ASPEN PUBLISHERS TAKEOVERS A Strategic Guide to Mergers and Acquisitions, Second Edition by Meredith M. Brown, Ralph C. Ferrara, Paul S. Bird, Gary W. Kubek and William D. Regner TAKEOVERS: A Strategic Guide to Mergers and Acquisitions, is a practical one-volume guide to takeovers, for lawyers, investment bankers and corporate officers. The book provides straightforward advice as to the laws and the issues bidders and targets must consider. The authors summarize the statutes, rules and case law and provide a sound understanding of strategies that can be applied to specific situations. The result is a strong introduction to takeovers, including: + How tender offers are regulated in the United States + Planning for and launching a tender offer * Tender offer tactics * Proxy contests * The Hart-Scott-Rodino Act + Financing of tender offers * Fraudulent conveyance issues in leveraged acquisitions + Strategic litigation 0735542058Special considerations for cross-border transactions, including the SEC’s cross-border tender offer rules Planning for the defense, including assessing vulnerability to a takeover Federal regulation of a target’s responses to a takeover The business judgment rule and state law governing the rights and duties of a target company’s board of directors Going private transactions Defensive charter provisions Poison pills Antitrust defenses How to protect a negotiated transaction against a competing bid State takeover legislation By giving a grounding in takeovers, the authors provide an under- e standing of many of the key issues—regulatory, antitrust, due diligence, financing, timing—that govern entirely negotiated transactions. The new edition expands and updates the entire book, including: ¢ Recent trends in mergers and acquisitions * Changes in the regulation of cross-border M&A © The impact of rule 14d-10 on tender offers * How the Sarbanes-Oxley Act has affected M&A * Selective disclosure and tipping issues * Stockholder proposals relating to poison pills * Stockholder access rules relating to director nominations * Changes in judicial review of director decisions * Omnicare and other major developments relating to deal protection* Pure Resources and other key going private cases * Changes in state takeover laws 1104 For questions concerning this shipment, billing, missing pages, or other customer service matters, call our Customer Service Department at 1-800-234-1660. For toll-free ordering, please call 1-800-638-8437. © 2004 Aspen Publishers ‘A Wolterskiuwer CompanyASPEN PUBLISHERS TAKEOVERS: A STRATEGIC GUIDE TO MERGERS AND ACQUISITIONS SECOND EDITION ‘TAB CARD FILING INSTRUCTIONS—page 1 Included with your book are tab cards that should be filed as follows: Check as Insert. i: Insert After oO Part I — Historical Context hii o Part II ~ Considerations for the Bidder 2-4 a Part II] — Considerations for the 12-27 ‘Target a Table of Cases 18-4 oO Index TC-27 When you have finished filing your tab cards, please place these instructions immediately inside the cover of your book. 7104TAKEOVERS A Strategic Guide to Mergers and AcquisitionsTAKEOVERS A Strategic Guide to Mergers and Acquisitions Second Edition Meredith M. Brown Ralph C. Ferrara Paul S. Bird Gary W. Kubek William D. Regner Coauthors Previously published in part by Butterworth’s as Takeovers: A Strategist’s Manual for Business Combinations John H. Hall Coauthor for the first and second editions Stephen B. Presser Coauthor for the second edition Jonathan E. Richman Coauthor and Editor for the first edition Christine E. Gray Alexander M. Metviner Coauthors for the first edition ASPEN 1185 Avenue of the Americas, New York, NY 10036 www.aspenpublishers.com“This publication is designed to provide accurate and authoritative information in regard to the @ subject matter covered. It is sold with the understanding that the publisher is not engaged in ren- dering legal, accounting, or other professional services. If legal advice or other professional assis- tance is required, the services of a competent professional person should be sought, —From a Declaration of Principies jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations © 2004, 2001 Aspen Publishers, Inc. A Wolters Kluwer Company wwmaspenpublishers.com All rights reserved. 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KF1477.T368 2004 346.73'0662—de22 2004046323About Aspen Publishers Aspen Publishers headquartered in New York City, is a leading infor- mation provider for attorneys, business professionals, and law students. Written by preeminent authorities, our products consist of analytical and practical information covering both U.S. and international topics. ‘We publish in the full range of formats, including updated manuals, books, periodicals, CDs, and online products. Our proprietary content is complemented by 2,500 legal databases, containing over 11 million documents, available through our Loislaw division. Aspen Publishers also offers a wide range of topical legal and business databases linked to Loislaw’s primary material. Our mission is to provide accurate, timely, and authoritative content in easily acces- sible formats, supported by unmatched customer care. To order any Aspen Publishers title, go to www.aspenpublishers.com or call 1-800-638-8437. To reinstate your manual update service, call 1-800-638-8437. For more information on Loislaw products, go to www.loislaw.com or call 1-800-364-2512. For Customer Care issues, e-mail CustomerCare @ aspenpublishers.com; call 1-800-234-1660; or fax 1-800-901-9075. Aspen Publishers A Wolters Kiuwer CompanySUBSCRIPTION NOTICE This Aspen Publishers product is updated on a periodic basis with sup- plements to reflect important changes in the subject matter. If you pur- chased this product directly from Aspen Publishers, we have already recorded your subscription for the update service. If, however, you purchased this product from a bookstore and wish to receive future updates and revised or related volumes billed separately with a 30-day examination review, please contact our Customer Service Department at 1-800-234-1660, or send your name, company name (if applicable), address, and the title of the product to: ASPEN PUBLISHERS 7201 McKinney Circle Frederick, MD 21704ABOUT THE AUTHORS Meredith M. Brown co-chairs the Mergers and Acquisitions Group at Debevoise & Plimpton LLP. He has written extensively on M&A and securities law matters, and is the editor of International Mergers and Acquisitions: An Introduction (Kluwer 1999) and co-editor of Mechanics of Global Offerings (Kluwer 1995). He has been a lecturer in law on advanced securities regulation at Columbia Law School, and has co- chaired the Capital Markets Forum and the securities law committee of the International Bar Association’s Section on Business Law. Ralph C. Ferrara heads the Washington office of Debevoise & Plimpton LLP. He was General Counsel of the Securities and Exchange Commission from 1978 to 1981. He has written widely on securities law matters, and is the co-author of Managing Marketeers: Supervisory Responsibility of Broker-Dealers and Investment Advisers (CCH 2000); and author of Ferrara on Insider Trading and The Wall (Law Journal Seminars-Press, 1995); Beyond Arbitration: Designing. Alternatives to Securities Litigation (Butterworth’s, 1991); Shareholder Derivative Litigation: Besieging the Board (Law Jounal Seminars-Press, 1995) and Securities Practice: Federal and State Enforcement (Callaghan, 1985). Paul S. Bird co-chairs the Mergers and: Acquisitions Group at Debevoise & Plimpton LLP and is an author of numerous articles on mergers and acquisitions. - Gary W. Kubek is a parmer in the Litigation Department of Debevoise & Plimpton-LLP. He has written extensively on M&A, securities law and antitrust matters. William D, Regner is a partner in the Mergers & Acquisitions Group at Debevoise & Plimpton LLP. He has written numerous articles on mergers & acquisitions and is a member of the Committee on Mergers, Acquisitions and Corporate Control Contests of the Association of the Bar of the City of New York.TABLE OF CONTENTS About the Authors... Introduction o.oo Acknowledgments PART I. HISTORICAL CONTEXT Chapter 1. BACKGROUND....ssssssssere Chapter 2. LEGISLATIVE RESPONS! PART I. CONSIDERATIONS FOR THE BIDDER Chapter 3. PLANNING FOR A TAKEOVER .. 3-1 Law of the Jurisdiction of Incorporation Charter and Bylaws (e) Regulatory Issues. (f) Target’s Shareholder Profile (g) “Social Issues”...... (b) Financing and Change of Control Issues (i) Potential Acquirors (2) Other Due Diligence. C. Consider the Bidder’s Own Vulnerability D. Analysis of Ways to Acquire the Target Chapter 4. THE DEFINITION OF “TENDER OFFER”... The SEC’s Eight-Factor ‘Analysis, SEC’s Past Proposal to Define “Tender Offer’ Judicial Response to Eight-Factor Analysis Open-Market Purchases Not Considered a Tender Offer ...... paR>Chapter 5. INITIAL PURCHASES TABLE OF CONTENTS Chapter 6. COMPLIANCE WITH THE WILLIAMS A. ACT; ALTERNATIVE TAKEOVER TECHNIQUES... Schedule 13D and Schedule 13G.. (1) Beneficial Ownership .. (2) Brokers and Investment Advisers as Beneficial Owners (3) Group Purchases. (a) Management Groups (b) Group Filings..... (4) Contents of Schedule 13) (5) Amendments to Schedule 13) (a) “Material Change”. (b) “Promptly”... (6) Remedies for Noncompliance with Section 13(d) (a) Private Right of Action. (b) SEC Enforcement Actions. 6-31 (7) Ten-Day Window... Starting a Tender Offer. (1) “Nibbles” and “Bear Hugs” .. (2) Disclosures upon Initiating a Tender Offe 6-39 (3) Timing Considerations... (a) Period of Tender Offer . (b) Shareholders’ Withdrawal Rights (c) Subsequent Offering Period (4) Prompt Payment .... (5) Proration of Tender Offer Purchases. (6) Exchange Offers... (a) Exchange Offer vs. Cash Tender Offer. (&) Publicity and Gun-Jumping; When Must ‘Written Material Be Filed with the SEC? ...6-53 (c) Getting the Information on Fil (7) Repurchases of Shares, Going Private ‘Transactions and Issuer Self-Tenders. (a) Issuer Purchases... (b) Going Private Transaction: ({c) Issuer Self-TendersTABLE OF CONTENTS Ml @ (8) Equal Treatment of Shareholders: The Best Price and All Holders Provisions .. 6-62 (9) Changes in Tender Offer Terms 6-67 (10) Abandonment of Tender Offer .. 6-73 (11) Inside Information ..... (a) Rule 14e-3 (i) “Disclose or Abstain” Provision Gi) — Anti-Tipping Provision .. (b) The Continued Vitality of Section 10(b) and Rule 10b-5 in Takeover and Mergers and Acquisitions Settings (i) Misappropriation Gi) Rules 10b-5-1 and 10b5- (iii) Basic, Inc. v. Levinson (iv) ITSA and ITSFEA . (c) Private Rights of Action for Insider Tradin; (d) Attempts to Define Statutorily .. r (12) Other Rules.... {a) Rule 14e-4 (b) Rule i4e-5 C. Section 16 of the Exchange Act.. (Ll) Section 16(a) (2) Section 16(b) . (3) Exemptions from (4) Amount of Liability. D. Tender Offer Methods. (Lt) Cash Tender Offers for All Shares (2) Two-Tier Offers .. (3) Exchange Offers (4) Bust-Up Takeovers and Group Bids. (1) Advantages and Disadvantages (2) Filing Requirements (a) Schedule 13D. (b) Schedule 14A Proxy Statements . (c) What Is a Solicitation? (d) Other Proxy Materials...xii 3) @) (5) TABLE OF CONTENTS (ce) The Impact of the 1992 and 2000 Amendments to the Proxy Rules on Proxy Contests... a (f) The Impact of the Internet and the 1992 and 2000 Amendments to the Proxy Rules on the Use of E-Mails and Web Sites in Proxy Contests... 4 Strategic Considerations in Proxy Contests ......6-147 (a) Seven Fundamental Questions for Insurgents (b) Development of Issues Against Management .. (c) Orchestration of Campaign i) Obtaining a Shareholder List. (ii) Letters to Shareholders .. (iii) Web Site and E-mails to Shareholders... (d) Changes in the Behavior of Institutional Investors .... Seeking to Dismantle the Target's Takeover Defenses... (a) Conflicts of Interest and the Bidder’s Nominees .... {b) Mandatory Bylaw Proposals Shareholder Access to Proxy Materials Chapter 7. HART-SCOTT-RODINO ANTITRUST BOOR Jurisdictional Standards... Premerger Notification Form. Filing Fees.... Waiting Periods and Gun Jumping. Exemptions to the HSR Act. qa) Q) (3) IMPROVEMENTS ACT Investment Intent Exemption.. Convertible Securities. Acquisition by an Acquisition Vehicle. Chapter 8. HIGH YIELD FINANCING OF A. High Yield Financing B. TENDER OFFERS. The Margin Requirements 5-2,TABLE OF CONTENTS xiii Chapter 9. CONFLICTS OF INTEREST AND CONFIDENTIAL INFORMATION. Chapter 10. LBOs AND FRAUDULENT CONVEYANCE ISSUES... Chapter 11. STRATEGIC LITIGATION.. A. Preparing to Resist the Target’s Attack. B. Suits by the Bidder ....... (1) Challenging State Takeover Statutes (2) Suing the Target’s Board C. Choice of Forum. Chapter 12. SPECIAL CONSIDERATIONS FOR (1) Rules on Cross-Border Offer: {a) What the New Rules Do Not Exempt. (b) Tender Offers for Non-U.S. Companies ..... (i) Tier I Companies. Gi) Tier II Companies (c) Exemption from Securities Registration Requirements for Exchange Offers for Non-U.S. Companies That Are No More Than 10% U.S.-Owned .....12-16 (@) How to Compute Whether the Non-U.S. Company Is Sufficiently Non-U.S. Owned .. (2) Case-by-Case Harmonization (3) Deference to Home Country United States-Canada Multi-Jurisdictional Disclosure System C. Restrictions on Foreign Ownership of US. Corporations.. (1) Restrictions in Particular Industri (a) Communications... (b) Energy and Natural Resources... (c) Defense Contractors . (2) Acquisitions That May Impair National Security: the Exon-Florio Amendment... 