Us Takeover Guide 6010059

A Guide to Takeovers in the United States
Clifford Chance
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U.S. M&A Practice
Our U.S. M&A practice is a leader in domestic and cross-border M&A, providing clients with high value strategic and structuring advice and superior project management and coordination ability. Our team is part of a global practice which is a recognized market-leader for M&A and is known for our business-oriented legal approach to M&A transactions. We provide advice across the full spectrum of M&A products and services
n n n n n n n n n Strategic planning and structuring advice Mergers & acquisitions (public & private) Financial advisor representation Tender offers Corporate reorganizations Private equity Negotiated transactions Unsolicited bids PIPES n n n n n n n n n Complex cross-border M&A Leveraged buyouts REITs and real estate related M&A Joint ventures Recapitalizations Proxy contests Disclosure advice Advance anti-takeover preparation Distressed investing
...and are supported by strong regulatory and other specialist capabilities. We work closely with our tax, real estate, competition/antitrust, employee benefits and other practice areas and industry groups both domestically and globally to provide clients with the full spectrum of requisite legal advice for each transaction. For further information about this Guide or our U.S. M&A capabilities, please contact any of the following partners:
John Healy, Partner/Co-Head of Americas M&A, T: +1 212 878 8281, E: john.healy@cliffordchance.com Brian Hoffmann, Partner/Co-Head of Americas M&A, T: +1 212 878 8490, E: brian.hoffmann@cliffordchance.com Jeff Berman, Partner, T: +1 212 878 3460, E: jeff.berman@cliffordchance.com David Brinton, Partner, T: +1 212 878 8276, E: david.brinton@cliffordchance.com Sarah Jones, Partner, T: +1 212 878 3321, E: sarah.jones@cliffordchance.com Craig Medwick, Partner, T: +1 212 878 8168, E: craig.medwick@cliffordchance.com Paul Meyer, Partner, T: +1 212 878 8176, E: paul.meyer@cliffordchance.com Benjamin Sibbett, Partner, T: +1 212 878 8491, E: benjamin.sibbett@cliffordchance.com Roger Singer, Partner, T: +1 212 878 3288, E: roger.singer@cliffordchance.com Nicholas Williams, Partner, T: +1 212 878 8010, E: nick.williams@cliffordchance.com
Introduction
This Guide to Takeovers in the United States provides a summary overview of the principal legal considerations with respect to takeovers of U.S. public companies. It considers, from both a legal and regulatory perspective, the various stages of a takeover from the initial approach to, through to obtaining control of, the target company. It addresses several key areasthe applicable regulatory framework (Chapter One), preliminary takeover activity, including stakebuilding, preliminary agreements and seeking support from the targets shareholders (Chapter Two), primary acquisition structures (Chapter Three), deal protection, including no-shop, no-talk and go-shop provisions as well as fiduciary outs and break fees (Chapter Four), fiduciary duties applicable to a target companys board of directors in the M&A context (Chapter Five), takeover defenses (Chapter Six), antitrust/merger clearance (Chapter Seven) and U.S. regulation of non-U.S. investment in the United States (CFIUS) (Chapter Eight). This Guide does not, however, address any financial, tax or accounting matters or the application to takeovers of securities and other laws of jurisdictions outside the United States. Many of the legal issues discussed in this Guide are potentially applicable to takeovers of non-U.S. companies that have shares traded or held in the United States. While the Guide touches briefly on some of the issues that arise in that context, its principal focus is on takeovers of U.S. public companies. Other issues that are not covered in this Guide must also be addressed when the target company is a non-U.S. company. The Guide does not purport to be comprehensive, but rather provides a summary overview of a series of complex topics. It is not intended to, and does not, constitute legal advice. The information contained in this Guide is accurate as of October 2010.
contents
1. Regulatory Framework State Corporate Laws Federal Securities Laws Securities Act Proxy Rules Tender Offer Rules Other Primary Regulations Federal Securities Laws Applicable to Stakebuilding Antitrust/Merger Clearance Exon-Florio/CFIUS Regulated Industries 2. Preliminary Activity Approaching the Target Confidentiality Stakebuilding Management Team and Outside Advisers Due Diligence Financing Preliminary Agreements Between Acquirer and Target Confidentiality Agreements Standstill Agreements Exclusivity/Expense Reimbursement Agreements Letters of Intent Seeking Support From Shareholders
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3. Acquisition Structures Choice of Acquisition Structure - Two-Step or Single-Step Two-Step Structure Single-Step Structure Summary Comparison of Structuring Alternatives Provisions Commonly Included in the Merger Agreement Implementation of a Two-Step Transaction Implementation of a Single-Step Transaction Additional Structuring Considerations Registration Under the Securities Act Required Board and Shareholder Approvals Appraisal Rights Disclosure of Financial Statements Minimum Offer Period; Withdrawal Rights All Holders/Best Price Rule Target Companys Obligations Arrangements Between the Acquirer and Members of Targets Management Team Trading Restrictions Foreign Private Issuers 4. Deal Protection No-Shop, No-Talk and Go-Shop Provisions Fiduciary Outs and Break-Up Fees Stock Option Agreements Voting/Support Agreements
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5. Fiduciary Duties of a Target Companys Board of Directors Principal Components of Directors Fiduciary Duties Fiduciary Duties in the M&A Context 6. Takeover Defenses Poison Pill Shareholder Rights Plans Charter and Bylaw Provisions Antitakeover Statutes 7. Antitrust/Merger Clearance 8. The Committee on Foreign Investment in the United States (CFIUS) Appendix A Indicative Timeline for Single-Step and Two-Step Cash Acquisitions of U.S. Public Companies Appendix B Deal Structure Considerations in Acquiring a U.S. Public Company The Relative Advantages and Disadvantages of the Single-Step and Two-Step Structures
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1. Regulatory Framework
State Corporate Laws Federal Securities Laws Securities Act of 1933 Proxy Rules Tender Offer Rules Other Primary Regulations Federal Securities Laws Applicable to Stakebuilding Antitrust/Merger Clearance Exon-Florio/CFIUS Regulated Industries
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A Guide to Takeovers in the United States, Clifford Chance US LLP
Section 1: Regulatory Framework
In this chapter, we provide a brief overview of the more significant regulatory requirements likely to be relevant to an acquisition of a U.S. public company.
State Corporate Laws Most domestic U.S. publicly traded businesses are organized as corporations. With very limited exceptions, the laws under which U.S. corporations are organized are state (not federal) laws. State corporate laws dictate what shareholder approvals are required for a particular form of transaction.1 State corporate laws also establish the duties of a target companys board of directors during the takeover process. Accordingly, state corporate laws govern the ability of a target companys board of directors to reject or resist unsolicited takeover proposals, as well as the boards responsibilities when negotiating the terms of a takeover or choosing from among competing proposals. When we discuss corporate laws in this Guide, unless otherwise indicated, we are referring to Delaware law. According to recent studies, more than 50% of the corporations in the Fortune 500 are incorporated in Delaware. Federal Securities Laws The primary U.S. federal securities laws that are potentially applicable to takeover transactions are: n the registration requirements of the Securities Act of 1933 (the Securities Act), which potentially apply to M&A transactions when the consideration to be received by the targets shareholders includes securities;
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n the provisions of the Securities Exchange act of 1934 (the Exchange Act) and related rules governing proxy solicitations in respect of shares registered under the Exchange Act (generally referred to as the proxy rules); and n the portions of the Exchange Act and related rules governing the conduct of tender offers (generally referred to as the tender offer rules). Securities Act The registration requirements of the Securities Act potentially apply to share-for-share acquisitions and other transactions in which the targets shareholders are offered securities. The registration requirements of the Securities Act do not apply to all-cash M&A transactions. For purposes of the Securities Act, an M&A transaction in which the consideration to be received by the target companys shareholders consists in whole or in part of securities is deemed to involve an offer and sale of securities, regardless of whether the transaction is effected pursuant to a tender offer or a shareholder vote. Under the Securities Act, unless an exemption is available, (i)an offer to sell securities cannot be made until a registration statement covering the proposed offering has been filed with the SEC, and (ii)a sale (defined to include a binding contract of sale) cannot be effected until the registration
In one situation, stock exchange rules also are relevant to shareholder approval requirements: if the acquirer in a share-for-share transaction is listed on a U.S. exchange and as a result of the transaction will increase the number of its outstanding shares by 20% or more, the acquirer will be required under stock exchange rules to obtain the approval of its own shareholders. A Guide to Takeovers in the United States, Clifford Chance US LLP 2
statement has become effective (which, generally, means cleared by the SEC). For most share-for-share acquisitions of U.S. public companies, no exemption from registration will be available and, as a result, a share-for-share acquisition of a U.S. public company almost certainly will have to be registered under the Securities Act. If the target company in a share-for-share transaction qualifies as a foreign private issuer under the SECs rules2 or is closely held, exemptions from registration under the Securities Act may be available. The SECs rules prescribe various forms of registration statements for use in registering different kinds of transactions under the Securities Act. For a share-for-share transaction, the required form of registration statement is Form S-4 or, if the acquirer qualifies as a foreign private issuer, Form F-4. For any share-forshare acquisition of a U.S. public company, in addition to the registration requirements of the Securities Act, the transaction also will be subject to either the proxy rules or the tender offer rules because the transaction will be effected either pursuant to a single-step merger that requires a vote of the targets shareholders, or pursuant to an exchange offer.3 Accordingly, the disclosure document required to be included in the registration statement must satisfy both of the applicable sets of rules (the Securities Act rules and either the proxy rules or the tender offer
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rules). The disclosure document to be sent to the target companys shareholders4 must contain detailed disclosure regarding, among other things, the terms of the transaction, the negotiations between the parties, the target board of directors deliberations, fairness opinions of financial advisors, historical financial information with respect to the target and acquirer and, depending on the size of the target relative to the acquirer, pro forma financial information giving effect to the transaction. The SECs legal and accounting staff normally will review and comment on a registration statement prior to the SEC declaring the registration statement effective under the Securities Act. The process of preparing the registration statement and dealing with the SEC staffs comments typically would be expected to take not less than six weeks, and sometimes much longer, especially for a first-time registrant (a company that has never filed a registration statement with the SEC). Particularly for a nonU.S. acquirer whose shares are not already listed on a U.S. exchange, complying with these Securities Act registration requirements can be time-consuming and expensive. For an acquirer that is not already subject to the ongoing reporting requirements of the Exchange Act, the use of a Securities Act registration statement to effect an M&A transaction will trigger a requirement to comply with those ongoing reporting requirements from the time the registration statement is declared
The SECs definition of a foreign private issuer is set out on page 21.
Some states expressly permit compulsory share exchanges that eliminate the need for a merger. See footnote 8 on page 19 for a more detailed explanation of this structuring alternative. In U.S. practice the disclosure document used in a transaction subject to registration under the Securities Act is called a prospectus; the disclosure document used to solicit proxies is called a proxy statement; and the disclosure document used in a tender offer is called an offer to purchase. Hybrid disclosure documents have hybrid namesfor example, a disclosure document used in a share-for-share transaction to be voted on by the target companys shareholders is called a proxy statement/prospectus. A Guide to Takeovers in the United States, Clifford Chance US LLP
effective by the SEC. The ongoing reporting requirements include, in the case of a U.S. domestic issuer, the requirement to file annual reports on Form 10-K, quarterly reports on Form10-Q and interim reports on Form 8-K, and in the case of a foreign private issuer, the requirement to file annual reports on Form20-F and interim reports on Form 6-K. If the acquirers shares are not subsequently listed on a U.S. exchange, it may be possible at a later date to deregister the shares and thereby end the obligation to comply with the SECs periodic reporting requirements.5 Proxy Rules Some public company acquisition structures require a vote by either or both of the targets or the acquirers shareholders. If the class of shares to be voted is registered under Section 12 of the Exchange Act (which will always be the case if the shares to be voted are listed on a U.S. exchange), the process of soliciting those votes will be subject to the SECs proxy rules unless the issuer of the shares qualifies as a foreign private issuer under the SECs rules.6 The proxy rules set forth detailed disclosure requirements that are similar in many respects to the Securities Act disclosure requirements described above. A proxy statement cannot be sent to shareholders in definitive form until it has been on file with the SEC for at least 10 days. If the SEC staff provides comments on the proxy statement, there may be a longer delay before it can be sent to shareholders in definitive form.
