This action might not be possible to undo. Are you sure you want to continue?
International law firm Clifford Chance combines the highest global standard with local expertise. Leading lawyers from different backgrounds and nationalities come together as one firm, offering unrivalled depth of legal resources across the key markets of the Americas, Asia, Europe and the Middle East. The firm focuses on the core areas of commercial activity: corporate and M&A; capital markets; finance and banking; real estate; tax, pension and employment; and litigation and dispute resolution. Through a strong understanding of clients’ businesses, cultures and objectives, Clifford Chance draws on the full breadth of its legal skill to provide results driven commercial advice. Visit our website—www.cliffordchance.com—to discover more about us.
U.S. M&A Practice
Our U.S. M&A practice is a leader in domestic and cross-border M&A, providing clients with high value strategic and structuring advice and superior project management and coordination ability. Our team is part of a global practice which is a recognized market-leader for M&A and is known for our business-oriented legal approach to M&A transactions. We provide advice across the full spectrum of M&A products and services…
n n n n n n n n n Strategic planning and structuring advice Mergers & acquisitions (public & private) Financial advisor representation Tender offers Corporate reorganizations Private equity Negotiated transactions Unsolicited bids PIPES n n n n n n n n n Complex cross-border M&A Leveraged buyouts REITs and real estate related M&A Joint ventures Recapitalizations Proxy contests Disclosure advice Advance anti-takeover preparation Distressed investing
...and are supported by strong regulatory and other specialist capabilities. We work closely with our tax, real estate, competition/antitrust, employee benefits and other practice areas and industry groups both domestically and globally to provide clients with the full spectrum of requisite legal advice for each transaction. For further information about this Guide or our U.S. M&A capabilities, please contact any of the following partners:
John Healy, Partner/Co-Head of Americas M&A, T: +1 212 878 8281, E: firstname.lastname@example.org Brian Hoffmann, Partner/Co-Head of Americas M&A, T: +1 212 878 8490, E: email@example.com Jeff Berman, Partner, T: +1 212 878 3460, E: firstname.lastname@example.org David Brinton, Partner, T: +1 212 878 8276, E: email@example.com Sarah Jones, Partner, T: +1 212 878 3321, E: firstname.lastname@example.org Craig Medwick, Partner, T: +1 212 878 8168, E: email@example.com Paul Meyer, Partner, T: +1 212 878 8176, E: firstname.lastname@example.org Benjamin Sibbett, Partner, T: +1 212 878 8491, E: email@example.com Roger Singer, Partner, T: +1 212 878 3288, E: firstname.lastname@example.org Nicholas Williams, Partner, T: +1 212 878 8010, E: email@example.com
This Guide to Takeovers in the United States provides a summary overview of the principal legal considerations with respect to takeovers of U.S. public companies. It considers, from both a legal and regulatory perspective, the various stages of a takeover from the initial approach to, through to obtaining control of, the target company. It addresses several key areas–the applicable regulatory framework (Chapter One), preliminary takeover activity, including stakebuilding, preliminary agreements and seeking support from the target’s shareholders (Chapter Two), primary acquisition structures (Chapter Three), deal protection, including “no-shop,” “no-talk” and “go-shop” provisions as well as “fiduciary outs” and break fees (Chapter Four), fiduciary duties applicable to a target company’s board of directors in the M&A context (Chapter Five), takeover defenses (Chapter Six), antitrust/merger clearance (Chapter Seven) and U.S. regulation of non-U.S. investment in the United States (CFIUS) (Chapter Eight). This Guide does not, however, address any financial, tax or accounting matters or the application to takeovers of securities and other laws of jurisdictions outside the United States. Many of the legal issues discussed in this Guide are potentially applicable to takeovers of non-U.S. companies that have shares traded or held in the United States. While the Guide touches briefly on some of the issues that arise in that context, its principal focus is on takeovers of U.S. public companies. Other issues that are not covered in this Guide must also be addressed when the target company is a non-U.S. company. The Guide does not purport to be comprehensive, but rather provides a summary overview of a series of complex topics. It is not intended to, and does not, constitute legal advice. The information contained in this Guide is accurate as of October 2010.
1. Regulatory Framework State Corporate Laws Federal Securities Laws Securities Act Proxy Rules Tender Offer Rules Other Primary Regulations Federal Securities Laws Applicable to Stakebuilding Antitrust/Merger Clearance Exon-Florio/CFIUS Regulated Industries 2. Preliminary Activity Approaching the Target Confidentiality Stakebuilding Management Team and Outside Advisers Due Diligence Financing Preliminary Agreements Between Acquirer and Target Confidentiality Agreements Standstill Agreements Exclusivity/Expense Reimbursement Agreements Letters of Intent Seeking Support From Shareholders
1 2 2 2 4 4 5 5 5 5 5 6 7 7 7 9 9 10 10 10 10 11 11 11
contents 3.Two-Step or Single-Step Two-Step Structure Single-Step Structure Summary Comparison of Structuring Alternatives Provisions Commonly Included in the Merger Agreement Implementation of a Two-Step Transaction Implementation of a Single-Step Transaction Additional Structuring Considerations Registration Under the Securities Act Required Board and Shareholder Approvals Appraisal Rights Disclosure of Financial Statements Minimum Offer Period. Acquisition Structures Choice of Acquisition Structure . Deal Protection “No-Shop. Withdrawal Rights All Holders/Best Price Rule Target Company’s Obligations Arrangements Between the Acquirer and Members of Target’s Management Team Trading Restrictions Foreign Private Issuers 4.” “No-Talk” and “Go-Shop” Provisions Fiduciary Outs and Break-Up Fees Stock Option Agreements Voting/Support Agreements 12 13 13 14 14 14 15 16 17 17 17 17 18 18 19 19 19 20 21 22 23 24 24 25 .
contents 5. Public Company The Relative Advantages and Disadvantages of the Single-Step and Two-Step Structures 26 27 27 30 31 31 31 33 36 39 41 . Antitrust/Merger Clearance 8.S. Public Companies Appendix B Deal Structure Considerations in Acquiring a U. Takeover Defenses “Poison Pill” Shareholder Rights Plans Charter and Bylaw Provisions Antitakeover Statutes 7. Fiduciary Duties of a Target Company’s Board of Directors Principal Components of Directors’ Fiduciary Duties Fiduciary Duties in the M&A Context 6.S. The Committee on Foreign Investment in the United States (CFIUS) Appendix A Indicative Timeline for Single-Step and Two-Step Cash Acquisitions of U.
1. Regulatory Framework State Corporate Laws Federal Securities Laws Securities Act of 1933 Proxy Rules Tender Offer Rules Other Primary Regulations Federal Securities Laws Applicable to Stakebuilding Antitrust/Merger Clearance Exon-Florio/CFIUS Regulated Industries 2 2 2 4 4 5 5 5 5 5 1 A Guide to Takeovers in the United States. Clifford Chance US LLP .
Under the Securities Act. we provide a brief overview of the more significant regulatory requirements likely to be relevant to an acquisition of a U.S.S. we are referring to Delaware law. an M&A transaction in which the consideration to be received by the target company’s shareholders consists in whole or in part of securities is deemed to involve an offer and sale of securities. exchange and as a result of the transaction will increase the number of its outstanding shares by 20% or more. as well as the board’s responsibilities when negotiating the terms of a takeover or choosing from among competing proposals. When we discuss corporate laws in this Guide. the acquirer will be required under stock exchange rules to obtain the approval of its own shareholders. With very limited exceptions. more than 50% of the corporations in the Fortune 500 are incorporated in Delaware. State corporate laws dictate what shareholder approvals are required for a particular form of transaction. corporations are organized are state (not federal) laws.S. public company. The registration requirements of the Securities Act do not apply to all-cash M&A transactions. A Guide to Takeovers in the United States. For purposes of the Securities Act. federal securities laws that are potentially applicable to takeover transactions are: n the registration requirements of the Securities Act of 1933 (the “Securities Act”). stock exchange rules also are relevant to shareholder approval requirements: if the acquirer in a share-for-share transaction is listed on a U. unless otherwise indicated. which potentially apply to M&A transactions when the consideration to be received by the target’s shareholders includes securities. unless an exemption is available.S. Clifford Chance US LLP 2 . According to recent studies.S.Section 1: Regulatory Framework In this chapter. Accordingly. State Corporate Laws Most domestic U. (i) an offer to sell securities cannot be made until a registration statement covering the proposed offering has been filed with the SEC. publicly traded businesses are organized as corporations. the laws under which U. 1 n the provisions of the Securities Exchange act of 1934 (the “Exchange Act”) and related rules governing proxy solicitations in respect of shares registered under the Exchange Act (generally referred to as the proxy rules). Federal Securities Laws The primary U. regardless of whether the transaction is effected pursuant to a tender offer or a shareholder vote.1 State corporate laws also establish the duties of a target company’s board of directors during the takeover process. Securities Act The registration requirements of the Securities Act potentially apply to share-for-share acquisitions and other transactions in which the target’s shareholders are offered securities. state corporate laws govern the ability of a target company’s board of directors to reject or resist unsolicited takeover proposals. and (ii) a sale (defined to include a binding contract of sale) cannot be effected until the registration In one situation. and n the portions of the Exchange Act and related rules governing the conduct of tender offers (generally referred to as the tender offer rules).
the transaction also will be subject to either the proxy rules or the tender offer rules because the transaction will be effected either pursuant to a “single-step” merger that requires a vote of the target’s shareholders. the required form of registration statement is Form S-4 or. the target board of directors’ deliberations. historical financial information with respect to the target and acquirer and. and the disclosure document used in a tender offer is called an offer to purchase. Some states expressly permit compulsory share exchanges that eliminate the need for a merger. Form F-4. exchange. a disclosure document used in a share-for-share transaction to be voted on by the target company’s shareholders is called a proxy statement/prospectus. For most share-for-share acquisitions of U.S. a share-for-share acquisition of a U. In U. generally. public company almost certainly will have to be registered under the Securities Act. public company. If the target company in a share-for-share transaction qualifies as a foreign private issuer under the SEC’s rules2 or is closely held.S. fairness opinions of financial advisors. the negotiations between the parties. or pursuant to an exchange offer.S. The SEC’s rules prescribe various forms of registration statements for use in registering different kinds of transactions under the Securities Act. Hybrid disclosure documents have hybrid names–for example. in addition to the registration requirements of the Securities Act. complying with these Securities Act registration requirements can be time-consuming and expensive. and sometimes much longer. the disclosure document used to solicit proxies is called a proxy statement. practice the disclosure document used in a transaction subject to registration under the Securities Act is called a prospectus. depending on the size of the target relative to the acquirer. the terms of the transaction. acquirer whose shares are not already listed on a U. For a share-for-share transaction. The disclosure document to be sent to the target company’s shareholders4 must contain detailed disclosure regarding. For any share-forshare acquisition of a U.3 Accordingly. especially for a first-time registrant (a company that has never filed a registration statement with the SEC). the use of a Securities Act registration statement to effect an M&A transaction will trigger a requirement to comply with those ongoing reporting requirements from the time the registration statement is declared The SEC’s definition of a foreign private issuer is set out on page 21. if the acquirer qualifies as a foreign private issuer. public companies. A Guide to Takeovers in the United States.Section 1: Regulatory Framework statement has become effective (which. as a result. Clifford Chance US LLP 4 3 . among other things. See footnote 8 on page 19 for a more detailed explanation of this structuring alternative. means cleared by the SEC).S.S. exemptions from registration under the Securities Act may be available. The SEC’s legal and accounting staff normally will review and comment on a registration statement prior to the SEC declaring the registration statement effective under the Securities Act.S. Particularly for a nonU. no exemption from registration will be available and. For an acquirer that is not already subject to the ongoing reporting requirements of the Exchange Act. the disclosure document required to be included in the registration statement must satisfy both of the applicable sets of rules (the Securities Act rules and either the proxy rules or the tender offer 2 3 rules). pro forma financial information giving effect to the transaction. The process of preparing the registration statement and dealing with the SEC staff’s comments typically would be expected to take not less than six weeks.