12-17 12-20xiv TABLE OF CONTENTS PART II. CONSIDERATIONS FOR THE TARGET Chapter 13. PLANNING CONSIDERATIONS FOR RESPONDING TO HOSTILE TENDER OFFERS A. Creation of Working Group and Assignment of Responsibilities... w Q B. Preparation of Directors and Officers wo Q) The Working Group. Responsibilities... Preparation of Directors ..... Preparation of the CEO and Senior Management .... C. Overview of Pre-Tender Offer Defensive - Measures ..... a Q) 8) @ 6) (6) ) 8) @) Chapter 14. A. Target Response a) (2) Assessing Vulnerability .. Early Warning Systems . Shareholder List Analysis and Shareholder Relations. Advance Research .. (a) Existing Takeover Defenses . (b) Additional Background Information (c) Regulatory Matters .... 13-16 {d) State Takeover Statutes. 13-16 Charter Amendments .. 13-17 Bylaw Amendments. 13-19 Structural Changes. 13-22 Poison Pills 13-23 Defensive Acquisition 13-25 ‘WILLIAMS ACT REGULATION OF TENDER OFFER RESPONSES “Stop-Look-and-Listen’ fers Announcement of Target’s Position on Offer (a) Duty to File Schedule 14D-9 (b) Contents of Schedule 14D-9 (i) | Management’s Self-Interest .... (ii) Basis for Deeming Offer Inadequate .... (iii) Discussions with Potential Buyers...TABLE OF CONTENTS. xv rd (c) Curative Effect of Disclosure by Offeror .. (d) Remedies for Misstatements B. Lack of a Federal Substantive Remedy Under Section 14(e) (1) Schreiber. (2) The Post-Schreiber Era. C. Section 14(e) as a Federal Disclosure Bidder’s Financial Condition. (b) Projections ..... (c) Possible Harm to Target from Change in Control... (d) Reasons for the Offer (3) Scienter.... @ (4) Causation/Reliance (5) “In Connection With’ (6) The Target’s Duty to Disclose Negotiations with a Bidder... (a) General Rul (b) Circumstances Disclose... (i) Disclosure Required by an SEC Line Ite (ii) Disclosure Company Is Buying or Selling Its Own Shares... oo (iii) Disclosure Required To Correct a Material Misstatement or Omission... on (iv) Public Disclosure Required To Prevent Selective Disclosure Issues (v) Disclosure Required Because of Earlier Statements ol 4-51, sol 4-54xvi Chapter 15. A. The Role of Target TABLE OF CONTENTS: STATE LAW REGULATION OF TENDER OFFER RESPONSES: THE BUSINESS JUDGMENT RULE AND OTHER STANDARDS agement B. The Standards for Reviewing Actions by the Target’s Directors.. (ly Q) @) The General Business Judgment Rule: Recent History (a) The Duty of Care and the Duty to Be Informed....... a (b) The Duty of Loyalty and the Absence of Conflicting Interests ves (c) The Duty to Be Informed About Alternatives in a Negotiated Stock Gi) Phelps Dodge Corp. v. Cyprus Amax Minerals Co. (ii) The Moral. (d) Do’s and Don’ts from the Case: @) Cautionary Tale: Smith v. Van Gorkom ii) Doing It Right: Moran v. Household .. Enhanced Scrutiny in the Case of Defensive Actions: The Unocal. Test... (a) Reasonable-Grounds for Believing There Is a Danger to Corporate Policy and Effectiveness (b) The Reasonableness of the Defensive Response in Relation to the Threat Posed. (c) A Variant to Unocal: The Test under the Principles of Corporate Governance........ 15-54 Enhanced Scrutiny in the Case of Sale of Control: Revlon and QVC-Paramount.. (a) Revlon...‘TABLE OF CONTENTS xvii @ (b) QVC-Paramount .. . G) What Circumstances Trigger the Duty to Seek Best Value? .. Gi) How to Seek the Best Value . (c) States Other Than Delaware. (4) Actions That Thwart a Shareholder Vote (5) The Entire Fairness Test... C. Counseling the Target’s Board in Responding to a Third-Party Tender Offer. (1) Adequate Notice and the Absence of Unnecessary Rush (2) Proper Documentatio1 (3) Adequate Information... eee D. Counseling the Target’s Board in Responding to an Offer from a Controlling Shareholder: Going Private Transactions... (1) The Key Players .... (2) The Work of the Special Committee and Tts Advisers... e@ (3) The Financial Adviser’s Wor (4) Applicable Legal Standards. (a) Negotiated Mergers .. (b) Going Private Tender Offers. (c) Short-Form Mergers ..... (5) Structuring the Transaction ... (6) What If No Agreement Can Be Reached?... (7) Financing the Deal. (8) Going Private Disclosure Issue: (9) Going Private Litigation (10) But It Can Be Done! E. State Legislative Developments Relating to the Duties of Directors (1) Limits on Directors’ Lial Damages .... (a) Delaware (b) New York .. (c) Other StatesXViii TABLE OF CONTENTS (2)° Statutory Permission to Submit a Merger Agreement to Shareholders for Approval, Even Though Directors No Longer Believe the Agreement Is Advisable Chapter 16.. SPECIFIC DEFENSES AND DEFENSIVE (2) Elimination of Consent or Requiring Unanimity for Consent... (3) Consent Procedure and Record Date (4) Supermajority and Fair Price Provision: (5) Authority to Consider Non-Shareholder Interests... (©) Cumulative Votin; (7) Antigreenmail Amendment: (8) Increase in Authorized Shares (9) Limitations on Director Eligibility, Size of Board, or Power to Remove Directors {10) Calling of Special Meetings... (11) Advance Notice of Shareholder Proposals. (12) Inequitable Purpose and Effect .. (13) Disclosure Requirements Poison Pills...... (1) The Most Common Kind: The Call Plan. (a) How a Cali Plan Works..... @) Adoption of a Rights Plan (ii) Terms of a Typical Cat] Right (iii) Variants from the Typical Call Right... {iv) Tax and Accounting Aspects (b) Call Rights in the Courts (c) Restrictions on Which Directors Can Redeem the Pill, and When: Dead Hand and Slow Hand Pills 116-59 (d) Benefits and Costs of a Call Rights Plan... (i) Benefits. Gi) Costs 16-63TABLE OF CONTENTS xix (ec) How a Bidder Deals with a Poison Pill: Possible Antidotes ... (i) Condition to the Offer Gi) Litigation... (iii) Proxy Fights: Taking the Case to the Shareholders (2) Other Types of Poison Pill Plans .. (a) Put Plans... (b) Value Assurance Plans and Protect D (iit) Transferability (b) Distribution... (©) One Share/One Vote, SEC Rule 19¢-4, and Stock Exchange Rules...... (i) One Share/One Vote and Rule 19c-4... ii) Stock Exchange and NASD Rules... (2) Supervoting Preferred Stock ..... (3) Other Voting Restructuring Plans.. Antitrust Challenges... (1) Standing of Target Under the Clayton Act (2) Standing of Target Under the Hart-Scott-Rodino Act (3) Acquisitions by Targe! . Purchase by the Target of Its Own Shares from Persons Other Than the Bidder (1) State Law Duties of Care and Loyalty. (2) Financing Issues ..... 3) Federal Law Questions (a) Rule 13e-1 (b) Rule 13e-4 {c) Regulation MTABLE OF CONTENTS FE Greenmail...... (1) State Law... (2) Federal Legislation Relating to Greenmail (3) Federal Issues ..... (4) The Future of Greenmail G. Recapitalizations .... (1) Examples of Recapitalizations in General..... (2) Recapitalizations and ESOPs. (a) Financing a Recapitalization Through a Leveraged ESOP... (b) Fiduciary Duties and ESOPs H. Issuance of Stock... I. Pac-Man Defense... J. Employee Compensatien .. (1) Golden Parachute Cases (2) Pension Parachute Cases K. Antitakeover Provisions in Collective Bargaining Agreements L. White Knight Mergers. M. Treatment of Competing Bidders. (1) Careful Scrutiny If the Transaction Is with an Insider... (2) Requiring Bidders to Sign a Confidenti Agreement Containing Standstill Provisions........ N. Deal Protection Provisions (1) Crown Jewel Options (2) Stock Options ..... (3) Termination Fees and Reimbursement of Expenses..... (4) No-Shop and No-Talk Provisions (5) Shareholder Support Agreements... (6) Guidance as to Deal Protection Provisions... Chapter 17. STATE TAKEOVER LEGISLATION A. ‘“First-Generation” Statutes. B. “Second- and Third-Generation” Statutes (1) Control Share Acquisition Statutes ...TABLE OF CONTENTS: xxi @ (2) Other State Approaches: Fair Price/ Supermajority Statutes and Business Combination Statutes... o Chapter 18. FEDERAL TAX CHANGES REGARDING TAKEOVERS... A. Anti-Morris Trust Provisions. B. Non-Qualified Preferred Stock Provisions .. C. Capital Gains and Dividends Rates for Individualls ........ssssssesesssorsssessesssansssesenssee resnrveeeveneenseney 18-4 Table of Cases TID eK wsescsssrsssesoosenssneseosesesrsanessosseneINTRODUCTION ‘We intend in this book to demystify the takeover process for those who are not specialists in the field but who may be called upon to manage a contest for control. The book was written particularly for the corpo- tate lawyers and officers who are expected to understand the takeover Process, to control the experts, and to explain everything to the direc- tors, executives, and employees caught up in the whirlwind. We hope that this book will be useful not only to corporate counsel but also to other persons who work on mergers and acquisitions (“M&A”): out-. side counsel, investment bankers, and corporate officers interested in an overview of the legal aspects of takeovers. It is the M&A strategist’s guide to attack and survival. This book focuses on takeovers—that is, acquisitions of control that, at least initially, do not depend on negotiation between the bidder and the target. But an understanding of takeovers is essential to an understanding of all public company M&A, whether the transactions are negotiated or overtly hostile. That is because: The ability to conduct a takeover underlies many negoti- ated transactions. If war is an extension of diplomacy—and the outcome of diplomatic discussions is often colored by the parties’ assessment of their relative military strength and will- ingness to use it—so, too, takeovers are an extension of nego- tiated corporate acquisitions, and the outcome of negotiated mergers is often colored by the parties’ assessment of whether the bidder might take its case directly to the target’s stock- holders. Most acquisitions end up as negotiated deals, approved by the target’s board of directors. But many acquisitions that are announced as friendly negotiated transactions commence with an unsolicited approach by the bidder, and the target’s will- ingness to talk to the bidder is often affected by the target’s recognition that the bidder might undertake a takeover.xxiv INTRODUCTION Similarly, it is not unheard of for a bidder, stymied by lack of progress in nonpublic overtures to the target, to commence a tender offer for the target’s shares. Takeover cases and takeover-related statutes govern many aspects of negotiated transactions. Many of the leading M&A cases—cases as to directors’ duties, deal protection, treatment of competing bids, severance agreements, poison pills and other shark repellents, for example—arose in the context of bitterly contested takeovers. That is not surprising, because takeovers, which are unfriendly or at least non-negotiated by definition, often involve litigation. Similarly, statutes introduced in response to takeovers and takeover tactics also govern aspects of deals that are com- pletely friendly. Think, for example, in federal legislation, of the Exchange Act’s laws and rules as to disclosure of benefi- cial ownership, or the conduct of tender offers or going private transactions. In state legislation, think of statutory definitions of directors’ duties, and of business combination statutes like Delaware’s section 203—and how they shape the tactics and conduct of negotiated transactions. This book will give you an understanding of takeover tactics and takeover-based case law and statutory law that also shape negotiated transactions. It will also give you an introduction to legal issues—for example, relating to securities, general corporate law, antitrust and financing—that are as applicable to negotiated transactions as they are to takeovers. It is impossible to treat all of these areas exhaustively in a single handbook. There are multi-volume treatises dealing with each of these areas. Our goal, instead, is to give the reader a strong introductory understanding of central issues affecting takeovers—issues that in many cases are equally applicable to negotiated acquisitions. ‘We also strive to do that in a demystifying way. We know, for example, that takeovers are shrouded in jargon and catch words. To help those who work only occasionally on takeovers, we have included up front a glossary to help readers translate phrases like bear hugs and crown jewel options and dead hand poison pills.INTRODUCTION XY As we said earlier, overtly hostile takeovers make up a fairly small part of the total number of acquisitions. That’s not surprising, as a gen- eral matter, no matter where we are in the business cycle: There is less chance for extensive due diligence in a hostile transaction. Bidders and their directors don’t like buying a pig in a poke. On average, hostile bidders have less likelihood of acquiring the target than do acquirors who enter into friendly transaction agreements, Our own unscientific review of hostile tender offers for U.S. targets from the beginning of 1995 through February 2004 indicates that close to a third of the targets were bought by other bidders. About 19% of the targets remained independent. Little more than half of the targets were acquired by the hostile bidder—and in the overwhelming majority of those cases at a price significantly higher than the initial bid. Apart from these general reasons for the relative infrequency of takeovers, there are more specific cyclical factors. As the biblical Preacher puts it, there is a time for war and a time for peace. The frequency of takeovers, and the kinds of takeovers, change. When