure may violate those covenants. See, e.g., In re BankAt- lantic Bancorp, Inc. Litigation, C.A. No. 7068-VCL, 2012 WL 621478 (Del. Feb. 27, 2012) (concluding that a sale of a subsidiary would constitute a sale of “substantial- ly all” assets within the meaning of an indenture for trust preferred securities and enjoining the sale). 3 See § 1.10[g] infra. 1-115 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[4] Transaction structure may also affect which state and federal regula- tory approvals will be required. The choice of structure may be influ- enced by tax and other considerations that are important to large or controlling shareholders. [4]—Tender Offers A tender offer involves the acquiror making a direct offer to the public shareholders to acquire their shares, commonly conditioned on the acquiror holding at least a majority of each class of the stock of the target following the close of the tender offer. Usually, following the tender offer, the acquiror and the target, pursuant to a previously signed merger agreement, are merged, ensuring the completeness of the transaction. In cases where the acquiror holds, following the offer, more than the statutorily prescribed percentage (usually 90%) of each class of the stock of the target, the acquiror can complete the acqui- sition by a short-form merger, thereby avoiding the need to hold a shareholder’s meeting or solicit proxies. If the tender offer does not result in the acquiror reaching the required threshold for a short-form merger, a “subsequent offering period” may be used to acquire addi- tional shares following the closing of the tender offer, and the merg- er agreement may include a “top-up” provision (discussed further below) permitting the acquiror to purchase newly issued shares direct- ly from the target in order to reach the requisite threshold. As described below, a tender offer, with a second step merger or short-form merger, can provide a faster and more appealing structure for a corporation in comparison to the one-step merger. Until the mid- dle of the last decade, uncertainty that surrounded the tender offer “all-holders, best-price” rule led to a marked decrease in the use of the tender offer structure, as opposed to a merger, in effecting trans- actions. Fortunately, however, amendments to the best-price rule adopted by the SEC in 2006 have resolved most of that uncertainty and appear to have markedly diminished risk from best-price law- suits. Accordingly, the tender offer structure is playing a much more significant role in business combination transactions. [a]—Advantages of the Tender Offer Structure Exposure to market risk for both an acquiror and a seller is mag- nified by the possibly protracted time period between agreement on the terms of the transaction, shareholder approval and consummation. The length of delay is usually driven by SEC requirements for a proxy statement (and registration statement, where stock is to be issued in the transaction). All-cash tender offers may generally be consummated more quickly, subject only to a minimum offer period

(Rel. 54) § 1.10[4] TAKEOVERS & FREEZEOUTS 1-116 of 20 business days from commencement (assuming no extensions based on SEC comments or conditions to closing the transaction). In addition to speed, another advantage that some have identified is the relative favorability of the tender offer structure in dealing with shareholder activists that may be opposed to the deal. Attempts by dissident shareholders to “hold up” friendly merger transactions by engineering “no” votes was one of the major recent M&A develop- ments, and the tender offer structure offers some advantages that may be useful in these situations, including that: (1) the tender offer does not suffer from the so-called “dead vote” problem that arises in con- tested merger transactions when a substantial number of shareholders sell their shares after the record date and then do not vote, or do not change an outdated vote, after they have sold their economic interest; (2) ISS and other proxy advisory services only occasionally have made recommendations with respect to tender offers, leaving share- holders to make up their own minds based on economic interest rather than on ISS’ views, which include a perception of process or other non-price factors (although ISS has begun to issue such recommen- dations); and (3) recent experience indicates that dissident sharehold- ers may be less likely to try to “game” a tender offer than a merger vote, and therefore the risk of a “no” vote (less than 50% tender) may be lower than for a traditional voted merger. In addition, the Delaware Chancery Court has held that “entire fair- ness” review is inapplicable to a tender or exchange offer in cases where a controlling shareholder is bidding for minority held shares so long as certain conditions are met.4 Under prior SEC regulations, all-cash tender offers had a distinct advantage over exchange offers that included securities as all or part of the consideration, because cash offers would commence upon fil- ing, while exchange offers-which required a registration statement for the securities to be exchanged in the transaction-were subject to SEC review before the 20-business-day time period started running. Amendments to the tender offer rules, which became effective in 2000, placed cash tender offers and security exchange offers on a more equal regulatory footing by permitting security exchange offers not involving going-private or roll-up transactions to commence upon filing of a registration statement.5 Even under the revised SEC rules, however, companies may not consummate security exchange offers

4 See § 5A.02[2][c] infra. 5 See “SEC Rules 14d-1-14d-9; Final Rule: Regulation of Takeovers and Securi- ty Holder Communications,” SEC Release Nos. 33-7760; 34-42055; IC-24107 (Oct. 22, 1999). 1-117 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[4] until the registration statement registering the securities to be issued as consideration in the offer becomes effective. Still, the 2000 amend- ments make hostile equity takeover bids more feasible and emphasize the need for a company to be prepared to respond to unsolicited takeover attempts. A two-step structure involving a tender offer is not necessarily always preferable to a one-step merger, however, and the decision of which structure to employ must be made in light of the particular cir- cumstances of the transaction. For example, in a transaction that involves a lengthy regulatory approval process, the tender offer would have to remain open until the regulatory approval was obtained; and if the tender offer did not result in the acquiror holding sufficient shares to effect a short-form merger, additional time would be need- ed to effect the back-end merger. On the other hand, structuring such an acquisition as a one-step merger would permit the parties to obtain shareholder approval during the pendency of the regulatory process, and then close the transaction promptly after obtaining regulatory approval. An acquiror may prefer a merger in this circumstance, as fiduciary-out provisions in a merger agreement typically terminate upon shareholder approval, while a tender offer remains subject to interloper risk so long as it remains open. A seller may also prefer a merger structure in this circumstance, as the reduced time between signing and closing minimizes the risk of a failure of a closing con- dition (most importantly, the material adverse effect condition). In addition, the tender offer structure poses financing-related complica- tions—albeit not insuperable ones—due to the facts that financing for the tender offer will be needed at the time of its closing, when the acquiror will not yet have access to the target’s balance sheet, and that the Federal Reserve Board’s margin rules restrict borrowings secured by public company stock to 50% of its market value. Some private equity firms have utilized a dual-track approach that involves launching a two-step tender offer (including a top-up option) concurrently with filing a proxy statement for a one-step merger. The logic behind this approach is that, if the tender offer fails to receive the number of shares needed to reach the 90% required for a short- form merger (after giving effect to the top-up option) such that a long-form merger is necessary to acquire 100% of the target’s shares, the parties would already be well along the path to the shareholder meeting. Examples include 3G Capital/Burger King, Bain Capital/Gymboree and TPG/Immucor. Some strategic transactions also have employed a dual-track approach, for example where there is uncertainty at the outset as to whether regulatory approval will involve a lengthy process, such as an antitrust “second request” (e.g., Verizon/Terremark).

(Rel. 54) § 1.10[4] TAKEOVERS & FREEZEOUTS 1-118

[b]—Top-Up Options One deal feature that has introduced increased certainty for, and therefore attractiveness of, tender offers is the use of a top-up option. Such options are issued to the tendering party by the target in order to give a sufficient number of shares, when added to the number acquired in the tender offer, to allow the acquiror to use the short- form merger statute (90% in Delaware). Targets occasionally negoti- ate requirements for the minimum percentage of shares that are required to be tendered for the option to be triggered, and parties need to keep in mind the stock exchange requirements that an issuance of 20% or more of the outstanding shares requires shareholder approval. Top-up options have become a standard feature of two-step tender offers (according to FactSet Mergers, a top-up option was included in approximately 90% of all agreed tender offers in 2011), although their increased presence has triggered greater scrutiny by the courts. Liti- gation concerning top-up options has focused on the validity of promissory notes as consideration for the shares received through a top-up option and the impact of top-up options on the appraisal rights of shareholders that dissent from the transaction. In In re Cogent, Inc. Shareholder Litigation,6 the plaintiffs claimed that the consideration for the top-up option in the merger agreement, which allowed Cogent to sell to 3M up to 139 million shares at the tender offer price in exchange for a promissory note, was illusory because 3M would be paying for the shares with a promise to pay itself once it owned Cogent. The Delaware Court of Chancery noted that Section 157 of the DGCL “leaves the judgment as to the suffi- ciency of consideration received for stock to the conclusive judgment of the directors, absent fraud.” The Court then concluded that the promissory note was unlikely to be illusory in this case because the note was a recourse obligation against 3M.7 Plaintiffs also claimed that the top-up option would result in the issuance of shares at less than their fair value (due to the dilutive effect of the issuance and the uncertain value of the promissory note), which could result in a lower valuation of the company’s assets in a subsequent appraisal proceed- ing as compared to a valuation prior to the exercise of the top-up option (notwithstanding a stipulation in the merger agreement that the appraisal value would not take into account the top-up option or the promissory note). The Court rejected this claim, noting that although Delaware courts have not conclusively resolved whether the Delaware appraisal statute (Section 262 of the DGCL) allows merger parties to

6 In re Cogent, Inc. Shareholder Litigation, 7 A.3d 487 (Del. Ch. 2010). 7 Id, at 506. 1-119 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[4] stipulate the conditions under which an appraisal will be conducted, there were “indications from the Court of Chancery that it is permis- sible.”8 A later decision of the Delaware Court of Chancery confirms that properly structured top-up options will withstand legal challenge and effectively facilitate prompt completion of a back-end merger. In Olson v. ev3, Inc.,9 the merger agreement provided that the acquiror could pay for the shares issued through the top-up option with a promissory note, the terms of which would be determined in the future by the acquiror and reasonably satisfactory to the target. The plaintiff challenged these provisions as failing to comply with the DGCL and claimed that the promissory note would be deeply dis- counted in any future appraisal proceeding and would reduce the value of the target’s shares for purposes of the appraisal. In an attor- ney fee hearing, Vice Chancellor Laster gave little weight to the “appraisal dilution” argument. However, the Court noted that the orig- inal merger agreement provisions concerning the top-up option (which had been amended pursuant to the settlement to remedy their defects) had failed to comply with Section 157 of the DGCL. Specif- ically, because the terms of the promissory note were not specified, the merger agreement failed to state the consideration to be paid for the shares issued through the top-up option; the board could not deter- mine whether par value was received for the shares; and the board itself did not determine the sufficiency of the consideration for the shares. The ev3 opinion, although rendered in the context of an attorney fee hearing, is the clearest statement yet that the legality of a proper- ly structured top-up option is well settled in Delaware law. The deci- sion effectively “codifies” best practices in structuring a top-up option, including the following points:

• where (as is usual) the purchase price of the top-up option will be paid for in a combination of cash and a promissory note, the aggregate par value of the top-up option shares is best paid for in cash, with the material terms of the promissory note, such as the principal and interest rate, specified in the merger agree- ment; • although the Vice Chancellor gave little weight to the appraisal dilution argument advanced by the plaintiffs, it would seem pru- dent to provide in the merger agreement that shares issued under