Tender Offer Rules If the proposed takeover is structured to involve an offer to purchase shares directly from the shareholders of the target, the tender offer rules will be applicable. An offer for shares that are not registered under Section 12 of the Exchange Act is subject only to the (relatively limited) requirements imposed by Section 14(e) of, and Regulation 14E under, the Exchange Act. By contrast, an offer for shares that are registered under Section 12 of the Exchange Act also is subject to the more extensive requirements imposed by Section 14(d) of, and Regulation 14D under, the Exchange Act. Shares that are listed on the NYSE, Nasdaq or another U.S. exchange must be registered under Section12 of the Exchange Act. For tender offers subject to Regulation 14D, detailed disclosure requirements apply. An offer for shares of a foreign private issuer will be exempt from most of the requirements imposed by Regulations 14D and 14E if the percentage of the class of the targets shares being sought in the offer that is held by U.S. holders is not more than 10%, pursuant to the Tier I exemption. If the U.S. ownership level is over 10% but is not more than 40%, a more limited set of exemptions, the Tier II exemptions, may be available. The calculation of the 10% and 40% thresholds are not straightforward exercises and must be done in accordance with SEC-prescribed rules. All-cash acquisitions of U.S. public companies commonly are structured as two-step transactionsa tender offer
This can present a difficult choice. A decision by an acquirer not to list its shares on a U.S. exchange in order to facilitate subsequent deregistration may make its acquisition proposal less attractive to the target company and its shareholders, or could lead to flowback that puts pressure on the acquirers share price. Solicitations in respect of shares of foreign private issuers are exempt from the proxy rules under Exchange Act Rule 3a12-3(b). A Guide to Takeovers in the United States, Clifford Chance US LLP 4
followed by a merger that squeezes out any untendered shares, typically by converting them into the right to receive the same cash price per share offered in the tender offer. The two-step approach usually has timing advantages over the alternative single-step transaction structure. These alternative acquisition structures are discussed in more detail in Chapter 3 of this Guide. Other Primary Regulations Federal Securities Laws Applicable to Stakebuilding Would-be acquirers seeking to acquire stakes in target companies must take into account the restrictions on insider trading imposed pursuant to Rule 10b-5 under the Exchange Act; the potential requirement to report beneficial ownership of shares in excess of 5% on Schedule 13D; and the short-swing profits rules imposed under Section 16(b) of the Exchange Act (which potentially can require disgorgement of profits from trading after the acquirers position in the targets shares exceeds 10%).7 Stakebuilding and related matters are discussed in Chapter 2 of this Guide. Antitrust/Merger Clearance Many U.S. M&A transactions are subject to the clearance process imposed under the U.S. Hart-Scott-Rodino Antitrust Improvements Act (commonly referred to as the HSR Act). The HSR clearance process and other antitrust matters are discussed in Chapter 7 of this Guide. Exon-Florio/CFIUS The Exon-Florio provision of the Defense Production Act grants the President of the United States the authority to suspend or
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prohibit acquisitions of U.S. businesses by non-U.S. investors that threaten to impair the national security. The authority to administer the Exon Florio provision has been delegated to the Committee on Foreign Investment in the United States (CFUIS). The Exon-Florio provision contemplates that parties to a transaction can voluntarily submit to a review of their proposed transaction by CFIUS. Despite the voluntary nature of the notification, acquirers that believe their transaction could possibly give rise to national security concerns typically choose to follow the notification process because acquisitions by non-U.S. investors that fall within the Exon-Florio provision but are not cleared by CFIUS remain indefinitely subject to the imposition of divestment or other requirements by the President. The Exon-Florio provision and CFIUS are discussed in Chapter 8 of this Guide. Regulated Industries Various federal and state regulatory requirements may apply to transactions of targets operating in particular industries, including: n Registered Investment Funds/Advisers n Banking/Financial Institutions n Energy n Natural Resources n Public Utilities n Telecommunications n Gaming n Defense n Insurance
Under Exchange Rule 3a12-3(b), Section 16 does not apply to acquisitions of shares of foreign private issuers. A Guide to Takeovers in the United States, Clifford Chance US LLP
2. Preliminary Activity
Approaching the Target Confidentiality Stakebuilding Management Team and Outside Advisers Due Diligence Financing Preliminary Agreements Between Acquirer and Target Confidentiality Agreements Standstill Agreements Exclusivity/Expense Reimbursement Agreements Letters of Intent Seeking Support From Shareholders
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Section 2: Preliminary Activity
The early stages of an acquisition of a U.S. public company can be crucial. Key questions to be decided include whether and how to approach the target; whether and how to preserve confidentiality; and whether and how to build a toehold position in the targets shares. These questions are discussed in more detail in this chapter.
Approaching the Target Boards of directors of U.S. public companies have greater latitude than their counterparts in many other parts of the world to actively resist takeover proposals they disfavor. For this reason, if discussions are to be initiated by the acquirer, the initial approach to the target should be handled carefully. Of course, if the acquirers approach is not unsolicited but is instead in response to an approach by the target or an announcement by the target that it is exploring strategic alternatives (generally understood to mean seeking takeover proposals), then the initial approach is likely to be less sensitive. Confidentiality Subject to a handful of exceptions, early disclosure of takeover discussions with a U.S. public company target generally is not required. In many cases, the first public announcement of a takeover of a U.S. public company occurs only after acquirer and target have entered into a definitive merger agreement. The situations in which disclosure of takeover discussions is required before the parties have entered into a definitive agreement include: n situations in which the target has reason to believe that a leak has occurred and that at least some trading in the targets shares is being conducted by persons in possession of information regarding the targets takeover discussions; and
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n situations in which disclosure of takeover discussions is necessary in order to prevent other public statements by the target from being misleading. If a U.S. public company responds to an inquiry about whether it is in takeover discussions at a time when discussions of that type are in fact occurring, the target cannot deny the existence of those discussions (because doing so would violate the SECs Rule 10b-5) but may be able to respond with no comment. Stakebuilding Acquirers sometimes make open-market or negotiated block purchases of a target companys shares before beginning negotiations with the target or before a negotiated transaction with the target is announced (these are sometimes called toehold purchases). There are several possible reasons to pursue toehold purchases. Such purchases are likely to be at a less expensive price per share than the transaction price finally agreed with the target, thereby helping lower the total cost of the acquisition. If the acquirer is outbid by a third party, the profit on the toehold share position will help defray transaction costs that otherwise would be borne by the would-be acquirer. Alternatively, a sizeable toehold might help defeat a competing bid. And, finally, if the approach has the potential to turn hostile, the acquirer may need to hold shares in order to have standing to sue the target or its board of directors.
There is no mandatory offer regime in the United States requiring that a person who acquires a specific percentage of shares in a target company must make an offer for the remaining shares. Accordingly, toehold purchases (even substantial ones) will not trigger an obligation to make a follow-on offer. In general, toehold acquisitions are permissible, subject to the following considerations: n If the acquirer holds material nonpublic information regarding the target, purchases of the targets shares may violate Rule 10b-5. For this purpose, the acquirers plans to acquire the target do not disqualify the acquirer from making purchases. In addition, if the takeover is to be implemented by way of a tender offer the SECs Rule 14e-3 will prohibit certain third parties who learn of the tender offer, including the acquirers advisers but not the acquirer itself, from acquiring the targets shares before the acquirers plans have been publicly announced. n If any discussions with the target occur, the target almost certainly will insist that the acquirer enter into a confidentiality agreement in which the acquirer agrees to use information provided by the target solely to negotiate an acquisition agreement with the target, and agrees (through a standstill clause) to refrain from purchasing the targets shares. n Share purchases beyond specified levels are permitted only after compliance with the merger clearance process discussed in Chapter 7 of this Guide.
n A person or group of persons that acquires beneficial ownership of more that 5% of the outstanding shares of any class of equity securities registered under Section 12 of the Exchange Act (which would include any shares listed on a U.S. exchange) in anticipation of pursuing an acquisition proposal will be required to file a Schedule 13D with the SEC (within 10 days after crossing the 5% threshold) that discloses, among other things, information about the acquirers share position and intentions with respect to the target. The person or group is permitted to acquire more shares after passing the 5% threshold during the 10-day period prior to filing the Schedule 13D. The Schedule 13D is publicly available immediately upon filing. The definition of beneficial ownership for this purpose is broad and includes not only direct ownership but also, potentially, shares held by third parties that are the subject of options or voting commitments in favor of the acquirer, and some types of long positions established though use of derivatives. n If the target has adopted a poison pill rights plan, the acquirer should take care to limit its ownership of the targets shares to below the level at which the (disastrously dilutive) provisions of the pill are triggered. Pill triggers frequently are set at 10% or 15% of outstanding shares of common stock, but some are lower. Poison pill shareholder rights plans are discussed in greater detail in Chapter 6 of this Guide.
n Various state antitakeover statutes can be triggered by share accumulations. In Delaware, the trigger level is 15% (Section 203 of the Delaware General Corporation Law). Toehold acquisitions should remain below the applicable trigger levels. These statutes typically use broad concepts of beneficial ownership borrowed from the SECs Schedule 13D rules. This means they can be inadvertently triggered if, for example, an acquirer enters into support agreements with major shareholders of the target. State antitakeover statutes are discussed in greater detail in Chapter 6 of this Guide. n The short-swing profits rule, contained in Section 16(b) of the Exchange Act and related rules, will require disgorgement of any profit deemed made on the basis of purchases and sales made within 6 months of one another by a person that owns 10% or more of a class of publicly traded shares.8 n If the acquirers share position exceeds 10%, the acquirer may be deemed to be an affiliate of the target company, which would cause any subsequent acquisition transaction to become subject to the heightened disclosure obligations imposed pursuant to Rule 13e-3 under the Exchange Act. Management Team and Outside Advisers The acquirer must empower its management team with sufficient authority to make quick and effective decisions, and engage appropriate outside advisors with expertise to assist in the process. In addition to legal counsel, it may also be advisable for
an acquirer to engage various other outside advisers, including investment bankers, independent accountants and, potentially depending on the nature of the transaction, proxy solicitation firms, public relations firms, industry experts or other consultants. Due Diligence In order to ensure that the proposed acquisition will satisfactorily address the acquirers financial and strategic objectives, an acquirer will want to perform due diligence on the target prior to making its decision to proceed. Due diligence is typically conducted with respect to the business, financial and legal aspects of the target. Due diligence, if well conducted, enables the acquirer to gain insight into, among other things, the potential targets capital structure and operating characteristics and to better assess the risk profile of the potential investment. Due diligence also provides a basis for establishing the acquisition price and structure (including any appropriate price adjustments) and informs negotiation of the risk allocation and other provisions of the transaction documents. Contractual protections, such as representations and warranties with respect to the targets business9 conditions to closing and covenants governing the operations of the target between signing and closing, often need to be tailored based on the due diligence findings. Due diligence may also reveal important information with respect to postacquisition integration. Due diligence is not a one-size-fits-all process. Each prospective acquirer must decide for itself how much time and expense to dedicate to due diligence activities taking into account, among other things, the requirements of the
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Under Exchange Act Rule 3a12-3(b), Section 16 does not apply to acquisitions of shares of foreign private issuers.
As indicated elsewhere in this Guide, in a U.S. public company acquisition, the target companys representations and warranties typically will not survive the closing, so if the acquirer discovers a problem after the completion of the transaction, it has no right to be indemnified or recover damages. A Guide to Takeovers in the United States, Clifford Chance US LLP