this book first appeared in 1987, unsolicited tender offers happened sometimes at the rate of two or three a day. By con- trast, in all of 2003, Thomson Financial reported only nine unsolicited tender offers were announced for U.S. targets—less than one hostile tender offer a month. The decline in the number of overtly hostile tender offers in recent years has reflected, among other factors: A decrease in the willingness of bidders to undertake, and of lenders to finance, highly leveraged hostile cash takeovers of the sort that contributed to the bankruptcy of Campeanu. Greater efficacy of state antitakeover acts—including business combination statutes impeding mergers with a large .share- holder without board approval before the shareholder became a large largesholder—and of rights plans (so-called “poison pills”) in slowing down takeovers.xvi INTRODUCTION * Decisions in Delaware and elsewhere that substantially enlarged the discretion of the target’s board of directors to reject a hostile bid.! + During the stock market boom of the late 1990’s, as stock val- ues went up, a greater percentage of deals were for stock rather than for cash. * Until the 2000 amendments to the SEC’s tender offer rules, it took substantially longer to launch a hostile stock offer than a hostile cash offer. * Since the rash of Enron and other major corporate collapses in 2001 and 2002, bidders and their directors, having heightened sensitivity to the possibility of misleading financial statements, are even more reluctant than before to buy companies without extensive due diligence. In addition to the sharp decline in overtly hostile tender offers since the late 1980s, the intervening years have seen: * A sharp rise in the number of cross-border and non-U.S. deals. « An increase in bust-up exchange offers—in other words, transac- tions in which after a negotiated stock merger between two parties has been announced, a competing bidder launches an unsolicited exchange offer for one of the merger partners, conditioned on the shareholders rejecting the previously announced merger. * A willingness of the biggest and most reputable companies in America and elsewhere in the world to proceed by means of a hostile tender offer if necessary to achieve a compelling strategic objective. Think, for example, of the tender offers by IBM for Lotus; GE Capital for Kemper; Johnson & Johnson for Cordis; ATT for NCR; WorldCom for MCT; Alcoa for Reynolds Metals; Wamer Lambert for Pfizer; SunTrust Banks for Wachovia; Weyerhaeuser for Willamette; Northrop Grumman for TRW; ' See, e.g., Paramount Communications, Inc. v. Time, Inc., 571 A.24 1140 (Del. 1990). For a discussion of the leading Delaware cases on the rights and duties of a target's board of directors, see infra Chapter 15.INTRODUCTION xxvii @ AIG for American General; Oracle for PeopleSoft. And hostile activity is not limited to the United States. European hostile ten- der offers have included the Sanofi-Synthelabo bid for Arentis; Olivetti for Telecom Italia; TotalFina for ElfAcquitaine (and vice versa); Royal Bank of Scotland for National Westminster Bank; Vodafone Airtouch for Mannesmann; Kingfisher for Castorama; Alcan for Pechiney. * After a slow M&A market in the early 1990s, a succession of record years of M&A activity, followed by a slight rise in 2000 and sharp drops in 2001 through 2003, as shown by the following table: Global M&A Activity? Aggregate Dollar Volume Number of Completed of Completed Transactions Year M&A Transactions (8 billion) 1996 20,391 1,090 @ 1997 22,418 1,369 1998 25,056 2,209 1999 27,097 2,459 2000 29,235 3,712 2001 22,712 2,185 2002 18,891 1,332 2003 19,033 1,149 The rise in M&A in the late 1990’s had many causes, including: + The optimism and confidence that came with a soaring stock market. * The resulting greater valuations of targets and greater willingness on the part of bidders to use stock as the acquisition currency. * The widespread beliefs that scale was important to the ability to compete nationally and globally, and that buying related @ 2 SDC Platinum Software (Thomson Financial 2001).svi INTRODUCTION businesses and stripping costs was an effective way to achieve growth in income. The sharp drop in M&A in 2001 and 2002 reflected, among other things: * The sharp drop in stock prices. ¢ The impact of Enron and other scandals. * The drop in confidence of CEOs and boards because of the pre- ceding factors. Will there be a rise in hostile takeovers in coming years? As Yogi Berra is reported to have said, prediction is hard, especially about the future. It is true that the end of pooling accounting has made the use of cash as consideration for an acquisition more attractive. It is also true that there have been several highly visible hostile takeover bids in 2003 and 2004—including Simon’s bid for Taubman; Oracle’s bid for PeopleSoft, Arvin Meritor’s bid for Dana and the Sanofi bid for Aventis. Moreover, financing is relatively inexpensive and institutional share- holders have become more activist. As of this writing, two of these (Simon-Taubman and Arvin Meritor-Dana) have been terminated. All we can predict with certainty is that the M&A practitioner will need to understand how a takeover works—how a bidder can take its case directly to the target’s shareholders if the target’s board is unwill- ing to negotiate or is unreasonable in its demands, and how a target can resist an unsolicited bid. That knowledge is essential in U.S. mergers and acquisitions. It is increasingly important in the burgeoning world of non-U.S. M&A, as non-U.S. bidders and targets and their advisers look to U.S. tactics for guidance. ‘We trust this handbook will give you a strong introduction to takeovers, including: * How tender offers are regulated in the United States * Planning for and launching a tender offer * Tender offer tactics * Proxy contestsINTRODUCTION xxix * The Hart-Scott-Rodino Act * Rules relating to the financing of tender offers * Fraudulent conveyance issues in leveraged acquisitions * Strategic litigation * Special considerations for cross-border transactions, including the SEC’s cross-border tender offer rules. * Planning for the defense, including assessing a company’s vulnerability to a takeover + Federal regulation of a target’s responses to a takeover * The business judgment rule and state law governing the rights and duties of a target company’s board of directors © Defensive charter provisions * Poiscn pills + Antitrust defenses + Recapitalization as a defense + How to protect a negotiated transaction against a competing bid + State takeover legislation By giving you a grounding in takeovers—offense and defense—we also hope to give you an understanding of many of the key issues— regulatory, antitrust, due diligence, financing, timing, etc—that you need to know in an entirely negotiated transaction.ACKNOWLEDGMENTS The authors wish to acknowledge the substantial contributions to this book of their colleagues at Debevoise & Plimpton LLP including in particular William B. Beekman, David A. Brittenham, David A. Duff, Gary M. Friedman and Elizabeth Pagel-Serebransky. They also wish to thank Kenneth G. Pogrin, Dmitriy A. Tartakovskiy, John D.L. Rather and Dagmar R. Myslinska for their contributions to Debevoise & Plimpton’s ongoing research into the law of takeovers. That research has served as the foundation for this edition. This book is a successor to Takeovers: A Strategist’s Manual for Business Combinations. The first edition of that book was written by attorneys then or previously practicing with the New York and Washington offices of Debevoise & Plimpton LLP. Professor Stephen B. Presser, Raoul Berger Professor of Legal History at Northwestern University, was added as an author for the second edition, and the revi- sions for that edition were drafted by Professor Presser, Meredith Brown and Ralph Ferrara. The authors would like to acknowledge the tremendous efforts of the support staff of Debevoise & Plimpton LLP in organizing the suc- cessive editions of this book and its predecessors. Without their patience and good humor, the task could never have been completed.GLOSSARY NOTE: This glossary is intended to give a general simplified introduction, not a precise definition, to some of the terms used in this book. Action by consent Action by shareholders by signing a written consent without a meeting of shareholders. Some states permit share- holders to act by consent (unless the certificate of incorporation prohibits that); others do not. Advance notice bylaw A provision in the bylaws of a corpora- tion that requires any shareholder who wishes to bring any business before a shareholder meeting to give written notice of that business to the corporation within a specified period of time before the meeting. All-cash tender offer A tender offer in which the entire consid- eration offered by the bidder for tendered shares consists of cash. “All holders” rule A rule set forth in Exchange Act Rule 14d- 10(a)(1) that requires a tender offer to be open to all security holders of the class of securities subject to the tender offer. Anti-tipping rule A rule that proscribes the communication by insiders of bidders and issuers and their “tippees” of material nonpublic information relating to a tender offer to any other person under circum- stances in which it is reasonably foreseeable that such communication is likely to result in a violation of the disclose or abstain rule of Exchange Act Rule 14e-3(a). There is a comparable prohibition relating to tipping of material nonpublic information about a company (whether or not relating to a tender offer) under Exchange Act Rule 10b-5. Appraisal right Under state corporate law, a statutory right of shareholders who dissent from some extraordinary corporate action (such as a merger or other business combination) to receive from the corporation payment of the fair value of their shares, as appraised by a court. “Bear hug” An acquisition offer that carries with it, implicitly or explicitly, the threat of a hostile takeover if it is rebuffed by the iiixxxiy GLOSSARY target company. A more hostile form of bear hug is one that is publicly disclosed by the potential bidder. Beneficial ownership Under Exchange Act Rule 13d-3, a person has beneficial ownership of a registered security if the person either has or shares direct or indirect power to vote, sell, or determine the dis- position of that security, or has the right to acquire that security within 60 days. “Best Price” Rule A rule set forth in Exchange Act Rule 14d- 10(a)(2) that requires the consideration paid to any security holder by the bidder in a tender offer to be the highest consideration paid to any other security holder during the tender offer. Bidder Under Exchange Act Rule 14d-1(g)(2), the term “bidder” means “any person who makes a tender offer or on whose behalf a ten- der offer is made.” As used in the Exchange Act, this term does not include, however, a person who makes an issuer self-tender. Blank check preferred stock Preferred stock issuable in series, the terms of which can be fixed by the directors without a shareholder vote. A new series of preferred stock could be issued to underlie a poison pill, or, subject to compliance with requirements under stock exchange mules or applicable law, could be issued to a minority investor. Blasius test A rule under which an action taken by a corpora- tion’s board of directors without shareholder approval, with the sole or primary purpose of thwarting a shareholder vote or disenfranchising shareholders, will be upheld only if the directors can show a com- pelling justification for the action. This rule was articulated by the Delaware Court of Chancery in Blasius Industries, Inc. v. Atlas Corp., 464 A.2d 651 (Del. Ch. 1988). Break-up fee See termination fee. Business combination A general term used to refer to transac- tions such as mergers, consolidations, and acquisitions of most of a corporation’s shares or assets. Business combination statutes State second- generation takeover statutes that impede a bidder’s ability to effect a merger or certain other kinds of corporate transactions with a company incorporated under the laws of the state after the bidder has acquired control of the targetGLOSSARY XXXV company, by providing that an “interested shareholder”—defined to mean the owner of at least a specified threshold percentage (usually 10 percent to 20 percent of an issuer’s stock}—may not enter into a business combi- nation with the corporation for a specified period from the time the threshold percentage is crossed, unless, before the crossing of the thresh- old, the issuer’s directors have approved either the business combination or the crossing of the threshold. Also called merger ban statutes. Business Judgment Rule A rule under which the directors of a company, in making a business decision, are presumed to have acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company and its share- holders, so that the directors’ decision should be respected by courts unless it is established that the directors were interested or lacked inde- pendence relative to the decision, did not act in good faith, acted in a manner that cannot be attributed to a rational business purpose, or reached their decision by a grossly negligent process that included the failure to consider all material facts reasonably available. See, e.g., Brehm