8 Id, at 507. 9 Olson v. ev3, Inc., C.A. No. 5583-VCL, 2011 WL 704409 (Del. Ch. Feb. 21, 2011). (Rel. 54) § 1.10[4] TAKEOVERS & FREEZEOUTS 1-120

the top-up option and related consideration paid should be excluded for purposes of determining fair value in any appraisal action; • shares to be issued under the top-up option should not exceed the target’s “available headroom” under its charter for shares available for issuance; and • the record of target board deliberations should reflect the direc- tors’ consideration of the top-up option (which would generally be included in their consideration of the merger agreement if it includes the top-up option and its key terms). [c]—The “All-Holders, Best-Price” Rule The tender offer “all-holders, best-price” rule (Exchange Act Rule 14d-10) requires that the consideration paid to any security holder in a tender offer be the highest consideration paid to any other security holder in the offer. Prior to the final amendments to the rule, federal circuit courts had split as to whether the rule was violated by bonus- es, non-compete payments, severance payments and similar employ- ee benefit or compensatory arrangements made to executives of a tar- get company who held target shares in the context of an acquisition structured as a tender offer. The uncertainty surrounding the effect of compensatory arrange- ments, the fact-intensive nature of a court’s review of these arrange- ments and the potential for significant damages in the event of a find- ing of a violation of the best-price rule led to a marked decrease in the use of the tender offer structure, as opposed to a merger, in effect- ing transactions. However, the SEC in 2006 announced long-awaited final amend- ments to the best-price rule to resolve the uncertainty with respect to the rule’s application to employment, severance, non-compete and similar arrangements. The amendments modified the language of the best-price rule to require that “[t]he consideration paid to any securi- ty holder for securities tendered in the tender offer is the highest con- sideration paid to any other security holder for securities tendered in the tender offer”—clarifying that the best-price rule applies only to consideration paid for securities, rather to any amounts paid to a security holder “during the tender offer.” Amounts paid pursuant to an employment compensation, severance or other employee benefits arrangement are explicitly exempted from consideration under the best-price rule 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 ten- ders. In order to effectuate these provisions, the rule includes a safe 1-121 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[6] harbor under which the requirements of the compensation exemption are deemed to be satisfied if the arrangements are approved by an independent compensation committee of the target or, if the bidder is a party to the arrangement, of the bidder. The final amendments became effective in December 2006. Com- mentators greeted the proposed amendments with great enthusiasm, and the amendments as finally adopted have significantly reduced the threat of shareholder plaintiffs challenging tender offers under the best-price rule. Given the advantages of the tender offer structure described above, it is unsurprising that the proportion of acquisitions structured as tender offers has dramatically increased. [5]—All-Cash Transactions The popularity of stock as a form of consideration ebbs and flows with economic conditions. All-cash transactions and part-cash struc- tures became more commonplace with the elimination of pooling-of- interests accounting, and the ready availability of credit prior to the recent financial crisis. Particularly in the case of an unsolicited offer, all-cash bids have the benefit of being of certain value and will gain quick attention from a seller’s shareholders. The value of a cash offer does not fluctuate with market prices. In addition, the acquiror’s stock price is often less adversely affected than in the case of an all-stock offer because of the avoidance of dilution. Of course, some bidders may not have sufficient cash and financing sources to pursue an all- cash transaction. In such cases, the relative benefits and complexities of part-cash/part-stock and all-stock transactions must be considered. [6]—All-Stock Transactions [a]—Pricing Formulae and Allocation of Market Risk The typically lengthy interval between signing and closing and the volatility of security trading prices subjects the typical stock merger to market risks. A drop in the price of an acquiror’s stock between execution of the acquisition agreement and the closing of the trans- action can result in the seller’s stockholders receiving less value for their exchanged shares or can increase the transaction’s potentially dilutive effect on the acquiror’s shares. Such market risk can be addressed by a pricing structure that uses a valuation formula instead of a fixed exchange ratio and, frequently, a collar. In addition to, or in lieu of, a collar pricing mechanism, transactions have also includ- ed so-called “walk-away” provisions permitting unilateral termination in the event the acquiror’s share price falls below a certain level (either on an absolute or an indexed basis).

(Rel. 54) § 1.10[6] TAKEOVERS & FREEZEOUTS 1-122

[i]—Fixed Exchange Ratio The simplest pricing structure in a stock-for-stock transaction is to set a fixed exchange ratio at the time a merger agreement is signed. The advantage of a fixed exchange ratio for an acquiror is that it per- mits the acquiror to determine at the outset how much stock it will have to issue (and thus to determine the impact on per share earnings with some certainty). On the other hand, a decline in the market value of an acquiror’s stock and the accompanying decline in the value that seller’s stockholders will receive at closing could jeopardize stock- holder approval and/or invite third-party competition. From an acquiror’s perspective, these are generally risks that can be dealt with if and when they arise, and an acquiror typically prefers the certain- ty of a fixed number of shares. With a fixed exchange ratio, the seller’s stockholders, if they choose to hold their stock until the closing, bear both general market risk and specific risk associated with the acquiror’s stock. Of course, to the extent an acquiror and a seller are in the same industry, indus- try-wide changes would, presumably, affect their stock prices simi- larly. A fixed exchange ratio is frequently used in merger of equals transactions. The fixed exchange ratio is also the most common (but far from exclusive) pricing alternative in all-stock transactions with a larger aggregate dollar value. This may be due in part to the fact that large public companies typically have actively traded , and the acquiror may persuasively argue that the market will soon reflect the value of the merged company. A fixed exchange ratio promotes max- imum risk sharing between the seller stockholders and the acquiror stockholders. Even if the market moves adversely, companies that are parties to pending strategic mergers in which the nominal market value of the consideration to their stockholders has significantly declined have successfully defended their deals based on the long-term strategic prospects of the combining companies. [ii]—Fixed Value With Floating Exchange Ratio; Collars In many situations, one or both parties (typically the seller) will be unwilling to leave the nominal value of the consideration at the time it is to be paid dependent upon market fluctuation. An alternative is to provide for a floating exchange ratio, which will deliver a fixed dollar value of the acquiror’s stock. The exchange ratio is set based on an average market price for the acquiror’s stock during some peri- od, normally ten to thirty trading days, prior to closing. Thus, the acquiror would agree to deliver a fixed value (e.g., $30) in stock for each of the seller’s shares, with the number of acquiror’s shares to be 1-123 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[6] delivered based on the market price during the specified period. An acquiror bears the market risk of a decline in the price of its stock since, in such event, it will have to issue more shares to deliver the agreed value. Correspondingly, an acquiror may benefit from an increase in the price of its stock since it will be required to deliver fewer shares to provide the agreed value. A seller’s stockholders bear little market risk in this scenario and correspondingly will not bene- fit from an increase in stock prices since the per share value is fixed. Because, as the transaction becomes more likely and approaches fruition, the acquiror’s stock may fall due to the anticipated dilution, the acquiror can be expected to argue for an earlier valuation period, while the seller may claim that the market price over some period immediately prior to consummation provides a better measure of con- sideration received. A floating exchange ratio based upon the acquiror’s stock price during a pre-closing period, while protecting the seller’s stockholders against price declines, exposes the acquiror to the possibility of mas- sive dilution, limited only by the amount by which the stock price can decline. In this regard, acquirors must be cognizant of the fact that the price of their stock may decline precipitously based on events or circumstances having little or nothing to do with the fortunes of the acquiror and that such declines for any reason may be only short- lived. To protect against such dilution, agreements with floating exchange ratios frequently include a “collar” that places a cap on the maximum number of shares to be issued and, at the same time, a floor on the minimum number of shares that may be issued. Such agree- ments provide, in effect, both upper and lower market price limits within which the number of shares to be delivered will be adjusted. If market prices go outside the range, no further adjustments are made. Obviously, the size of the range determines the degree of pro- tection afforded to, and the amount of the risk borne by, the seller’s stockholders and the acquiror. In a market environment in which stock often forms at least part of the merger consideration and market volatility cannot be predict- ed, companies must carefully consider the possibility of dramatic market events between signing and closing. In some cases, where an open-ended fixed value formula was used, a dramatic drop in the buyer’s stock required the buyer to acquire its target for far more shares than had been intended at the time the transaction was announced. [iii]—Fixed Exchange Ratio Within Price Collar Another formulation that may appeal to a seller that is willing to accept some risk of a preclosing market price decline in an acquiror’s

(Rel. 54) § 1.10[6] TAKEOVERS & FREEZEOUTS 1-124 stock, but wishes to protect against declines beyond a certain point, combines elements of the two formulations described above. In this formulation, the seller’s stockholders are entitled to receive a fixed number of shares of acquiror stock in exchange for each of their shares, and there is no adjustment in that number as long as the acquiror’s stock is valued within a specified range during the valua- tion period (e.g., 10% above or below the price on the date the par- ties agree to the exchange ratio). If, however, the acquiror’s stock is valued outside that range during the valuation period, there is an adjustment in the number of shares to be delivered. Thus, for exam- ple, if the parties agree on a one-for-one exchange ratio and value the acquiror’s stock at $30 for purposes of the transaction, they might agree that price movements in the acquiror’s stock between $27 and $33 would not result in any adjustments. If, however, the stock is val- ued at $25 during the valuation period, the number of shares to be delivered in exchange for each seller share would be 1.08, i.e., a num- ber of shares equal to $27 (the low end of the collar) based on the $25 valuation. To avoid the risk of serious dilution, an acquiror would want to put limits on the maximum number of shares it would have to deliver. In that case, the seller would want to set a minimum number of shares its stockholders would receive. An acquiror would argue that the sell- er’s stockholders should bear some of the risk of a price decline, and a seller would argue that its stockholders, if they are to bear risk of a price decline, should receive the benefits from a price increase. Although collars are typically symmetrical, they are not always so. [b]—Walk-Aways In a number of transactions in the late 1990s, the parties have also included conditions to closing that give the seller the right to walk away from the merger if the price of the acquiror’s stock falls below a certain level. For example, a fixed exchange ratio walk-away pro- vision could permit termination of a merger agreement by the seller if, at the time the transaction is to close, the acquiror’s stock has decreased by 15% — a single trigger. Some walk-away formulae pro- vide for a double trigger, requiring not only an agreed-upon absolute percentage decline in the acquiror’s stock price but also a specified absolute percentage decline in the acquiror’s stock price relating to a defined peer group of selected companies during the pricing period. The double trigger essentially limits the walk-away right to market price declines specifically related to the acquiror. The theory is that the seller should not be able to walk away as a result of industry events. Walk-away rights are generally tested during a short trading 1-125 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[6] period prior to closing and often include a “top-up” option for an acquiror to elect to increase the exchange ratio to avoid triggering the seller’s walk-away right. Similarly, an acquiror entering into a transaction with a floating exchange ratio, or with a fixed ratio within a price collar but without a cap on the number of shares it must issue, may negotiate for a ter- mination right if its stock falls below a specified level, thus requiring it to issue more than a specified number of additional shares in order to provide the agreed consideration. In such a case, the seller can be expected to negotiate for the right to waive, so that if the acquiror has to issue more than the specified number of additional shares, the sell- er may waive the requirement for additional consideration and the acquiror remains obligated to consummate the merger. Walk-away rights are not very common. Although walk-aways may appear desirable at first glance, they create additional risks that a transaction that appears desirable from a business and strategic point of view will not be consummated due to temporary market fluctua- tions. Moreover, the necessity for stockholder approval by both par- ties inherent in most stock-for-stock transactions provides a de facto walk-away right for price declines existing at the time of the vote, assuming that such declines are sufficiently large to defeat stock- holder approval. Stock market declines have caused some transactions with floating exchange ratios or price collars to fall into the range in which one party has a walk-away option, including in some cases within a few weeks of announcement of the transaction. Such events can cause substantial difficulty in the planning of the post-merger combined company, since most walk-away rights relating to stock price declines are only triggered during a short period immediately prior to closing. In such circumstances, each party to a merger may prefer to rely on more customary walk-away rights, such as the occurrence of a material adverse effect with respect to the other party prior to clos- ing. Stockholder approval, required for most mergers, generally con- tinues to be the most effective means of ensuring that the negotiated deal, including its price, remains in the best interests of each party’s stockholders. The benefits of a walk-away, and the related compo- nents of a floating exchange ratio or a price collar, must be carefully weighed against the potentially significant costs of transaction uncer- tainty and the risk of non-consummation after months of planning for the combined company. [c]—Finding the Appropriate Pricing Structure The pricing structure used in a particular transaction (and thus the allocation of market risk between an acquiror and a seller and their

