SEC posts tender offer "best-price" proposal
By: Cydney Posner
The SEC has posted its proposal to clarify the tender offer best-price rules. The proposed rules make clear that the best-price rule applies only to consideration offered and paid for securities tendered in an issuer or third-party tender offer and not to consideration offered and paid in connection with employment compensation, severance or other employee benefit arrangements entered into with employees or directors of the target company. The SEC has also proposed a safe harbor (applicable only to third-party tender offers) that would allow the compensation committee of the target or bidder, depending upon which company is party to the arrangement, to cause a compensatory arrangement to fall within the safe harbor just by approving it as within the rule.
The best-price rule provides that no bidder shall "make a tender offer unless: (1) [t]he tender offer is open to all security holders of the class of securities subject to the tender offer; and (2) [t]he consideration paid to any security holder pursuant to the tender offer is the highest consideration paid to any other security holder during such tender offer." There has been a significant amount of litigation relating to whether compensation and benefits paid to employees and directors of the target company should be viewed as part of the consideration paid "pursuant to the tender offer," and the courts have split as to the outcome, depending primarily upon whether they followed the bright-line test (which looks only at amounts paid during the time span of the tender) or the integral-part test (which looks at all integral elements of the tender, including compensation and commercial arrangements, regardless of when paid). This split among the courts has led to substantial uncertainty, with the result that some counsel have favored structuring transactions as statutory mergers instead of tender offers.
The proposed amendments to the best-price rule do not follow either the integral-part or the bright-line test. Instead, the proposed amendments would focus on whether any consideration paid to security holders for securities tendered into an offer is the highest consideration paid to any other security holder for securities tendered into the tender offer. Although the SEC does not believe that the rule should be limited to a specified time period, it does believe that the fact that most recipients of compensatory payments are security holders is "pure happenstance" and that such payments would be made to the recipients whether or not they were security holders. Accordingly, the proposed amendments take the position that the best-price rule was not intended to apply to consideration paid pursuant to arrangements, including employment compensation, severance or other employee benefit arrangements, so long as the consideration paid pursuant to these arrangements was not to acquire the securities of persons that happen to be security holders.
Proposed amendments to Rules 13e-4(f)(8)(ii) and 14d-10(a)(2)
Specifically, the proposal would revise the best-price rule to state that a bidder shall not make a tender offer unless "[t]he consideration paid to any security holder for securities tendered in the tender offer is the highest consideration paid to any other security holder for securities tendered in the tender offer." To clarify the intent, the clause "for securities tendered in the tender offer" would replace the current clauses "pursuant to the tender offer" and "during such tender offer."
Proposed amendments to Rule 14d-10©
The proposal also includes revisions to Rule 14d-10 to include a specific exemption from the third-party best-price rule for the following:
"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 employees and directors of the subject company, where the amount payable under the arrangement:
The arrangements need not be for the purpose of providing incentives with respect to future performance, but may also be designed, for e.g., to persuade departing employees to relinquish or renegotiate long-term employment contracts, golden parachutes and other arrangements. The fact that an arrangement does not fall within the exemption (for e.g., commercial arrangements) would not raise any inference that the arrangement constitutes consideration paid for securities tendered in a tender offer. If the payments to be made pursuant to an arrangement are "proportional to or otherwise based on the number of securities" held by the employee or director, then this relationship between the payment and the securities would defeat the purpose of the exemption and would, accordingly, subject the payments to the application of the third-party best-price rule.
(i) relates solely to past services performed or future services to be performed or refrained from performing, by the employee or director (and matters incidental thereto), and
(ii) is not based on the number of securities the employee or director owns or tenders."
Compensation committee safe harbor
To provide increased certainty, the SEC has proposed a non-exclusive safe harbor providing that an arrangement will be deemed an employment compensation, severance or other employee benefit arrangement if it is approved as meeting the requirements of paragraphs (c)(2)(i) and (ii) of the exemption described above by the compensation committee of the target or bidder (depending upon whether the target or bidder is a party to the arrangement) or, if there is no compensation committee, by the committee of the applicable board (including a newly constituted committee) that performs functions similar to a compensation committee, which committee, in each case, must be composed solely of independent directors. The independence standards for compensation committee members as defined in the listing standards applicable to listed issuers should be used or, if the bidder or target, as applicable, is not a listed issuer, the bidder or target would use a definition of independence of a national securities exchange or a national securities association, so long as the chosen definition is used consistently for all members of the compensation committee. The SEC believes that board fiduciary duties, together with recent corporate governance advances, should provide the necessary safeguards. The SEC notes that any action by a compensation committee or other group of directors that violates a fiduciary duty generally would be an issue of state law, but would not necessarily result in a violation of the third-party best-price rule.