detailed disclosure requirements apply. the Exchange Act. the requirement to file annual reports on Form 20-F and interim reports on Form 6-K. If the U. the requirement to file annual reports on Form 10-K.S. exchange must be registered under Section 12 of the Exchange Act. the tender offer rules will be applicable. The calculation of the 10% and 40% thresholds are not straightforward exercises and must be done in accordance with SEC-prescribed rules.S.S. it may be possible at a later date to deregister the shares and thereby end the obligation to comply with the SEC’s periodic reporting requirements. An offer for shares of a foreign private issuer will be exempt from most of the requirements imposed by Regulations 14D and 14E if the percentage of the class of the target’s shares being sought in the offer that is held by U. If the acquirer’s shares are not subsequently listed on a U. If the SEC staff provides comments on the proxy statement.S. the process of soliciting those votes will be subject to the SEC’s proxy rules unless the issuer of the shares qualifies as a foreign private issuer under the SEC’s rules.S. ownership level is over 10% but is not more than 40%. public companies commonly are structured as “two-step” transactions–a tender offer 5 This can present a difficult choice. the “Tier II” exemptions. in the case of a U. Nasdaq or another U. exchange).S. a more limited set of exemptions.S. All-cash acquisitions of U. A Guide to Takeovers in the United States. domestic issuer. and Regulation 14E under. A decision by an acquirer not to list its shares on a U. the Exchange Act. The ongoing reporting requirements include. Solicitations in respect of shares of foreign private issuers are exempt from the proxy rules under Exchange Act Rule 3a12-3(b).5 Proxy Rules Some public company acquisition structures require a vote by either or both of the target’s or the acquirer’s shareholders. there may be a longer delay before it can be sent to shareholders in definitive form. An offer for shares that are not registered under Section 12 of the Exchange Act is subject only to the (relatively limited) requirements imposed by Section 14(e) of. and in the case of a foreign private issuer.S. A proxy statement cannot be sent to shareholders in definitive form until it has been on file with the SEC for at least 10 days. If the class of shares to be voted is registered under Section 12 of the Exchange Act (which will always be the case if the shares to be voted are listed on a U. holders is not more than 10%. quarterly reports on Form 10-Q and interim reports on Form 8-K. For tender offers subject to Regulation 14D. Clifford Chance US LLP 4 6 . or could lead to flowback that puts pressure on the acquirer’s share price. pursuant to the “Tier I” exemption. an offer for shares that are registered under Section 12 of the Exchange Act also is subject to the more extensive requirements imposed by Section 14(d) of. By contrast.6 The proxy rules set forth detailed disclosure requirements that are similar in many respects to the Securities Act disclosure requirements described above. Tender Offer Rules If the proposed takeover is structured to involve an offer to purchase shares directly from the shareholders of the target. exchange in order to facilitate subsequent deregistration may make its acquisition proposal less attractive to the target company and its shareholders.Section 1: Regulatory Framework effective by the SEC. and Regulation 14D under. exchange. may be available. Shares that are listed on the NYSE.
Section 16 does not apply to acquisitions of shares of foreign private issuers. Clifford Chance US LLP 5 . The HSR clearance process and other antitrust matters are discussed in Chapter 7 of this Guide.7 Stakebuilding and related matters are discussed in Chapter 2 of this Guide. typically by converting them into the right to receive the same cash price per share offered in the tender offer. acquirers that believe their transaction could possibly give rise to national security concerns typically choose to follow the notification process because acquisitions by non-U. Antitrust/Merger Clearance Many U. including: n Registered Investment Funds/Advisers n Banking/Financial Institutions n Energy n Natural Resources n Public Utilities n Telecommunications n Gaming n Defense n Insurance Under Exchange Rule 3a12-3(b).S. The Exon-Florio provision contemplates that parties to a transaction can voluntarily submit to a review of their proposed transaction by CFIUS. businesses by non-U. Regulated Industries Various federal and state regulatory requirements may apply to transactions of targets operating in particular industries. Other Primary Regulations Federal Securities Laws Applicable to Stakebuilding Would-be acquirers seeking to acquire stakes in target companies must take into account the restrictions on insider trading imposed pursuant to Rule 10b-5 under the Exchange Act. the potential requirement to report beneficial ownership of shares in excess of 5% on Schedule 13D. Despite the voluntary nature of the notification.S.S. The authority to administer the Exon Florio provision has been delegated to the Committee on Foreign Investment in the United States (“CFUIS”). investors that fall within the Exon-Florio provision but are not cleared by CFIUS remain indefinitely subject to the imposition of divestment or other requirements by the President. Exon-Florio/CFIUS The Exon-Florio provision of the Defense Production Act grants the President of the United States the authority to suspend or 7 prohibit acquisitions of U. The Exon-Florio provision and CFIUS are discussed in Chapter 8 of this Guide.Section 1: Regulatory Framework followed by a merger that “squeezes out” any untendered shares. Hart-Scott-Rodino Antitrust Improvements Act (commonly referred to as the “HSR Act”).S. A Guide to Takeovers in the United States. The two-step approach usually has timing advantages over the alternative single-step transaction structure. M&A transactions are subject to the clearance process imposed under the U. These alternative acquisition structures are discussed in more detail in Chapter 3 of this Guide. and the “short-swing profits” rules imposed under Section 16(b) of the Exchange Act (which potentially can require disgorgement of profits from trading after the acquirer’s position in the target’s shares exceeds 10%). investors that threaten to impair the national security.S.
Preliminary Activity Approaching the Target Confidentiality Stakebuilding Management Team and Outside Advisers Due Diligence Financing Preliminary Agreements Between Acquirer and Target Confidentiality Agreements Standstill Agreements Exclusivity/Expense Reimbursement Agreements Letters of Intent Seeking Support From Shareholders 7 7 7 9 9 10 10 10 10 11 11 11 A Guide to Takeovers in the United States.2. Clifford Chance US LLP 6 .
early disclosure of takeover discussions with a U. Of course. And. Key questions to be decided include whether and how to approach the target. Clifford Chance US LLP n situations in which disclosure of takeover discussions is necessary in order to prevent other public statements by the target from being misleading. whether and how to preserve confidentiality. Confidentiality Subject to a handful of exceptions. Such purchases are likely to be at a less expensive price per share than the transaction price finally agreed with the target. The situations in which disclosure of takeover discussions is required before the parties have entered into a definitive agreement include: n situations in which the target has reason to believe that a leak has occurred and that at least some trading in the target’s shares is being conducted by persons in possession of information regarding the target’s takeover discussions. Alternatively. if the acquirer’s approach is not unsolicited but is instead in response to an approach by the target or an announcement by the target that it is “exploring strategic alternatives” (generally understood to mean seeking takeover proposals). public company can be crucial. if discussions are to be initiated by the acquirer. if the approach has the potential to turn hostile. If a U.Section 2: Preliminary Activity The early stages of an acquisition of a U. public company target generally is not required. the profit on the toehold share position will help defray transaction costs that otherwise would be borne by the would-be acquirer. a sizeable toehold might help defeat a competing bid. There are several possible reasons to pursue toehold purchases. . These questions are discussed in more detail in this chapter. the first public announcement of a takeover of a U. the acquirer may need to hold shares in order to have standing to sue the target or its board of directors. thereby helping lower the total cost of the acquisition. public company occurs only after acquirer and target have entered into a definitive merger agreement.S. public companies have greater latitude than their counterparts in many other parts of the world to actively resist takeover proposals they disfavor. finally.” Stakebuilding Acquirers sometimes make open-market or negotiated block purchases of a target company’s shares before beginning negotiations with the target or before a negotiated transaction with the target is announced (these are sometimes called “toehold” purchases).S. Approaching the Target Boards of directors of U.S. public company responds to an inquiry about whether it is in takeover discussions at a time when discussions of that type are in fact occurring. If the acquirer is outbid by a third party. For this reason. then the initial approach is likely to be less sensitive. and whether and how to build a “toehold” position in the target’s shares. In many cases. the target cannot deny the existence of those discussions (because doing so would violate the SEC’s Rule 10b-5) but may be able to respond with “no comment. the initial approach to the target should be handled carefully. and 7 A Guide to Takeovers in the United States.S.S.
The Schedule 13D is publicly available immediately upon filing. among other things. the acquirer should take care to limit its ownership of the target’s shares to below the level at which the (disastrously dilutive) provisions of the pill are triggered. potentially. Accordingly. In addition. from acquiring the target’s shares before the acquirer’s plans have been publicly announced. The person or group is permitted to acquire more shares after passing the 5% threshold during the 10-day period prior to filing the Schedule 13D. Poison pill shareholder rights plans are discussed in greater detail in Chapter 6 of this Guide.Section 2: Preliminary Activity There is no mandatory offer regime in the United States requiring that a person who acquires a specific percentage of shares in a target company must make an offer for the remaining shares. toehold purchases (even substantial ones) will not trigger an obligation to make a follow-on offer. For this purpose. Clifford Chance US LLP 8 . subject to the following considerations: n If the acquirer holds material nonpublic information regarding the target. including the acquirer’s advisers but not the acquirer itself. and some types of long positions established though use of derivatives.S. exchange) in anticipation of pursuing an acquisition proposal will be required to file a Schedule 13D with the SEC (within 10 days after crossing the 5% threshold) that discloses. The definition of “beneficial ownership” for this purpose is broad and includes not only direct ownership but also. In general. if the takeover is to be implemented by way of a tender offer the SEC’s Rule 14e-3 will prohibit certain third parties who learn of the tender offer. shares held by third parties that are the subject of options or voting commitments in favor of the acquirer. and agrees (through a “standstill” clause) to refrain from purchasing the target’s shares. Pill triggers frequently are set at 10% or 15% of outstanding shares of common stock. n A person or group of persons that acquires “beneficial ownership” of more that 5% of the outstanding shares of any class of equity securities registered under Section 12 of the Exchange Act (which would include any shares listed on a U. toehold acquisitions are permissible. n If the target has adopted a “poison pill” rights plan. the acquirer’s plans to acquire the target do not disqualify the acquirer from making purchases. information about the acquirer’s share position and intentions with respect to the target. n If any discussions with the target occur. n Share purchases beyond specified levels are permitted only after compliance with the merger clearance process discussed in Chapter 7 of this Guide. the target almost certainly will insist that the acquirer enter into a confidentiality agreement in which the acquirer agrees to use information provided by the target solely to negotiate an acquisition agreement with the target. A Guide to Takeovers in the United States. but some are lower. purchases of the target’s shares may violate Rule 10b-5.
