CHAPTER 1 Practical Aspects of Tender Offers and Acquisitions Chapter Contents § 1.01 General Perspectives [1] Deal Activity [2] Unsolicited Deals [3] Private Equity Trends [4] Acquisition Financing [5] Hedge 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 Takeover 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 Tender Offer [2] Identifying the Takeover Target [3] Form of Offer [a] Cash Tender Offer [b] Exchange Offer [c] The Cash Option Transaction [i] Tax Considerations [ii] Structuring the Transaction [iii] Securities Law Questions 1-1 (Rel. 54) TAKEOVERS & 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 Bond, 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] Stock 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 corporation a potential target and to increase their abili- ty to consummate the acquisitions they attempt, target corporations 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 private placement 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 buyouts.4 With the huge amount of LBO capital