(Rel. 54) § 1.10[6] TAKEOVERS & FREEZEOUTS 1-126 respective stockholders) will depend on the characteristics of the transaction and the relative bargaining strength of the parties. A pric- ing structure used for one transaction may, for a variety of reasons, be entirely inappropriate for another. For instance, the pricing formu- la in a transaction involving companies of significantly different size, one of which is clearly the acquiror, could be quite different from that employed in a merger of equals or similar transaction, where the stockholders of each party are being given the opportunity to partici- pate, over the longer term, in a new partnership. The determination whether to negotiate for collar pricing or anoth- er price protection device depends on various factors, including the views on the potentially dilutive effect of an issuance, the overall prospects for the stock market in the relevant industry, the relative size of the two companies, the parties’ subjective market expectations over time and whether it is desirable or necessary to peg the transac- tion price to a cash value. An acquiror must also consider the anticipated effect on its stock price of shorting by arbitrageurs once the transaction is announced. In some mergers, pricing formulas and collars are considered inadvisable due to the potential downward pressure on an acquiror’s stock as a result of arbitrage trading. In a situation that is a pure sale, a seller might legitimately request the inclusion of protective provisions such as a floating exchange ratio and/or a walk-away. This is especially so if the seller has other significant strategic opportunities available to it. An acquiror may argue that the seller should not be entitled to absolute protection (in the form of a walk-away) from general market (compared to acquiror- specific) risk. That is, the acquiror may argue that if its stock does no more than follow a general market trend, there should be no right on the part of the seller to “walk.” A double trigger walk-away can cor- rect for general market or industry-wide events. For example, the double trigger walk-away may require that the acquiror’s average stock price prior to closing fall (1) 15% or 20% from its price at the time of announcement, and (2) 15% or 20% relative to a defined peer group of selected stocks. At the other end of the spectrum, in a merger of equals or “part- nership” type of transaction, claims on the part of a seller for price protection, especially walk-aways, are less firmly based. The argu- ment for some price protection is that, once the deal is signed, the seller’s stockholders are (and should be) participants in both the opportunities and the risks of the combined company. Moreover, in both this type of transaction and a true acquisition, the seller can always find some comfort, albeit less direct, in respect of acquiror- specific price risk in the representations on the part of the acquiror 1-127 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[7] relating to the nonoccurrence of material adverse changes and other warranties (the accuracy of which will be a condition to closing). Further, companies considering cross-border transactions may also need to consider the impact of different currencies on the pricing structure. Currency risk raises similar issues to those found in market risk, and can amplify the market volatility factor inherent in all-stock transactions. Because of the length of time required to complete some strategic acquisitions such as bank or telecommunications mergers, and the fact that they have generally been stock-for-stock transactions, the man- agement of, or protection against, market risk through various price- related provisions can assume particular significance during transac- tion negotiations. Blind adherence to precedent without an analysis of the particulars of the transaction at hand can be disastrous, as can careless experimentation. Transaction participants should carefully consider the many alternative pricing structures available in light of the parties’ goals and the various risks involved. [7]—Hybrid Transactions: Stock and Cash In certain circumstances, the use of a mixture of stock and cash as consideration is appealing. Sellers may find mixed consideration desirable because the cash component provides some downside pro- tection to sellers from a decline in the price of the acquiror’s stock. In addition, depending on the allocation procedure employed, both short- and long-term investors may be able to receive their preferred consideration in the form of all cash or all stock. Those who choose not to cash out may be able to retain the tax benefits of a tax-free exchange. In structuring a part-cash, part-stock pricing formula and allocating the cash and stock consideration pools, it is also important to consider how dissenting shares, employee stock options and other convertible securities will be treated. In addition, a board considering a proposal involving both cash and stock consideration should seek the advice of counsel with regard to whether the transaction may invoke enhanced scrutiny/Revlon duties.10 [a]—Possible Cash-Stock Combinations There are a variety of potential pricing structures that can be uti- lized in a part-cash, part-stock transaction. Choosing the right pricing formula involves all of the complications raised in determining pric- ing formulas for an all-stock transaction (namely, the issues relating

10 See § 5A.01[1][b] infra. (Rel. 54) § 1.10[7] TAKEOVERS & FREEZEOUTS 1-128 to fixed exchange ratios, floating exchange ratios, collars and walk- aways), plus the added complication of matching the formula for the stock component to the formula for the cash component. An impor- tant threshold issue is whether the values of the stock and cash com- ponents are meant to remain equal as the price of the acquiror’s shares fluctuates or whether there will be scenarios in which the val- ues of the cash and stock components can diverge. This will be an important consideration in determining the proper allocation proce- dures for the cash and stock components. The simplest formula is a fixed exchange ratio for the stock com- ponent linked with a fixed per-share cash amount for the cash com- ponent, with fixed percentages of the seller’s shares being converted into cash and stock, respectively. Because the value of the stock com- ponent of the transaction will vary with fluctuations in the acquiror’s share price while the cash component remains fixed, it is important for the allocation procedures to be sensitive to the potential for sig- nificant oversubscriptions for stock, if the value of the acquiror’s shares rises, and significant oversubscriptions for cash, if the value of the shares declines. A more common hybrid pricing mechanism is to link a floating exchange ratio pricing formula for the stock component with a fixed cash price. This formula has the advantage of equalizing the stock and cash values (generally based upon the average trading price for the acquiror’s shares over a ten- or twenty-day trading period prior to the effective date of the merger). This approach helps facilitate a cash election procedure by ensuring that there will not be an economic dif- ferential pushing stockholders towards either the cash or stock con- sideration. Issues may still arise in situations where the acquiror’s shares trade outside the collar range established for the floating exchange ratio or where there is a last-minute run-up or decline in the price of the acquiror’s stock. While there can be a variety of business reasons for adjusting the aggregate limits on the percentage of target shares to be exchanged for cash versus stock consideration, historically the most common reason has been the desire to preserve the tax-free status of the trans- action. A part-cash, part-stock merger (including a two-step transac- tion with a first step tender or exchange offer followed by a back-end merger) generally can qualify as a tax-free reorganization only if at least a minimum amount of the total value of the consideration con- sists of acquiror stock.11 Historically, satisfaction of this requirement was, in all cases, determined by reference to the fair market value of the acquiror stock issued in the merger (i.e., on the closing date).

11 See § 1.10[1] supra. 1-129 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[7] Accordingly, a part-cash, part-stock merger, particularly with a fixed or collared exchange ratio, that met this requirement when the merg- er agreement was signed could fail to qualify as a tax-free reorgani- zation if the value of the acquiror’s shares declined before the clos- ing date. Final regulations issued by the IRS in December 2011 permit the parties, in circumstances where the consideration is “fixed,” to determine whether this requirement is met by reference to the fair market value of the acquiror stock at signing rather than at closing. The final regulations clarify that parties can rely on the sign- ing date rule even if the acquisition agreement contemplates a stock/cash election as long as the aggregate mix of stock/cash con- sideration is fixed. Adding an additional degree of complexity, hybrid cash-stock mergers often have formula-based walk-away rights. The walk-away formula can be quite complex and is typically tailored to the specif- ic concerns of the acquiror and the seller. Many part-cash, part-stock deals include some protection for seller’s stockholders against a decline in the value of the acquiror’s stock (to the extent the cash por- tion is not proportionally increased), in which case full walk-away protection is less important. Part-cash, part-stock transactions can also be structured to avoid triggering a vote by the acquiror’s shareholders under stock exchange rules by providing for a decrease in the stock portion of the consid- eration (and corresponding increase in the cash portion of the con- sideration) to the extent necessary to keep the number of shares issued below the relevant threshold.12 [b]—Allocation and Oversubscription A key issue in part-cash, part-stock transactions is choosing the best method of allocating the cash and stock components to satisfy divergent stockholder interests. The simplest allocation method is straight proration without seller stockholder elections. In a straight proration, each of the seller’s stockholders receives a proportionate share of the aggregate pools of stock and cash consideration. Thus, in a transaction in which 50% of the consideration is being paid in stock and 50% of the consideration is being paid in cash, each seller stock- holder exchanges 50% of his shares for acquiror stock and 50% of his shares for cash. Stockholders who exchange their shares for a mixture of cash and stock generally will recognize gain on the exchange to the extent of the lesser of (x) the gain on the exchange, measured as the difference between the fair market value of the stock and cash