As indicated elsewhere in this Guide. In addition to legal counsel. Toehold acquisitions should remain below the applicable trigger levels. Due diligence also provides a basis for establishing the acquisition price and structure (including any appropriate price adjustments) and informs negotiation of the risk allocation and other provisions of the transaction documents. will require disgorgement of any profit deemed made on the basis of purchases and sales made within 6 months of one another by a person that owns 10% or more of a class of publicly traded shares. Section 16 does not apply to acquisitions of shares of foreign private issuers.S. the requirements of the 8 9 Under Exchange Act Rule 3a12-3(b). for example. State antitakeover statutes are discussed in greater detail in Chapter 6 of this Guide. contained in Section 16(b) of the Exchange Act and related rules. financial and legal aspects of the target. so if the acquirer discovers a problem after the completion of the transaction. In Delaware. it has no right to be indemnified or recover damages. Management Team and Outside Advisers The acquirer must empower its management team with sufficient authority to make quick and effective decisions. in a U. These statutes typically use broad concepts of beneficial ownership borrowed from the SEC’s Schedule 13D rules. which would cause any subsequent acquisition transaction to become subject to the heightened disclosure obligations imposed pursuant to Rule 13e-3 under the Exchange Act. proxy solicitation firms. an acquirer enters into support agreements with major shareholders of the target. Due diligence is not a “one-size-fits-all” process. among other things. Due diligence is typically conducted with respect to the business. Due Diligence In order to ensure that the proposed acquisition will satisfactorily address the acquirer’s financial and strategic objectives. Due diligence. if well conducted. enables the acquirer to gain insight into. often need to be tailored based on the due diligence findings. A Guide to Takeovers in the United States. Clifford Chance US LLP 9 . public relations firms. the target company’s representations and warranties typically will not survive the closing.8 n If the acquirer’s share position exceeds 10%. Due diligence may also reveal important information with respect to postacquisition integration. Each prospective acquirer must decide for itself how much time and expense to dedicate to due diligence activities taking into account.Section 2: Preliminary Activity n Various state antitakeover statutes can be triggered by share accumulations. including investment bankers. Contractual protections. industry experts or other consultants. and engage appropriate outside advisors with expertise to assist in the process. an acquirer will want to perform due diligence on the target prior to making its decision to proceed. independent accountants and. the acquirer may be deemed to be an “affiliate” of the target company. the potential target’s capital structure and operating characteristics and to better assess the risk profile of the potential investment. such as representations and warranties with respect to the target’s business9 conditions to closing and covenants governing the operations of the target between signing and closing. it may also be advisable for an acquirer to engage various other outside advisers. among other things. This means they can be inadvertently triggered if. n The “short-swing profits” rule. potentially depending on the nature of the transaction. public company acquisition. the trigger level is 15% (Section 203 of the Delaware General Corporation Law).
U and X. target company is to be financed by borrowings that are secured directly or indirectly by the acquired shares. Those regulations generally limit the permitted amount of financing to 50% of the current market value of the purchased shares. Standstill provisions also typically contain broad prohibitions on other potentially-disruptive behavior by acquirers. Preliminary Agreements Between Acquirer and Target Depending on the circumstances. including A Guide to Takeovers in the United States.S. law does not contain the prohibitions found in some other jurisdictions with respect to subsidiaries providing financial assistance to parent companies (so long as the subsidiary is 100%-owned by the parent). the target typically also will wish to perform diligence on the acquirer. The laws of many U. states do. contain prohibitions on “fraudulent conveyances”—generally defined as transfers of property (including grants of security interests) at a time when the transferring company is insolvent or is rendered insolvent as a result of the transfer. Standstill Agreements If the target is a public company. Standstills prohibit the prospective acquirer from acquiring or offering to acquire shares. Unlike in some other jurisdictions. and knowledge of. in the United States this type of secured acquisition financing can be accomplished without the use of elaborate “whitewash” or similar procedures. the financing arrangements may be subject to the Federal Reserve Board’s margin regulations— Regulations T.S. the target company usually will insist on including a standstill agreement in the confidentiality agreement. several different types of preliminary agreements may be utilized. however. There are various transaction structures that can be used to avoid these margin regulations. Financing If the purchase of shares of a publicly-traded U. Clifford Chance US LLP 10 . and in that case the confidentiality obligations will be mutual. If the contemplated transaction is share-for-share.Section 2: Preliminary Activity acquirer’s funding sources and the acquirer’s comfort level with. taking into effect the target company’s assumption of the acquisition debt. Whether a single-step structure or a two-step structure is used. the target company and its business. lenders may insist on extensive analyses to support the conclusion that the target company remains solvent immediately following the completion of the acquisition. the margin regulations will not apply if the acquirer borrows on an unsecured basis and no “negative pledge” or similar restrictions apply to the acquired shares. U. not the acquired shares.S. a secured lender’s collateral will be the assets of the target company. In a two-step transaction structure where the acquirer borrows to finance the purchase of tendered shares. In a singlestep transaction structure. Frequently this is a “one-way” agreement covering only information provided by the target. In highly-leveraged transactions. the collateral for secured acquisition debt ultimately will be the assets of the target. Confidentiality Agreements A confidentiality or non-disclosure agreement typically requires the recipient of confidential information to keep the information confidential and to use the information solely in connection with its evaluation of the proposed transaction. and so the margin regulations will not apply. but 12-24 months is more typical). other securities or assets of the target or its subsidiaries both during negotiations and for a specified time thereafter (sometimes targets request standstill periods as long as three years.
Exclusivity/Expense Reimbursement Agreements Acquirers sometimes fear they will invest a significant amount of time and expense in conducting due diligence and negotiations in connection with a takeover only to then see the target sold to a third party. however. when the proposed transaction is a management-led buyout. acquirers sometimes try to persuade the target to enter into an exclusivity agreement (in which the target promises to refrain from takeover discussions with third parties for a specified period) and/or an expense reimbursement agreement (in which the target promises to pay the prospective acquirer’s expenses if a transaction is not completed). Seeking Support From Shareholders Would-be acquirers should take great care in seeking support agreements from major shareholders of the target company.Section 2: Preliminary Activity participation in proxy contests and other public or private attempts to influence the management of the target. Exclusivity agreements are slightly more common. To address this concern. A letter of intent creates a roadmap for proceeding to the definitive agreement and helps to expose any “deal breakers” early in the discussions. When they are used. Agreements of this type could trigger Schedule 13D filing obligations.S. in some cases with devastatingly adverse consequences. Support agreements without the consent of the target company’s board of directors typically also will violate the form of standstill clause customarily contained in confidentiality agreements. which describes the material terms of a proposed transaction. Clifford Chance US LLP . Letters of intent are not commonly used in connection with acquisitions of U. Some acquirers successfully negotiate the right to be released from their standstill obligations in certain circumstances in order to compete with other bidders seeking to acquire the target company. state antitakeover statutes and poison pill rights plans. Letters of Intent Parties sometimes sign a letter of intent. Well-advised public target companies rarely agree to these requests. public companies. 11 A Guide to Takeovers in the United States. they typically are non-binding.
Clifford Chance US LLP 12 . Withdrawal Rights All Holders/Best Price Rule Target Company’s Obligations Arrangements Between the Acquirer and Members of Target’s Management Team Trading Restrictions Foreign Private Issuers 13 13 14 14 14 15 16 17 17 17 17 18 18 19 19 19 20 21 A Guide to Takeovers in the United States.Two-Step or Single-Step Two-Step Structure Single-Step Structure Summary Comparison of Structuring Alternatives Provisions Commonly Included in a Merger Agreement Implementation of a Two-Step Transaction Implementation of a Single-Step Transaction Additional Structuring Considerations Registration Under the Securities Act Required Board and Shareholder Approvals Appraisal Rights Disclosure of Financial Statements Minimum Offer Period. Acquisition Structures Choice of Acquisition Structure .3.
If the acquirer obtains enough shares through the tender offer. a negotiated acquisition of a public company invariably is effected pursuant to a merger agreement.Section 3: Acquisition Structures In the United States. Even if the second-step merger takes some time to complete. converts all of the outstanding shares of the target company into the right to receive the exchange consideration. Illinois and Texas. The second-step merger (sometimes also called a “squeeze-out” merger) is used to eliminate the shares not tendered in the tender offer by converting them into the right to receive the same amount of consideration per share that is paid in the tender offer. which require no shareholder vote but do not directly affect untendered shares (i. the acquirer controls the target company from the time it completes its tender offer. Clifford Chance US LLP 11 13 . In these cases. The merger agreement will provide either for a “two-step” transaction structure that begins with a tender offer.e. hostile takeover bids usually involve a tender offer by the acquirer made without the benefit of a merger agreement or a favorable recommendation from the target company’s board of directors. A compulsory share exchange is an alternative to a traditional merger structure in many states. provided the conditions to the offer are satisfied at that time.Two-Step or Single-Step Two-Step Structure In a two-step structure. including New York. the target and a subsidiary of the acquirer (commonly referred to as a merger subsidiary). the merger agreement provides for a tender offer by the merger subsidiary followed by a “second-step” merger between the merger subsidiary and the target. A Guide to Takeovers in the United States. triggers appraisal rights and. Those offer conditions customarily include. the merger subsidiary offers to buy any and all of the shares of the target that have been tendered before the expiration of the offer. Unlike exchange or tender offers. because there is no merger there is no need to establish a temporary merger subsidiary. specially formed for the purpose of the transaction. Acquirers in all-cash transactions often By contrast. if approved. stock or other securities pursuant to a plan of share exchange that is approved by the target’s board of directors and shareholders. In this chapter. among others..11 Choice of Acquisition Structure . if required by the statute. the applicable state statute typically authorizes a compulsory exchange of all outstanding shares of the target company for cash. their respective attributes and the processes typically followed to implement them. As a result. In the tender offer. a sufficient 10 number of shares having been tendered so that the acquirer can vote through the second-step merger alone (without needing the votes of any other shareholders). but not Delaware. we discuss these alternative structures. or a “single-step” merger transaction structure. the acquirer’s shareholders. they remain outstanding).10 The merger agreement typically has three parties – the acquirer. usually under the laws of the same jurisdiction as the target. state statutes that permit compulsory share exchanges provide that a plan of share exchange is subject to a target shareholder vote. the acquirer’s board and. then it can remove and replace the existing directors and vote through the second-step merger without requiring the approval of any remaining target shareholders.
Summary Comparison of Structuring Alternatives A summary timeline for each of the single-step and two-step acquisition techniques is provided in Appendix A to this Guide.13 and (iv) when the target’s board of directors wishes to expose the transaction to competing bids for a longer period of time than would be available in a two-step transaction. Because those rules only apply to tender offers. (ii) when the acquiring company is financing the transaction with loans and the lenders do not wish to provide bridge financing for the purchase of shares in a first-step tender offer. tender offer/merger mechanics).Section 3: Acquisition Structures prefer the two-step structure because (assuming the offer is well-received by the target’s shareholders) it reduces the period of time that the transaction is potentially exposed to competing bids and to risks of adverse 12 developments that could threaten a closing. when the merger becomes legally effective.S. so if 12 If the consideration to be offered to the target company’s shareholders includes securities and the transaction must be registered under the Securities Act. and the acquirer wishes to avoid the technical difficulties presented by the application of the SEC’s tender offer rules to those kinds of arrangements. 13 A Guide to Takeovers in the United States. the target company’s shares all are converted at the same time. The merger agreement also will contain representations and warranties. provisions for conduct of the target’s business both before and after completion of the transaction. Situations in which a single-step merger might be preferred include (i) when there are regulatory or other approvals that cannot be satisfied quickly (such as. even in a single-step transaction any special arrangements such as equity roll-overs must be fully disclosed to the target company’s shareholders. most Securities Act-registered acquisitions of U. the timing advantage of the two-step structure is lost. or registration with the SEC if the consideration being offered to the target company’s shareholders consists in whole or in part of shares of the acquiring company) so that the timing advantage of the twostep structure is eliminated. A summary of the relative advantages and disadvantages of the two techniques is provided in Appendix B to this Guide. no tender offer is made and instead the merger is submitted to a vote of the target’s shareholders.S. public company acquisition. treatment of options. price per share. Clifford Chance US LLP 14 . Provisions Commonly Included in the Merger Agreement The merger agreement will specify the transaction terms (e. (iii) when the transaction will include an equity roll-over by management or other target shareholders. Of course. public company targets use the single-step structure.g. antitrust approvals. The process to implement a single-step transaction is described in greater detail below. the target company’s representations and warranties will not survive the closing. into the right to receive the per share consideration being offered by the acquirer. As a result. Customarily in a U. for example. they do not apply to single-step transactions (in which no tender offer is used). in the merger. The process to implement a two-step acquisition is described in greater detail below. Equity roll-over arrangements present technical issues under Rule 14d-10 (the “all holders/best price” rule) and Rule 14e-5 (which prohibits purchases outside the tender offer). Single-Step Structure In a single-step structure. the conditions to the obligations of the parties to complete the transaction and termination provisions..