y. Eisner, 746 A.2d 244 (Del. 2000); Aronson v. Lewis, 473 A.2d 805 (Del. 1984). Bust-up takeover A tender offer in which the bidder intends to sell off pieces of the target once it obtains control of the target, rather than to operate the target as an ongoing business enterprise, because the bidder believes that the pieces of the target are more valuable when sold separately than is the target as a single entity. Call rights plan A shareholder rights plan under which the holder of a right (other than the third party that has acquired more than a specified percentage of the target company’s stock) has the right to buy securities—of the target company or, in some instances, of the bid- der—at a specified or formula exercise price, in the event a third party acquires more than a specified percentage of the target company’s stock (often in the range of 10 percent to 20 percent). “Chewable” poison pill A shareholder rights plan that excludes from the kinds of acquisitions that trigger the shareholder rights plan the acquisition of target company shares pursuant to a specified kind of tender offer—for example, an all-cash, all-shares fully financed ten- der offer—that is open for at least a specified number of days, that is irrevocably conditioned on the tender of at least a majority of theXXXvi GLOSSARY target’s outstanding shares, and that is accompanied by a fairness opinion from a nationally recognized investment banking firm. Classified board A board of directors that is divided so that the entire board is not up for election in any one year. Typically, the board is divided into three classes, with the directors in each class serving for a term of three years. This means that only one-third of the board comes up for election at any annual meeting of shareholders. Also called staggered board. Control share acquisition statutes State second-generation takeover statutes that prevent a bidder from acquiring or voting more than a specified percentage of the shares of a target incorporated under the laws of the state, unless the zarget’s stockholders approve the acqui- sition or the bidder’s right to vote its shares. Crown jewel lock-up See crown jewel option. Crown jewel option A deal protection provision that gives a tar- get-approved bidder an option to buy a desirable part of the target com- pany under certain circumstances—for example, if the target enters into a transaction with another bidder, or if a bidder acquires more than a specified percentage of the target’s stock. Also called crown Jewel lock-up. Cumulative voting A method of voting either permitted or required by a state corporation statute that entitles a shareholder in the election of directors to vote the product of the number of shares owned by the shareholder multiplied by the number of directors to be elected, and to cast those votes for one or more candidates rather than for the full number of directors to be elected. “Dead hand” poison pill A poison pill that contains a provision to the effect that if a majority of the board of directors is replacéd in a proxy contest by someone that had made a takeover bid or proposed to acquire the company, only “continuing directors” (directors in office before the proxy contest and successors appointed with their approval) can redeem the poison pill. Deal protection provisions Provisions in a negotiated merger or acquisition agreement that are designed to restrict the target's abil- ity to seek or enter into competing transactions before the merger orGLOSSARY XXXVI acquisition is completed or the agreement is terminated. Deal protec- tion provisions include no-shop provisions, no-talk provisions and termination fees. Defensive acquisition An acquisition that makes a potential tar- get a less attractive takeover candidate. Examples: an acquisition of a company (i) in a regulated industry, such as a bank or an insurance company, in order to discourage hostile bids by acquirors that are unwilling to endure a lengthy regulatory review that might be needed to obtain approval to acquire a regulated company or its parent, or (ii) that competes substantially with potential bidders, and so may create an antitrust obstacle to a takeover. ‘Disclose or abstain” rule A rule under which a person has a duty to abstain from trading if the person (i) is in possession of mate- rial nonpublic information relating to a tender offer, (ii) knows or has reason to know that the information is not public, or (iii) knows or has reason to know that the information was acquired from the bidder, the issuer, or an insider of the bidder or issuer, unless the nonpublic infor- mation and its source are publicly disclosed, by press release or other- wise, within a reasonable time prior to any purchase or sale. See Exchange Act Rule 14e-3(a). There is a comparable disclose or abstain tule relating to material nonpublic information, whether or not relating to a tender offer. See Exchange Act Rule 10b-5. Dual-class capitalization Division of a company’s common stock into two classes with differing voting rights. Example: one class has low-voting shares (one vote per share), and the other has high- voting shares (for instance, ten votes per share). Duty of care A fiduciary duty owed by the directors of a corpo- ration under state corporate law to be adequately informed in making a business decision. Under Delaware case law, this includes the requirement to consider all material information reasonably available. Duty of loyalty A fiduciary duty owed by the directors of a cor- poration under state corporate law, which requires them, in making a business decision, not to have a material self-interest or lack inde- pendence in the decision and to act in good faith, Eight-factor analysis An eight-factor test used by the SEC to determine whether an accumulation of shares is a tender offer.XXxViii GLOSSARY Employee stock ownership plan (ESOP) A type of employee benefit plan that in some cases has been used to place control over sub- stantial blocks of the target company’s stock in the hands of employees. Entire fairness test A standard of review applicable to board decisions on matters in which a majority of the directors have eco- nomic interests that are in material conflict with those of the share- holders, or if other predicates of the business judgment rule have not been satisfied. See, e.g., Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983). This standard also applies to a going private transaction that is a corporate transaction such as a merger—tather than a non-coercive tender offer—and that involves a controlling shareholder. Under this standard, the directors must demonstrate that the transaction is entirely fair to the corporation and its public shareholders. See, e.g., Kahn vy. Tremont Corp., 694 A.2d 422 (Del. 1997). In some circumstances—for example, if the transaction is made subject to the approval of holders of a majority of the publicly held shares, or if a committee of disinter- ested directors has vigorously represented the interests of the public shareholders—the burden shifts to the plaintiff to show why the trans- action is not entirely fair. In reviewing a transaction for “entire fairness,” Delaware courts look at both the procedural fairness (“fair dealing”) and the substantive or price fairness (“fair price”). ERISA The Employee Retirement Income Security Act of 1974. ERISA establishes a federal statutory framework that governs the administration of employee benefit plans and the rights of the benefi- ciaries under the plan. Exchange Act The Securities Exchange Act of 1934 (codified as amended in 15 U.S.C. §§ 78a et seq.). The Exchange Act in general deals with trading in securities (including tender offers). Exchange offer A tender offer in which a bidder offers securi- ties, instead of cash (or sometimes together with cash), as considera- tion for tendered shares. Exchange ratio The ratio used to compute how much of a type of consideration is to be issued in a business combination for each share of the target. . Exon-Florio amendment Pub. L. No. 102-99, § 8, 105 Stat. 487 (1988) (codified as amended at 50 U.S.C. § 2170), amending theGLOSSARY xxxix Defense Production Act of 1950 to authorize the President of the United States to investigate, suspend or prohibit acquisitions by foreign persons of companies engaged in U.S. interstate commerce—including non-U.S. companies—if the acquisition is determined to represent a threat to U.S. national security. Fairness opinion _A letter from an investment banking firm to the board of directors (or in some cases, such as going private transac- tions, to a special committee of disinterested directors) of one of the corporations in a business combination to the effect that the consider-. ation to be paid (or, in the case of a stock merger or an exchange offer, the exchange ratio) in the business combination is fair to the share- holders (in some cases such as going private transactions, the public shareholders) of the target, or, if addressed to the board of directors of the bidder, to the bidder, from a financial point of view. Fair price provision A charter provision that requires superma- jority approval for a merger with a significant shareholder unless the Price (or percentage premium over market price) that the significant shareholder pays to other shareholders in the merger equals or exceeds the highest price (or percentage premium) paid by the acquiror in acquiring the target’s shares before the merger. Fair . price/supermajority statutes State second-generation ~ takeover statutes designed to curb coercive two-tiered bids (such as two-tier, front-end-loaded tender offers) by requiring approval by hold- ers of a supermajority of the target's shares before a bidder that owns . more than a specified percentage of the target company’s stock may consummate a merger or other business combination with a target, . unless, before reaching the statutory threshold of stock ownership, the merger or combination is approved by the target’s directors or the bid- der agrees to pay all shareholders (including those who did not tender - into the bidder's offer) a “fair price.” “Fair price” sometimes is defined to afford all shareholders the higher of (i) the price paid for any of the stock acquired by the bidder, (ii) the market price of the stock, or (iii) the price shareholders would be paid in the event of dissolution of the corporation. In some cases, the definition includes the concept that in the second step of a business combination, the bidder pays sharehold- ers the highest percentage premium over market that the bidder paid to acquire shares in the market or in a first step tender offer.xl GLOSSARY “Fiduciary out” A provision in a negotiated merger or acquisi- tion agreement that permits the sarget’s board to take certain actions, such as considering competing bids, providing confidential information to potential bidders, entering into merger discussions with them, and even terminating the agreement, even though such actions are prohib- ited by the deal protection provisions of the agreement, if failure to take such actions would be inconsistent with the board’s fiduciary duties to the target or its shareholders. “First-generation” takeover statutes Antitakeover statutes that were enacted by a number of states as initial attempts at state regula- tion of takeovers through state securities laws administered by state regulatory officials. These laws often required prior approval by the state officials before a tender offer could be launched. These statutes were struck down as inconsistent with the Williams Act and invalid under the Supremacy and Commerce Clauses of the U.S. Constitution. “Flip-in” poison pill A shareholder rights plan under which the holder of a right under the plan (other than the third party that has acquired more than a specified percentage of the targer’s stock without the approval of the target’s board of directors) becomes entitled to buy, upon payment of the exercise price for the right, stock of the target company at half price. “Flip-over” poison pill A shareholder rights plan under which the holder of a right under the plan (other than a holder of more than a specified percentage of the target’s stock) becomes entitled to buy, upon payment of the exercise price for the right, stock of the bidder (or stock of the surviving company after a merger) at half price. Fraud-on-the-market theory A theory relating to proof of reliance in securities fraud actions that is “based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business. Misleading statements will therefore defraud purchasers of stock even if the purchasers do not directly rely on the misstatements.” Basic v. Levinson, 485 U.S. 224, 239 (1988). In cases based on the fraud-on-the-market theory, the plaintiff's reliance on the truth of the defendant’s misrepresentations is presumed and need not be proven as a separate element of the cause of action.GLOSSARY xl Fraudulent conveyance . A transaction may be a fraudulent con- yeyance if a company makes a transfer or incurs an obligation without receiving fair consideration. Under most state and federal fraudulent conveyance statutes, the creditors of that company may sue to invali- date such a transfer or obligation if the company was insolvent or in a precarious financial condition (as defined in the applicable statute) at the time of the transaction, or