October 24, 2006
On October 18, 2006, the U.S. Securities and Exchange Commission unanimously approved changes to the tender offer best-price rules set forth in Exchange Act Rules 14d-10(a)(2) and 13e-4(f)(8)(ii). The best-price rule provides that the consideration offered and paid to any security holder in a tender offer must be equal to the highest consideration paid to any other security holder in the offer. In other words, all shareholders must be paid the same price for securities tendered in a tender offer.
The purpose of the amendments is to clarify how the best-price rule applies to arrangements, usually compensatory in nature, entered into by a bidder with the employees or directors of the target company in connection with the bidder’s tender offer and back-end acquisition. Previously, acquirers had been reluctant to conduct tender offers due to the uncertainty created by a split in the federal circuit courts as to exactly when the best-price rule applied to such arrangements. Now, hopefully acquirers and target companies can proceed with greater certainty as to how the best-price rule will be applied to their transactions, and the tender offer as a means of acquisition will be on more equal ground with statutory mergers and other forms of business combination transactions.
Specifically, the best-price rule amendments include provisions that:
Exempt negotiations and the amendments to compensation, severance, and other employee benefit arrangements for employees, directors and officers from the inclusion in the best-price rule calculation. Therefore, any such compensatory arrangements would not count toward the price paid for the shares in a tender offer.
Provide a safe harbor for the exemption from the tender offer best-price rule for certain compensation, severance, and employee benefit arrangements where such arrangements are approved by one or a committee of independent directors (with “independence” determined by the board and not the applicable exchange listing rules). The safe harbor will apply to both issuer and third-party tender offers.
Notably, the SEC did not specifically exempt commercial arrangements from the best-price rule, although the Commission indicated that such arrangements should not trigger application of the rules. Finally, it should be noted that the SEC did not include a de minimis exclusion in the amendments. Many commenters, including committees of the American Bar Association (ABA), New York State Bar Association and Securities Industry Association (SIA) had requested an exemption for both commercial arrangements and de minimis transactions.
The best-price rule amendments are expected to become effective 30 or 60 days after they are published in the Federal Register. Also, the SEC has not made the final adopting release available, which may contain further information on the operation of the amended best-price rule, so this client alert is based only on materials furnished in connection with the open meeting at which the amendments were adopted.
Upcoming Webcast:
Gibson Dunn also invites you to join James Moloney and other speakers, including the head of the SEC’s Office of Mergers & Acquisitions, as they discuss the recent amendments to the best price rule at a webcast, "The Evolving ‘Best Price’ Rule," on Thursday, December 6, 2006 (3:00-3:45 pm, Eastern). To register, please visit http://www.deallawyers.com/Webcast/2006_12_06/.
© 2006 Gibson, Dunn & Crutcher LLP
The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.