The merger agreement commonly will include a “no-shop” provision (prohibiting the target from soliciting competing bids between announcement and closing) and a “break fee” provision (providing for a payment by the target to the acquirer in certain circumstances. the offer must remain open for at least 10 business days after any change in the price per share being offered. Unlike a single-step merger.Section 3: Acquisition Structures the acquirer discovers a problem after the completion of the transaction it has no right to be indemnified or recover damages. including if the target determines to abandon the transaction in favor of a competing bid). Chapter 4 of this Guide contains a more detailed discussion of these and other deal protection provisions. For example. Generally. and in some cases. which permits the acquirer to increase . a two-step transaction structure. The merger agreement for a two-step transaction typically will require the acquirer to complete the second-step merger if it closes its tender offer. The permissible extent of protection from these provisions is limited by Delaware law. higher fees may be permissible). the acquiring company gains control over the target company and can give the requisite shareholder approval of the second-step merger by voting the shares acquired in the tender offer. By acquiring the requisite percentage of the target company’s shares. the preparation of the disclosure document used in a tender offer. Acquirers sometimes also receive commitments from significant shareholders of the target to support the transaction. regardless of subsequent adverse developments. the tender offer must remain open for at least 20 business days following its first publication and the offer period may be required to be extended if material changes are made to the terms of the offer within a short time before its scheduled expiration. because of the specific facts of the case. must be pre-cleared by the SEC before dissemination. including a requirement that at least enough shares must have been tendered so that the bidder will be able when it owns those shares to vote through the second-step merger without the votes of any other shareholders (a simple majority of the outstanding shares entitled to vote in Delaware.0-3. Implementation of a Two-Step Transaction As described above. beginning with a tender offer. No-shop clauses must be tempered with the qualification that the target can respond to a bona fide unsolicited proposal that appears to be superior to the one already agreed to. which requires the preparation of a proxy statement that.5% of transaction value are common (although there may be instances where. often is used to accelerate the process of gaining control of a target company. as described below. The merger 15 A Guide to Takeovers in the United States. unless a greater percentage is specified in its certificate of incorporation). is controlled principally by the acquirer. lower amounts are required. Under the SEC’s rules. an all-cash tender offer requires no prior SEC clearance. and the process of addressing any SEC comments. Also. If the shares owned by the merger subsidiary at the completion of the tender offer represent 90% or more of the target company’s outstanding shares. The bidder’s obligation to accept and pay for shares tendered in response to the tender offer customarily is subject to a series of conditions. then the acquirer will be able to take advantage of the statutory “short-form” merger procedure. break fees in the range of 2. Clifford Chance US LLP agreement in a two-step transaction will provide that the merger subsidiary must commence a tender offer for the target company’s shares within a specified period (usually 10 business days) following the signing of the merger agreement.
In these cases. they are sent to shareholders. though.. they can be sent to the target’s shareholders beginning 10 days after the 14 preliminary proxy materials were filed. in a single-step transaction the process of preparing the key disclosure document and dealing with SEC comments is controlled by the target company. ev3. comments and other developments. If more than a majority but less than 90% of the target company’s shares are acquired in the tender offer.g. however. It has become fairly common in tender offer transactions for the target to grant the acquirer a “top-up option. 2010) (court found top-up option could be coercive because of its potential effect on the price obtainable in a statutory appraisal proceeding). cleared with the SEC and delivered to the other remaining shareholders of the target (even though their vote is not needed to effect the merger). the process of obtaining and resolving the comments will most likely take 4-6 weeks (although longer or shorter periods are possible). After the proxy materials are cleared by the SEC. following execution of the merger agreement. The SEC’s rules permit preliminary proxy materials (but not a proxy card) to be sent to shareholders before they are cleared by the SEC staff.” which permits an acquirer that is below but fairly close to the 90% threshold to buy sufficient shares from the target to achieve the 90% ownership level. Delaware law requires the notice of the meeting to be given not less than 20 and not more than 60 days before the meeting date. complete the SEC clearance process and hold its shareholders’ meeting as soon as reasonably practicable. it can merge with the subsidiary company without a vote of the subsidiary company’s shareholders. See. The proxy materials must be filed in preliminary form by the target company with the SEC. A Guide to Takeovers in the United States. although some recent court decisions suggest these top-up options should be designed and used carefully. the secondstep merger can be completed without preparing or distributing a proxy statement or calling a meeting of the target’s shareholders. The acquirer often engages the services of a proxy soliciting firm to assist in this process. e.14 Implementation of a Single-Step Transaction In a single-step transaction. Olson v. and to consult with the acquirer about SEC filings. in order to complete the merger an information statement (or proxy statement) must be prepared. Ch. If the materials are reviewed and commented on by the SEC staff. Subject to these contractual provisions. Clifford Chance US LLP 16 . (Del. thereby commencing the proxy solicitation process. the parties (acquirer and target) prepare the proxy materials that are required to be delivered to the target company’s shareholders before the meeting to be held to approve the transaction. but this is rarely done except in hostile or contested takeovers. The merger agreement for a single-step acquisition typically includes covenants on the part of the target company to make the necessary SEC filings. If the SEC’s staff decides not to review the proxy materials.Section 3: Acquisition Structures its ownership of the target company to 100% within a matter of a few days. Delaware law provides that if a company owns at least 90% of the shares of another company. proxy solicitation firms typically recommend a solicitation period of at least 35 days before the meeting. submissions. In order to assure a favorable result. Inc.
the approval of the target company’s shareholders must be obtained to approve the merger. to file annual reports on Form 20-F and interim reports on Form 6-K. and in a two-step transaction in which the second-stage merger does not qualify for the “short-form” merger process (because the acquirer does not own 90% or more of the target company’s outstanding shares 15 following the completion of the tender offer). In a single-step transaction. The merger subsidiary will have only one shareholder (typically the acquirer or one of its wholly-owned subsidiaries) and the approval of that shareholder can be given by a short.S. the filing of a registration statement will trigger a requirement or the part of the acquirer to comply subsequently with the continuous reporting requirements of the U. Shareholders who tender their shares to the acquirer. the approval must be by a majority of all outstanding shares entitled to be voted. then the acquirer’s shareholders will have to vote to approve the issuance of the acquirer’s shares in the transaction if the number of shares to be issued will be 20% or more of the number of the acquirer’s shares outstanding immediately before the transaction. quarterly reports on Forms 10-Q and interim reports on Form 8-K. to file annual reports on Form 10K. The exercise of dissenters’ rights does not affect the validity of the merger. however. the merger agreement must be approved by the boards of directors of the two companies that will be merged (the target company and the acquirer’s merger subsidiary) and by the shareholders of both those companies. The “fair value” to be determined by the court does not include a takeover premium. Appraisal rights do not apply to the first step tender offer in a two-step transaction. unless its certificate of incorporation provides for a greater percentage. An appraisal award affects only the shares of shareholders who properly exercise their rights to appraisal. or vote in favor of the merger.S. nor does it prevent the acquirer from owning 100% of the target’s equity immediately upon completion of the merger (and before the appraisal claims are resolved). For a Delaware target company. Required Board and Shareholder Approvals Under Delaware law. if the consideration to be offered to the target company’s shareholders otherwise includes securities. If shares are being offered as part of the acquisition consideration and the acquirer’s shares are listed on a U. the transaction will be subject to the registration requirements of the Securities Act. shareholders who tender their shares in the offer are not entitled to exercise appraisal rights. to the second-step merger. in which case the appraised value in cash (and not the per share price specified in the merger agreement) is what the shareholders who exercise those rights are entitled to receive. Appraisal Rights Under Delaware law and except for certain stock-for-stock mergers15 shareholders of a target company in a merger have the right (usually called “dissenters’ rights” or “appraisal rights”) to dissent from the merger and elect to have the Delaware Chancery Court appraise the fair value of their shares. They would apply. in the case of a domestic issuer. Clifford Chance US LLP 17 .Section 3: Acquisition Structures Additional Structuring Considerations Registration Under the Securities Act As discussed in Chapter 1. Accordingly. A Guide to Takeovers in the United States. written consent signed by an authorized officer of the company that is the merger subsidiary’s sole shareholder. If the acquirer is not already an SEC reporting company. and in the case of a foreign private issuer. are not eligible to exercise dissenters’ rights. in the case of a share-for-share acquisition or. securities laws. stock exchange. including.
pro forma financial statements giving effect to the proposed business combination. both the tender offer rules (in a two-step acquisition) and the proxy rules (in a single-step acquisition) require inclusion of the acquirer’s financial statements in the disclosure document sent to the target company’s shareholders if the financial condition of the acquirer is material to the target company shareholders’ decision to tender their shares or vote in favor of the merger. Minimum Offer Period. U. sends or gives the target’s shareholders the means to tender securities in the tender offer. and (iii) either (x) the acquirer is an SEC-reporting company or (y) the offer is for all outstanding securities of the subject class. Despite the slightly different formulations.S. (ii) the tender offer is not subject to any financing conditions.Section 3: Acquisition Structures Disclosure of Financial Statements In all-cash transactions. must be included in the disclosure documents. the acquirer must have its financing committed or otherwise clearly available and cannot have an express financing contingency. Withdrawal Rights Under the SEC’s rules. GAAP). in some cases. together with. The tender offer “commences” when the acquirer first publishes. or in certain cases reconciled to. as applicable. The proxy rules provide that the acquirer’s financial statements will be material (and therefore must be provided) if the acquisition will require financing and the financing is not assured. This can be particularly important for acquirers who cannot readily produce financial statements of the type required by the SEC’s rules. The tender offer rules provide that the acquirer’s financial statements will be presumed not material (and therefore not required) if (i) the consideration offered consists solely of cash. A Guide to Takeovers in the United States. the financial statement requirements of the tender offer rules and the proxy rules are essentially the same–to avoid including financial statements in the documents sent to the target’s shareholders. at a minimum.S. GAAP or. These rules relax prior requirements that would have mandated disclosure in U. All persons tendering securities in response to the tender offer have the right to withdraw them while the offer is open and at any time after 60 days following the commencement of the offer. GAAP. A “follow-on” offer period of 3-20 business days is permitted during which no withdrawal rights apply and securities must be purchased as and when tendered for the same form and amount of consideration as ultimately offered to shareholders in the initial offering period. Clifford Chance US LLP 18 . In share-for-share transactions and other transactions in which the consideration being offered by the acquirer to the target’s shareholders includes securities. reconciliation to U. historical audited and unaudited financial statements of the acquirer and the target (prepared in accordance with. The SEC’s rules also require that a tender offer must remain open for at least 10 business days following a public announcement of a change in the percentage of securities being sought or in the consideration being offered. The SEC has adopted rules that permit foreign private issuers to use financial statements that are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The SEC staff takes the position that other changes of comparable significance require the same treatment and that other material changes to the offer require the offer to remain open for at least five business days.S. a tender offer must remain open for at least 20 business days after it commences.