acquirers funding sources and the acquirers comfort level with, and knowledge of, the target company and its business. Financing If the purchase of shares of a publicly-traded U.S. target company is to be financed by borrowings that are secured directly or indirectly by the acquired shares, the financing arrangements may be subject to the Federal Reserve Boards margin regulations Regulations T, U and X. Those regulations generally limit the permitted amount of financing to 50% of the current market value of the purchased shares. There are various transaction structures that can be used to avoid these margin regulations. In a singlestep transaction structure, a secured lenders collateral will be the assets of the target company, not the acquired shares, and so the margin regulations will not apply. In a two-step transaction structure where the acquirer borrows to finance the purchase of tendered shares, the margin regulations will not apply if the acquirer borrows on an unsecured basis and no negative pledge or similar restrictions apply to the acquired shares. Whether a single-step structure or a two-step structure is used, the collateral for secured acquisition debt ultimately will be the assets of the target. Unlike in some other jurisdictions, in the United States this type of secured acquisition financing can be accomplished without the use of elaborate whitewash or similar procedures. U.S. law does not contain the prohibitions found in some other jurisdictions with respect to subsidiaries providing financial assistance to parent companies (so long as the subsidiary is 100%-owned by the parent). The laws of many U.S. states do, however, contain prohibitions on fraudulent conveyancesgenerally defined as transfers of property
(including grants of security interests) at a time when the transferring company is insolvent or is rendered insolvent as a result of the transfer. In highly-leveraged transactions, lenders may insist on extensive analyses to support the conclusion that the target company remains solvent immediately following the completion of the acquisition, taking into effect the target companys assumption of the acquisition debt. Preliminary Agreements Between Acquirer and Target Depending on the circumstances, several different types of preliminary agreements may be utilized. Confidentiality Agreements A confidentiality or non-disclosure agreement typically requires the recipient of confidential information to keep the information confidential and to use the information solely in connection with its evaluation of the proposed transaction. Frequently this is a one-way agreement covering only information provided by the target. If the contemplated transaction is share-for-share, the target typically also will wish to perform diligence on the acquirer, and in that case the confidentiality obligations will be mutual. Standstill Agreements If the target is a public company, the target company usually will insist on including a standstill agreement in the confidentiality agreement. Standstills prohibit the prospective acquirer from acquiring or offering to acquire shares, other securities or assets of the target or its subsidiaries both during negotiations and for a specified time thereafter (sometimes targets request standstill periods as long as three years, but 12-24 months is more typical). Standstill provisions also typically contain broad prohibitions on other potentially-disruptive behavior by acquirers, including
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participation in proxy contests and other public or private attempts to influence the management of the target. Some acquirers successfully negotiate the right to be released from their standstill obligations in certain circumstances in order to compete with other bidders seeking to acquire the target company. Exclusivity/Expense Reimbursement Agreements Acquirers sometimes fear they will invest a significant amount of time and expense in conducting due diligence and negotiations in connection with a takeover only to then see the target sold to a third party. To address this concern, acquirers sometimes try to persuade the target to enter into an exclusivity agreement (in which the target promises to refrain from takeover discussions with third parties for a specified period) and/or an expense reimbursement agreement (in which the target promises to pay the prospective acquirers expenses if a transaction is not completed). Well-advised public target companies rarely agree to these requests. Exclusivity agreements are slightly more common, however, when the proposed transaction is a management-led buyout. Letters of Intent Parties sometimes sign a letter of intent, which describes the material terms of a proposed transaction. A letter of intent creates a roadmap for proceeding to the definitive agreement and helps to expose any deal breakers early in the discussions. Letters of intent are not commonly used in connection with acquisitions of U.S. public companies. When they are used, they typically are non-binding.
Seeking Support From Shareholders Would-be acquirers should take great care in seeking support agreements from major shareholders of the target company. Agreements of this type could trigger Schedule 13D filing obligations, state antitakeover statutes and poison pill rights plans, in some cases with devastatingly adverse consequences. Support agreements without the consent of the target companys board of directors typically also will violate the form of standstill clause customarily contained in confidentiality agreements.
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3. Acquisition Structures
Choice of Acquisition Structure - Two-Step or Single-Step Two-Step Structure Single-Step Structure Summary Comparison of Structuring Alternatives Provisions Commonly Included in a Merger Agreement Implementation of a Two-Step Transaction Implementation of a Single-Step Transaction Additional Structuring Considerations Registration Under the Securities Act Required Board and Shareholder Approvals Appraisal Rights Disclosure of Financial Statements Minimum Offer Period; Withdrawal Rights All Holders/Best Price Rule Target Companys Obligations Arrangements Between the Acquirer and Members of Targets Management Team Trading Restrictions Foreign Private Issuers
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Section 3: Acquisition Structures
In the United States, a negotiated acquisition of a public company invariably is effected pursuant to a merger agreement.10 The merger agreement typically has three parties the acquirer, the target and a subsidiary of the acquirer (commonly referred to as a merger subsidiary), specially formed for the purpose of the transaction, usually under the laws of the same jurisdiction as the target. The merger agreement will provide either for a two-step transaction structure that begins with a tender offer, or a single-step merger transaction structure. In this chapter, we discuss these alternative structures, their respective attributes and the processes typically followed to implement them.11
Choice of Acquisition Structure - Two-Step or Single-Step Two-Step Structure In a two-step structure, the merger agreement provides for a tender offer by the merger subsidiary followed by a second-step merger between the merger subsidiary and the target. In the tender offer, the merger subsidiary offers to buy any and all of the shares of the target that have been tendered before the expiration of the offer, provided the conditions to the offer are satisfied at that time. Those offer conditions customarily include, among others, a sufficient
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number of shares having been tendered so that the acquirer can vote through the second-step merger alone (without needing the votes of any other shareholders). The second-step merger (sometimes also called a squeeze-out merger) is used to eliminate the shares not tendered in the tender offer by converting them into the right to receive the same amount of consideration per share that is paid in the tender offer. Even if the second-step merger takes some time to complete, the acquirer controls the target company from the time it completes its tender offer. Acquirers in all-cash transactions often
By contrast, hostile takeover bids usually involve a tender offer by the acquirer made without the benefit of a merger agreement or a favorable recommendation from the target companys board of directors. If the acquirer obtains enough shares through the tender offer, then it can remove and replace the existing directors and vote through the second-step merger without requiring the approval of any remaining target shareholders. A compulsory share exchange is an alternative to a traditional merger structure in many states, including New York, Illinois and Texas, but not Delaware. In these cases, the applicable state statute typically authorizes a compulsory exchange of all outstanding shares of the target company for cash, stock or other securities pursuant to a plan of share exchange that is approved by the targets board of directors and shareholders, the acquirers board and, if required by the statute, the acquirers shareholders. Unlike exchange or tender offers, which require no shareholder vote but do not directly affect untendered shares (i.e., they remain outstanding), state statutes that permit compulsory share exchanges provide that a plan of share exchange is subject to a target shareholder vote, triggers appraisal rights and, if approved, converts all of the outstanding shares of the target company into the right to receive the exchange consideration. As a result, because there is no merger there is no need to establish a temporary merger subsidiary. A Guide to Takeovers in the United States, Clifford Chance US LLP
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prefer the two-step structure because (assuming the offer is well-received by the targets shareholders) it reduces the period of time that the transaction is potentially exposed to competing bids and to risks of adverse 12 developments that could threaten a closing. The process to implement a two-step acquisition is described in greater detail below. Single-Step Structure In a single-step structure, no tender offer is made and instead the merger is submitted to a vote of the targets shareholders. in the merger, the target companys shares all are converted at the same time, when the merger becomes legally effective, into the right to receive the per share consideration being offered by the acquirer. Situations in which a single-step merger might be preferred include (i) when there are regulatory or other approvals that cannot be satisfied quickly (such as, for example, antitrust approvals, or registration with the SEC if the consideration being offered to the target companys shareholders consists in whole or in part of shares of the acquiring company) so that the timing advantage of the twostep structure is eliminated, (ii) when the acquiring company is financing the transaction with loans and the lenders do not wish to provide bridge financing for the purchase of shares in a first-step tender offer, (iii) when the transaction will include an equity roll-over
by management or other target shareholders, and the acquirer wishes to avoid the technical difficulties presented by the application of the SECs tender offer rules to those kinds of arrangements,13 and (iv) when the targets board of directors wishes to expose the transaction to competing bids for a longer period of time than would be available in a two-step transaction. The process to implement a single-step transaction is described in greater detail below. Summary Comparison of Structuring Alternatives A summary timeline for each of the single-step and two-step acquisition techniques is provided in AppendixA to this Guide. A summary of the relative advantages and disadvantages of the two techniques is provided in Appendix B to this Guide. Provisions Commonly Included in the Merger Agreement The merger agreement will specify the transaction terms (e.g., price per share, treatment of options, tender offer/merger mechanics). The merger agreement also will contain representations and warranties, provisions for conduct of the targets business both before and after completion of the transaction, the conditions to the obligations of the parties to complete the transaction and termination provisions. Customarily in a U.S. public company acquisition, the target companys representations and warranties will not survive the closing, so if
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If the consideration to be offered to the target companys shareholders includes securities and the transaction must be registered under the Securities Act, the timing advantage of the two-step structure is lost. As a result, most Securities Act-registered acquisitions of U.S. public company targets use the single-step structure. Equity roll-over arrangements present technical issues under Rule 14d-10 (the all holders/best price rule) and Rule 14e-5 (which prohibits purchases outside the tender offer). Because those rules only apply to tender offers, they do not apply to single-step transactions (in which no tender offer is used). Of course, even in a single-step transaction any special arrangements such as equity roll-overs must be fully disclosed to the target companys shareholders.
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the acquirer discovers a problem after the completion of the transaction it has no right to be indemnified or recover damages. The merger agreement commonly will include a no-shop provision (prohibiting the target from soliciting competing bids between announcement and closing) and a break fee provision (providing for a payment by the target to the acquirer in certain circumstances, including if the target determines to abandon the transaction in favor of a competing bid). The permissible extent of protection from these provisions is limited by Delaware law. Generally, break fees in the range of 2.0-3.5% of transaction value are common (although there may be instances where, because of the specific facts of the case, lower amounts are required, and in some cases, higher fees may be permissible). No-shop clauses must be tempered with the qualification that the target can respond to a bona fide unsolicited proposal that appears to be superior to the one already agreed to. Acquirers sometimes also receive commitments from significant shareholders of the target to support the transaction. Chapter 4 of this Guide contains a more detailed discussion of these and other deal protection provisions. Implementation of a Two-Step Transaction As described above, a two-step transaction structure, beginning with a tender offer, often is used to accelerate the process of gaining control of a target company. Unlike a single-step merger, which requires the preparation of a proxy statement that, as described below, must be pre-cleared by the SEC before dissemination, an all-cash tender offer requires no prior SEC clearance. Also, the preparation of the disclosure document used in a tender offer, and the process of addressing any SEC comments, is controlled principally by the acquirer. The merger