if that transaction rendered the company insolvent or unable to pay its debts as they became due. Going private transaction A transaction in which a large share- holder or a group of shareholders of a publicly held company seeks to take the company private by buying out the public stockholdings, for example in a tender offer or a merger. Examples: squeeze-out mergers and LBOs of public companies. “Golden parachute” A severance agreement between a corpora- tion and one of its top executives providing benefits payable upon the termination of the executive’s employment in the event of a change in control or in other specified circumstances. Often the severance benefits are payable only if, after a change in control, there is another event (a “second trigger”) such as a termination of employment by the company without cause or a termination of employment by the employee for good reason (¢.g., a material reduction in the employee’s responsibilities.) Greenmail A payment by a target company to repurchase, at a premium price, shares held by an unfriendly bidder or a significant shareholder of the target company. Group Under Exchange Act Rule 13d-5(b)(1), for purposes of the Williams Act, a group is formed when two or more persons agree to act together to acquire, hold, vote, or dispose of securities. Shares owned by the group’s members individually are attributed to the group. Group bid A tender offer launched by a group of bidders, each of whom is interested in only a segment of the target and who therefore join together for the purpose of making the tender offer and acquiring control, at which point the bidders divide the target into several pieces and go their separate ways. Gun-jumping In an exchange offer, the making of a communi- cation about the transaction before a registration statement relating toxiii GLOSSARY the securities to be issued in the exchange offer is filed with the SEC. ‘Under the January 2000 Amendments, such communications are per- mitted from and including the first public announcement of the trans- action until the filing of a registration statement relating to the transaction, so long as any written communication made in connection with or related to the transaction is properly filed with the SEC. See Securities Act Rule 165(a). Hart-Scott-Rodino Act (H-S-R Act) The Hart-Scott-Rodino Antitrust Improvements Act of 1976, Pub. L. No. 94-435, Title 1, § 301, 90 Stat. 1390 (1976) (codified as 15 U.S.C. § 18a), which added Section 7A to the Clayton Act to require the filing of a pre-merger noti- fication form with the U.S. antitrust agencies with advance information about significant mergers and acquisitions so that those agencies could adequately review the anticompetitive effects of proposed business combinations prior to their consummation. Hedged tendering A practice prohibited by Exchange Act Rule 14e-4, whereby a security holder, in a partial tender offer, either ten- ders securities to more than one bidder or sells his securities in the open market and also tenders them to the bidder in order to sell that portion of his securities that he estimates will not be accepted by the partial bidder once proration of tender offer purchases has occurred. High-yield bonds Bonds of less than investment grade that usu- ally have a rate of return significantly above the typical rate of return ‘on corporate bonds of investment grade, but that also have a default rate that is considerably higher than that on all corporate bonds. Also called junk bonds. Inside information Information about a company that is not gen- erally available to the trading public and is in possession of a corporate insider or of any other person who knows or has reason to know that such information is nonpublic and has been acquired from a corporate insider. Insider trading Trading in securities while in possession of inside information. Although since 1984 Congress has repeatedly con- sidered adopting a statutory definition of insider trading, no such statu- tory definition has been adopted to date, largely due to the SEC’s concern that a statutory definition would hamper the SEC’s enforcementGLOSSARY xiii effort by providing loopholes through which individuals might escape prosecution. As a result, the definition of insider trading remains tele- gated to the courts and to the SEC. Although the SEC has not defined insider trading, in 2000 it adopted Rule 10b5-1, defining when a pur- chase or sale constitutes trading “on the basis of” material nonpublic information, and Rule 10b5-2, identifying some of the circumstances in which a person has a duty of trust or confidence for purposes of viola- tions of the insider trading rules based on material nonpublic informa- tion misappropriated in breach of a duty of trust or confidence. Investment intent exemption An exemption to the $50 million reporting threshold established by the H-S-R Act for acquisitions of voting securities that permits a person to acquire up to 10 percent of an issuer’s voting securities—regardless of the value of those hold- ings—if the acquisition is “solely for the purpose of investment,” meaning that the investor has “no intention of participating in the for- mulation, determination or direction of the basic business decisions of the issuer.” Issuer self-tender A tender offer made by an issuer or by an affil- iate of an issuer for any class of the issuer’s own securities. Just as Section 14(d) of the Exchange Act does not define “tender offer,” Section 13(e) does not define what constitutes an issuer self-tender. The SEC and some courts use the same eight-factor test to evaluate both types of tender offers. Issuer self-tenders are regulated by Exchange Act Rule 13e-4. Also called issuer tender offer and self-tender offer. Issuer tender offer See issuer self-tender. January 2000 amendments A number of amendments to the SEC mules governing tender offers and market accumulations of stock under the Williams Act, promulgated by Exchange Act Release No. 42,055, {1999-2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) { 86,215 (Oct. 19, 1999), effective as of January 2000. Among other things, the amend- ments permitted more communications about exchange offers before the securities being offered are registered with the SEC, and more informa- tion about tender offers before they are formally commenced. Junk bonds See high-yield bonds. Leveraged buyout (LBO) A method of acquiring a company in which the acquiror uses the credit of the target itself to back up the ~xiv GLOSSARY borrowing of the funds needed to buy out the public’s shares and to refinance any of the target’s debt that may need refinancing. Leveraged ESOP An ESOP that incurs a significant amount of debt in order to purchase the company’s stock, with the expectation that the debt will be repaid by using periodic cash contributions made to the ESOP by the employer and plan participants. Mandatory bylaw proposal A proposal by a shareholder that shareholders amend a company’s bylaws. Example: a bidder might seek to dismantle a shareholder rights plan by proposing a bylaw amendment to require redemption of the poison pill rights unless shareholders approve the continuation of the shareholder rights plan. A mandatory shareholder proposal (unlike a precatory proposal, which merely Tequests the directors to consider a proposed action) may be inconsistent with state law provisions that the business and affairs of a corporation are to be managed by or under the supervision of the directors. Merger A statutory combination of two corporations, in which one corporation ceases to exist as a legal entity. The surviving corpo- ration retains its corporate identity and acquires all of the assets and liabilities of the other corporation. Merger ban statutes See business combination statutes. Misappropriation theory A rule under which a person who “improperly obtains or converts to his own benefit nonpublic information has an absolute duty to disclose that information or to refrain from trading.” Chiarella v. United States, 445 U.S. 222, 239-40 (1980) (Brennan, J., concurring and Burger, C.J., dissenting). This rule is based on the theory that a person who trades on the basis of inside information defrauds the source of the information, often his employer or the employer’s clients, and therefore, he need not owe any duty to a purchaser or seller of secu- nities in order to be liable. MJDS See United States~Canada Multi-Jurisdictional Disclosure System. Morris Trust Transaction A transaction (named after a case in which the technique was used) in which a corporation spins off the stock of a subsidiary and, shortly thereafter, the corporation is acquired .by an unrelated acquiror through a tax-free merger or other tax-free transaction. See Reverse Morris Trust Transaction.GLOSSARY xiv “No-hand” poison pill A type of “dead hand” poison pill that cannot be redeemed by any of the directors (sometimes only for a spec- ified period) after a board election, if there has been a change in con- trol of the board (e.g., after a proxy contest) and if redemption is reasonably likely to facilitate a business combination with someone who backed the election of the new directors. If the directors are barred from redeeming the rights only for a specified period of time, this is called a “slow-hand” poison pill. No-shop provision A provision in a negotiated merger or acqui- sition agreement that prohibits the target from soliciting competing transactions before the merger or acquisition is completed or the agree- ment is terminated. No-talk provision A provision in a negotiated merger or acqui- sition agreement that prohibits the target from furnishing information or entering into merger discussions with competing bidders. Pac-Man defense A defense to a hostile tender offer whereby the target responds to an actual or anticipated bid by making a tender offer for the bidder's stock. Partial tender offer A tender offer for less than all of the outstanding securities of a class of securities (e.g., common stock) of a target company. “Pension parachute” A device that compensates the beneficiar- jes of a company’s pension plan by providing for the vesting of increased pension benefits to be paid out of the pension fund’s surplus assets (i.e., the value of the fund in excess of the value of its accrued liabilities) in the event of an unfriendly change in control, the termi- nation of the pension plan within a specified period following a change of control, or the reduction of payments to the pension fund following a change in control. Poison pill See shareholder rights plan. Pooling-of-interests accounting A method of accounting that allowed the parties to a merger or another business combination to add together their balance sheets. This method of accounting eliminated the need to show goodwill in the financial statements of the acquiror when the acquisition price exceeds the fair value of the target’s assets. Effective in 2001, the accounting rules were changed to eliminate poolingxlvi GLOSSARY accounting. However, the goodwill created in an acquisition need not be written down periodically over time, but only when impaired. See SFAS 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. Pre-merger notification form A form that a bidder is required to file under the H-S-R Act before acquiring shares of a target company. The form calls for a description of the parties and the transaction, cur- rent financial statements, and a breakdown of dollar revenues according to the Standard Industrial Classification codes. Proration of tender offer purchases Under Section 14(d)(6) of the Exchange Act and Exchange Act Rule 144-8, if the bidder in a par- tial tender offer receives, during the tender offer period, tenders of more shares than were sought in the offer, the bidder must purchase the desired amount of shares on a pro rata basis, according to the num- ber of shares tendered by each tendering shareholder. “Protect preferred” plan A poison pill under which a target company issues to its shareholders shares of “protect preferred” stock that have a special dividend or put feature that requires the company to pay a special dividend to holders of the protect preferred in the event that combined trading prices of the target company’s common stock and the protect preferred stock do not equal or exceed a target price for a specified period of time prior to a specified date, with a provision that if the board decides not to pay the special dividend, the holders of the protect preferred will be entitled to an appropriate remedy, such as the election of a specified percentage of the board of directors or the conversion of the protect preferred to common stock of the target company. Proxy contest A proxy solicitation in which a dissident share- holder or group of shareholders solicits shareholder votes to elect a new slate of directors or in support of a particular shareholder proposal ‘or in opposition to a management proposal. Also called a proxy fight. Proxy fight See proxy contest. Proxy solicitation Under Exchange Act Rule 14a-1(2), the term “proxy solicitation” includes (i) any request for a proxy, whether or not accompanied by or included in a form of proxy; (ii) any request to exe- cute or not to execute, or to revoke, a proxy; or (iii) any communicationGLOSSARY xvii to shareholders “under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.” Public announcement