all-cash vs. so long as all holders have the same choice. including the history of dealings and negotiations with the bidder. in a transaction in which the target company’s management is expected to “roll over” its equity position in the target. for example. Arrangements Between the Acquirer and Members of Target’s Management Team There may be commercial reasons for an acquirer to reach agreement at an early stage with the key members of a target company’s management team on terms that incentivize those managers to stay with the business following the acquisition.. for example. In recommended offers. The offer can. however. (ii) express no opinion and remains neutral toward the offer. the acquirer may be prudent to use a single-step acquisition structure (thereby altogether avoiding the rule.g. presentation or advice received from any financial adviser retained by the target or its board. The document sent to shareholders and filed with the SEC also is required to include a description of the reasons for the board’s position. part cash and part securities). which only applies to tender offers) because equity rollovers were not specifically addressed in the 2006 amendments and could be deemed to violate the rule. or (iii) state that it is unable to take a position with respect to the offer.Section 3: Acquisition Structures All Holders/Best Price Rule A tender offer must be open to all shareholders of the subject class of securities and all holders must be paid the highest consideration paid to any other security holder during the offer (Rule 14d-10.S. While the 2006 amendments did provide a workable “safe harbor” for management compensation arrangements. That recommendation or position also must be filed with the SEC on a Schedule 14D-9. provide the target’s shareholders with the right to choose among different forms of consideration (e. potentially problematic situations. Accordingly. which is commonly known as the “all holders/best price rule”). the substance of any report. Rule 14d-10 was interpreted by some U. Clifford Chance US LLP . the SEC amended the rule to provide that the negotiation and receipt of employment benefits will not violate the rule provided certain procedures are followed. the target company must publish or send to the target’s shareholders its recommendation or position with respect to the tender offer within 10 business days after commencement of the tender offer. the target’s Schedule 14D-9 setting forth the target board of director’s recommendation is typically mailed to its shareholders together with the acquirer’s offer materials. new employment contracts). the amendments failed to address some other. transaction participants 19 A Guide to Takeovers in the United States. The uncertainty caused by these court decisions led acquirers to make greater use of the single-step acquisition structure. details of all purchases and sales of the target company’s shares during the previous 60 days by the target company itself and by its officers and directors and any change-in-control arrangements or other executive compensation arrangements that will be affected by the offer. Before holding any such discussions. Target Company’s Obligations Whether a tender offer is unsolicited or recommended by the target’s board of directors. In 2006. as well as specified additional information. The SEC’s rules require the target company’s board to (i) recommend acceptance or rejection of the offer. however. courts to apply when members of the target company’s management team negotiate to receive special benefits following completion of the takeover (such as.
Regulation M treats a share-for-share transaction as a “distribution.Section 3: Acquisition Structures must carefully consider the possible consequences under U. Rule 13e-3 also will apply if the acquirer already is an “affiliate” of the target company (which would be the case if the acquirer holds 10% or more of the target company’s shares or has a board seat). in particular.S. It covers both purchases and arrangements to 16 purchase.16 An acquirer seeking to engage in discussions with members of the target company’s management team also should bear in mind that if those members hold significant amounts of the target’s stock. securities laws because the substance of any proposals or agreements between the parties are generally required to be disclosed to the target’s shareholders. It applies to “distributions” of securities.. In addition. The rule also covers “related securities” (i. the takeover transaction may become subject to the SEC’s “going private” rule. The prohibition applies from the announcement of the tender offer until its expiration. A Guide to Takeovers in the United States. because the SEC staff takes the position that a restricted period may begin for a hostile competing acquirer before it mails its own offer materials. Rule 13e-3. including public offerings for cash. an agreement. their respective affiliates and anyone acting on behalf of any of them. The rule does not apply during the time of any subsequent offering period if the consideration is the same in form and amount as offered in the original tender offer. Clifford Chance US LLP 20 . and extends to the acquirer. if such arrangements would give any existing director or executive officer of the target a significant equity interest or rights in the entity formed to acquire the target. Competing share-for-share bids can raise additional complications under Regulation M. shareholders. Rule 13e-3 requires additional disclosure and. arrangement or understanding with them could cause the acquirer to be deemed a “beneficial owner” of the target and could inadvertently trigger one or more of the anti-takeover provisions described in Chapter 6. although purchases on the other side of an information barrier within the investment bank are permitted.” An acquirer’s investment bank is potentially subject to these restrictions. if the acquirer also is soliciting “no” votes on the first transaction. if the target’s board recommends in favor of the transaction) to affirmatively state whether or not the terms of the transaction are fair to the unaffiliated shareholders of the target and to give detailed reasons for that conclusion. The period during which these restrictions apply begins on the day of mailing the proxy solicitation materials and continues through the time of the vote. The restrictions apply to “distribution participants” (including the acquirer) and “affiliated purchasers.” and imposes restrictions on bids for. The additional required disclosure includes any valuation requests or analyses prepared by third parties for the transaction participants. requires the acquirer (and the target. its dealer manager. Regulation M prohibits certain trading activity regardless of whether the persons trading have an intent to manipulate prices.S. and purchases of. shares of the class being offered to the target’s shareholders. Changes to the cross-border tender offer rules adopted by the SEC in 2008 make it easier for parties to comply with Rule 14e-5 in the context of a takeover offer for shares of a foreign private issuer that has U.e. Trading Restrictions The SEC’s Rule 14e-5 prohibits purchases outside of a tender offer of shares of the class being sought in the offer. securities immediately convertible into or exchangeable for shares of the class being sought in the offer).
Tender offers that qualify for the Tier II exemption have limited relief from a number of the tender offer rules.S. issuers (other than governmental issuers) qualify as foreign private issuers unless: (a) more than 50% of the issuer’s outstanding voting securities are directly or indirectly held of record by residents of the United States and (b) any of the following conditions are satisfied: (i) the majority of the issuer’s executive officers or directors are U. 21 A Guide to Takeovers in the United States. no more than 40% of the shares being sought in the offer may be held by U. notwithstanding the availability of the Tier I and Tier II exemptions. If.Section 3: Acquisition Structures Foreign Private Issuers If a tender offer is made for shares of a foreign private issuer the tender offer may not be subject to all of the SEC’s tender offer rules. citizens or residents.S. In addition.S. measured by the percentage of the target company’s shares being sought in the offer that are held by U. The calculation of the 10% and 40% thresholds are not straightforward exercises and must be done in accordance with SEC-prescribed rules. if the offer is a share-for-share offer that qualifies for the Tier I exemption. because the acquirer may have the benefit of the “Tier I” or “Tier II” exemptions. share ownership in the target company.S. no more than 10% of the shares being sought in the offer may be held by U. residents and certain other conditions must be satisfied. The availability of the Tier I and Tier II exemptions is based principally on the level of U. Clifford Chance US LLP . and do not qualify for any relief from the registration requirements of the Securities Act. residents and certain other conditions must be satisfied. transaction participants are unable to reconcile the U. it may nonetheless be possible to obtain specific exemptive relief directly from the SEC. To qualify for the Tier I exemption. A corporation organized under the laws of a U. filing and procedural requirements of the tender offer rules.S. tender offer rules with the rules of the jurisdiction in which the target company is organized. All non-U. To qualify for the Tier II exemption. holders. Tender offers that qualify for the Tier I exemption are exempt from almost all of the disclosure. pursuant to Rule 802 under the Securities Act the transaction will be exempt from the registration requirements of the Securities Act.S.S. The Tier I and Tier II exemptions are available only when the target company is a foreign private issuer.S. jurisdiction (such as Delaware) can never qualify as a foreign private issuer. (ii) more than 50% of the assets of the issuer are located in the United States or (iii) the business of the issuer is administered principally in the United States.
Deal Protection “No-Shop.4. Clifford Chance US LLP 22 .” “No-Talk” and “Go-Shop” Provisions Fiduciary Outs and Break-Up Fees Stock Option Agreements Voting/Support Agreements 23 24 24 25 A Guide to Takeovers in the United States.
by providing non-public information to the interloper and discussing potential contract terms with it. we discuss the deal protection mechanisms most commonly used in U. if the target board is being asked to approve a management-led buyout transaction that has not been preceded by any auction or other market check process. These concerns might arise. limited 23 A Guide to Takeovers in the United States. public company invariably contain “deal protection” provisions. In these situations. the restrictions imposed by these provisions are subject to exceptions which allow a target company to respond to an unsolicited proposal that the target’s board believes represents (or reasonably may be expected to lead to) a superior transaction. To help alleviate this risk. Virtually every U.” “No-Talk” and “Go-Shop” Provisions “No-shop” and “no-talk” provisions restrict target companies from soliciting. In some situations. and invariably only upon immediate payment of a break fee). Customarily. the target can terminate the merger agreement (frequently only after giving a right to match to the acquirer under the first merger agreement. A “go-shop” provision permits a target to actively solicit competing offers for a specified.S. third parties with respect to competing transactions.S. public company merger agreement contains a form of no-shop/no-talk clause.S. providing information to. the target company’s board of directors may be concerned that a grant of broad deal protection rights to an acquirer may appear inconsistent with the target board’s fiduciary obligation to maximize shareholder value. initiating discussions with. practice. there is a risk that a competing third-party offer may emerge that could prevent the transaction provided for in the merger agreement from being consummated. Clifford Chance US LLP . encouraging. “No-Shop. The merger agreement typically provides that if the discussions over the unsolicited competing offer result in a definitive agreement with the competing acquirer. or negotiating with. merger agreements providing for the acquisition of a U. In this chapter. discourage competing offers and compensate the would-be acquirer if a negotiated deal is broken up as a result of a competing offer.Section 4: Deal Protection Between the time a merger agreement is entered into and publicly announced and the time it is voted on by shareholders (in the case of a single-step transaction) or the time the first-stage tender offer is completed (in the case of a two-step transaction). the target board and its advisers sometimes modify the customary no-shop/no-talk agreements by adding a “go-shop” provision. for example.