agreement in a two-step transaction will provide that the merger subsidiary must commence a tender offer for the target companys shares within a specified period (usually 10 business days) following the signing of the merger agreement. Under the SECs rules, the tender offer must remain open for at least 20 business days following its first publication and the offer period may be required to be extended if material changes are made to the terms of the offer within a short time before its scheduled expiration. For example, the offer must remain open for at least 10 business days after any change in the price per share being offered. The bidders obligation to accept and pay for shares tendered in response to the tender offer customarily is subject to a series of conditions, including a requirement that at least enough shares must have been tendered so that the bidder will be able when it owns those shares to vote through the second-step merger without the votes of any other shareholders (a simple majority of the outstanding shares entitled to vote in Delaware, unless a greater percentage is specified in its certificate of incorporation). By acquiring the requisite percentage of the target companys shares, the acquiring company gains control over the target company and can give the requisite shareholder approval of the second-step merger by voting the shares acquired in the tender offer. The merger agreement for a two-step transaction typically will require the acquirer to complete the second-step merger if it closes its tender offer, regardless of subsequent adverse developments. If the shares owned by the merger subsidiary at the completion of the tender offer represent 90% or more of the target companys outstanding shares, then the acquirer will be able to take advantage of the statutory short-form merger procedure, which permits the acquirer to increase
its ownership of the target company to 100% within a matter of a few days. Delaware law provides that if a company owns at least 90% of the shares of another company, it can merge with the subsidiary company without a vote of the subsidiary companys shareholders. In these cases, the secondstep merger can be completed without preparing or distributing a proxy statement or calling a meeting of the targets shareholders. If more than a majority but less than 90% of the target companys shares are acquired in the tender offer, however, in order to complete the merger an information statement (or proxy statement) must be prepared, cleared with the SEC and delivered to the other remaining shareholders of the target (even though their vote is not needed to effect the merger). It has become fairly common in tender offer transactions for the target to grant the acquirer a top-up option, which permits an acquirer that is below but fairly close to the 90% threshold to buy sufficient shares from the target to achieve the 90% ownership level, although some recent court decisions suggest these top-up options should be designed and used carefully.14 Implementation of a Single-Step Transaction In a single-step transaction, following execution of the merger agreement, the parties (acquirer and target) prepare the proxy materials that are required to be delivered to the target companys shareholders before the meeting to be held to approve the transaction. The proxy materials must be filed in preliminary form by the target company with the SEC. If the SECs staff decides not to review the proxy materials, they can be sent to the targets shareholders beginning 10 days after the
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preliminary proxy materials were filed. If the materials are reviewed and commented on by the SEC staff, the process of obtaining and resolving the comments will most likely take 4-6 weeks (although longer or shorter periods are possible). The SECs rules permit preliminary proxy materials (but not a proxy card) to be sent to shareholders before they are cleared by the SEC staff, but this is rarely done except in hostile or contested takeovers. After the proxy materials are cleared by the SEC, they are sent to shareholders, thereby commencing the proxy solicitation process. The acquirer often engages the services of a proxy soliciting firm to assist in this process. In order to assure a favorable result, proxy solicitation firms typically recommend a solicitation period of at least 35 days before the meeting. Delaware law requires the notice of the meeting to be given not less than 20 and not more than 60 days before the meeting date. The merger agreement for a single-step acquisition typically includes covenants on the part of the target company to make the necessary SEC filings, complete the SEC clearance process and hold its shareholders meeting as soon as reasonably practicable, and to consult with the acquirer about SEC filings, submissions, comments and other developments. Subject to these contractual provisions, though, in a single-step transaction the process of preparing the key disclosure document and dealing with SEC comments is controlled by the target company.
See, e.g., Olson v. ev3, Inc. (Del. Ch. 2010) (court found top-up option could be coercive because of its potential effect on the price obtainable in a statutory appraisal proceeding). A Guide to Takeovers in the United States, Clifford Chance US LLP 16
Additional Structuring Considerations Registration Under the Securities Act As discussed in Chapter 1, in the case of a share-for-share acquisition or, if the consideration to be offered to the target companys shareholders otherwise includes securities, the transaction will be subject to the registration requirements of the Securities Act. If the acquirer is not already an SEC reporting company, the filing of a registration statement will trigger a requirement or the part of the acquirer to comply subsequently with the continuous reporting requirements of the U.S. securities laws, including, in the case of a domestic issuer, to file annual reports on Form 10K, quarterly reports on Forms 10-Q and interim reports on Form 8-K, and in the case of a foreign private issuer, to file annual reports on Form 20-F and interim reports on Form 6-K. Required Board and Shareholder Approvals Under Delaware law, the merger agreement must be approved by the boards of directors of the two companies that will be merged (the target company and the acquirers merger subsidiary) and by the shareholders of both those companies. The merger subsidiary will have only one shareholder (typically the acquirer or one of its wholly-owned subsidiaries) and the approval of that shareholder can be given by a short, written consent signed by an authorized officer of the company that is the merger subsidiarys sole shareholder. In a single-step transaction, and in a two-step transaction in which the second-stage merger does not qualify for the short-form merger process (because the acquirer does not own 90% or more of the target companys outstanding shares
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following the completion of the tender offer), the approval of the target companys shareholders must be obtained to approve the merger. For a Delaware target company, unless its certificate of incorporation provides for a greater percentage, the approval must be by a majority of all outstanding shares entitled to be voted. If shares are being offered as part of the acquisition consideration and the acquirers shares are listed on a U.S. stock exchange, then the acquirers shareholders will have to vote to approve the issuance of the acquirers shares in the transaction if the number of shares to be issued will be 20% or more of the number of the acquirers shares outstanding immediately before the transaction. Appraisal Rights Under Delaware law and except for certain stock-for-stock mergers15 shareholders of a target company in a merger have the right (usually called dissenters rights or appraisal rights) to dissent from the merger and elect to have the Delaware Chancery Court appraise the fair value of their shares, in which case the appraised value in cash (and not the per share price specified in the merger agreement) is what the shareholders who exercise those rights are entitled to receive. The fair value to be determined by the court does not include a takeover premium. The exercise of dissenters rights does not affect the validity of the merger, nor does it prevent the acquirer from owning 100% of the targets equity immediately upon completion of the merger (and before the appraisal claims are resolved). An appraisal award affects only the shares of shareholders who properly exercise their rights to appraisal. Shareholders who tender their shares to the acquirer, or vote in favor of the merger, are not eligible to exercise dissenters rights.
Appraisal rights do not apply to the first step tender offer in a two-step transaction. They would apply, however, to the second-step merger. Accordingly, shareholders who tender their shares in the offer are not entitled to exercise appraisal rights. A Guide to Takeovers in the United States, Clifford Chance US LLP
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Disclosure of Financial Statements In all-cash transactions, both the tender offer rules (in a two-step acquisition) and the proxy rules (in a single-step acquisition) require inclusion of the acquirers financial statements in the disclosure document sent to the target companys shareholders if the financial condition of the acquirer is material to the target company shareholders decision to tender their shares or vote in favor of the merger, as applicable. This can be particularly important for acquirers who cannot readily produce financial statements of the type required by the SECs rules. The proxy rules provide that the acquirers financial statements will be material (and therefore must be provided) if the acquisition will require financing and the financing is not assured. The tender offer rules provide that the acquirers financial statements will be presumed not material (and therefore not required) if (i) the consideration offered consists solely of cash; (ii) the tender offer is not subject to any financing conditions; and (iii) either (x) the acquirer is an SEC-reporting company or (y) the offer is for all outstanding securities of the subject class. Despite the slightly different formulations, the financial statement requirements of the tender offer rules and the proxy rules are essentially the sameto avoid including financial statements in the documents sent to the targets shareholders, the acquirer must have its financing committed or otherwise clearly available and cannot have an express financing contingency. In share-for-share transactions and other transactions in which the consideration being offered by the acquirer to the targets shareholders includes securities, historical audited and unaudited financial statements of the acquirer and the target (prepared in accordance with, or in certain cases reconciled to, U.S. GAAP), together with, in some cases, pro forma financial statements
giving effect to the proposed business combination, must be included in the disclosure documents. The SEC has adopted rules that permit foreign private issuers to use financial statements that are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). These rules relax prior requirements that would have mandated disclosure in U.S. GAAP or, at a minimum, reconciliation to U.S. GAAP. Minimum Offer Period; Withdrawal Rights Under the SECs rules, a tender offer must remain open for at least 20 business days after it commences. The tender offer commences when the acquirer first publishes, sends or gives the targets shareholders the means to tender securities in the tender offer. All persons tendering securities in response to the tender offer have the right to withdraw them while the offer is open and at any time after 60 days following the commencement of the offer. A follow-on offer period of 3-20 business days is permitted during which no withdrawal rights apply and securities must be purchased as and when tendered for the same form and amount of consideration as ultimately offered to shareholders in the initial offering period. The SECs rules also require that a tender offer must remain open for at least 10 business days following a public announcement of a change in the percentage of securities being sought or in the consideration being offered. The SEC staff takes the position that other changes of comparable significance require the same treatment and that other material changes to the offer require the offer to remain open for at least five business days.
A Guide to Takeovers in the United States, Clifford Chance US LLP 18
All Holders/Best Price Rule A tender offer must be open to all shareholders of the subject class of securities and all holders must be paid the highest consideration paid to any other security holder during the offer (Rule 14d-10, which is commonly known as the all holders/best price rule). The offer can, however, provide the targets shareholders with the right to choose among different forms of consideration (e.g., all-cash vs. part cash and part securities), so long as all holders have the same choice. Rule 14d-10 was interpreted by some U.S. courts to apply when members of the target companys management team negotiate to receive special benefits following completion of the takeover (such as, for example, new employment contracts). The uncertainty caused by these court decisions led acquirers to make greater use of the single-step acquisition structure. In 2006, however, the SEC amended the rule to provide that the negotiation and receipt of employment benefits will not violate the rule provided certain procedures are followed. While the 2006 amendments did provide a workable safe harbor for management compensation arrangements, the amendments failed to address some other, potentially problematic situations. Accordingly, in a transaction in which the target companys management is expected to roll over its equity position in the target, for example, the acquirer may be prudent to use a single-step acquisition structure (thereby altogether avoiding the rule, which only applies to tender offers) because equity rollovers were not specifically addressed in the 2006 amendments and could be deemed to violate the rule. Target Companys Obligations Whether a tender offer is unsolicited or recommended by the
targets board of directors, the target company must publish or send to the targets shareholders its recommendation or position with respect to the tender offer within 10 business days after commencement of the tender offer. That recommendation or position also must be filed with the SEC on a Schedule14D-9. The SECs rules require the target companys board to (i)recommend acceptance or rejection of the offer, (ii)express no opinion and remains neutral toward the offer, or (iii)state that it is unable to take a position with respect to the offer. The document sent to shareholders and filed with the SEC also is required to include a description of the reasons for the boards position, as well as specified additional information, including the history of dealings and negotiations with the bidder, the substance of any report, presentation or advice received from any financial adviser retained by the target or its board, details of all purchases and sales of the target companys shares during the previous 60 days by the target company itself and by its officers and directors and any change-in-control arrangements or other executive compensation arrangements that will be affected by the offer. In recommended offers, the targets Schedule 14D-9 setting forth the target board of directors recommendation is typically mailed to its shareholders together with the acquirers offer materials. Arrangements Between the Acquirer and Members of Targets Management Team There may be commercial reasons for an acquirer to reach agreement at an early stage with the key members of a target companys management team on terms that incentivize those managers to stay with the business following the acquisition. Before holding any such discussions, transaction participants
