United States: SEC Proposes Amendments To Tender Offer "All-Holders, Best-Price" Rule

On December 14, 2005, the U.S. Securities and Exchange Commission (SEC) proposed amendments to the tender offer "all-holders, best-price" rule (contained in rules 14d-10 and 13e-4 under the Exchange Act), which currently requires that "consideration paid to any security holder pursuant to a tender offer is the highest consideration paid to any other security holder during such tender offer." The long-awaited amendments are aimed at resolving significant uncertainties with respect to the application of the rule to employment, severance, bonus, non-compete and comparable arrangements entered into with target company director/employee stockholders in third-party and issuer tender offers.

The uncertainty surrounding various U.S. circuit courts' application of the existing rule to employment, severance, bonus, non-compete and other comparable types of arrangements (and the significant damages that an acquiror could face if found to have breached the rule) has created significant disincentives for acquirors to structure transactions as tender offers.

For example, some circuit courts have adopted an "integral to the offer test." Typically, when courts apply this test, they are unable to dismiss complaints alleging that payments made to director/employee stockholders for employment and other comparable arrangements in a tender offer (before the commencement or after the consummation) should be included in calculating the consideration paid to the director/employee stockholder for his or her shares. Other circuit courts have adopted a strict "bright-line" timing test whereby payments made prior to commencement or after consummation of a tender offer do not fall within the ambit of the "all-holders, best-price" rule. However, the plaintiff has free choice over forum selection, which further exacerbates the problem because acquirors have no control as to which circuit court will (and consequently which test will be used to) determine the merits of the claim.

If an acquiror breaches the rule, then the acquiror must pay the highest amount it paid to any director/employee stockholder (including pursuant to employment or any other arrangement described above) to all stockholders.

The SEC’s proposed amendments revise the current rule to read as follows: "the consideration paid to any security holder for securities tendered in the tender offer . . . [must be] the highest consideration paid to any other security holder for securities tendered in the tender offer" (emphasis added).

Through its proposed revisions, the SEC hopes to clarify what it believes is the true intent of the "all-holders, best-price" rule and to refocus the courts’ attention on the price paid for the securities and not on other payments made to director/employee stockholders of the target at or around the time of the tender offer (as long as such other payments were not made to acquire their securities).

In addition to clarifying the wording of the rule itself, the proposed amendments provide a specific exemption to the rule in the context of third-party tender offers for the "negotiation, execution, or amendment of an employment compensation, severance, or other employee benefit arrangement, or payments made or to be made or benefits granted or to be granted according to such arrangements" with respect to director/employee stockholders of the target company. The exemption applies if the amount payable under such arrangements:

• Relates solely to past services performed or future services to be performed or refrained from (i.e., non-competition and similar covenants) by the director/employee stockholder

• Is not based on the number of target company securities the director/employee stockholder owns or tenders

This exemption would be available to agreements entered into either by the acquiror or target company. Although the proposed amendments do not contain an exemption for non-compensatory arrangements (such as commercial arrangements), they do instruct that the lack of such an exemption should not suggest that the non-compensatory arrangement constitutes consideration paid for securities tendered in an offer.

The proposed amendments also create a non-exclusive safe harbor for third-party tender offers if an independent compensation committee of the acquiror or target’s board of directors (depending upon which entity is party to the arrangement) approves the employment or other compensatory arrangement as meeting the requirements of the exemption described above.

If adopted, we would expect that transaction parties would structure any and all new or modified compensatory arrangements to fit within the safe harbor in order to "perfect" the exemption afforded by the amended rule.

The SEC is accepting comments on the proposed amendments to the "all-holders, best-price" rule through February 21, 2006 (available at http://www.sec.gov/rules/proposed/34-52968.pdf).

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