Some other termination fees.17 These types of defensive stock option agreements are different from the “top-up” options discussed earlier in this Guide. Clifford Chance US LLP 24 . Termination fees in the 2. Some acquirers (particularly private equity-backed acquirers) structure reverse break fees so as to give them an option to terminate the merger agreement for any reason upon payment of the reverse break fee. provides for a only a relatively modest break fee if the merger agreement is terminated to allow a transaction with a new bidder who emerged during the go-shop period. In most cases. it is quite common to provide that if the target company’s shareholders vote down a transaction at a 17 time when a competing proposal has been announced.5% range are common.9%. which might include failure to obtain antitrust/merger control clearances by a specified date or failure to obtain financing by a specified date. Termination or “break” fees are payments required under a merger agreement if the merger agreement is terminated for one or more specified reasons. The option typically becomes exercisable only upon the occurrence of specified triggering events.Section 4: Deal Protection period of time after the merger agreement has been signed and the transaction has been announced and. which sometimes are granted to help the acquirer qualify to use the short-form merger procedure after a first-stage tender offer. are customarily payable on a deferred or contingent basis. but only if the target subsequently agrees to a competing transaction within a contractually-agreed period after the termination (12 months would be typical). such as a competing third-party offer or acquisition by a third party of a specified percentage of the target’s stock. the size of the termination fee and the events that trigger an obligation to pay it are the topics of significant negotiation. Delaware courts have approved termination fees ranging from 1% to 6% of the transaction value. To avoid shareholder approval requirements under relevant stock exchange rules. For example. the merger agreement provides that the exercise of a fiduciary out triggers payment of a break fee by the target to the acquirer. however. Many merger agreements contain no reverse break fee provision. Invariably. Stock Option Agreements Stock options are sometimes granted by target companies and give the acquirer the right to purchase a specified amount of stock. “Reverse break fee” provisions require the acquirer to pay a fixed amount to the target if the merger agreement is terminated for one or more specified reasons. A Guide to Takeovers in the United States. the right is limited to a situation in which the target’s board has approved a competing transaction after complying with the no-shop/no-talk provision contained in the merger agreement. usually at the deal price per share. usually.0-3. a termination fee will be payable by the target. the amount of stock issuable. and as a result of the vote-down the merger agreement is terminated. Typically. The termination fee payable by the target when it terminates in order to enter into a new merger agreement with a competing acquirer invariably is payable immediately. generally does not exceed 19. in the case of an agreement with the target itself. Fiduciary Outs and Break-Up Fees A “fiduciary out” provision gives the target’s board the right to terminate the merger agreement if the board determines that its fiduciary duties require it to do so.
n The Delaware Supreme court has held that it is not permissible to obtain voting commitments covering enough shares to vote through the proposed merger without any other shareholder support unless the target company’s board of directors has the right to terminate the merger agreement or prevent the transaction from being put to a vote.. 818 A.Section 4: Deal Protection Voting/Support Agreements Acquirers sometimes obtain commitments from significant shareholders of the target company to support the transaction agreed with the target by tendering or voting their shares accordingly. 19 Omnicare v.19 n As discussed earlier in this Guide.18 n If the transaction involves a tender offer.2d 914 (Del. the support commitments may constitute impermissible “gun-jumping” under the Securities Act. shareholder support commitments also may trigger poison pill rights plans or state antitakeover statutes unless the target company’s board has taken action (before any discussions with the applicable shareholders with respect to the proposed acquisition have taken place) to disapply those antitakeover defenses. all holders of the subject securities and that all holders are offered the same amount and form of consideration. 2003). which means that tender commitments should be obtained before the first public announcement of the tender offer. A Guide to Takeovers in the United States. Clifford Chance US LLP 25 . it permits these support arrangements) with respect to situations in which the support commitments are provided only by corporate insiders and certain other conditions are met. or votes are solicited from (in the case of a merger). 18 The conditions include requirements that the offer is made to (in the case of an exchange offer). some technical considerations apply: n In share-for-share transactions. the support commitments must comply with Rule 14e-5 (which prohibits purchases–including contracts to purchase–after a tender offer is publicly announced and before it is completed). The SEC staff takes a “no-action” position (i. NCS Healthcare.e. While these types of support arrangements generally are permissible.
Fiduciary Duties of a Target Company’s Board of Directors Principal Components of Directors’ Fiduciary Duties Fiduciary Duties in the M&A Context 27 27 A Guide to Takeovers in the United States. Clifford Chance US LLP 26 .5.
and making deliberate decisions after thorough and candid discussions. Fiduciary Duties in the M&A Context Under the business judgment rule. In essence. among other things. courts decline to substitute their own views for those of the directors or to second guess the outcome of directors’ decisions. decisions of directors are presumed to have been made on an informed basis. if challenged. the standards of conduct required of the target company’s board of directors are imposed principally as a result of state corporate law through the imposition of fiduciary duties.Section 5: Fiduciary Duties of a Target Company’s Board of Directors In acquisitions of U. Even with the benefit of the business judgment rule. we briefly review those fiduciary duties under Delaware law. in good faith and in the honest belief that the action taken was in the best interest of the corporation. If the transaction is fair to the corporation and the self-interested director discloses his personal 27 A Guide to Takeovers in the United States. In this chapter. Clifford Chance US LLP stake in the outcome. The duty of loyalty requires directors to act in good faith in the best interests of the corporation and its stockholders without regard for personal interests. considering the advice of experts. The duty of candor requires directors to disclose fully and fairly all material information within a board’s control and to provide a balanced. and occasionally greater than. probing assumptions and studying materials necessary to vote or act in an informed manner.S. federal securities laws. Simply put. a board may be found to have breached its fiduciary duties if the court finds that the directors of a target company in an M&A transaction . This is typically accomplished by. Principal Components of Directors’ Fiduciary Duties The duty of care requires directors to act on an informed and deliberate basis and with the degree of care that an ordinarily prudent person would use under similar circumstances. the director will not be held to have breached the duty of loyalty. a director must inform himself of all material.S. under Delaware law the actions taken by a board in the context of a business combination transaction. To satisfy the duty of care in connection with making decisions on behalf of the corporation. When the business judgment rule applies. taking time to evaluate the action under consideration. this means that each director must put the interest of the corporation and its stockholders ahead of his own. Courts have invoked this duty to impose disclosure requirements that are distinct from. relevant information that is reasonably available to him. will be reviewed under the deferential standard of the business judgment rule. the disclosure obligations imposed under the U. truthful account of all matters disclosed in communications with stockholders. asking questions. This duty is not an absolute prohibition on insider transactions. attending and participating in meetings of the board of directors. this duty requires directors to make well-informed business decisions. Subject to the exceptions discussed below. public companies.
21 the Delaware Supreme Court held that once the directors decide to sell control of the corporation. 1986). Mesa Petroleum Co.” In order to be afforded the protections of the business judgment rule with respect to defensive action. In Revlon. The standard of review applied by Delaware courts in considering shareholder challenges to boardimplemented defensive actions is not entirely deferential. or if directors are found to have violated their duties of care or loyalty. Delaware courts apply the “heightened scrutiny” standard first articulated by the Delaware Supreme Court in Unocal Corp.S.Section 5: Fiduciary Duties of a Target Company’s Board of Directors approved a sale of the company without taking the time to sufficiently inform themselves of all the relevant facts. board actions may become subject to the Unocal standard discussed below. 506 A. The scheme of takeover regulation applied under Delaware law (and the laws of other U. Instead of applying the same deferential business judgment rule standard of review that applies to most board actions. the terms of the transaction. board actions may become subject to the entire fairness standard. n If there is a controlling or otherwise dominating shareholder on both sides of the transaction. jurisdictions) differs significantly from the takeover regulations of many other jurisdictions around the world. board actions may become subject to the Revlon standard discussed below. Delaware law does not impose a general prohibition on defensive actions by target companies’ boards of directors.2d 173 (Del. 1985). MacAndrews & Forbes Holdings.” 20 21 493 A. n If directors are contemplating a sale or break-up of the corporation. Delaware law grants directors broad latitude to implement measures that deter or even completely prevent takeover proposals of which they disapprove. Inc. Delaware courts apply an even more stringent standard of review when analyzing the conduct of a target’s board of directors after the board has decided to pursue a change-of-control transaction. A Guide to Takeovers in the United States. the business judgment rule is not initially applied and the board’s conduct instead is subject to enhanced judicial scrutiny. their role changes from being “defenders of the corporate bastion to auctioneers charged with getting the best price for the shareholders at a sale of the company. In several important situations. v. subject only to the requirement that in implementing defensive actions the directors must comply with their fiduciary obligations. v. there is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred.2d 946 (Del. Delaware courts typically grant boards a fair amount of latitude in satisfying this standard. rather than those of the corporation and its shareholders.20 The court in that case stated that because of the “omnipresent specter that a board may be acting primarily in own interests. the possible alternatives and the relevant valuation considerations. Those situations are: n When taking defensive actions in the face of a potential change of control of the corporation. Instead. the directors must show that (i) they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed and (ii) the action the board took was reasonable in relation to the threat posed. Clifford Chance US LLP 28 .
that while an auction or market check process may be desirable. Clifford Chance US LLP . and attempts by the board to fend off competing bids are subject only to the Unocal standard of review.. Most notably. Delaware courts have evolved some elaborate rules for cases in which a controlling or dominant shareholder engages in M&A transactions affecting the company.2d 34 (Del. Court decisions subsequent to Revlon helped to define its scope. it is not invariably required. The board can decide not to pursue any sale transaction at all. Maryland’s corporate statute. for example. In addition. subject to only a modestsized break fee requirement. The board’s decision to pursue such a transaction is entitled to deferential review under the business judgment standard. QVC Network. 571 A. if the target’s board decides to negotiate with a single acquirer without running any kind of auction or market check process. a board that decides to forego any kind of pre-announcement auction or market check will request a “go-shop” provision.22 If the board of a target company is pursuing a sale of the company. however.Section 5: Fiduciary Duties of a Target Company’s Board of Directors Under Revlon. a share-for-share merger in which the combined companies will not have a controlling shareholder is not subject to the Revlon standard. or more likely to maintain the target’s current levels of employment or corporate philanthropy. contains provisions intended to counter Unocal and Revlon by applying a uniform business judgment presumption and Pennsylvania’s statute specifically authorizes the board of a target company to take into account the interest of constituents other than the company’s shareholders. Nonetheless. 637 A. Sometimes. decide to approve a sale to a favored bidder in the face of a higher and equally credible bid from a third party. but those rules typically do not apply to the arms’-length third party transactions that are the subject of this Guide. for example. the board should be prepared to show why that approach is consistent with its duty to maximize the sale price. Compare Paramount Communications v. even on grounds that the favored bidder will be a better steward of the target company. Delaware courts have said. it may seek to satisfy its Revlon obligation to maximize value for shareholders by running an auction or market check process. the board of a public company cannot. it is required to follow a process that it reasonably believes in good faith should yield the best value for shareholders. many states’ corporate laws are more deferential than Delaware’s to the conduct of directors of target companies in change-of-control situations. 1994) (a share-for-share transaction that would result in a single individual controlling the combined company was subject to Revlon). but once it decides to sell.2d 1140 (Del. A well-advised board in this situation typically will seek to protect its decision-making process from judicial criticism (i) by creating a good record as to why it believes dealing with a single bidder was appropriate and (ii) by limiting the extent of the “deal protection” rights granted to the acquirer in the merger agreement so that if a competing bid unexpectedly emerges the barriers to the competing bid will not be preclusive. Time Inc. 22 29 A Guide to Takeovers in the United States. allowing it to actively “shop” (seek bids for) the company for a limited period of time after the transaction is announced. 1990) (Revlon duties did not apply in a share-for-share deal that did not result in control of the combined company by a single shareholder) with Paramount Communications v.
Takeover Defenses “Poison Pill” Shareholder Rights Plans Charter and Bylaw Provisions Antitakeover Statutes 31 31 31 A Guide to Takeovers in the United States.6. Clifford Chance US LLP 30 .