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must carefully consider the possible consequences under U.S. securities laws because the substance of any proposals or agreements between the parties are generally required to be disclosed to the targets shareholders. In addition, if such arrangements would give any existing director or executive officer of the target a significant equity interest or rights in the entity formed to acquire the target, the takeover transaction may become subject to the SECs going private rule, Rule 13e-3. Rule13e-3 requires additional disclosure and, in particular, requires the acquirer (and the target, if the targets board recommends in favor of the transaction) to affirmatively state whether or not the terms of the transaction are fair to the unaffiliated shareholders of the target and to give detailed reasons for that conclusion. The additional required disclosure includes any valuation requests or analyses prepared by third parties for the transaction participants.16 An acquirer seeking to engage in discussions with members of the target companys management team also should bear in mind that if those members hold significant amounts of the targets stock, an agreement, arrangement or understanding with them could cause the acquirer to be deemed a beneficial owner of the target and could inadvertently trigger one or more of the anti-takeover provisions described in Chapter 6. Trading Restrictions The SECs Rule 14e-5 prohibits purchases outside of a tender offer of shares of the class being sought in the offer. The prohibition applies from the announcement of the tender offer until its expiration. It covers both purchases and arrangements to
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purchase, and extends to the acquirer, its dealer manager, their respective affiliates and anyone acting on behalf of any of them. The rule also covers related securities (i.e., securities immediately convertible into or exchangeable for shares of the class being sought in the offer). The rule does not apply during the time of any subsequent offering period if the consideration is the same in form and amount as offered in the original tender offer. Changes to the cross-border tender offer rules adopted by the SEC in 2008 make it easier for parties to comply with Rule 14e-5 in the context of a takeover offer for shares of a foreign private issuer that has U.S. shareholders. Regulation M prohibits certain trading activity regardless of whether the persons trading have an intent to manipulate prices. It applies to distributions of securities, including public offerings for cash. Regulation M treats a share-for-share transaction as a distribution, and imposes restrictions on bids for, and purchases of, shares of the class being offered to the targets shareholders. The restrictions apply to distribution participants (including the acquirer) and affiliated purchasers. An acquirers investment bank is potentially subject to these restrictions, although purchases on the other side of an information barrier within the investment bank are permitted. The period during which these restrictions apply begins on the day of mailing the proxy solicitation materials and continues through the time of the vote. Competing share-for-share bids can raise additional complications under Regulation M, because the SEC staff takes the position that a restricted period may begin for a hostile competing acquirer before it mails its own offer materials, if the acquirer also is soliciting no votes on the first transaction.
Rule 13e-3 also will apply if the acquirer already is an affiliate of the target company (which would be the case if the acquirer holds 10% or more of the target companys shares or has a board seat). A Guide to Takeovers in the United States, Clifford Chance US LLP 20
Foreign Private Issuers If a tender offer is made for shares of a foreign private issuer the tender offer may not be subject to all of the SECs tender offer rules, because the acquirer may have the benefit of the Tier I or Tier II exemptions. The availability of the Tier I and Tier II exemptions is based principally on the level of U.S. share ownership in the target company, measured by the percentage of the target companys shares being sought in the offer that are held by U.S. holders. To qualify for the Tier I exemption, no more than 10% of the shares being sought in the offer may be held by U.S. residents and certain other conditions must be satisfied. To qualify for the Tier II exemption, no more than 40% of the shares being sought in the offer may be held by U.S. residents and certain other conditions must be satisfied. The calculation of the 10% and 40% thresholds are not straightforward exercises and must be done in accordance with SEC-prescribed rules. The Tier I and Tier II exemptions are available only when the target company is a foreign private issuer. All non-U.S. issuers (other than governmental issuers) qualify as foreign private issuers unless: (a)more than 50% of the issuers outstanding voting securities are directly or indirectly held of record by residents of the United States and (b) any of the following conditions are satisfied: (i) the majority of the issuers executive
officers or directors are U.S. citizens or residents; (ii) more than 50% of the assets of the issuer are located in the United States or (iii) the business of the issuer is administered principally in the United States. A corporation organized under the laws of a U.S. jurisdiction (such as Delaware) can never qualify as a foreign private issuer. Tender offers that qualify for the Tier I exemption are exempt from almost all of the disclosure, filing and procedural requirements of the tender offer rules. In addition, if the offer is a share-for-share offer that qualifies for the Tier I exemption, pursuant to Rule 802 under the Securities Act the transaction will be exempt from the registration requirements of the Securities Act. Tender offers that qualify for the Tier II exemption have limited relief from a number of the tender offer rules, and do not qualify for any relief from the registration requirements of the Securities Act. If, notwithstanding the availability of the Tier I and Tier II exemptions, transaction participants are unable to reconcile the U.S. tender offer rules with the rules of the jurisdiction in which the target company is organized, it may nonetheless be possible to obtain specific exemptive relief directly from the SEC.
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4. Deal Protection
No-Shop, No-Talk and Go-Shop Provisions Fiduciary Outs and Break-Up Fees Stock Option Agreements Voting/Support Agreements
23 24 24 25
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Section 4: Deal Protection
Between the time a merger agreement is entered into and publicly announced and the time it is voted on by shareholders (in the case of a single-step transaction) or the time the first-stage tender offer is completed (in the case of a two-step transaction), there is a risk that a competing third-party offer may emerge that could prevent the transaction provided for in the merger agreement from being consummated. To help alleviate this risk, discourage competing offers and compensate the would-be acquirer if a negotiated deal is broken up as a result of a competing offer, merger agreements providing for the acquisition of a U.S. public company invariably contain deal protection provisions. In this chapter, we discuss the deal protection mechanisms most commonly used in U.S. practice.
No-Shop, No-Talk and Go-Shop Provisions No-shop and no-talk provisions restrict target companies from soliciting, encouraging, initiating discussions with, providing information to, or negotiating with, third parties with respect to competing transactions. Virtually every U.S. public company merger agreement contains a form of no-shop/no-talk clause. Customarily, the restrictions imposed by these provisions are subject to exceptions which allow a target company to respond to an unsolicited proposal that the targets board believes represents (or reasonably may be expected to lead to) a superior transaction, by providing non-public information to the interloper and discussing potential contract terms with it. The merger agreement typically provides that if the discussions over the unsolicited competing offer result in a definitive agreement with the competing acquirer, the target can terminate the merger agreement (frequently only after giving a right to match to the acquirer under the first merger agreement, and invariably only upon immediate payment of a break fee). In some situations, the target companys board of directors may be concerned that a grant of broad deal protection rights to an acquirer may appear inconsistent with the target boards fiduciary obligation to maximize shareholder value. These concerns might arise, for example, if the target board is being asked to approve a management-led buyout transaction that has not been preceded by any auction or other market check process. In these situations, the target board and its advisers sometimes modify the customary no-shop/no-talk agreements by adding a go-shop provision. A go-shop provision permits a target to actively solicit competing offers for a specified, limited
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period of time after the merger agreement has been signed and the transaction has been announced and, usually, provides for a only a relatively modest break fee if the merger agreement is terminated to allow a transaction with a new bidder who emerged during the go-shop period. Fiduciary Outs and Break-Up Fees A fiduciary out provision gives the targets board the right to terminate the merger agreement if the board determines that its fiduciary duties require it to do so. In most cases, the right is limited to a situation in which the targets board has approved a competing transaction after complying with the no-shop/no-talk provision contained in the merger agreement. Invariably, the merger agreement provides that the exercise of a fiduciary out triggers payment of a break fee by the target to the acquirer. Termination or break fees are payments required under a merger agreement if the merger agreement is terminated for one or more specified reasons. Typically, the size of the termination fee and the events that trigger an obligation to pay it are the topics of significant negotiation. Delaware courts have approved termination fees ranging from 1% to 6% of the transaction value. Termination fees in the 2.0-3.5% range are common. The termination fee payable by the target when it terminates in order to enter into a new merger agreement with a competing acquirer invariably is payable immediately. Some other termination fees, however, are customarily payable on a deferred or contingent basis. For example, it is quite common to provide that if the target companys shareholders vote down a transaction at a
17
time when a competing proposal has been announced, and as a result of the vote-down the merger agreement is terminated, a termination fee will be payable by the target, but only if the target subsequently agrees to a competing transaction within a contractually-agreed period after the termination (12 months would be typical). Reverse break fee provisions require the acquirer to pay a fixed amount to the target if the merger agreement is terminated for one or more specified reasons, which might include failure to obtain antitrust/merger control clearances by a specified date or failure to obtain financing by a specified date. Many merger agreements contain no reverse break fee provision. Some acquirers (particularly private equity-backed acquirers) structure reverse break fees so as to give them an option to terminate the merger agreement for any reason upon payment of the reverse break fee. Stock Option Agreements Stock options are sometimes granted by target companies and give the acquirer the right to purchase a specified amount of stock, usually at the deal price per share. To avoid shareholder approval requirements under relevant stock exchange rules, the amount of stock issuable, in the case of an agreement with the target itself, generally does not exceed 19.9%. The option typically becomes exercisable only upon the occurrence of specified triggering events, such as a competing third-party offer or acquisition by a third party of a specified percentage of the targets stock.17
These types of defensive stock option agreements are different from the top-up options discussed earlier in this Guide, which sometimes are granted to help the acquirer qualify to use the short-form merger procedure after a first-stage tender offer. A Guide to Takeovers in the United States, Clifford Chance US LLP 24
Voting/Support Agreements Acquirers sometimes obtain commitments from significant shareholders of the target company to support the transaction agreed with the target by tendering or voting their shares accordingly. While these types of support arrangements generally are permissible, some technical considerations apply: n In share-for-share transactions, the support commitments may constitute impermissible gun-jumping under the Securities Act. The SEC staff takes a no-action position (i.e., it permits these support arrangements) with respect to situations in which the support commitments are provided only by corporate insiders and certain other conditions are met.18 n If the transaction involves a tender offer, the support commitments must comply with Rule 14e-5 (which prohibits purchasesincluding contracts to purchaseafter a tender offer is publicly announced and before it is completed), which means that tender commitments should be obtained before the first public announcement of the tender offer. n The Delaware Supreme court has held that it is not permissible to obtain voting commitments covering enough shares to vote through the proposed merger without any other shareholder support unless the target companys board of directors has the right to terminate the merger agreement or prevent the transaction from being put to a vote.19
n As discussed earlier in this Guide, shareholder support commitments also may trigger poison pill rights plans or state antitakeover statutes unless the target companys board has taken action (before any discussions with the applicable shareholders with respect to the proposed acquisition have taken place) to disapply those antitakeover defenses.
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The conditions include requirements that the offer is made to (in the case of an exchange offer), or votes are solicited from (in the case of a merger), all holders of the subject securities and that all holders are offered the same amount and form of consideration.
19
Omnicare v. NCS Healthcare, 818 A.2d 914 (Del. 2003).