12 See the discussion of the Pfizer/Wyeth transaction at § 5A.30[7] infra.

(Rel. 54) § 1.10[7] TAKEOVERS & FREEZEOUTS 1-130 received over their tax basis in their shares, and (y) the amount of cash received. Such gain generally should be taxable as a capital gain as long as the seller’s shares were held as a capital asset. The main drawback of straight proration is that seller’s stockholders cannot choose their desired form of consideration and therefore all will like- ly recognize taxable gain. A more common approach is the use of a cash election merger. Cash election procedures are designed to provide the seller’s stock- holders with the option of choosing between the cash and stock con- sideration. Such procedures allow the short-term investors to cash out of their positions while longer-term investors can exchange their shares in a tax-free exchange. Cash election procedures work best where the value of the cash and stock pools is equal and where there is a proportionate split between short- and long-term investors approximating the split between the available cash and stock consid- eration. It has been the general experience to date that in most public com- pany mergers involving medium- to large-sized sellers, seller stock- holders will be divided roughly equally between those desiring cash and those desiring stock. Institutional investors (many of which are tax-exempt institutions and thus indifferent between a taxable and tax-free exchange) tend to opt for the cash consideration, while indi- vidual stockholders (including insiders of seller) tend to opt for stock. There can be no certainty at the outset, however, that this will be the case. Accordingly, the contractual provisions and related public dis- closures concerning the election procedures must be drafted carefully to deal with the possibility that there may be significant oversub- scriptions for one of the two pools. The easiest way of assuring simplicity in a cash election process is to provide for straight proration in the event of oversubscriptions for either the cash or the stock pool. This allocation method is still prefer- able to a straight proration without election procedures, because even if there are oversubscriptions, some stockholders will elect to receive the undersubscribed consideration and some stockholders will not return an election form and can be deemed to have elected to receive the undersubscribed consideration. Proration in this context, however, also, has certain significant drawbacks. Few seller stockholders will be fully satisfied because most will get a prorated portion of the unde- sired consideration and will also incur some taxation. The tax conse- quences of exchanging the seller’s shares for a mixture of cash and stock consideration can be somewhat severe since, depending upon the stockholder’s tax basis in the seller’s shares, the stockholder may be required to recognize gain up to the full extent of the cash received. Proration within the oversubscribed election pool will be 1-131 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[8] most compelling when there is a significant difference between the value of the cash and stock consideration that is driving the oversub- scriptions. The more common approach for handling oversubscriptions has been to select stockholders on a random or other equitable basis from those who have elected to receive the oversubscribed consideration until a sufficient number of shares are removed from the oversub- scribed pool. This procedure generally focuses on ensuring that most stockholders wishing to effect a tax-free exchange can do so, while minimizing the number of stockholders whose elections are not satis- fied. The methods by which stockholders are selected for removal from the oversubscribed pool vary from a straight lottery to selection based on block size or time of election. Flexibility can also be pre- served for giving preference to elections by officers and directors or other significant stockholders. Holders of director and employee stock options are also typically provided with an opportunity to roll over their stock options into options exercisable for acquiror shares at the exchange ratio. Since proration is less problematic in the event of an oversubscription for cash, there is some precedent for using proration for cash oversubscriptions, but a lottery selection process for stock oversubscriptions. Companies engaging in cash election transactions should be pre- pared to deal with persistent questions from stockholders from the time of signing of the merger agreement through the closing of the transaction. Most questions will come from arbitrageurs wishing to understand the full intricacies of the election and allocation process and the pricing variations. Because of the discount that generally exists between the price of the seller’s shares and the transaction value, so-called “risk arbitrageurs” seek to accurately value the respective securities, carefully measure the risks and rewards of a potential investment and to limit the risks of any positions they may hold through various hedging techniques. Consequently, risk arbi- trageurs will be extremely interested in the selection and allocation process since it may directly affect their investment and hedging strategies. [8]—Contingent Value Rights Where target shareholders are particularly concerned about the value of acquiror securities received as merger consideration, the par- ties can employ a Contingent Value Right (“CVR”) to provide some assurance of that value over some post-closing period of time. This kind of CVR, often called a “price-protection” CVR, typically pro- vides a payout equal to the amount (if any) by which the specified

(Rel. 54) § 1.10[8] TAKEOVERS & FREEZEOUTS 1-132 target price exceeds the actual price of the reference security at matu- rity. Unlike floating exchange ratios, which only provide value pro- tection to target shareholders for the period between signing and clos- ing, price-protection CVRs are more similar to put options and are issued at closing with maturities that usually range from one to three years. For example, a price-protection CVR for a security that has a $40 market value at the time of the transaction might provide that if, on the first anniversary, the average market price over the preceding one- month period is less than $38, the CVR holder will be entitled to cash or acquiror securities with a fair market value to compensate for the difference between the then-average trading price and $38. Price-pro- tection CVRs typically also include a floor price, which caps the potential payout under the CVR if the market value of the reference shares drops below the floor, functioning in the same manner as a col- lar or a cap in the case of floating exchange ratios. For example, the previously-described CVR might include a $33 floor price, such that CVR holders would never be entitled to more than $5 in price pro- tection, thereby limiting the financial or dilutive impact upon the acquiror at maturity of the CVR. In most cases, CVRs are memorialized in a separate agreement, which usually calls for a trustee or rights agent to act on behalf of the holders. At maturity, CVRs may be payable in cash or acquiror secu- rities or, in some cases, a combination of the two at the option of the acquiror. Acquirors may also negotiate for the option of extending the maturity of the CVRs, typically in exchange for an increase in the tar- get price. Targets often require the acquiror to make CVRs trans- ferrable (in which case the CVRs generally also have to be registered under the Securities Act) and, in some cases, to list them on a stock exchange. CVRs can also be used in other contexts, especially where the par- ties are unable to reach agreement as to the valuation of a specific asset, liability or contingency, including, for example, the outcome of a significant litigation, or the regulatory approval of a new drug. A CVR of this type, often called an “event-driven” CVR, may be used to bridge a valuation gap between the two parties and to increase deal certainty by allowing the parties to close the deal without the contin- gency having been resolved. Event-driven CVRs typically provide holders with payments when certain events resolving the contingency occur, or when specific goals, usually related to the performance of the acquired business, are met. For instance, Sanofi-Aventis SA’s 2011 agreement to acquire Genzyme for $20 billion—the largest transaction to ever include a CVR—provided for additional payments 1-133 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[9] (up to an aggregate value of nearly $4 billion) tied to six payment triggers, including the receipt of FDA approval for a particular drug, four product sales milestones and a production milestone. Although both price-protection and event-driven CVRs can provide significant benefits in the structuring of a transaction, parties consid- ering their use need to be aware of potential pitfalls. CVRs are high- ly-structured instruments with many variables, and their negotiation and implementation can introduce significant additional complexity to a deal. While CVRs may be useful tools in bridging valuation gaps and overcoming disagreements, there is also a possibility that they create their own valuation issues and increase the potential for dispute during negotiations. Moreover, because CVRs remain outstanding and often impose restrictions on the actions of the acquirer long after clos- ing, they may become the source of litigation, particularly where great care was not taken to anticipate potential misalignments between the interests of the acquiror and the CVR holders. Finally, CVRs are subject to a host of additional securities law, accounting and tax considerations, and parties contemplating their use should seek legal, financial, accounting and tax advice. [9]—Mergers of Equals Combinations between large companies of comparable size are often referred to as “mergers of equals” or “MOEs.” Structurally, an MOE can be accomplished by having both companies’ stocks surren- dered and a new company’s stock issued in their place or by having one of the companies issue its stock for its merger partner’s stock, often with little or no being paid to either party’s shareholders. And, while the term suggests that both companies are on an equal footing with one another after the deal is complete, in point of fact, other than the size of the parties, the “equality” of the two partners (e.g., post-merger governance and management) varies substantially from transaction to transaction. In many MOE’s, neither party’s shareholders transfer control; instead, control remains with the public shareholders as a group. The exchange ratio is set to reflect the relative asset, earnings and capital contributions and market capitalizations of the two merging parties— typically, but not always, resulting in a market-to-market exchange. Premiums to market are also possible but are often relatively modest compared to those seen in outright acquisitions where one party is usually vying for control of the combined entity. MOEs can be difficult to negotiate and hard to execute. Because MOEs generally do not provide stockholders with a control premium, it is often important that any proposed transaction be structured as a

(Rel. 54) § 1.10[9] TAKEOVERS & FREEZEOUTS 1-134 true combination of equals with shareholders sharing the benefits of the merger proportionately. The appearance, and reality, of balance are both essential. Parties to a transaction claiming to be a “merger of equals” can expect the SEC to ask them to explain the basis for describing it as such in the proxy materials. Common goals and vision are key and cooperation must begin at the highest levels of each company, where difficult decisions frequently must be made. The successful implementation of a merger of equals requires care- ful advance planning. It is critical that a positive stock market reac- tion to the transaction be obtained in order to reduce both parties’ vul- nerability to stockholder unrest and/or a competing offer following the announcement of the transaction. Strong market support and a strong business rationale for the merger are needed to assure con- summation of the transaction. [a]—The Advantages of an MOE Structure MOEs can be an attractive avenue for growth. MOEs can help enhance shareholder value through merger synergies and can be less costly than high premium acquisitions. A low-premium MOE struc- ture may represent the most effective avenue available to a would-be acquiror for a large scale expansion. MOEs are also an attractive alternative for smaller companies that would not otherwise have the interest, opportunity or financial capability to launch a large-scale expansion program. An outright sale of a company is often an unattractive alternative for a variety of business, economic and social reasons. Management and boards properly perceive their duty as managing their companies for the long-term benefit of their shareholders and other significant constituencies. While some sales can be highly beneficial for share- holders, they typically result in the loss of the company as an inde- pendent presence in its community—which can be especially signifi- cant for older, well-established companies. Shareholders too can lose in an outright sale or merger with a larger acquiror, by being cashed out of their investment prematurely or being forced to accept an equi- ty security in a company that is significantly different from the one in which they originally invested. Often, the best business fit for a company is combining with a comparably sized competitor that best complements its operating strengths and long-term business strategy. In any stock-for-stock merger transaction, the value of the consid- eration received is highly dependent upon the combined company’s future performance. Often, there is no better way to protect the stock- holders’ investment than to ensure a significant continuing manage- ment role for each company’s existing directors and management 1-135 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[9] team. In most of the larger MOEs, there has been substantial balance, if not exact parity, in board representation and in senior executive positions. MOEs allow the best people from both organizations to manage the combined company, thus enhancing long-term stockhold- er values. Many MOEs allow the parties to achieve significant cost savings and operational efficiencies, again borrowing the best from both parties. Assuming a proper exchange ratio is set, MOEs allow for a fair and efficient means for the stockholders of both companies to share in the merger synergies. MOEs are not right for all companies, and the rationale for any MOE transaction must be carefully considered in advance. Parties to an MOE should expect their transaction to be closely scrutinized by the analyst, investor and acquiror communities, who will eagerly jump at the opportunity to exploit any weakness in the rationale put forward for the proposed transaction. [b]—Resolving the Key Governance Issues After agreeing on the business goals and means to enhance share- holder value, partners to an MOE must seek to resolve key manage- ment and operational issues. Management compatibility is extremely important, and MOE agreements are almost always struck at the CEO-to-CEO level. Key issues to be addressed include:

• The split of the board (sometimes a fifty/fifty split, although a number of situations have involved a slight majority in favor of one party; agreements concerning committee structure, chair- manship and membership are also common); • The split of the Chairman and CEO position (frequently one party gets the Chairman position and the other party gets the CEO position, although sometimes the CEO of one party assumes both the Chairman and CEO title while the CEO of the other party may be guaranteed the title after a specified transi- tion period; co-CEO positions, while often unwieldy, are some- times used; retirement age and use of consulting agreements are often taken into account); • The selection of the combined senior management team (typi- cally involves retention of executives from both parties; the spe- cific allocation of duties among key management team members is often addressed, sometimes in exacting detail; existing employment arrangements must also be considered; employment contracts often require modifications to protect employee and company interests and to reflect the newly proposed manage- ment structure);

(Rel. 54) § 1.10[9] TAKEOVERS & FREEZEOUTS 1-136

• The rationalization of separate corporate cultures (including atti- tudes toward, and practices regarding, compensation, employee benefit and incentive plans, management styles, business strate- gy, use of technology, operating priorities, community involve- ment and reinvestment and future business strategies); • Identification of merger synergies (a fair sharing of any “social costs” and operational disruptions associated with the proposed merger synergies is important, as is a unified approach to any severance arrangements); • The combined company’s name (many options exist—e.g., a new name, a combined name, retention of one of the old names, retention of one name for some operations and the other name for other operations); • Location of corporate headquarters and other key operations (often based on costs and operational considerations, but can be a key social issue in MOEs involving companies headquartered in different cities or states); • Legal structure of the merger and choice of a surviving entity (the manner in which the merger is structured can affect the public perception as to whether one of the parties is “being acquired;” legal structure can also have important tax, account- ing, regulatory and state law consequences including the required shareholder vote; “double-dummy” structures are sometimes used to avoid having to choose between either of the merging parties or to effect other changes deemed to be desir- able going forward, such as a change of domicile); • The exchange ratio (the amount of the premium, if any, and how the premium is expressed can have an important impact on the public perception of the transaction; the pro forma dividend pay- out ratio must also be considered).