This typically is accomplished by having the target’s board of directors take action (which is expressly permitted under the typical rights plan) to amend the rights plan in advance of the triggering event that otherwise would occur as a result of the negotiated transaction. Any prospective acquirer of a U. we briefly review some of the principal antitakeover defenses potentially available to a U. approved by the target’s board of directors. shareholder rights plans can be adopted by the board of directors without the consent of the company’s shareholders. public company. Control share statutes deny voting rights to 31 A Guide to Takeovers in the United States. Charter and Bylaw Provisions A company may adopt provisions in its charter and/or bylaws that reduce its vulnerability to an unsolicited offer. public company should take into account the various antitakeover provisions or devices that the target company may have adopted or to which it may be subject under applicable state law. Business combination statutes prohibit certain types of business combination transactions between an acquirer and a target for a period of time (typically three years) after the acquirer has acquired beneficial ownership of more than a specified threshold amount of the target’s shares (typically 15%).Section 6: Takeover Defenses A prospective acquirer of a U. In this chapter. care should be taken to ensure that a target’s rights plan is not inadvertently triggered. or the business combination then being pursued is. although other less common antitakeover provisions (such as “fair price” provisions) conceivably could appear also. “Poison Pill” Shareholder Rights Plans Shareholder rights plans (commonly referred to as “poison pills”) function by causing shares acquired by an unwanted acquirer (once the acquirer reaches a prescribed ownership threshold. these types of statutory provisions must be carefully considered in order to avoid inadvertently triggering their application. public company should carefully check the target’s organizational documents to confirm what vote is required and that no other provisions will affect the proposed transaction. Antitakeover Statutes Many states have enacted antitakeover statutes. typically 15%) to be massively diluted by causing share purchase rights held by all shareholders (other than the unwanted acquirer) to become exercisable at a substantial discount to the thenprevailing market price. Clifford Chance US LLP . The only provisions of this type likely to be relevant to a negotiated transaction are those requiring a special or supermajority vote of shareholders. that transaction was. Even in negotiated transactions. In a negotiated transaction.S. before consummation of the transaction pursuant to which the acquirer exceeded the threshold amount. which consist primarily of business combination statutes and control share acquisition statutes.S. Exceptions to this prohibition generally include if. Each of these statutes is designed to discourage or prevent takeovers that have not been approved by the target’s board of directors.S. In Delaware and many other states.
Section 6: Takeover Defenses shares of a target’s stock held by an acquirer once the acquirer’s share ownership exceeds a specified threshold (typically 15%). Exceptions to this prohibition generally include if. the target’s board of directors approves the transaction or the target’s remaining shareholders approve the proposed transaction. A Guide to Takeovers in the United States. prior to the transaction pursuant to which the acquirer exceeded the threshold amount. With respect to this shareholder approval requirement. state statutes typically set forth a period of time within which a target must convene a special meeting of shareholders if requested by the acquirer. Clifford Chance US LLP 32 . Acquirers should take care to avoid inadvertently triggering these statutory provisions through share accumulation activity or by seeking shareholder support agreements.
Clifford Chance US LLP . Antitrust/Merger Clearance 33 A Guide to Takeovers in the United States.7.
23 For purposes of determining whether these values are exceeded. For transactions valued between $63. which currently ranges from $45.S. merger clearance requirements and process. Under the HSR Act. 23 Filings are required for transactions valued at more than $253. together with its parents.” In the roughly 5% of transactions where such a second request is made.4 million and $253. parties should take care when preparing officer.7 million (again using the 2010 values). the waiting period is extended for an additional 30 days (10 days in case of cash tender offers) after the parties have supplied the requested information.and board-level materials. The merger clearance process in the United States is governed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”). and a second party must have assets or revenues exceeding $126.S.000. For transactions that are subject to HSR. would substantially lessen competition or tend to create a monopoly in any line of commerce. each party must complete a form and submit certain documentary attachments. These so-called “4. the merger clearance process is jointly administered by the U.7 million regardless of whether the size-of-persons condition is satisfied. transactions are exempted unless they have a material nexus with the United States.7 million. even if these “sizeof-transaction” and “size-of-persons” tests are satisfied.000 to $280. the statute grants the government a 30-day “waiting period” in which to review the transaction.S. a filing is required only if a second condition is satisfied–one party must have assets or revenues exceeding $12. The HSR rules include various exemptions that may render transactions non-reportable. the government analyzes whether the transaction. Notification to those agencies is required if the transaction will result in the acquirer holding assets or voting securities of the target with a value that is re-set annually.c documents” (named after the section of the form on which they are indexed) are the single most common trigger for follow-on questions from government investigators. At the end of the waiting period. Because the requested information is typically substantial. In determining whether a transaction warrants detailed investigation or challenge. The parties are barred from closing during the waiting period unless the government grants early termination. although a shorter period of 15 days applies for cash tender offers and certain acquisitions in a bankruptcy setting. To complete the filing. Department of Justice. Once the filing has been perfected. the acquirer is also required to pay a filing fee. The 2010 value is $63. the parties are free to close unless the government issues a request for additional information. Notably. if consummated. we briefly review the U. although worldwide activity is used when applying the thresholds. Federal Trade Commission and the U. A Guide to Takeovers in the United States. which may be requested and is often granted in situations that clearly present no substantive antitrust concerns.Section 7: Antitrust/Merger Clearance In this chapter. commonly referred to as a “second request. Clifford Chance US LLP 34 . most significantly certain documents prepared by or for officers or directors for purposes of evaluating the transaction with respect to certain competition-related factors enumerated in the rules. depending on the value of the transaction.9 million. a “party” is viewed as the actual acquirer. subsidiaries and other controlled affiliates. hence.4 million. compiling and submitting it often requires months.
The most targetfavorable formulation is a “hell-or-high-water” provision that obligates the acquirer to agree to any obligations or divestitures that regulators require to complete the transaction. Covenants in merger agreements typically specify the level of effort that the parties are required to undertake to obtain antitrust clearances— ”commercially reasonable efforts. Until a transaction has closed. Covenants in merger agreements that give the acquirer rights to control any commercial activities of the target during the period between signing and closing should be examined with particular care to assure that they are reasonably necessary and justifiable and that they will not cause interim competitive harm or provoke an adverse government response. good faith due diligence and transition planning are fine. regardless of cost and consequence.” “best efforts” or some other formulation—and in transactions that face potential antitrust exposure.” “reasonable best efforts. In general. Statutory “gun jumping” provisions prohibit the premature implementation of transactions before they have been approved by antitrust regulators. such as whether the acquirer will be required to agree to divestitures or other remedies or whether the parties will be required to engage in litigation to defend the legality of the transaction. but parties should avoid engaging in activities that go beyond these areas and steps sometimes will need to be taken to firewall information that is competitively sensitive. Clifford Chance US LLP . parties should be cautious about the information they exchange and the steps they take to integrate their operations. 35 A Guide to Takeovers in the United States. covenants and closing conditions may be used to define more specific obligations.Section 7: Antitrust/Merger Clearance Parties to negotiated transactions commonly negotiate the allocation of antitrust risk and specify their obligations to address antitrust investigations and challenges.
Clifford Chance US LLP 36 .8. The Committee on Foreign Investment in the United States (CFIUS) A Guide to Takeovers in the United States.
S. Treasury Department. or CFIUS.S. and two permanent non-voting members: the Secretary of the U.S. authorized to review transactions that could result in control of a U. technology and infrastructure have historically been of particular interest to CFIUS.S. CFIUS has asserted jurisdiction over minority as well as majority investments. CFIUS regulations define “control” to include “the power. and the Attorney General. In addition to its general authority to review acquisitions of U. direct or indirect” by any means to “cause decisions” of importance to a U.S. While not an exhaustive list.” Accordingly. industries such as defense. The Executive Order also provided observer status for several other White House officials.S. CFIUS identifies potential national security risks on a case-by-case basis by considering whether the identity. persons. business and (ii) acquisitions of U. By broadly interpreting the concept of control. The Committee on Foreign Investment in the United States.S. by Executive Order 11858. however. governments.S. Defense.S. Commerce and Energy. Foreign Investment and National Security Act of 2007.25 In addition to the Secretary of the U. Department of Labor and the Director of National Intelligence.-government-owned or controlled entity of any U.S. acquirer is non-U.S. CFIUS regulations do not. Treasury Department. and sometimes infrastructure. CFIUS has six other permanent voting members: the Secretaries of the U. In addition. energy. In this chapter. background or nationality of the purchaser presents a threat to the national security of the United States in the context of potential vulnerabilities arising from the nature and role of the target U. The likelihood of intervention by CFIUS increases with the sensitivity of the acquirer’s profile24 and the strategic importance of the industry in which the proposed acquisition will be made. we briefly review the CFIUS process.S. CFIUS designates a lead agency for each of its reviews depending on the nature of the business at issue. business. Homeland Security.S.S. Trade Representative and the Director of the U. or that are based in countries that are not close allies of the United States. is an inter-agency committee.S. CFIUS is mandated to conduct a full investigation of two specific types of transactions: (i) acquisitions by a non-U.Section 8: The Committee on Foreign Investment in the United States (CFIUS) Non-U.S. Office of Science and Technology Policy. businesses by non-U.S. “critical infrastructure” regardless of whether the non-U. Clifford Chance US LLP 25 37 . business by non-U. Departments of State. the President of the United States appointed to CFIUS the U. define “national security. as a result of the U. business.S.S.S. or FINSA. A Guide to Takeovers in the United States. chaired by the Secretary of the U. have more sensitive profiles for this purpose.-government-owned or controlled but only if 24 Acquirers that are controlled by non-U. persons to determine the effect of such transactions on the national security of the United States. acquirers of public companies that operate in sensitive areas (notably defense and advanced technology. transportation and natural resources) should consider the applicability of the review process operated by CFIUS.
including in the form of commitment letters on specific issues or mitigation agreements addressing a broader range of security objectives.” Thus. together with the head of the lead agency responsible for reviewing the transaction. the greater the incentive for parties to notify CFIUS voluntarily in order to demonstrate cooperation and attempt to establish a positive tone for the ensuing national security review. is mandatory in order to close an acquisition. and seek to impose national security undertakings and/or recommend that the President of the United States block or unwind the transaction. as Chair of CFIUS. parties can mitigate the risk that CFIUS might unilaterally initiate its own review. either pre. jointly determine that the acquisition does not present a national security risk. If. On occasion. if required. and to avoid the risk of presidential intervention. A Guide to Takeovers in the United States. assets or operations deemed too sensitive for the particular non-U. By obtaining a pre-closing clearance. CFIUS filings are voluntary.S. The greater the likelihood that CFIUS will express serious interest in a transaction unilaterally. Clifford Chance US LLP 38 .Section 8: The Committee on Foreign Investment in the United States (CFIUS) CFIUS determines that “the transaction could impair national security and that risk has not been mitigated. however.S. acquirer to retain. CFIUS may waive the full investigation requirement only if the U.or post-closing. With respect to certain acquisitions by governmentcontrolled entities. In contrast to an HSR filing.S. Secretary of the Treasury. during a review or investigation. CFIUS identifies an unresolved national security concern. however. CFIUS has rejected any solution other than the divestiture of U. Parties that enter into these types of arrangements do so in exchange for a clearance from CFIUS. which. CFIUS can clear an acquisition of critical infrastructure by a non-governmentcontrolled entity without conducting a full investigation if it determines that the transaction presents no national security risks. it may seek to resolve such concern through the imposition of contractual undertakings on the parties.
Appendix A Indicative Timeline for Single-Step and Two-Step Cash Acquisitions of U. Public Companies 39 A Guide to Takeovers in the United States.S. Clifford Chance US LLP .