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5. Fiduciary Duties of a Target Companys Board of Directors
Principal Components of Directors Fiduciary Duties Fiduciary Duties in the M&A Context
27 27
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Section 5: Fiduciary Duties of a Target Companys Board of Directors
In acquisitions of U.S. public companies, the standards of conduct required of the target companys board of directors are imposed principally as a result of state corporate law through the imposition of fiduciary duties. In this chapter, we briefly review those fiduciary duties under Delaware law.
Principal Components of Directors Fiduciary Duties The duty of care requires directors to act on an informed and deliberate basis and with the degree of care that an ordinarily prudent person would use under similar circumstances. In essence, this duty requires directors to make well-informed business decisions. To satisfy the duty of care in connection with making decisions on behalf of the corporation, a director must inform himself of all material, relevant information that is reasonably available to him. This is typically accomplished by, among other things, attending and participating in meetings of the board of directors; asking questions; probing assumptions and studying materials necessary to vote or act in an informed manner; taking time to evaluate the action under consideration; considering the advice of experts; and making deliberate decisions after thorough and candid discussions. The duty of loyalty requires directors to act in good faith in the best interests of the corporation and its stockholders without regard for personal interests. Simply put, this means that each director must put the interest of the corporation and its stockholders ahead of his own. This duty is not an absolute prohibition on insider transactions. If the transaction is fair to the corporation and the self-interested director discloses his personal
stake in the outcome, the director will not be held to have breached the duty of loyalty. The duty of candor requires directors to disclose fully and fairly all material information within a boards control and to provide a balanced, truthful account of all matters disclosed in communications with stockholders. Courts have invoked this duty to impose disclosure requirements that are distinct from, and occasionally greater than, the disclosure obligations imposed under the U.S. federal securities laws. Fiduciary Duties in the M&A Context Under the business judgment rule, decisions of directors are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the corporation. When the business judgment rule applies, courts decline to substitute their own views for those of the directors or to second guess the outcome of directors decisions. Subject to the exceptions discussed below, under Delaware law the actions taken by a board in the context of a business combination transaction, if challenged, will be reviewed under the deferential standard of the business judgment rule. Even with the benefit of the business judgment rule, a board may be found to have breached its fiduciary duties if the court finds that the directors of a target company in an M&A transaction
approved a sale of the company without taking the time to sufficiently inform themselves of all the relevant facts, the terms of the transaction, the possible alternatives and the relevant valuation considerations. In several important situations, the business judgment rule is not initially applied and the boards conduct instead is subject to enhanced judicial scrutiny. Those situations are: n When taking defensive actions in the face of a potential change of control of the corporation, board actions may become subject to the Unocal standard discussed below. n If directors are contemplating a sale or break-up of the corporation, board actions may become subject to the Revlon standard discussed below. n If there is a controlling or otherwise dominating shareholder on both sides of the transaction, or if directors are found to have violated their duties of care or loyalty, board actions may become subject to the entire fairness standard. The scheme of takeover regulation applied under Delaware law (and the laws of other U.S. jurisdictions) differs significantly from the takeover regulations of many other jurisdictions around the world. Delaware law does not impose a general prohibition on defensive actions by target companies boards of directors. Instead, Delaware law grants directors broad latitude to implement measures that deter or even completely prevent takeover proposals of which they disapprove, subject only to the requirement that in
implementing defensive actions the directors must comply with their fiduciary obligations. The standard of review applied by Delaware courts in considering shareholder challenges to boardimplemented defensive actions is not entirely deferential. Instead of applying the same deferential business judgment rule standard of review that applies to most board actions, Delaware courts apply the heightened scrutiny standard first articulated by the Delaware Supreme Court in Unocal Corp. v. Mesa Petroleum Co.20 The court in that case stated that because of the omnipresent specter that a board may be acting primarily in own interests, rather than those of the corporation and its shareholders, there is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred. In order to be afforded the protections of the business judgment rule with respect to defensive action, the directors must show that (i) they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed and (ii) the action the board took was reasonable in relation to the threat posed. Delaware courts typically grant boards a fair amount of latitude in satisfying this standard. Delaware courts apply an even more stringent standard of review when analyzing the conduct of a targets board of directors after the board has decided to pursue a change-of-control transaction. In Revlon, Inc. v. MacAndrews & Forbes Holdings,21 the Delaware Supreme Court held that once the directors decide to sell control of the corporation, their role changes from being defenders of the corporate bastion to auctioneers charged with getting the best price for the shareholders at a sale of the company.
20 21
493 A.2d 946 (Del. 1985). 506 A.2d 173 (Del. 1986). A Guide to Takeovers in the United States, Clifford Chance US LLP 28
Under Revlon, the board of a public company cannot, for example, decide to approve a sale to a favored bidder in the face of a higher and equally credible bid from a third party, even on grounds that the favored bidder will be a better steward of the target company, or more likely to maintain the targets current levels of employment or corporate philanthropy. The board can decide not to pursue any sale transaction at all, but once it decides to sell, it is required to follow a process that it reasonably believes in good faith should yield the best value for shareholders. Court decisions subsequent to Revlon helped to define its scope. Most notably, a share-for-share merger in which the combined companies will not have a controlling shareholder is not subject to the Revlon standard. The boards decision to pursue such a transaction is entitled to deferential review under the business judgment standard, and attempts by the board to fend off competing bids are subject only to the Unocal standard of review.22 If the board of a target company is pursuing a sale of the company, it may seek to satisfy its Revlon obligation to maximize value for shareholders by running an auction or market check process. Delaware courts have said, however, that while an auction or market check process may be desirable, it is not invariably required. Nonetheless, if the targets board decides to negotiate with a single acquirer without running any kind of auction or market check process, the board should be prepared to show why that approach is consistent with its duty to maximize the sale price. A well-advised board in this situation typically will seek to
protect its decision-making process from judicial criticism (i) by creating a good record as to why it believes dealing with a single bidder was appropriate and (ii) by limiting the extent of the deal protection rights granted to the acquirer in the merger agreement so that if a competing bid unexpectedly emerges the barriers to the competing bid will not be preclusive. Sometimes, a board that decides to forego any kind of pre-announcement auction or market check will request a go-shop provision, allowing it to actively shop (seek bids for) the company for a limited period of time after the transaction is announced, subject to only a modestsized break fee requirement. Delaware courts have evolved some elaborate rules for cases in which a controlling or dominant shareholder engages in M&A transactions affecting the company, but those rules typically do not apply to the arms-length third party transactions that are the subject of this Guide. In addition, many states corporate laws are more deferential than Delawares to the conduct of directors of target companies in change-of-control situations. Marylands corporate statute, for example, contains provisions intended to counter Unocal and Revlon by applying a uniform business judgment presumption and Pennsylvanias statute specifically authorizes the board of a target company to take into account the interest of constituents other than the companys shareholders.
Compare Paramount Communications v. Time Inc., 571 A.2d 1140 (Del. 1990) (Revlon duties did not apply in a share-for-share deal that did not result in control of the combined company by a single shareholder) with Paramount Communications v. QVC Network, 637 A.2d 34 (Del. 1994) (a share-for-share transaction that would result in a single individual controlling the combined company was subject to Revlon).
22
29
6. Takeover Defenses
Poison Pill Shareholder Rights Plans Charter and Bylaw Provisions Antitakeover Statutes
31 31 31
30
Section 6: Takeover Defenses
A prospective acquirer of a U.S. public company should take into account the various antitakeover provisions or devices that the target company may have adopted or to which it may be subject under applicable state law. In this chapter, we briefly review some of the principal antitakeover defenses potentially available to a U.S. public company.
Poison Pill Shareholder Rights Plans Shareholder rights plans (commonly referred to as poison pills) function by causing shares acquired by an unwanted acquirer (once the acquirer reaches a prescribed ownership threshold, typically 15%) to be massively diluted by causing share purchase rights held by all shareholders (other than the unwanted acquirer) to become exercisable at a substantial discount to the thenprevailing market price. In Delaware and many other states, shareholder rights plans can be adopted by the board of directors without the consent of the companys shareholders. In a negotiated transaction, care should be taken to ensure that a targets rights plan is not inadvertently triggered. This typically is accomplished by having the targets board of directors take action (which is expressly permitted under the typical rights plan) to amend the rights plan in advance of the triggering event that otherwise would occur as a result of the negotiated transaction. Charter and Bylaw Provisions A company may adopt provisions in its charter and/or bylaws that reduce its vulnerability to an unsolicited offer. The only provisions of this type likely to be relevant to a negotiated transaction are those requiring a special or supermajority vote of shareholders, although other less common antitakeover provisions (such as fair price provisions) conceivably could appear also. Any prospective acquirer of a U.S. public company should carefully check the targets organizational documents to confirm what vote is required and that no other provisions will affect the proposed transaction. Antitakeover Statutes Many states have enacted antitakeover statutes, which consist primarily of business combination statutes and control share acquisition statutes. Each of these statutes is designed to discourage or prevent takeovers that have not been approved by the targets board of directors. Even in negotiated transactions, these types of statutory provisions must be carefully considered in order to avoid inadvertently triggering their application. Business combination statutes prohibit certain types of business combination transactions between an acquirer and a target for a period of time (typically three years) after the acquirer has acquired beneficial ownership of more than a specified threshold amount of the targets shares (typically 15%). Exceptions to this prohibition generally include if, before consummation of the transaction pursuant to which the acquirer exceeded the threshold amount, that transaction was, or the business combination then being pursued is, approved by the targets board of directors. Control share statutes deny voting rights to
31
Section 6: Takeover Defenses
shares of a targets stock held by an acquirer once the acquirers share ownership exceeds a specified threshold (typically 15%). Exceptions to this prohibition generally include if, prior to the transaction pursuant to which the acquirer exceeded the threshold amount, the targets board of directors approves the transaction or the targets remaining shareholders approve the proposed transaction. With respect to this shareholder approval requirement, state statutes typically set forth a period of time within which a target must convene a special meeting of shareholders if requested by the acquirer. Acquirers should take care to avoid inadvertently triggering these statutory provisions through share accumulation activity or by seeking shareholder support agreements.
32
7. Antitrust/Merger Clearance
33
Section 7: Antitrust/Merger Clearance
In this chapter, we briefly review the U.S. merger clearance requirements and process.
The merger clearance process in the United States is governed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the HSR Act). Under the HSR Act, the merger clearance process is jointly administered by the U.S. Federal Trade Commission and the U.S. Department of Justice. Notification to those agencies is required if the transaction will result in the acquirer holding assets or voting securities of the target with a value that is re-set annually. The 2010 value is $63.4 million. For transactions valued between $63.4 million and $253.7 million (again using the 2010 values), a filing is required only if a second condition is satisfiedone party must have assets or revenues exceeding $12.7 million, and a second party must have assets or revenues exceeding $126.9 million.23 For purposes of determining whether these values are exceeded, a party is viewed as the actual acquirer, together with its parents, subsidiaries and other controlled affiliates. The HSR rules include various exemptions that may render transactions non-reportable, even if these sizeof-transaction and size-of-persons tests are satisfied. Notably, although worldwide activity is used when applying the thresholds, transactions are exempted unless they have a material nexus with the United States. For transactions that are subject to HSR, each party must complete a form and submit certain documentary attachments, most significantly certain documents prepared by or for officers or directors for purposes of evaluating the transaction with respect to certain competition-related factors enumerated in the rules. These so-called 4.c documents (named after the section of the form on which they are indexed) are the single most common trigger for follow-on questions from government investigators; hence, parties should take care when preparing officer- and board-level materials. To complete the filing, the acquirer is also required to pay a filing fee, which currently ranges from $45,000 to $280,000, depending on the value of the transaction. Once the filing has been perfected, the statute grants the government a 30-day waiting period in which to review the transaction, although a shorter period of 15 days applies for cash tender offers and certain acquisitions in a bankruptcy setting. The parties are barred from closing during the waiting period unless the government grants early termination, which may be requested and is often granted in situations that clearly present no substantive antitrust concerns. At the end of the waiting period, the parties are free to close unless the government issues a request for additional information, commonly referred to as a second request. In the roughly 5% of transactions where such a second request is made, the waiting period is extended for an additional 30 days (10 days in case of cash tender offers) after the parties have supplied the requested information. Because the requested information is typically substantial, compiling and submitting it often requires months. In determining whether a transaction warrants detailed investigation or challenge, the government analyzes whether the transaction, if consummated, would substantially lessen competition or tend to create a monopoly in any line of commerce.