In most transactions, there is a trade-off among these various key issues, as the parties strive to achieve a mutually acceptable balance of power. Negotiating a mutually acceptable balance of power in an MOE is often difficult, and may actually run counter to the long-term objec- tive of ensuring a successful integration of the two companies (which may require the existence of one dominant, visionary force within the combined company). The success or failure of an MOE may depend on the strength of the CEOs who bring the transaction together and their ability to work effectively to ensure a smooth transition to a new unified corporate culture. No easy formula for success exists. Each 1-137 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[9] situation must be judged on the basis of individual facts and circum- stances, with sensitivity to the personalities involved and their respec- tive talents and weaknesses. The discussion and resolution of governance issues should be han- dled carefully to avoid any actual or perceived conflict of interest. The personal interests of directors or officers must not be put before the interests of the company’s shareholders, employees and other important constituencies. Arrangements that ensure that shareholder, employee and community interests are properly protected are legiti- mate to consider. Once an agreement is reached concerning the key governance issues, it will be important that appropriate provisions are put in place to ensure that both parties live up to the bargain. Nothing is as cer- tain as the fact that no matter how close the parties are before the transaction, “things will change after the merger.” While no set of legal rules can fully protect the parties against changes that occur after the merger, the parties should consider building some basic pro- tections into the merger agreement, the key executives’ employment agreements, and, in some instances, even the combined company’s charter, bylaws and operational statements. Among other areas that may deserve written protections are: principal executive officer suc- cessorship provisions, board successorship provisions (both pre- and post-merger for a specified duration) and any super-majority voting provisions. Also, when considering amendments to charters and bylaws to become effective upon closing, parties should keep in mind the SEC Staff’s current views regarding “unbundling” of proposals in the proxy statement, and consider what steps can be taken to mini- mize the likelihood that the SEC Staff would require separate pro- posals on the proxy card. [c]—Contractual, Fiduciary and Other Legal Issues Relating to MOEs The merger agreement for an MOE is often a balanced contract with matching representations, warranties and interim covenants from both parties. MOEs are typically structured as tax-free, stock-for- stock transactions, with a fixed exchange ratio without collars or walk-aways, and the contract will need to include the standard provi- sions included in stock-for-stock transactions. Defining the appropriate scope of pre-signing due diligence, and confidentiality, in general, is a critical issue, since premature disclo- sures or leaks can seriously jeopardize such typically low-premium deals. Each situation must be assessed carefully to achieve the prop- er balance of pre- and post-signing due diligence and integration plan- ning.

(Rel. 54) § 1.10[9] TAKEOVERS & FREEZEOUTS 1-138

MOEs usually do not involve a sale of control of either party with- in the meaning of the applicable case law on directors’ fiduciary duties. Accordingly, directors have broad discretion under the busi- ness judgment rule to pursue an MOE transaction that they deem to be in the best long-term interests of their company, its shareholders and its other important constituencies, even if they recognize that an alternative sale or merger transaction could deliver a higher premium over current market value. MOEs generally are not comparable to sales of control. An MOE can be fair even though the post-announcement trading value of the company’s shares is less than that which could be achieved in a sale transaction. It is prudent, however, for a board, as part of its deliber- ative process, to consider what alternative business strategies might exist, including an affordability analysis of what potential acquirors could pay in an acquisition context. The Delaware courts, in the Time13 and QVC14 decisions and elsewhere, have indicated that direc- tors have wide latitude in pursuing long-term strategic objectives through an MOE or similar strategy that does not involve a sale of control. Notably, the original Paramount/Viacom 1994 merger was a rare example of a purported merger of equals that actually involved a change of control—since the post-merger entity would be controlled by one individual. A is important for both parties. Fairness opinions in MOE transactions must be carefully crafted to provide clarity as to what is and is not being covered in the opinion. While extensive explanations are not required, or in most instances useful, it is impor- tant to avoid the impression that the opinion is attempting to compare the proposed MOE to a sale of control. Careful attention to the proxy statement disclosure relating to the fairness opinion is also important. A good example of the complexity that can arise in connection with fairness opinions rendered in MOE transactions occurred in con- nection with the 1990 merger of two insurance brokers, Corroon & Black and Willis Faber. After the merger was announced, Aon Cor- poration made a cash proposal for Corroon & Black at a price above the then-current market value reflected in the MOE exchange ratio. Corroon & Black was able to reject the Aon proposal and proceed with its MOE transaction, in part aided by the continuing validity of the fairness opinion it received from its investment banker. The opin- ion was amended after the Aon proposal to clarify that the banker was

13 Paramount Communications Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1989). 14 Paramount Communications Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1994). 1-138.1 PRACTICAL ASPECTS OF TENDER OFFERS § 1.10[9] not addressing the relative merits of the MOE compared with alter- native business strategies (such as pursuing a sale of the company), which was a matter that was within the board’s business judgment, but rather that the banker was only addressing the fairness of the exchange ratio within the context of an MOE transaction. While no protection is iron-clad, steps can be taken to protect an MOE transaction. First and foremost, it is important to recognize that the period of greatest vulnerability is the period before the transaction is signed and announced. Leaks or premature disclosure of MOE negotiations can provide the perfect opening for a would-be acquiror to submit an acquisition proposal designed to derail the MOE talks or pressure one party into a sale or auction. Nothing will kill a low-pre- mium MOE faster than a run-up in the stock of one of the merging parties—whether or not the run-up is based on takeover speculation— because no company wants to announce an MOE reflecting an exchange ratio that reflects a substantial discount to market. Structural protections such as cash break-up fees and support com- mitments may be appropriate. Although they do not have the ability to frustrate favorable accounting treatment that they once did, cross stock options may still be appropriate, provided that the option terms are reasonable and do not deprive stockholders of a fair opportunity to vote on the proposed transaction. Relatively robust agreements by both parties not to shop their com- panies after the deal is announced, and agreements not to terminate the merger agreement in the face of a competing offer without giving the stockholders a fair opportunity to vote on the merger, may be appropriate. Utilization of a rights plan can also be appropriate to protect the parties to an MOE from hostile intervention.15 Since an MOE gener- ally does not involve a sale of control of the company, parties to an MOE should send a strong signal that they have no intention of engaging in a sale of control transaction even if their MOE transac- tion is voted down by shareholders. While as a practical matter it may be difficult for the parties to avoid a takeover if an aggressive acquiror steps forward, the best defense is always a strong public commitment to remaining independent. The 2007 Caremark/CVS transaction illustrates that MOEs are not immune from overbids. The transaction was initially structured as an all-stock, no-premium MOE. In response to an interloping bid from Express Scripts, CVS raised its bid to allow some cash premium for Caremark shareholders. This came in the form of a special dividend,

15 See discussion of rights plans at § 6.03[4] infra.

(Rel. 54) § 1.10[9] TAKEOVERS & FREEZEOUTS 1-138.2 declared by the Caremark board with the approval of CVS and ulti- mately fixed at $7.50 per share, to be payable to Caremark share- holders only if the CVS merger was approved. CVS also promised a 150 million-share, $35-per-share buyback of combined CVS/Care- mark stock after the completion of the merger, to allow Caremark shareholders a further opportunity to receive cash in connection with the merger.16 Caremark’s approach—which was criticized by the Delaware Court of Chancery for being “supine”17—in fact achieved significant addi- tional value for Caremark shareholders while preserving many of the strategic and financial benefits of a merger-of-equals transaction. While Express Scripts and some Caremark shareholders sought to enjoin the deal and the Court pushed back Caremark’s meeting date twice to allow shareholders time to absorb new disclosures, the court ultimately allowed the meeting to go forward so that fully informed shareholders could vote on the deal. Moreover, in denying Express Scripts leave to file an interlocutory appeal from its decision, the Court noted that it had not found that the Caremark directors had vio- lated any fiduciary duties and refused to invalidate the standard deal protection provisions of the merger agreement or force Caremark to negotiate with Express Scripts. The plaintiffs did have one success in that the Court ruled that Caremark’s shareholders were entitled to appraisal rights based on the special dividend to be paid conditioned on the closing of the merger; it remains to be seen, however, whether this aspect of the Court’s ruling will be extended to other transactions involving different underlying facts.

16 See Louisiana Municipal Police Employees’ Retirement System v. Crawford, 918 A.2d 1172 (Del. Ch. 2007). 17 Id., 918 A.2d at 1188. 1-138.3 PRACTICAL ASPECTS OF TENDER OFFERS § 1.11[1] § 1.11 Cross-Border Transactions [1]—Overview International capital flows, multinational enterprises and cross-bor- der M&A activity have become ever-larger and more multifaceted parts of the global economy. Cross-border activity has featured a diverse variety of industries, target countries and sources of acquisi- tion capital, and such transactions have increased since 2009, reach- ing $880 billion in value in 2011 notwithstanding the lingering nega- tive impacts of the economic and financial crises on capital flows and M&A activity worldwide. Deal volume remains well below the multi- trillion dollar high water mark of 2007, however, perhaps due to uncertainty regarding Europe and other markets. Cross-border M&A and strategic investment activity by volume proceeded apace in 2011 as major economies continue to recover, and cross-border deals com- prised 37% of global M&A in 2011, up from a low of 27% in 2009. In the U.S., only 16% of announced U.S. deals in 2011 involved non- U.S. acquirors or investors, reflecting a significant decline from 2010, perhaps due to European acquirors sitting on the sidelines, Asian acquirors focusing largely on regional consolidation and emerging market opportunities, and dampening of other emerging market play- ers’ enthusiasm for U.S. deals. Emerging markets continue to drive a significant share of cross-border activity, most notably in the energy, power, materials and financial sectors, but also in acquisitions of household names and of sophisticated industrial enterprises in devel- oped economies. In the last decade, mega-deals have surged in prominence in the international arena. From 2004 through 2009, completed or announced multi-billion dollar cross-border deals included, among many others, the $101 billion acquisition by a Royal Bank of Scot- land-led consortium of ABN Amro Bank (and the separate $21 billion sale of ABN’s LaSalle Bank subsidiary to Bank of America), Sanofi- Synthelabo’s $65 billion acquisition of Aventis, the $52 billion acqui- sition of Anheuser-Busch by InBev N.V. and the NYSE-Euronext merger. A number of significant cross-border deals. including several mega-deals, were not consummated. These include the NYSE Euronext-Deutsche Börse AG business combination that would have created the world’s largest exchange operator and AT&T’s $39 billion acquisition of T-Mobile USA from Deutsche Telekom AG, both of which were terminated amid regulatory opposition. Other significant cross-border transactions that ran into trouble included the sale of Daewoo Electronics of South Korea by its creditors to the Entekahb