SEC review sometimes can take longer than indicated. 27 Squeeze-out merger proxy materials are relatively unlikely to be reviewed and commented on by the SEC. file definitive tender offer materials with SEC. A Guide to Takeovers in the United States. ACQUIRER NOW OWNS 100% OF TARGET 26-50 55 Receive and resolve SEC comments26 Print and mail proxy materials 15-43 43 88 108 109 26 The SEC’s staff sometimes elects not to review and provide comments on a proxy statement. but may not be mailed for at least 10 days after they are filed with the SEC. then the timeline is subject to extension by as much as several more weeks in order to prepare a U. ACQUIRER NOW OWNS 100% OF TARGET 91 Complete merger (provided requisite vote of target shareholders is obtained) ACQUIRER NOW CONTROLS (AND OWNS 100% OF) TARGET 47-77 If Acquirer own less than 90% of Target’s outstanding shares – prepare and file proxy materials with SEC relating to “squeeze-out” merger Mail proxy materials27 Target shareholders’ meeting to vote on squeeze-out merger Complete merger. conversely.S. mail materials to target’s shareholders Address any comments provided by SEC staff Close tender offer (if minimum tender and other conditions satisfied) ACQUIRER NOW CONTROLS TARGET 90 Target shareholders’ meeting to vote on merger 47 If Acquirer now owns at least 90% of Target’s outstanding shares – file short-form merger certificate. registration statement and obtain SEC clearance Single-Step Transaction Day(s) Activity 1 2-15 16 Announcement Prepare proxy statement (Target with Acquirer’s input) File preliminary proxy materials with SEC Two-Step Transaction Day(s) Activity 1 2-15 15 Announcement Prepare Offer to Purchase (Acquirer) and Schedule 14D-9 (Target) Commence tender offer.Appendix A If the consideration being offered in the takeover consists in whole or in part of securities of the acquirer. Clifford Chance US LLP 40 . in which case the process is shortened by approximately 30-35 days from that indicated.
Appendix B Deal Structure Considerations in Acquiring a U. Clifford Chance US LLP .S. Public Company – The Relative Advantages and Disadvantages of the Single-Step and Two-Step Structures 41 A Guide to Takeovers in the United States.
thereby cutting off any competing bids that might emerge later. Single Closing at Which Bidder Acquires 100% of Target’s Shares) Summary: n Potentially vulnerable to competing bids for a longer period of time than a two-step transaction. Advantages: n Most often used in share-for-share transactions and when there are regulatory or other approvals that cannot be satisfied quickly (i. This timing disadvantage is irrelevant. Single-Step Transaction (Merger Voted on by Target’s Shareholders. Clifford Chance US LLP 42 . n If regulatory clearances are likely to take longer than the 3-4 months needed to complete a single-step transaction. and more typically 3 to 4 months. Advantages: n Acquirer can close its tender offer subject only to (1) the offer being open for at least 20 business days (SEC requirement). the two-step approach allows the acquirer to take control of the target significantly faster than under a single-step approach. it will take no less than 2 months. (2) receipt of antitrust and other regulatory approvals and (3) a sufficient number of shares being tendered by target shareholders (typically 50%). This timing advantage should make the transaction less vulnerable to competing bids.. target in as little as 5-6 weeks after announcement. target’s shareholders can vote to approve the transaction before regulatory or other approvals are obtained. the speed advantage of the two-step approach disappears.e. In a single-step transaction. and foreclose competing bids for. to obtain the approving vote of target’s shareholders. sharefor-share transaction) taking longer than 3-4 months. however. A Guide to Takeovers in the United States. if the transaction will require regulatory clearances (i. Acquirer could obtain working control of.e. if such approvals are likely to take longer than 3 to 4 months). In that situation.. n For private equity acquirers. Two-Step Transaction (Tender Offer Followed by “Second-Step” Merger in Which Bidder Acquires Untendered Target Shares) Summary: n If the offer is well received by target’s shareholders and regulatory clearances (including antitrust/competition law clearances) are likely to be obtained quickly. a single-step structure may be more attractive because it avoids technical issues relating to management equity rollovers (that affect only tender offers) and because acquisition debt financing is less complicated in a single-step transaction.Appendix B The relative advantages and disadvantages of using a single-step transaction structure as opposed to a two-step transaction structure are summarized below. The vulnerability to competing bids continues until that vote is obtained.
applies to tender offers (and therefore to two-step transactions) but not to single-step transactions. in comparison to successful two-step transactions. a proxy statement must be prepared and delivered to the shareholders of target who have not tendered their shares. n Acquirer has less control over the process because the merger proxy statement legally is the responsibility of target. n The transaction may be modestly more expensive from a legal fees perspective if the acquirer does not obtain sufficient shares in the tender offer to take advantage of short-form merger procedures. in order to complete the merger. Time required will be shorter if the SEC decides not to review the proxy materials. Target’s assets can be used as collateral for acquisition finance borrowings at time of initial drawdown. Target’s assets can be used as collateral only after the second stage of the transaction is completed. which do not need to be pre-cleared with the SEC. Disadvantages: n Longer period of time to obtain working control of target. Fastest time to completion realistically achievable would be around 12 to 16 weeks (which would include preparing proxy materials. n The SEC’s “all-holders/best price” rule. obtaining SEC clearance and soliciting proxies). Advantages: n Acquirer has greater control over timing because it prepares all the requisite tender offer documents. but a minimum of 2 ½ months realistically is required. Amendments to that Rule eliminated some significant problems associated with Rule 14d-10.Appendix B Advantages: n Timing and funding requirements generally are more predictable in a single-step transaction. 43 A Guide to Takeovers in the United States. Clifford Chance US LLP . This may make the single-step structure more attractive for private equity-type acquirers. but other concerns remain – notably in respect of equity rollovers. If more than a majority but less than 90% of the outstanding shares are tendered in the tender offer. Rule 14d-10. Disadvantages: n Achieving 100% ownership may take longer than the 5-6week period described above if 90% acceptance is not achieved. n Financing the transaction may be more difficult if lenders do not wish to provide bridge financing for the purchase of shares in the first-step tender offer.
DC 20006 . São Paulo. Gasheka 6 125047 Moscow Russia T +7 495 258 5050 F +7 495 258 5051 Munich Clifford Chance Theresienstraße 4-6 80333 Munich Germany T +49 89 216 32-0 F +49 89 216 32-8600 New York Clifford Chance 31 West 52nd Street New York NY 10019-6131 USA T +1 212 878 8000 F +1 212 878 8375 Paris Clifford Chance 9 Place Vendôme CS 50018 75038 Paris Cedex 01 France T +33 1 44 05 52 52 F +33 1 44 05 52 00 Prague Clifford Chance Jungamannova Plaza Jungamannova 24 110 00 Prague 1 Czech Republic T +420 222 555 222 F +420 222 555 000 Riyadh (Co-operation agreement) Al-Jadaan & Partners Law Firm P.Worldwide Contact Information 29* offices in 20 countries Abu Dhabi Clifford Chance 13th and 14th Floors Al Niyadi Building Airport Road Sector W-14/02 PO Box 26492 Abu Dhabi United Arab Emirates T +971 2 419 2500 F +971 2 419 2600 Amsterdam Clifford Chance Droogbak 1A 1013 GE Amsterdam PO Box 251 1000 AG Amsterdam The Netherlands T +31 20 7119 000 F +31 20 7119 999 Bangkok Clifford Chance Sindhorn Building Tower 3 21st Floor 130-132 Wireless Road Pathumwan Bangkok 10330 Thailand T +66 2 401 8800 F +66 2 401 8801 Barcelona Clifford Chance Av. Akasaka Minato-ku Tokyo 107-0052 Japan T +81 3 5561 6600 F +81 3 5561 6699 Warsaw Clifford Chance Norway House ul. 1050 Brussels Belgium T +32 2 533 5911 F +32 2 533 5959 Bucharest Badea Clifford Chance Excelsior Center 28-30 Academiei Street 12th Floor. 11 00197 Rome Italy Tel +39 06 422 911 Fax +39 06 422 91200 São Paulo Clifford Chance Rua Helena.C. Sector 1. Ukraine T +38 (044) 390 5885 F +38 (044) 390 5886 London Clifford Chance 10 Upper Bank Street London E14 5JJ United Kingdom T +44 20 7006 1000 F +44 20 7006 5555 Luxembourg Kremer Associés & Clifford Chance 2-4. Place de Paris B. Bucharest.P. North Tower Al-Umam Commercial Centre Salah-AlDin Al-Ayyubi Street Al-Malaz. 260 . Clifford Chance 2001 K Street NW Washington. SP Brazil T +5511 3049 3188 F +5511 3049 3198 Shanghai Clifford Chance 40th Floor. Bossi.Lwowska 19 00-660 Warsaw Poland T +48 22 627 11 77 F +48 22 627 14 66 Washington. 010016 Romania T +40 21 66 66 100 F +40 21 66 66 111 Dubai Clifford Chance 3rd Floor. 3 20121 Milan Italy T +39 02 806 341 F +39 02 806 34200 Moscow Clifford Chance Ul.6th Floor 04552-050. 1 Jinguomenwai Dajie Chaoyang District Beijing 100004 People’s Republic of China T +86 10 6505 9018 F +86 10 6505 9028 Brussels Clifford Chance Avenue Louise 65 Box 2. Köves & Partners in Hungary . Riyadh 11481 Fifth Floor.1001 USA T +1 202 912 5000 F +1 202 912 6000 *Clifford Chance has a co-operation agreement with Al-Jadaan & Partners Law Firm in Riyadh and a ‘best friends’ relationship with AZB & Partners in India and with Lakatos. Diagonal 682 08034 Barcelona Spain T +34 93 344 22 00 F +34 93 344 22 22 Beijing Clifford Chance Room 3326 China World Tower 1 No. 1147 L-1011 Luxembourg Grand-Duché de Luxembourg T +352 48 50 50 1 F +352 48 13 85 Madrid Clifford Chance Paseo de la Castellana 110 28046 Madrid Spain T +34 91 590 75 00 F +34 91 590 75 75 Milan Clifford Chance Piazzetta M. The Exchange Building Dubai International Financial Centre PO Box 9380 Dubai United Arab Emirates T +971 4 362 0444 F +971 4 362 0445 Düsseldorf Clifford Chance Königsallee 59 40215 Düsseldorf Germany T +49 211 43 55-0 F +49 211 43 55-5600 Frankfurt Clifford Chance Mainzer Landstraße 46 60325 Frankfurt am Main Germany T +49 69 71 99-01 F +49 69 71 99-4000 Hong Kong Clifford Chance 28th Floor Jardine House One Connaught Place Hong Kong T +852 2825 8888 F +852 2825 8800 Kyiv Clifford Chance 75 Zhylyanska Street 01032 Kyiv. Bund Centre 222 Yan An East Road Shanghai 200002 China T +86 21 6335 0086 F +86 21 6335 0337 Singapore Clifford Chance One George Street 19th Floor Singapore 049145 T +65 6410 2200 F +65 6410 2288 Tokyo Clifford Chance Akasaka Tameike Tower 7th Floor 2-17-7. D. Riyadh Kingdom of Saudi Arabia T +966 1 478 0220 F +966 1 476 9332 Rome Clifford Chance Via Di Villa Sacchetti.Box 3515.O.
com Abu Dhabi Amsterdam Bangkok Barcelona Beijing Brussels Bucharest Dubai Düsseldorf Frankfurt Hong Kong Kyiv London Luxembourg Madrid Milan Moscow Munich New York Paris Prague Riyadh (co-operation agreement) Rome São Paulo Shanghai Singapore Tokyo Warsaw Washington.cliffordchance. USA www. New York. N. J201009200037181 Clifford Chance has a co-operation agreement with Al-Jadaan & Partners Law Firm in Riyadh and a ‘best friends’ relationship with AZB & Partners in India and with Lakatos.C. D. 10019-6131. October 2010 31 West 52nd Street.© Clifford Chance Europe LLP.Y. Köves & Partners in Hungary .
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.