23
Filings are required for transactions valued at more than $253.7 million regardless of whether the size-of-persons condition is satisfied. A Guide to Takeovers in the United States, Clifford Chance US LLP 34
Section 7: Antitrust/Merger Clearance
Parties to negotiated transactions commonly negotiate the allocation of antitrust risk and specify their obligations to address antitrust investigations and challenges. Covenants in merger agreements typically specify the level of effort that the parties are required to undertake to obtain antitrust clearances commercially reasonable efforts, reasonable best efforts, best efforts or some other formulationand in transactions that face potential antitrust exposure, covenants and closing conditions may be used to define more specific obligations, such as whether the acquirer will be required to agree to divestitures or other remedies or whether the parties will be required to engage in litigation to defend the legality of the transaction. The most targetfavorable formulation is a hell-or-high-water provision that obligates the acquirer to agree to any obligations or divestitures that regulators require to complete the transaction, regardless of cost and consequence.
Until a transaction has closed, parties should be cautious about the information they exchange and the steps they take to integrate their operations. Statutory gun jumping provisions prohibit the premature implementation of transactions before they have been approved by antitrust regulators. In general, good faith due diligence and transition planning are fine, but parties should avoid engaging in activities that go beyond these areas and steps sometimes will need to be taken to firewall information that is competitively sensitive. Covenants in merger agreements that give the acquirer rights to control any commercial activities of the target during the period between signing and closing should be examined with particular care to assure that they are reasonably necessary and justifiable and that they will not cause interim competitive harm or provoke an adverse government response.
35
8. The Committee on Foreign Investment in the United States (CFIUS)
36
Section 8: The Committee on Foreign Investment in the United States (CFIUS)
Non-U.S. acquirers of public companies that operate in sensitive areas (notably defense and advanced technology, and sometimes infrastructure, transportation and natural resources) should consider the applicability of the review process operated by CFIUS. In this chapter, we briefly review the CFIUS process.
The Committee on Foreign Investment in the United States, or CFIUS, is an inter-agency committee, chaired by the Secretary of the U.S. Treasury Department, authorized to review transactions that could result in control of a U.S. business by non-U.S. persons to determine the effect of such transactions on the national security of the United States. By broadly interpreting the concept of control, CFIUS has asserted jurisdiction over minority as well as majority investments. CFIUS regulations define control to include the power, direct or indirect by any means to cause decisions of importance to a U.S. business. CFIUS regulations do not, however, define national security. Accordingly, CFIUS identifies potential national security risks on a case-by-case basis by considering whether the identity, background or nationality of the purchaser presents a threat to the national security of the United States in the context of potential vulnerabilities arising from the nature and role of the target U.S. business. The likelihood of intervention by CFIUS increases with the sensitivity of the acquirers profile24 and the strategic importance of the industry in which the proposed acquisition will be made.25 In addition to the Secretary of the U.S. Treasury Department, CFIUS has six other permanent voting members: the Secretaries of the U.S. Departments of State, Defense, Homeland Security, Commerce and Energy, and the Attorney General; and two permanent non-voting members: the Secretary of the U.S. Department of Labor and the Director of National Intelligence. In addition, by Executive Order 11858, the President of the United States appointed to CFIUS the U.S. Trade Representative and the Director of the U.S. Office of Science and Technology Policy. The Executive Order also provided observer status for several other White House officials. CFIUS designates a lead agency for each of its reviews depending on the nature of the business at issue. In addition to its general authority to review acquisitions of U.S. businesses by non-U.S. persons, as a result of the U.S. Foreign Investment and National Security Act of 2007, or FINSA, CFIUS is mandated to conduct a full investigation of two specific types of transactions: (i)acquisitions by a non-U.S.-government-owned or controlled entity of any U.S. business and (ii)acquisitions of U.S. critical infrastructure regardless of whether the non-U.S. acquirer is non-U.S.-government-owned or controlled but only if
24
Acquirers that are controlled by non-U.S. governments, or that are based in countries that are not close allies of the United States, have more sensitive profiles for this purpose. While not an exhaustive list, industries such as defense, energy, technology and infrastructure have historically been of particular interest to CFIUS. A Guide to Takeovers in the United States, Clifford Chance US LLP
25
37
Section 8: The Committee on Foreign Investment in the United States (CFIUS)
CFIUS determines that the transaction could impair national security and that risk has not been mitigated. Thus, CFIUS can clear an acquisition of critical infrastructure by a non-governmentcontrolled entity without conducting a full investigation if it determines that the transaction presents no national security risks. With respect to certain acquisitions by governmentcontrolled entities, however, CFIUS may waive the full investigation requirement only if the U.S. Secretary of the Treasury, as Chair of CFIUS, together with the head of the lead agency responsible for reviewing the transaction, jointly determine that the acquisition does not present a national security risk. In contrast to an HSR filing, which, if required, is mandatory in order to close an acquisition, CFIUS filings are voluntary. By obtaining a pre-closing clearance, parties can mitigate the risk that CFIUS might unilaterally initiate its own review, either pre- or post-closing, and seek to impose national security undertakings and/or recommend that the President of the United States block
or unwind the transaction. The greater the likelihood that CFIUS will express serious interest in a transaction unilaterally, the greater the incentive for parties to notify CFIUS voluntarily in order to demonstrate cooperation and attempt to establish a positive tone for the ensuing national security review. If, during a review or investigation, CFIUS identifies an unresolved national security concern, it may seek to resolve such concern through the imposition of contractual undertakings on the parties, including in the form of commitment letters on specific issues or mitigation agreements addressing a broader range of security objectives. Parties that enter into these types of arrangements do so in exchange for a clearance from CFIUS, and to avoid the risk of presidential intervention. On occasion, however, CFIUS has rejected any solution other than the divestiture of U.S. assets or operations deemed too sensitive for the particular non-U.S. acquirer to retain.
38
Appendix A
Indicative Timeline for Single-Step and Two-Step Cash Acquisitions of U.S. Public Companies
39
Appendix A
If the consideration being offered in the takeover consists in whole or in part of securities of the acquirer, then the timeline is subject to extension by as much as several more weeks in order to prepare a U.S. registration statement and obtain SEC clearance
Single-Step Transaction Day(s) Activity 1 2-15 16 Announcement Prepare proxy statement (Target with Acquirers input) File preliminary proxy materials with SEC Two-Step Transaction Day(s) Activity 1 2-15 15 Announcement Prepare Offer to Purchase (Acquirer) and Schedule 14D-9 (Target) Commence tender offer; file definitive tender offer materials with SEC; mail materials to targets shareholders Address any comments provided by SEC staff Close tender offer (if minimum tender and other conditions satisfied) ACQUIRER NOW CONTROLS TARGET 90 Target shareholders meeting to vote on merger 47 If Acquirer now owns at least 90% of Targets outstanding shares file short-form merger certificate. ACQUIRER NOW OWNS 100% OF TARGET 91 Complete merger (provided requisite vote of target shareholders is obtained) ACQUIRER NOW CONTROLS (AND OWNS 100% OF) TARGET 47-77 If Acquirer own less than 90% of Targets outstanding shares prepare and file proxy materials with SEC relating to squeeze-out merger Mail proxy materials27 Target shareholders meeting to vote on squeeze-out merger Complete merger. ACQUIRER NOW OWNS 100% OF TARGET
26-50 55
Receive and resolve SEC comments26 Print and mail proxy materials
15-43 43
88 108 109
26 The SECs staff sometimes elects not to review and provide comments on a proxy statement, in which case the process is shortened by approximately 30-35 days from that indicated; conversely, SEC review sometimes can take longer than indicated. 27 Squeeze-out merger proxy materials are relatively unlikely to be reviewed and commented on by the SEC, but may not be mailed for at least 10 days after they are filed with the SEC.
40
Appendix B
Deal Structure Considerations in Acquiring a U.S. Public Company The Relative Advantages and Disadvantages of the Single-Step and Two-Step Structures
41
Appendix B
The relative advantages and disadvantages of using a single-step transaction structure as opposed to a two-step transaction structure are summarized below.
Single-Step Transaction (Merger Voted on by Targets Shareholders; Single Closing at Which Bidder Acquires 100% of Targets Shares) Summary: n Potentially vulnerable to competing bids for a longer period of time than a two-step transaction. In a single-step transaction, it will take no less than 2 months, and more typically 3 to 4 months, to obtain the approving vote of targets shareholders. The vulnerability to competing bids continues until that vote is obtained. This timing disadvantage is irrelevant, however, if the transaction will require regulatory clearances (i.e., sharefor-share transaction) taking longer than 3-4 months. n For private equity acquirers, a single-step structure may be more attractive because it avoids technical issues relating to management equity rollovers (that affect only tender offers) and because acquisition debt financing is less complicated in a single-step transaction. Advantages: n Most often used in share-for-share transactions and when there are regulatory or other approvals that cannot be satisfied quickly (i.e., if such approvals are likely to take longer than 3 to 4 months). In that situation, targets shareholders can vote to approve the transaction before regulatory or other approvals are obtained, thereby cutting off any competing bids that might emerge later. Two-Step Transaction (Tender Offer Followed by Second-Step Merger in Which Bidder Acquires Untendered Target Shares) Summary: n If the offer is well received by targets shareholders and regulatory clearances (including antitrust/competition law clearances) are likely to be obtained quickly, the two-step approach allows the acquirer to take control of the target significantly faster than under a single-step approach. This timing advantage should make the transaction less vulnerable to competing bids. Acquirer could obtain working control of, and foreclose competing bids for, target in as little as 5-6 weeks after announcement. n If regulatory clearances are likely to take longer than the 3-4 months needed to complete a single-step transaction, the speed advantage of the two-step approach disappears. Advantages: n Acquirer can close its tender offer subject only to (1) the offer being open for at least 20 business days (SEC requirement), (2) receipt of antitrust and other regulatory approvals and (3) a sufficient number of shares being tendered by target shareholders (typically 50%).
42
Appendix B
Advantages: n Timing and funding requirements generally are more predictable in a single-step transaction. Targets assets can be used as collateral for acquisition finance borrowings at time of initial drawdown. n The SECs all-holders/best price rule, Rule 14d-10, applies to tender offers (and therefore to two-step transactions) but not to single-step transactions. Amendments to that Rule eliminated some significant problems associated with Rule 14d-10, but other concerns remain notably in respect of equity rollovers. This may make the single-step structure more attractive for private equity-type acquirers. Disadvantages: n Longer period of time to obtain working control of target, in comparison to successful two-step transactions. Fastest time to completion realistically achievable would be around 12 to 16 weeks (which would include preparing proxy materials, obtaining SEC clearance and soliciting proxies). Time required will be shorter if the SEC decides not to review the proxy materials, but a minimum of 2 months realistically is required. n Acquirer has less control over the process because the merger proxy statement legally is the responsibility of target.
Advantages: n Acquirer has greater control over timing because it prepares all the requisite tender offer documents, which do not need to be pre-cleared with the SEC. Disadvantages: n Achieving 100% ownership may take longer than the 5-6week period described above if 90% acceptance is not achieved. If more than a majority but less than 90% of the outstanding shares are tendered in the tender offer, in order to complete the merger, a proxy statement must be prepared and delivered to the shareholders of target who have not tendered their shares. n Financing the transaction may be more difficult if lenders do not wish to provide bridge financing for the purchase of shares in the first-step tender offer. Targets assets can be used as collateral only after the second stage of the transaction is completed. n The transaction may be modestly more expensive from a legal fees perspective if the acquirer does not obtain sufficient shares in the tender offer to take advantage of short-form merger procedures.
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Worldwide Contact Information 29* offices in 20 countries