An oral or written communication by a participant in a business combination that is reasonably designed to, or has the effect of, informing the public or security holders in general about the business combination. See Securities Act Rule 165(f)(3). Put rights plan A shareholder rights plan under which the holder of a right (other than a holder of more than a specified percent- age of the target company’s stock) has the right to put to the company securities already held by the holder at a fixed or formula exercise price in the event that a third party acquires more than a specified percent- age of the company’s stock and does not offer to buy the rest of the stock at a specified price (usually equal to the value of the considera- tion receivable if the rights are exercised). Recapitalization A financial restructuring that changes a com- pany’s debt-to-equity ratio. This may be effected by an investment in the company’s stock, an issuer self tender, or through a reclassification or merger. In some recapitalizations, a shareholder receives cash and/or securities and remains a stockholder in a much more highly leveraged company. Reverse Morris Trust Transaction A transaction in which a corporation spins off the stock of a subsidiary and, shortly thereafter, the subsidiary is acquired by an unrelated acquiror through a tax-free merger or other tax-free transaction. See Morris Trust Transaction. Revlon duty A duty of the board of directors of a corporation, once the board has authorized the sale of control of the corporation, to seek the best price reasonably available for the corporation’s shareholders. This duty was formulated by the Supreme Court of Delaware in Revlon, Inc. v, MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). Schedule 13D An SEC disclosure document that must be filed by any person (including a group) who acquires beneficial ownership of 5 percent or more of the outstanding shares of a class of voting equity securities registered under Section 12 of the Exchange Act with the SEC and with each national exchange on which the securities in question are traded. A Schedule 13D discloses, among other things, the acquiring person's plans or proposals relating to the company.xiviii GLOSSARY Schedule 13G An SEC disclosure document that calls for less disclosure than does a Schedule 13D and that may be filed, as an alter- native to Schedule 13D, by any person that beneficially owns less than 20 percent of a class of voting securities and did not acquire the secu- Tities with the purpose or effect of changing or influencing control of the issuer or in connection with or as a participant in any transaction having that purpose or effect. Schedule 14D-9 A Tender Offer Solicitation/Recommendation Statement that under Exchange Act Rule 14d-9(b) must be filed with the SEC by a sarget or other person who, after a bidder has actually com- menced a tender offer, makes a solicitation or recommendation (other than a “stop-look-and-listen” letter) to security holders with respect to the tender offer. Rule 14d-9 requires that a full Schedule 14D-9 be filed on the date the solicitation or recommendation is first published or sent or given to security holders. Before actual commencement of the tender offer, under Rule 14d-9(a), it is sufficient that all written communications are filed with the SEC no later than the date of the communication. Schedule TO Disclosure document that a bidder, upon com- mencing a tender offer, must file with the SEC and deliver to the tar- get, other bidders, and the stock exchanges {or NASD) on which the target’s stock is traded. See Exchange Act Rule 14d-3(a). “Second-generation” takeover statutes State antitakeover Statutes that were adopted in response to the invalidation of the first- generation takeover statutes and that seek to regulate takeovers by incorporating into state corporation statutes various provisions designed to regulate corporate governance aspects of takeovers of companies. Examples: business combination statutes, control share acquisition statutes and shareholder constituency statutes. Securities Act The Securities Act of 1933, Act of May 27, 1933, Ch. 38, 48 Stat. 78 (1933) (codified as amended at 15 U.S.C. §§ 77a et seq.). The Securities Act in general regulates the offering of securi- ties by companies. Self-tender offer See issuer self-tender. Shareholder constituency statutes State second-generation take- over statutes that permit or direct a corporation’s board, in formulatingGLOSSARY xlix an appropriate response to a takeover bid or in the course of taking other corporation action, to take into account the needs of “nonshareholder constituencies” such as employees, suppliers, creditors, customers, or the communities in which the corporation has facilities. These statutes may authorize a target company’s board to reject a bid on the grounds that constituencies other than shareholders might suffer as a result of a change in corporate control. Shareholder rights plan A takeover defense that is intended to encourage bidders to seek board approval before acquiring more than a specified percentage of a target company’s stock, by causing sub- stantial dilution to the bidder if it crosses the relevant threshold with- out the board’s prior approval. Also known as a poison pill. “Shark repellents” Provisions in a corporation's governing instruments designed to make it more difficult to acquire control of the corporation without the prior approval of the corporation’s board of directors. Examples: a staggered board in the corporation’s certificate of incorporation, an advance notice bylaw, a poison pill. Short tendering A practice whereby a person tenders, in a partial tender offer, a security in which he does not have a net long position both at the time of tender and at the end of the proration period. This practice. is prohibited by Exchange Act Rule 14e-4, which is designed to prevent investors from tendering more shares than they actually own, in the hope of increasing the number of their shares that the bidder actually will accept after proration of tender offer purchases. Short-swing trading A practice prohibited by Section 16(b) of the Exchange Act, whereby an insider, defined as a director, executive officer, or 10-percent shareholder of an issuer, makes any purchase and sale, or any sale and purchase, of an equity security of the issuer within any period of less than six months. Under Section 16(b), the insider must disgorge any profits realized from such short-term transactions, unless an exemption is applicable. “Slow hand” poison pill See “no-hand” poison pill. Squeeze-out merger A merger designed to eliminate minority interests in a corporation. Although state law permits the majority shareholders of a corporation to effect a squeeze-out merger that con- verts the common stock owned by the minority shareholders into cash,! GLOSSARY it requires fair treatment of the minority shareholders in the process, including granting them appraisal rights. Staggered board See classified board. Standstill provision A provision in an agreement with a target (e.g., a confidentiality agreement between a potential bidder and the tar- get) that restricts a person signing the agreement from making a tender offer, waging a proxy contest, buying more shares, or otherwise seeking to acquire control of the target without the approval of the target. “Status flip-in” poison pill See “flip-in” poison pill. Stock repurchase program The purchase by a target of its own shares from its shareholders through a tender offer, through privately negotiated transactions, or on the open market. See also issuer tender offers, self-tender offers, and issuer self-tenders. “Stop-look-and-listen” letter A target's communication to share- holders that does no more than ask shareholders not to make any imme- diate decision with respect to a tender offer until they have heard the target’s position. Subsequent offering period A period from three to 20 business days after the initial sender offer period has expired, in which target shares may be tendered, under Exchange Act Rules 14d-11 and 14d-7, if the ten- der offer satisfies certain requirements. Target shares may be tendered to the bidder during this period, but no tendered shares can be withdrawn, Supermajority requirement A provision requiring approval by holders of more than a majority of a company’s outstanding shares. Target The company the bidder is seeking to acquire. Tender offer Although the term “tender offer” is not defined in the Williams Act or the SEC rules promulgated under that statute, case law defines the typical or “conventional” tender offer as “a general, publicized bid by any individual or group to buy shares of a publicly- owned company, the shares of which [are] traded on a national securi- ties exchange, at a price substantially above the current market price.” Hanson Trust PLC v. SCM Corp., 774 F.2d 47, 54 (2d Cir. 1985). Depending on the circumstances, stock purchases of material amounts of stock at a premium, otherwise than in a conventional tender offer, can also be deemed to be a tender offer. See eight factor-analysis.GLOSSARY ui Tender offer period A minimum period of 20 business days, commencing when the bidder first publishes, sends or gives the target’s shareholders the means to tender their shares, during which a bidder must keep its tender offer open under Exchange Act Rule 14e-1. Ten-day window A period of 10 days following the date on which a holder of 5 percent of an issuer’s securities has reached or crossed the 5-percent threshold, during which Section 13(d) of the Exchange Act allows the 5-percent holder to purchase additional secu- Tities of the issuer, without filing a Schedule 13D disclosing that the 5-percent threshold has been crossed. Termination fee In a negotiated merger or acquisition agree- ment, an amount payable if one party terminates the agreement under certain circumstances—for example, to accept-a better transaction or because of shareholder rejection of the transaction after an announce- ment of a competing bid. Also called break-up fee. TIDE plan Acronym for. “Three-Year Independent Director Evaluation.” A shareholder rights plan that, by its terms, continues for more than three years only if a majority of the independent directors of the company approves that continuation. Toehold An initial position in a target's stock acquired by a bid- der through open-market or privately negotiated block transactions, which usually is kept secret until the bidder is required to comply with applicable Exchange Act disclosure requirements. Two-tier, front-end-loaded tender offer A two-step takeover method whereby a bidder obtains control by means of a partial tender offer for only a percentage of the farget’s outstanding shares (the “front end”), and follows up with a merger on terms less advantageous to the target's shareholders (the “back end”). United States-Canada Multi-Jurisdictiona! Disclosure System (MJDS) A system created in 1991 to allow U.S./Canada cross-border transactions to proceed in both jurisdictions on the basis of home country disclosure documents. Unocal test An enhanced business judgment rule test, established by the Delaware Supreme Court in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), requiring a target’s board of directors that has taken defensive action against a threatened acquisition of control to showWi GLOSSARY that the board reasonably perceived a threat to corporate policy and effectiveness and that the actions taken were reasonable in relation to the threat posed. Value assurance plan A shareholder rights plan under which shareholders receive a dividend in the form of a contingent note of the issuer, to remain outstanding for a specified period of time, with a pro- vision that if someone acquires more than a specified percentage of the issuer, the principal amount of the note becomes equal to the difference between a specified target value and the average price per share paid by the acquiror. Williams Act Pub. L. No. 90-439, §§ 2, 3, 82 Stat. 454, 455 (1968) (codified as amended at 15 U.S.C. §§ 78m and n), introduced by Senator Harrison A. Williams, Jr., which added subsections (d) and (e) to Section 13 and subsections (d), (e) and (f) to Section 14 of the Exchange Act—the subsections of the Exchange Act that provide the basic federal securities law framework for the regulation of market accumulations of stock and tender offers. Withdrawal rights The right of shareholders who tender their shares to a bidder in a tender offer to withdraw those shares at any time during the tender offer period (except during a subsequent offering period), or after the sixtieth calendar day from the commencement of the tender offer, if the bidder has not yet purchased those shares. White knight A friendly bidder who enters into a merger agree- ment with a target to prevent it from being acquired by a hostile bid- der in a pending or anticipated bid. White squire A third party that purchases a large position in a target's stock directly from the target and becomes a continuing signif- icant presence in the target's shareholder constituency. Often the white squire will acquire preferred stack having significant veto powers.7 Part |. Historical Context Takeovers: A Strategic Guide to Mergers and Acquisitions, 2/e 91111410084X9]UOD JLOVOISIH “L.EdPARTI HISTORICAL CONTEXTeo Chapter 1 BACKGROUND Before we talk about offense and defense takeover tactics, Jet us lay the groundwork with a little historical perspective. Just as you cannot appreciate military tactics at a given point in time without an under- standing of the available offensive and defensive weaponry, you cannot understand takeovers in the United States without an understanding of tender offers and the legislative response to their development. Hostile tender offers, which now seem so much a part of the corporate landscape, did not really exist in the United'States before the early 1960s, though they existed in England. In the 1950s, someone seeking to wrest control of a company from its incumbent directors gener- ally did so by-a proxy contest. The insurgent would put up its own slate of nominees for election by the shareholders, and campaign for votes. The practice was well established, and the SEC had detailed rules for the conduct and required disclosures in a proxy contest.! In the early 1960s, bidders began instead to seek to acquire control, in the face of management opposition, by tender offers—offers made directly to the shareholders of the target, seeking to buy their shares at a specified price. Bidders also accumulated large positions in the target company’s stock before launching tender offers. Apart from the gen- eral antifraud provisions in the securities laws, there was very little in federal law regulating tender offers or market accumulations—and 1. See infra § 6.B. for a discussion of the regulation of proxy contests. 