(Rel. 54) § 1.11[1] TAKEOVERS & FREEZEOUTS 1-138.4

Industrial Group of Iran (which collapsed after the acquiror failed to make full payment); the combination of the Singapore Exchange with Australia’s ASX Ltd. (which was terminated after Australian authori- ties rejected the deal as not being in the national interest); the Lon- don Stock Exchange’s merger with the TMX Group, parent of the Toronto Stock Exchange (withdrawn after failure to receive the required two-thirds vote of shareholders; the competing proposal by the Maple Group, a consortium of Canadian banks and pension funds, to acquire TMX remains pending in the face of regulatory head- winds); and the takeover bid for Redflex Holdings of Australia, a global traffic safety company, by The Carlyle Group and Macquarie Group Limited (a transaction that shareholders rejected). While friendly mergers continue to predominate over hostile takeover activity, hostile activity and contested situations remain sig- nificant factors in cross-border M&A activity. Major strategic buyers have been responsible for a significant portion of such activity and have had to navigate “overbid” situations. Major hostile cross-border deals include, among others, BHP Billiton’s ultimately withdrawn $39 billion offer for Canada’s Potash Corporation; Sanofi-Aventis SA’s unsolicited (and ultimately friendly and successful) offer for Gen- zyme; Kraft’s hostile (and subsequently friendly and successful) bid for Cadbury, the four-way battle among CF Industries, Calgary-based Agrium, Oslo-based Yara International and Terra Industries (resulting in Terra), Sinosteel’s successful hostile acquisition of Midwest Corp., InBev N.V.’s successful acquisition of Anheuser-Busch, the acquisi- tion by Roche of the shares of Genentech that it did not already own, BHP Billiton Ltd.’s hostile $147 billion bid for Rio Tinto Group (ulti- mately abandoned), the battle over ABN Amro, the $19.8 billion hos- tile offer by a consortium of private equity firms to acquire J Sains- bury PLC and the $15.8 billion hostile offer by Germany’s OMV AG for the Hungarian oil and gas company, MOL Magyar Olaj es Gazi- pari, and U.K.-based SABMiller’s over $10 billion hostile (and ulti- mately friendly) takeover of Foster’s Group of Australia. Given the turmoil in the financial sector and the lingering effects of the credit crisis, it is not surprising that the financial sector has fea- tured some of the most notable cross-border activity, such as capital injections by non-U.S. investors and SWFs. Looking forward, U.S. cross-border deals are likely to be driven by strategic investors seek- ing to clean up their balance sheets and streamline their business through spin-offs, carve-outs, and divestitures of non-core assets, and/or make opportunistic acquisitions to increase their market share and further solidify their market position. Other possible drivers include potential acquirors’ strong cash positions from defensive 1-138.5 PRACTICAL ASPECTS OF TENDER OFFERS § 1.11[2] stockpiling, the search for external growth to replace oft-missing internal growth, the need for heightened access to emerging markets and the traditional drivers of consolidation. Consolidation plays will inevitably attract the attention of competition authorities who may be reluctant to approve “synergistic” mergers that may result in signifi- cant job loss, even if job preservation is not a part of their mandates. Additionally, while the financial markets have improved, conser- vatism and tighter lending standards continue to create headwinds for leveraged players, further giving strategic investors an advantage over private equity counterparts while requiring creative structures to assure targets and investors as to certainty of financing. [2]—Special Considerations in Cross-Border Deals With advance planning and careful attention to the greater com- plexity and spectrum of issues that characterize cross-border M&A, such transactions can be accomplished in most circumstances without falling into the pitfalls and misunderstandings that have sometimes characterized cross-cultural business dealings. A number of important issues should be considered in advance of any cross-border acquisi- tion or strategic investment, whether the target is within the U.S. or elsewhere. [a]—Political and Regulatory Considerations A comprehensive analysis of political and regulatory implications should be undertaken well in advance of any cross-border acquisition proposal, particularly if the target company operates in a sensitive industry or if the acquiror is controlled, sponsored or financed by a foreign governmental entity. In election years, politics may play a bigger role than usual in transactions involving offshore acquirors or investors, and such deals will accordingly require greater advance planning and sensitivity. In the U.S., many parties and stakeholders have potential leverage (economic, political, regulatory, public rela- tions, etc.) and consequently it is important to develop a plan to address anticipated concerns that may be voiced by these stakehold- ers in response to the transaction. Moreover, it is essential that a com- prehensive communications plan be in place prior to the announce- ment of a transaction so that all of the relevant constituencies can be targeted and addressed with the appropriate messages. It is often use- ful to involve local public relations firms at an early stage in the plan- ning process. Planning for premature leaks is also critical. Most obstacles to a cross-border deal are best addressed in partnership with local players whose interests are aligned with those of the acquiror, as local support reduces the appearance of a foreign threat. It is in

(Rel. 54) § 1.11[2] TAKEOVERS & FREEZEOUTS 1-138.6 most cases critical that the likely concerns of federal, state and local government agencies, employees, customers, suppliers, communities and other interested parties be thoroughly considered and, if possible, addressed prior to any acquisition or investment proposal becoming public. Flexibility in transaction structures, especially in strategic or politically sensitive situations, may be helpful in particular circum- stances, such as no-governance or low-governance investments, minority positions or joint ventures, possibly with the right to increase to greater ownership or governance over time, e.g., when entering a non-domestic market, making an acquisition in partnership with a local company or management or in collaboration with a local source of financing or co-investor (such as a private equity firm); or utilizing a controlled or partly-controlled local acquisition vehicle, possibly with a board of directors having a substantial number of local citizens and a prominent local figure as a non-executive chair- man. Use of preferred securities (rather than ordinary ) or structured debt securities should also be considered. Ostensibly modest social issues, such as the name of the continuing enterprise and its corporate seat, or the choice of the nominal acquiror in a merger, can affect the perspective of government and labor officials. Depending on the industry involved and the geographical distribution of the workforce, labor unions and “works councils” may be more active and play a greater role in the current political environment. In the U.S., the Committee on Foreign Investment in the United States (CFIUS) is one of the key authorities to consider when seek- ing to clear U.S. acquisitions by non-U.S. acquirors. CFIUS is a multi-agency committee that reviews transactions under the Exon- Florio Act for potential national security implications in which non- U.S. acquirors could obtain “control” of a U.S. business or assets or involve investments by non-U.S. governments or investments in U.S. critical infrastructure, technology or energy assets. CFIUS by no means imposes an insurmountable hurdle, nothwithstanding some highly publicized examples to the contrary (such as Dubai Ports World’s attempt to buy the U.S. port assets of the Peninsular and Ori- ental Steam Navigation Company; certain acquisitions involving Huawei, a private Chinese technology company (such as its joint, and ultimately abandoned, bid with Bain Capital for 3Com Corporation and the required unwinding of its acquisition of the assets of 3Leaf Systems, a U.S. technology company); and the attempt by Northwest Non-Ferrous International Investment Company, a China-based com- pany, to acquire control of U.S.-based mining firm Firstgold. The pre- ceding examples notwithstanding, foreign acquirors from China, the United Arab Emirates (the country of origin for Dubai Ports World) 1-138.7 PRACTICAL ASPECTS OF TENDER OFFERS § 1.11[2] and other locales have successfully cleared the CFIUS process. The vast majority of cross-border transactions that are reviewed are cleared within the initial review period of thirty days, and only a small percentage of transactions requires further stages of review and possibly some form of remedial action to be taken. It is often prudent to make a voluntary filing with CFIUS if con- trol of a U.S. business is to be acquired by a non-U.S. acquiror and the likelihood of an investigation is reasonably high or if competing bidders are likely to take advantage of the uncertainty of a potential investigation. In most cases, a filing should be preceded by discus- sions with U.S. Treasury officials and other relevant parties. Although filings with CFIUS are voluntary, CFIUS also has the ability to inves- tigate transactions at its discretion, including after the transaction has closed. Proactively suggesting mitigation for any issues early in the review process in order to help shape any remedial measures can be critical in avoiding delay or potential disapproval. In transactions that may involve a CFIUS filing, a carefully crafted communications plan should be put in place prior to any public announcement or disclosure of the pending transactions. As a CFIUS review is only applicable when the foreign person is acquiring “control” over a U.S. business, such review can be avoid- ed by structuring a transaction so that the investor is not acquiring “control.” CFIUS regulations issued by the U.S. Department of the Treasury provide an exemption for non-U.S. investments of 10% or less of the voting securities of a U.S. business if made “solely for the purpose of passive investment.” Allthough this exclusion does not apply if the non-U.S. person intends to exercise control over the U.S. business or takes other actions inconsistent with passive intent. If the intent changes, CFIUS may review the investment even though it was initially made with a passive intent. Control status is fact-specific subject to a number of statutory guidelines, including implications of possession of a board seat or the exercise of pro rata voting rights, and whether the investor wields a degree of influence sufficient to determine, direct or decide “important” matters. Certain minority shareholder protections and negative rights may be held by non-U.S. investors without rendering such investors in control of an entity. For acquisitions of control by U.S. acquirors of non-U.S. domiciled companies, similar provisions exist under the laws of other jurisdic- tions, including most notably in Canada, Australia and China as well as some European nations. Any weaknesses in the ability to clear reg- ulatory hurdles could be used by reluctant targets or competing bid- ders to frustrate the acquisition.