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A Guide to Takeovers in the United States

U.S. M&A Practice

A Guide to Takeovers in the United States, Clifford Chance US LLP

Section 1: Regulatory Framework

Section 1: Regulatory Framework

Section 1: Regulatory Framework

Section 1: Regulatory Framework

A Guide to Takeovers in the United States, Clifford Chance US LLP

Section 2: Preliminary Activity

Section 2: Preliminary Activity

A Guide to Takeovers in the United States, Clifford Chance US LLP

Section 2: Preliminary Activity

Section 2: Preliminary Activity

Section 2: Preliminary Activity

A Guide to Takeovers in the United States, Clifford Chance US LLP

A Guide to Takeovers in the United States, Clifford Chance US LLP

Section 3: Acquisition Structures

Section 3: Acquisition Structures

A Guide to Takeovers in the United States, Clifford Chance US LLP

Section 3: Acquisition Structures

Section 3: Acquisition Structures

Section 3: Acquisition Structures

Section 3: Acquisition Structures

Section 3: Acquisition Structures

A Guide to Takeovers in the United States, Clifford Chance US LLP

Section 3: Acquisition Structures

Section 3: Acquisition Structures

A Guide to Takeovers in the United States, Clifford Chance US LLP

A Guide to Takeovers in the United States, Clifford Chance US LLP

Section 4: Deal Protection

A Guide to Takeovers in the United States, Clifford Chance US LLP

Section 4: Deal Protection

Section 4: Deal Protection

Omnicare v. NCS Healthcare, 818 A.2d 914 (Del. 2003).

5. Fiduciary Duties of a Target Companys Board of Directors

A Guide to Takeovers in the United States, Clifford Chance US LLP

Section 5: Fiduciary Duties of a Target Companys Board of Directors

Section 5: Fiduciary Duties of a Target Companys Board of Directors

Section 5: Fiduciary Duties of a Target Companys Board of Directors

A Guide to Takeovers in the United States, Clifford Chance US LLP

A Guide to Takeovers in the United States, Clifford Chance US LLP

Section 6: Takeover Defenses

A Guide to Takeovers in the United States, Clifford Chance US LLP

Section 6: Takeover Defenses

A Guide to Takeovers in the United States, Clifford Chance US LLP

A Guide to Takeovers in the United States, Clifford Chance US LLP

Section 7: Antitrust/Merger Clearance

Section 7: Antitrust/Merger Clearance

A Guide to Takeovers in the United States, Clifford Chance US LLP

8. The Committee on Foreign Investment in the United States (CFIUS)

A Guide to Takeovers in the United States, Clifford Chance US LLP

Section 8: The Committee on Foreign Investment in the United States (CFIUS)

Section 8: The Committee on Foreign Investment in the United States (CFIUS)

A Guide to Takeovers in the United States, Clifford Chance US LLP

A Guide to Takeovers in the United States, Clifford Chance US LLP

A Guide to Takeovers in the United States, Clifford Chance US LLP

A Guide to Takeovers in the United States, Clifford Chance US LLP

A Guide to Takeovers in the United States, Clifford Chance US LLP

A Guide to Takeovers in the United States, Clifford Chance US LLP

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