1-11-2 TAKEOVERS: there were abuses as a result. A market accumulator could acquire enough stock to influence management—or even to obtain a majority position—without even disclosing its identity or purpose. And in a public tender offer, the bidder could seek to stampede target share- holders into acceptance of a tender offer by offering a premium price for only a bare majority of the shares, holding the offer open only a few days, and making the offer available, not on a pro rata basis to all tendering shareholders if the offer were oversubscribed, but on a first- come, first-served basis. The result was that target shareholders had to make major investment decisions with little time and little informa- tion, and target management often had next to no time to seek for alternative transactions that would be better for shareholders. The use of tender offers in the United States increased in the 1960s precisely because tender offers were cheaper, less regulated, and more difficult to thwart than were other takeover strategies. In 1968, former Securities and Exchange Commission (“SEC”) Chairman Manuel F. Cohen wrote in his preface to Edward Aranow and Herbert Einhom’s classic treatise on proxy contests: One of the most striking phenomena of the corporate scene in recent years has been the large number of mergers and other forms of acquisitions—particularly mergers and acquisitions involving companies in different fields. Informed observers have stated that they consider the merger proxy statements prepared under the Commission’s Proxy Rules to be the most useful and informative documents available in evaluating today’s “conglomerate” companies. But in the very recent past, the situation has been getting away from us. Statutory mergers and proxy contests, traditional means of acquiring control of a publicly held corporation, are being supplanted to an increasing degree by cash purchases, either through tender offers or through private or open market purchases.” In addition to being uninformed, shareholders frequently found themselves confronted with “undue pressure . . . to act hastily to 2. E.R. Aranow & H.A, Einhorn, Proxy Contests for Corporate Control xvii 2d ed, 1968),BACKGROUND 1-3 accept [the offer], before management or any other group [had] an opportunity to present opposing arguments or competing offers.”? Shareholders also confronted substantial pressure from the target’s management, which usually urged them to reject tender offers. The Jack of regulation allowed management to engage in questionable defensive responses: If management does oppose the offer, the present lack of regulation leaves it with powerful weapons, which it may wield with impunity, provided its activities fall short of fraud. Management tactics may include making all sorts of predictions and extravagant claims. . . .* For example, management or its allies often would purchase the target’s securities on the open market in order to drive up the price of the company’s outstanding shares, thereby making the tender offer appear less attractive to shareholders—and potentially more expensive for the bidders 3. Senate Hearings on S. 510 Before the Subcomm, on Securities of the Senate Comm, on Banking and Currency, 90th Cong., Ist Sess. 21, 35 (1967). 4, dd. at 196, 5. Hd.Chapter 2 LEGISLATIVE RESPONSE In 1968, Congress enacted the Williams Act,' which attempted to remedy tender offer abuses by protecting shareholders of target companies. Because tender offers resemble proxy contests insofar as both devices are ways to achieve changes in corporate control, Congress conferred upon the SEC a degree of jurisdiction over tender offers similar to the authority that the SEC already exercised over proxy solicitations. Furthermore, the Williams Act imposed on bidders, and often on the target’s management, disclosure and reporting requirements similar to those applicable in proxy contests. The initial version of the bill was introduced in 1965 by Senator Harrison A. Williams, Jr., of New Jersey.? The bill did not focus on the need for an orderly and informed market but instead emphasized the need to restrain third-party tender offers. Nor did the bill attempt in any way to control target management’s response to tender offers. In the words of Senator Williams: In recent years we have seen proud old companies reduced to corporate shells after white-collar pirates have seized control 1, Pub. L. No. 90-439, §§ 2 & 3, 82 Stat. 454, 455 (1968), amending 15 U.S.C. §§ 78m and n. 2. S. Res. 2731, 89th Cong., 2d Sess. (1965). 2-12-2 TAKEOVERS. with funds from sources which are unknown in many cases, then sold or traded away the best assets, later to split up most of the loot among themselves. . . . The ultimate responsibility for preventing this kind of industrial sabotage lies with the management and the shareholders of the corporation that is so threatened. But the leniency of our laws places management and shareholders at a distinct disadvantage in coming to grips with the enemy? Senator Williams’s message was clear: protect incumbent management. The initial bill applied Section 16 of the Exchange Act, pertaining to insider trading and short-swing profits,‘ to tender offerors. The bill also required the SEC to establish rules for the filing of offering materials before a tender offer could proceed. In 1967, Senator Williams introduced a revised bill,’ which, with minor amendments, was passed by Congress and signed by President Johnson. The 1967 bill did not include short-swing trading rules ot advance-clearance provisions. Unlike its 1965 predecessor, however, the 1967 bill did contain detailed provisions to protect shareholders from the improper conduct of the target’s management and of tender offerors, Indeed, by 1967, Senator Williams had changed his objectives: We have taken extreme care to avoid tipping the scales either in favor of management or in favor of the person making the takeover bid. [The bill] is designed solely to require full and fair disclosure for the benefit of investors. The bill will at the same time provide the offeror and management equal opportunity to present their case.® The final bill’s legislative history thus reveals that Congress expressly disclaimed an intention to provide the target’s management 3, 111 Cong. Rec, 28,257-58 (1965) (remarks of Senator Williams). 4, Insider trading and short-swing profits are discussed infra § 6.C. 5. S. Rep. No, 90-510 (1967). 6. 113 Cong. Rec. 24,664 (1967) (remarks of Senator Williams).LEGISLATIVE RESPONSE 2-3 with a weapon with which to discourage takeover bids or to prevent large stock accumulations that would facilitate such attempts.’ Under the bill’s provisions, the Securities and Exchange Commission could specify the information to be included in any recommendation by manage- ment or others in favor or in opposition to a tender offer and could regulate the solicitation of investors by brokers and dealers who are often compensated for shares tendered as a result of their activities. It would also enable the Securities and Exchange Commission to regulate the activities of persons who make competing tender offers or seek to influence the investor's decisions on a tender offer.* The bill also attempted to guarantee to investors sufficient time to assess the disclosed information and to make a considered decision whether to tender. Shareholders no longer were to be stampeded into reaching immediate and uninformed investment decisions. In addition, the bill regulated market accumulations by adding Section 13(d) to the Exchange Act, requiring any person or group that acquired more than a threshold percentage (initially 10 percent; reduced in 1970 to 5 percent) of a company’s voting shares to file promptly with the SEC and to send to the company a statement on Schedule 13D, disclosing, among other things, the buyer’s identity, purposes, the financing for its past and proposed purchases, and any arrange- ments the buyer had with any other person relating to the company’s securities. The pattern of regulation laid down in the Williams Act continues to provide the basic federal securities law framework for the regulation of tender offers and market accumulations. There have, however, been significant changes since 1967 in the federal regulation of takeovers. In 1970, Congress not only lowered the 13(d) reporting requirement from 10 percent to 5 percent; it also made exchange offers subject to section 14(d} the section dealing with tender offers—and gave the SEC broad rule-making power to define, and prescribe means reasonably 7. See Rondeau v. Mossinee Paper Corp., 422 U.S. 49, 58-59 (1975). 8. S. Rep. No. 90-550, at 9 (1967); H.R. Rep. No. 90-1711, at 10 (1968).24 TAKEOVERS designed to prevent, acts and practices that are fraudulent, deceptive or manipulative in connection with tender offers.? Most dramatically, a thorough overhaul of the SEC’s tender offer rules went into effect in January 2000." The 2000 amendments, among other things: * Permitted bidders to say more, sooner, without committing “gunjumping” violations of the SEC’s rules on securities offer- ings and proxy solicitations. * Permitted an exchange offer—that is, a tender offer involving securities as all or part of the consideration for the target company’s shares—to start when a registration statement cover- ing the securities is filed with the SEC, rather than when it is declared effective. * Harmonized and simplified disclosure requirements in mergers and tender offers. * Updated the SEC’s tender offers by, for example, allowing bidders a “subsequent offering period” without withdrawal rights. * Permitted much more solicitation of proxies before a proxy statement is furnished to shareholders. + Exempted from some U.S. mules bids for non-U.S. target companies that are mostly owned by non-U.S. shareholders.'! 9, See Meredith M. Brown, The Scope of the Williams Act and its 1970 Amendments, 26 Bus. Lawyer 1637 (1971). 10. Exchange Act Release No. 42,055, [1999-2000 Transfer Binder] Fed. Sec. L. Rep. (CCH) 86,215 (Oct. 19, 1999). 