(Rel. 54) § 1.11[2] TAKEOVERS & FREEZEOUTS 1-138.8

[b]—Integration Planning and Due Diligence Integration planning and due diligence also warrant special atten- tion in the cross-border context. Wholesale application of the acquiror’s domestic due diligence standards to the target’s jurisdiction can cause delay, waste time and resources, or result in missing a prob- lem. Due diligence methods must take account of the target jurisdic- tion’s legal regime and local norms, including what steps a publicly traded company can take with respect to disclosing material non-pub- lic confirmation to potential bidders and implications for disclosure obligations. Many due diligence requests are best funneled through legal or financial intermediaries as opposed to being made directly to the target company. Due diligence with respect to risks related to the Foreign Corrupt Practices Act (“FCPA”)—and understanding the U.S. Department of Justice’s guidance for minimizing the risk of inherit- ing FCPA liability—is critical for U.S. acquirors acquiring a compa- ny with non-U.S. business activities; even acquisitions of foreign companies that do business in the U.S. may be scrutinized with respect to FCPA compliance. Diligence relating to compliance with the sanction regulations overseen by the Treasury Department’s Office of Foreign Asset Control can also be important for U.S. enti- ties acquiring non-U.S. businesses. Cross-border deals sometimes fail due to poor post-acquisition integration where multiple cultures, languages, historic business methods, and distance may create friction. Too often, a separation between the deal team and the integration/execution teams invites slippage in execution of a plan that in hindsight is labeled by the new team as unrealistic or overly ambitious. However, integration plan- ning needs to be carefully phased in as implementation cannot occur prior to the time most regulatory approvals are obtained. [c]—Competition Review and Action Cross-border M&A activity is subject to careful review by compe- tition authorities, and parties should prepare for multi-jurisdictional review and notifications.1 Over seventy jurisdictions have pre-merger notification regimes, and the list continues to grow; multinational transactions (including minority investments) may require over a dozen notifications. In recent years, the FTC, DOJ and the European Commission have not been hesitant to challenge—and block—cross- border mergers and other cross-border transactions, even, in very rare cases, post-consummation. Competition authorities often, though not

1 See § 1.01[8] supra. 1-138.9 PRACTICAL ASPECTS OF TENDER OFFERS § 1.11[2] always, coordinate their investigations of transactions. To the extent that a non-U.S. acquiror directly or indirectly competes or holds an interest in a company that competes in the same industry as the tar- get company, antitrust concerns may arise either at the federal agency or state attorneys general level in the U.S. as well as in the home country. Competition analyses will need to consider variations in mar- ket conditions and competition law across relevant jurisdictions. How relationships are treated (and views as to required relief) is one area of meaningful variation among competition author- ities. [d]—Deal Techniques and Cross-Border Practice Understanding the custom and practice of M&A in the jurisdiction of the target is essential. Successful execution is more art than sci- ence, and will benefit from early involvement by experienced local advisors. For example, understanding when to respect—and when to challenge—a target’s sale “process” is critical. Knowing how and at what price level to enter the discussions will often determine the suc- cess or failure of a proposal. In some situations it is prudent to start with an offer on the low side, while in other situations offering a full price at the outset may be essential to achieving a negotiated deal and discouraging competitors, including those who might raise political or regulatory issues. In strategically or politically sensitive transactions, hostile maneuvers may be imprudent; in other cases, unsolicited pres- sure may be of use. Similarly, understanding in advance the roles of arbitrageurs, hedge funds, institutional investors, private equity funds, proxy voting advisors and other important market players in the tar- get’s market—and their likely views of the anticipated acquisition attempt as well as when they appear and disappear from the scene— can be pivotal to the outcome of the contemplated transaction. Where the target is a U.S. public company, the customs and for- malities surrounding board of director participation in the M&A process, including the participation of legal and financial advisors, the provision of customary fairness opinions and the inquiry and analysis surrounding the activities of the board and the financial advisors, can be unfamiliar and potentially confusing to non-U.S. transaction par- ticipants and can lead to misunderstandings that threaten to upset del- icate transaction negotiations. Non-U.S. participants need to be well- advised as to the role of U.S. public company boards and the legal, regulatory and litigation framework and risks that can constrain or prescribe board action. These factors can impact both tactics and tim- ing of M&A processes and the nature of communications with the tar- get company.

(Rel. 54) § 1.11[2] TAKEOVERS & FREEZEOUTS 1-138.10

Additionally, local takeover regulations often differ from those in the acquiror’s home jurisdiction. For example, the concept common in Europe, India and other countries—in which an acquisition of a certain percentage of securities requires the bidder to make an offer for either the balance of the outstanding shares or for an additional percentage—is very different from U.S. practice. Per- missible deal protection structures, pricing requirements and defen- sive measures available to targets also differ. Sensitivity must be given to the contours of the target board’s fiduciary duties and deci- sion-making obligations in home jurisdictions, particularly with respect to consideration of stakeholder interests other than those of shareholders and non-financial criteria. Ongoing volatility in the global credit markets has resulted in heightened scrutiny of the financing aspects of all transactions, including cross-border deals. Local regulations with respect to financ- ing (e.g., the “funds certain” requirement in certain European juris- dictions and restrictions on borrowing from host country lenders or using target assets as collateral) must be carefully navigated. The rel- ative ease of implementation and availability of asset-based and other sophisticated securitized lending strategies, as is the case in the U.S. markets, also may be a factor. Disclosure obligations may also vary across jurisdictions. How and when an acquiror’s interest in the target is publicly disclosed should be carefully controlled, keeping in mind the various ownership thresholds that trigger mandatory disclosure under the law of the company being acquired. Treatment of derivative securities and other pecuniary interests in a target other than equity holdings also vary by jurisdiction and have received heightened regulatory focus in recent periods. [e]—U.S. Cross-Border Securities Regulation U.S. securities regulations apply to acquisitions and other business combination activities involving non-U.S. companies with U.S. secu- rity holders unless bidders can avoid a jurisdictional nexus with the U.S. and exclude U.S. security holders. Under the current two-tiered exemptive regime, relief from U.S. regulatory obligations is available when the transaction qualifies for one of two exemptions—the “Tier I” exemption where U.S. security holders comprise less than 10% of a security subject to a tender offer, and the “Tier II” exemption where the U.S. shareholder base does not exceed 40%. Tier I transactions are exempt from almost all of the disclosure, filing and procedural requirements of the U.S. federal tender offer rules, and securities issued in Tier I exchange offers, business combination transactions and rights offerings need not be registered under the U.S. Securities 1-138.11 PRACTICAL ASPECTS OF TENDER OFFERS § 1.11[2] Act. Tier II provides narrow relief from specified U.S. tender offer rules that often conflict with non-U.S. law and market practice (such as with respect to prompt payment, withdrawal rights, subsequent offering periods, extension of offers, notice of extension and certain equal treatment requirements) but does not exempt the transaction from most of the procedural, disclosure, filing and registration oblig- ations applicable to U.S. transactions. Non-U.S. transactions where U.S. ownership in the target company exceeds 40% are subject to U.S. regulation as if the transaction were entirely domestic. Significantly, neither Tier I nor Tier II exemptive relief limits the potential exposure of non-U.S. issuers—in nearly all cases already subject to regulation in their home jurisdiction—to liability under the anti-fraud, anti-manipulation and civil liability provisions of the U.S. federal securities laws in connection with transactions with U.S. entanglements. Both this risk and a desire to avoid the demands of U.S. regulation have persuaded many international issuers and bidders to avoid U.S. markets and exclude U.S. investors from significant corporate transactions. Notably, the exclusionary techniques that have developed for avoiding applicability of U.S. takeover regulation are often simply not available to non-U.S. purchasers who buy shares through open market purchases or other routine means not involving fully negotiated, contracted deals; it may simply be impossible when transacting on non-U.S. exchanges to exclude U.S. sellers, and hence this inability to exclude U.S. sellers may render problematic any attempts to structure around U.S. laws. As was seen in the Endesa/E.ON/Acciona matter, such uncertainty—and the potential for ensuing litigation—can be exploited to gain tactical advantage in a takeover battle. Several of the revisions to the U.S. cross-border securities regula- tory regime enacted in 2008 have provided U.S. and non-U.S. bidders with somewhat enhanced flexibility and certainty in structuring deals for non-U.S. targets, even if the amendments did not fundamentally alter the nature or scope of the existing regulations nor, in some respects, go far enough in enacting reforms. The 2008 revisions also codified relief in several areas of frequent conflict and inconsistency between U.S. and non-U.S. regulations and market practice. Also notable is the U.S. Supreme Court’s landmark decision in Morrison v. National Australia Bank Ltd.,2 which sharply limited the extraterritorial reach of the U.S. securities laws, particularly Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. The decision overturned forty years of lower-court precedent. The

2 Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010).

(Rel. 54) § 1.11[3] TAKEOVERS & FREEZEOUTS 1-138.12 decision and its progeny have eradicated billions of dollars in poten- tial liability for foreign securities issuers and curtailed, if not elimi- nated, a burgeoning species of securities litigation that had been known as “foreign-cubed” and “foreign-squared” class actions. [3]—Notable Developments [a]—Sovereign Wealth Fund Activity Flush with dollar-denominated cash from then-booming commodi- ties prices and trade surpluses, Sovereign Wealth Funds (“SWFs’)— the investment vehicles of resource-rich or export-heavy countries that manage trillions of dollars in assets—emerged by the beginning of 2008 as an important force in international equity investment and the M&A market, triggering concerns over the potential for politi- cal—rather than economic—motivations and interference. SWFs con- tinue to be influential investors, holding assets valued at approxi- mately $4.8 trillion in 2011. In fending off concerns over non-economic motivations, SWFs have argued that their proven abil- ity to deploy large amounts of capital quickly, long-term investment horizons and willingness to accept minimal governance arrangements may make them ideal investment partners. By the end of 2008, global economic turmoil obscured this politi- cal debate as financial firms from the U.S. and Europe actively sought and obtained large capital investments from Middle-Eastern and Asian SWFs. Abu Dhabi’s $7.5 billion infusion into Citigroup marked the beginning of a series of SWF infusions that ultimately included UBS (by GIC of Singapore and an unidentified Middle Eastern investor), Morgan Stanley (by China Investment Corporation) and Merrill Lynch (by Temasek, in the first instance). Citigroup and Mer- rill Lynch each drew from the SWF pool twice, with Citigroup tap- ping several institutions including GIC of Singapore and the Kuwait Investment Authority for an additional capital in January of 2008; Merrill raised capital initially from Singapore’s Temasek and later from funds in Korea and Kuwait, among others. More recently, sov- ereign investors have been allocating capital to certain European banks, many of which are seeking to shore up their capital positions in order to comply with new regulatory requirements. Investments by SWFs into distressed global banks during the financial crisis generally shared similar structural features: SWFs typ- ically received securities convertible over a number of years into common shares with an interim coupon (Temasek’s investment in Merrill Lynch common stock was an exception); individual SWF equity stakes in these institutions did not exceed 10%; the parties 1-138.13 PRACTICAL ASPECTS OF TENDER OFFERS § 1.11[3] explicitly agreed that the SWF would not receive board representation or special governance rights (with the exception of GIC’s investment into UBS, in which no such agreement was made); and several of these transactions also included voting and standstill provisions. Sov- ereign wealth funds have also participated in rights offerings. The onset of the global financial crisis had a profound impact on the investment strategies of SWFs. As with many private institution- al funds, many SWFs sustained significant losses on their investments both in the financial sector and elsewhere, although improving mar- ket valuations are having favorable offsetting effects. Home-country needs, coupled with many of the factors that led to increased risk- aversion among SWFs—uncertain political receptivity to SWF invest- ment in the developed world, poor returns or big losses on invest- ments and the global financial crisis—resulted in many SWFs retreating to a meaningful extent from distant markets and increasing domestic and regional investments, particularly in emerging markets. For example, the SWFs of China, Kuwait, Qatar, Kazakhstan and Norway have played or are expected to play meaningful roles in shoring up domestic financial institutions and investing in infrastruc- ture and recovery projects. Diversification, natural resource and infra- structure plays have also led to SWFs, such as those in China, look- ing beyond their home borders. For example, after making a multi-billion dollar investment in a GDF Suez gas exploration unit and a Caribbean-based plant in 2011, China Investment Corporation (CIC) purchased a significant stake in South Africa’s Shanduka Group, an investment holding company with interests in coal mining and other industries; South Africa is China’s largest single trading partner. CIC’s acquisition of a minority stake in Thames Water’s par- ent company from Santander Private Equity and Finpro, a Portuguese investment vehicle, marked its first foray into the United Kingdom’s infrastructure and utilities industry. SWFs have also made significant investments into major private equity and hedge funds in prior years. Pre-IPO investments included the China Investment Corporation’s $3 billion investment into Black- stone and Dubai International Capital’s $1.26 billion stake in Och- Ziff. Direct investments into funds included the $1.35 billion invest- ment by Mubadala of Abu Dhabi into the Carlyle Group and the Abu Dhabi Investment Authority’s 9% stake in Apollo Management. New private equity funds have also featured SWFs as investors. Notwithstanding the lingering effects of the financial crisis, SWFs have shown a pattern of experimentation with transaction size, struc- ture and approach outside the U.S. that may eventually reach our shores. For example, in addition to minority investments, which were

(Rel. 54) § 1.11[3] TAKEOVERS & FREEZEOUTS 1-138.14 the focus of SWF activity, and providing financing support in a num- ber of transactions, SWFs have become more amenable to whole- company acquisitions, as illustrated by acquisitions of the famous London department store Harrods and of France’s Cegelec by invest- ment arms of the Qatari government. The Malaysian sovereign wealth fund’s hostile $2.6 billion bid acquisition of the remaining shares of Singapore hospital operator Parkway Holdings, Ltd. over the objec- tions of rival bidder (and fellow shareholder) Fortis Healthcare Ltd. was particularly notable. In addition, SWFs have provided critical financing support to major transactions and engaged in significant collaborations with each other. Financing examples include the investment by Korea’s Nation- al Pension Service into LS Cable’s acquisition of Superior Essex and financial support from SWFs from China, Kuwait and Singapore for Blackrock’s purchase of Barclays Global Investors. The highly publi- cized acquisition of Rohm & Haas by Dow Chemical also featured SWF involvement—the Kuwait Investment Authority invested $1 bil- lion in Dow Chemical in exchange for convertible preferred stock as part of financing arrangements (another Kuwaiti entity, Petrochemical Industries Co., a subsidiary of Kuwait Petroleum Corporation, with- drew from the proposed $17.4 billion K-Dow Petrochemicals joint venture with Dow Chemicals that was to have provided a significant portion of the financing for the deal). Strategic partnerships and alliances among SWFs have been illus- trated by the combined investment and joint venture by Dubai-spon- sored entities with MGM Mirage and the Korea Investment Corpora- tion’s cooperation agreements and memoranda of understanding with the Abu Dhabi Investment Authority and Malaysian and Australian SWFs. Global regulation has gradually taken shape, in the form of best practices and voluntary codes of conduct governing SWFs and for- malized regulatory regimes implemented by the countries that receive SWF investments, in response to concerns about lack of transparency and the potential for politically motivated investments. [b]—Harmonization of Accounting Standards Recent years featured significant movement towards the creation of global accounting standards. Following the SEC’s revision of its treat- ment of foreign private issuers to permit them to prepare financial statements under International Financial Reporting Standards (“IFRS”) without reconciliation to U.S. GAAP, the SEC published a proposed “Roadmap” for the use by U.S. issuers of IFRS, as issued by the International Accounting Standards Board (“IASB”). The Roadmap provided for limited early usage of IFRS by selected issuers 1-138.15 PRACTICAL ASPECTS OF TENDER OFFERS § 1.11[4] and called for the SEC to determine in 2011 whether mandating the adoption of IFRS by U.S. issuers in 2014 would be in the public interest. In February 2010, the SEC issued a formal statement on global accounting standards (the “2010 Statement”), confirming the SEC’s view that a single set of high-quality globally accepted accounting standards—based on a convergence of IFRS and U.S. GAAP—would be desirable, extending the earliest mandatory adop- tion date to 2015 instead of 2014 and indicating that the SEC contin- ued to expect to determine in 2011 whether and how to incorporate IFRS into the U.S. financial reporting system. The 2010 Statement included adoption of a Work Plan for assessing the implications of convergence and the various considerations and milestones that would factor into the SEC’s evaluation as to whether adoption of IFRS for U.S. issuers would be in the public interest and further the protection of investors. The SEC has published various updates concerning progress on the Work Plan; these progress reports have included a comparison of the differences between U.S. GAAP and IFRS and an analysis of how IFRS is used in practice globally. In December 2011, the Staff of the SEC indicated that a final comprehensive report con- cerning IFRS was in progress and would likely be published in 2012, and that the Staff continued work on developing a recommended approach to IFRS harmonization for the Commission to consider. Statements by the SEC have emphasized that any harmonization framework should, among other things, provide for clear U.S. author- ity over the standards that apply to U.S. capital markets and a strong U.S. voice in the process of establishing global accounting standards. They have also indicated that retaining U.S. GAAP as the basis for U.S. financial reporting remains under consideration. The harmonization of accounting standards may facilitate cross- border M&A. Companies engaged in cross-border transactions often face difficult due diligence and integration questions with respect to accounting standards, and cross-border M&A activity often spurs de facto limited, but expensive and time-consuming, convergence among U.S. GAAP and IFRS (including as to jurisdictional variants). IFRS as issued by the IASB is not the only form of IFRS and “home coun- try” interpretations must be attended to with respect to reconciling valuations and ensuring a true—and sustainable—”meeting of the minds” with respect to pre- and post-closing purchase price adjust- ments. [4]—Deal Consideration and Transaction Structures While cash remains the predominant (although not exclusive) form of consideration in cross-border deals, non-cash structures are not uncommon, offering target shareholders the opportunity to participate

(Rel. 54) § 1.11[4] TAKEOVERS & FREEZEOUTS 1-138.16 in the resulting global enterprise. Where target shareholders will obtain a continuing interest in the acquiring corporation, expect heightened focus on the corporate governance and other ownership and structural arrangements of the acquiror in addition to business prospects. Pricing structures must be sensitive to exchange rate and currency risk as well as volatility in international markets. Alterna- tives to all-cash structures include non-cash currencies such as depositary receipts, “global shares,” and straight common equity, as well as preferred securities and structured debt. Transaction structure may affect the ability to achieve synergies, influence actual or perceived deal certainty and influence market per- ception. Structures should facilitate, rather than hinder, efforts to combine the operations of the two companies so as to achieve greater synergy, promote unified management, and realize economies of scale. The importance of simplicity in deal structure should not be underestimated—simple deal structures are more easily understood by market players and can facilitate the ultimate success of a transaction. One of the core challenges of cross-border deals using acquiror stock is the potential “flowback” of liquidity in the acquiror’s stock to the acquiror’s home market. This exodus of shares, prompted by factors ranging from shareholder taxation (e.g., withholding taxes or loss of imputation credits), index inclusion of the issuer or target equity, available liquidity in the newly issued shares, shareholder dis- comfort with non-local securities, to legal or contractual requirements that certain institutional investors not hold shares issued by a non- local entity or listed on a non-local exchange, can put pressure on the acquiror’s stock price. It may also threaten exemptions from registra- tion requirements that apply to offerings outside the home country of the acquiror. Tax issues will, of course, also influence deal structure. In struc- turing a cross-border deal, the parties will attempt to maximize tax efficiency from a transactional and on-going perspective, both at the entity and at the shareholder level. Transactions involving a U.S. tar- get corporation generally will be tax-free only if, in addition to satis- fying the generally applicable rules regarding reorganizations or Sec- tion 351 exchanges, they satisfy additional requirements under the IRC applicable to so-called “inversion” transactions. [a]—All-Cash All-cash transactions are easy for all constituencies to understand and present no flowback concerns, and the cash used in the transac- tion frequently must be financed through equity or debt issuances that will require careful coordination with the M&A transaction. Where 1-138.17 PRACTICAL ASPECTS OF TENDER OFFERS § 1.11[4] cash constitutes all or part of the acquisition currency, appropriate currency hedging should be considered given the time necessary to complete a cross-border transaction. [b]—Equity Consideration U.S. securities and corporate governance rules can be problematic for non-U.S. acquirors who will be issuing securities that will become publicly traded in the U.S. as a result of an acquisition. SEC rules, the Sarbanes-Oxley and Dodd-Frank Acts and stock exchange requirements should be evaluated to ensure compatibility with home country rules and to be certain that the non-U.S. acquiror will be able to comply. Rules relating to director independence, internal control reports and loans to officers and directors, among others, can fre- quently raise issues for non-U.S. companies listing in the U.S. Simi- lar considerations must be addressed for U.S. acquirors seeking to acquire non-U.S. targets. Structures involving the issuance of non- voting stock or other special securities of a non-U.S. acquiror may serve to mitigate some of the issues raised by U.S. corporate gover- nance concerns. [c]—Stock, Depositary Receipts and Global Shares All-stock transactions provide a straightforward structure for a cross-border transaction but may be susceptible to flowback. A depositary receipt approach carries many of the same advantages as an all-stock transaction but may mitigate flowback, as local institu- tional investors may be willing to hold the depositary receipts instead of the underlying non-local shares, easing the rate at which shares are sold back into the acquiror’s home country market. However, in the typical depositary receipt program, the depositary receipt holders are free to surrender their receipts to the depositary in exchange for the underlying shares. Once the underlying shares are received, the non- U.S. shareholder is free to trade them back into the acquiror’s home market. Another potential cross-border transaction structure involves the use of “global shares.” The acquiror issues common stock conform- ing to both U.S. and non-U.S. legal requirements, tradable on the home exchanges of both the acquiror and the target. There are sever- al advantages to using such shares in a cross-border deal: (1) poten- tially reduced flowback; (2) tradable in multiple currencies; and (3) improved global liquidity by creating a single security usable across multiple markets. Execution of a global share can be legally prob- lematic depending upon the compatibility of the legal and depositary regimes in the countries in which the stock will be traded. But to be

(Rel. 54) § 1.11[4] TAKEOVERS & FREEZEOUTS 1-138.18 truly successful, global shares require natural liquidity to develop for the shares in multiple markets. [d]—“Dual Pillar” Structures A more complex structure for a cross-border combination is known as the dual listed company (“DLC”) structure. In a DLC structure, each of the publicly traded parent corporations retains its separate corporate existence and stock exchange listing. Management integra- tion typically is achieved through overlapping boards of directors. Broadly speaking, DLC structures can be divided into two categories: “downstream” DLCs and “synthetic” DLCs. In a downstream DLC, the merged businesses are combined under one or more holding com- panies that are jointly owned by the two publicly traded parent com- panies. In a synthetic DLC, the merged businesses typically are not jointly owned, and economic integration is achieved solely through contractual “equalization” arrangements. Examples of downstream DLC structures include ABB Asea Brown Boveri and Reed-Elsevier. Royal Dutch/Shell, which had uti- lized such a structure for several decades, restructured into a single holding company a number of years ago. Examples of synthetic DLCs include RTZ-CRA and BHP-Billiton. Because DLC structures raise novel and complex tax, accounting, governance and other issues as applied to the U.S., they have, to date, not been successfully employed in cross-border mergers involving U.S. parent corporations.

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