11. See, e.g., Meredith M. Brown, Alan H. Paley & William D. Regner, Mergers & Acquisitions: The SEC’s New M&A Rules in Operation: What's Different, 14 INSIGHTS (Apr. 2000); Meredith M. Brown, Paul S. Bird & James A. Kiernan, The New SEC Rules on Cross-border Offers and Rights Offerings, 3 The M&A Lawyer 15 (Nov, 1999).Part Il. Considerations for the Bidder Takeovers: A Strategic Guide to Mergers and Acquisitions, 2/eJeppia ay} JO} SUOTBIApISUOD “| WedPART I CONSIDERATIONS FOR THE BIDDERPLANNING FOR A TAKEOVER A. The Bidder’s Working Group B. Know Your Target (1) The Target’s Takeover Defenses (a) (b) (c) @ {e) (f) (g) (h) i) (2) Other Due Diligence C. Consider the Bidder’s Own Vulnerability D. Analysis of Ways to Acquire the Target Chapter 3 Law of the Jurisdiction of Incorporation Charter and Bylaws Poison Pill Antitrust Regulatory Issues Target’s Shareholder Profile “Social Issues” Financing and Change of Control Issues Potential Acquirors The bidder must plan its takeover strategy carefully. It is essential that the bidder understand the target and anticipate the possible defenses that the target may implement, if the wansaction is unfriendly, or that must be dealt with in any event in a negotiated acquisition. Moreover, the bidder must analyze the economic effects of the acquisition, 3-13-2 TAKEOVERS arrange financing, and consider alternative strategies to carry out the proposed takeover within the applicable regulatory framework. A. The Bidder’s Working Group Because confidentiality and speed are often vital in the world of takeovers (and also in most negotiated acquisitions of public compa- nies), the bidder should assemble a working group that is as small as possible and that is expanded only on a need-to-know basis. The use of code names helps to maintain the confidentiality of the bidder’s offer. A working group typically consists of the following: Officers. To insure confidentiality, the bidder should involve only a smail number of its key officers in the takeover process. This group typically includes the chief executive officer, the chief financial officer (to consider the financing and the pro forma financial effect of the acquisition), and the general counsel (to coordinate legal analysis of the target and relations with outside counsel). Legal Counsel. In addition to regular inside and outside general counsel, bidders often rely on special takeover counse! to develop a strategy using state-of-the-art tactics and to give bidders the extra resources that they may need to act promptly. At a later stage, the bidder may need to retain local counsel in several jurisdictions if the bidder commences litigation chal- lenging takeover defenses such as poison pills or state takeover or regulatory statutes that might delay or frustrate the offer. Investment banker. An investment banker with takeover experi- ence can help coordinate the other members of the working group, advise on takeover strategies, evaluate the target com- pany, and help to arrange financing for the acquisition. If the acquisition involves a tender offer, an investment banker may act as a dealer manager. Dealer managers, however, are not required by law, and hostile bids sometimes proceed without them. Proxy solicitors. If the takeover involves a proxy solicitation (for example, to oppose a competing negotiated merger, or toPLANNING FOR A TAKEOVER 3-3 seek to elect the bidder’s nominees to the target’s board of directors), the bidder should retain professional proxy solicitors. * Public relations firm. Public relations consultants can help the bidder in communications with different constituencies—the press, investors, analysts, employees, regulators—and in antici- pating and responding to PR issues that might be raised by the target. A PR firm can be particularly important if the bid will involve shares of the bidder’s stock, the target might attempt to put downward pressure on the market price of the bidder’s stock. * Other advisors. Depending on the facts, the bidder's team may also include: * Accountants. To assist in ascertaining the accounting treatment for the transaction and in financial and tax due diligence of the target; * Governmental relations advisors. In case there are legislative or regulatory issues that cail for lobbying assistance; and * Investigators. In some cases in order to uncover facts demon- strating mismanagement of the target and/or the target’s directors’ improper responses to the takeover. B. Know Your Target Before launching a takeover, a bidder should research the target company—both to understand the target’s takeover defenses and to do traditional due diligence about the target’s business, prospects, assets and liabilities. (2) The Target’s Takeover Defenses The essence of analyzing the target’s takeover defenses is to understand both the obstacles to a takeover and whether the bidder— if it determines to go hostile—can remove those obstacles by taking its case directly to the shareholders in a proxy contest—for example, to replace the target’s directors. A bidder early on should review the target company’s defenses. In many cases, a good quick overview can be obtained from looking at a summary of defenses prepared by services3-4 TAKEOVERS like Sharkrepellent.com. This should be followed by a careful review of the actual wording of the key documents—for example, the target’s certificate of incorporation, by-laws and rights plan, and the takeover-related provisions of the law of the target’s jurisdiction of incorporation. Here are the kinds of factors a bidder considers in assessing a target’s takeover defenses: (a) Law of the Jurisdiction of Incorporation Where is the target incorporated? Things to look for in the state law include: * What percentage of the shares must vote in favor of a merger? For example, in New York, for corporations in existence on February 22, 1998, the required percentage is two-thirds, unless the charter otherwise provides,! while in Delaware the required percentage is a majority.’ This is important in determining how much of the target the bidder must own to be able to force through a merger. * State takeover statues. For example: * a business combination statute, which restricts a company’s ability to do a merger with a large shareholder. An example of this is Section 203 of the Delaware General Corporation Law, which bans a merger with a 15 percent holder for three years, with certain exceptions, unless, before the 15 percent threshold is crossed, the board of the target approves either the merger or the crossing by the bidder of the percentage threshold. * acontrol share acquisition statute, under which someone who acquires more than a specified percentage (usually 20 percent) cannot exercise voting rights unless the share- holders approve the acquisition. Note that some control share 1. N.Y. Bus. Comp. L. § 903(a)(2). 2. Del. Gen. Corp.'L. § 251(¢).PLANNING FOR A TAKEOVER 3-5 acquisition statutes may have unexpected results, including giving a bidder an opportunity to call a special meeting of shareholders of the target to consider granting the bidder vot- ing rights above the threshold. As a result, many potential target companies in states with control share acquistion statutes have opted out from the applicability of the statutes. * a statute that blesses a discriminatory poison pill} An example of this is Section 14-2-624 of the Georgia Business Corporation Code, looked to by the U.S. District Court in Atlanta in its July 1997 decision upholding the continuing director provisions of the pill Healthdyne used to resist Invacare’s tender offer.* There is no comparable provision in the Delaware corporation statue, and the Delaware Supreme Court in Quickturn Design Systems, Inc. v. Shapiro® struck down continuing director provisions of a poison pill. * a statute permitting (or in some rare cases requiring) directors to consider the interests of other constituencies (employees, customers, suppliers, the communities in which facilities are located) in reviewing a proposed acquisition of the company. + a control bid statute requiring the bidder to file detailed information with the state’s securities regulators upon commencement of its bid and allowing the regulators to suspend the bid if the filing fails to provide the required information until the bidder cures the defects.* 3. See § 16.B., infra for discussion of poison pills. 4. Invacare Corp. v. Healthdyne Technologies, Inc., 968 F. Supp. 1578 (N.D. Ga. 1997). Section 14-2-624 of the Georgia Business Corporation Code was subsequently amended in 2000 to expressly provide that the terms and conditions of a rights plan may include provisions that “limit, restrict, or condition the power of a future director to vote for the redemption, modification, or termination of the rights [plan]. . . for a period not to exceed 180 days from the initial election of the director. . . ." Ga. Bus. Corp. Code § 14-2-624(d)(2). 5. 721 A.2d 281 (Del. 1998). 6. For example, the Ohio securities statue allows the Ohio Division of Securities to summarily suspend the continuation of any “control bid made3-6 TAKEOVERS * Who can call a special meeting? Under some state laws (e.g., Llinois, Ohio, Connecticut, Maryland), holders of a specified percentage of the stock have the right to call a special meeting.” In Delaware, special meetings can be called only by the persons authorized to do so in the charter or bylaws.8 Many public Delaware companies have bylaws that do not authorize stockholders to call a special meeting. * Can shareholders act by consent, rather than just at a meeting? This would enable the bidder to take its case to shareholders at any time, rather than waiting for an annual meeting or seeking to call a special meeting. Contrast Delaware, which permits shareholders to act by consent (unless the charter otherwise provides)? (for example, IBM bid for Lotus; Johnson & Johnson bid for Cordis; Kollmorgen bid for Pacific Scientific), with New York, which requires consents to be unanimous." (b) Charter and Bylaws For example: + Is the board staggered, so that only part of the board comes up for election each year? Even if the board is staggered, is the staggered structure solidly protected? If the board is not stag- gered or if the staggered structure can be easily overtumed, the bidder can get complete control at the next annual meeting, if it can win a proxy fight. Examples include the 2000 deci- sion by Shorewood to merge with International Paper, after Chesapeake launched a hostile bid for Shorewood and a proxy pursuant to a tender offer” if the Division determines that the target has failed to provide to the Division all of the information specified in the statue or that the bidder's control bid materials do not provide full disclosure of all material infor- mation conceming the control bid. Ohio Ch. 1707 Securities § 1707.041(A). 7. Md. Gen. Comp. L. § 2-502(C)(1) (25 percent); Il. Bus. Corp. Act § 5/7.05 (1/5); Conn. Bus. Corp. Act § 33-696(a) (10 percent); Ohio Gen. Corp. L. § 1701.40(A)(3) (25 percent). 8. Del. Gen. Corp. L. § 211(d). 9. Del. Gen. Corp. L. § 211(b). 10. N.Y. Bus. Corp. L. § 615(a).; PLANNING FOR A TAKEOVER 3-7 fight to amend Shorewood’s bylaws to eliminate a staggered board,"' and the 1997 decision by ITT to enter into a transaction with Starwood Lodging, after the federal district court in Nevada struck down ITT’s plan to split itself into three pieces without a shareholder vote, and to have the largest piece (ITT Destinations) spun off with a charter that included a staggered board.'? * If state law permits shareholder action by consent, has the charter eliminated this? + Are there special supermajority voting requirements for mergers, at least with a bidder that owns more than a specified percentage of the target’s stock? + Does the charter provide for “blank check preferred”—that is, preferred stock issuable in series, the terms of which may be fixed by the directors? The preferred could be used to underlie a poison pill, or to issue to a white knight or white squire. * Does the charter have ample authorized but unissued common stock that could be issued to a white squire or white knight? + When is the annual meeting? How long can the target put off holding an annual meeting before the bidder can go to court to compel the annual meeting to be held? (For example, in Hilton’s - 1997 bid for ITT, under Nevada law, ITT had to hold its annual meeting within 18 months of the last annual meeting; ITT in October 1997 entered into an agreement for a transaction with © Starwood Lodging, in the face of a court order that the annual meeting be held not later than November 14, 1997.°) Are there provisions in the bylaws requiring a specified period of advance notice to the target for any shareholder nomination or other . action at a meeting? « Can the bidder call a special meeting of shareholders? How quickly? Even if the bylaws permit stockholders to call a 11. Chesapeake Corp. v. Shore, 771 A.2d 293 (Del. Ch. 2000). 12. Hilton Hotels Corp. v. ITT Corp., 978 F. Supp. 1342 (D. Nev. 1997), aff'd, 116 F.3d 1485 (9th Cir. 1997). 13. Hilton Hotels Corp. v. ITT Corp., 978 F. Supp. 1342 (D. Nev. 1997), aff'd, 116 F.3d 1485 (9th Cir. 1997).3-8 TAKEOVERS special meeting, the target’s directors may be able to amend the bylaws to defer for a reasonable period the time within which such a meeting must be held.'* * Is a supermajority required before the shareholders can amend the bylaws? (c) Poison Pill A shareholder rights plan, commonly known as a poison pill, is a device that encourages a would-be bidder to talk to a target’s directors before seeking to acquire more than a specified percentage of the target’s stock, because not doing so will result in substantial economic harm to the bidder: the rights held by the bidder will become void, and all the other shareholders will be able to buy shares of the target at half price. A rights plan can be adopted without shareholder approval; the directors authorize the rights to be distributed as a dividend to the target’s shareholders. Key terms include: * The percentage of the target’s stock that triggers a right to buy stock at half price (a so-called “flip-in”). This threshold percentage is usually in the range of 10 percent to 20 percent. * The exercise price. Since the essence of the pill is to inflict harm to the bidder by giving every other shareholder the right, on payment of the exercise price, to receive target’s shares worth twice the exercise price, the harm to the bidder will be greater, the higher the exercise price. * Whether the pill is “chewable,” by including such features as the shareholders’ ability to force a redemption of the pill by a referendum within a specified period of time, or having the pill not be applicable, if the tender offer is an all-cash offer for all of the target’s shares and meets other specified conditions. 14, Such a bylaw amendment, providing that if the requisite percentage of stockholders called a meeting, the board would fix the date for the meeting to be not less than 90 nor more than 100 days after the company had received and determined the validity of the requests, was upheld in Mentor Graphics Corp. v. Quickturn Systems, Inc., 728 A.2d 25 (Del. Ch. 1998).