Overview of Tender Offers

By Amy Bowerman Freed and Alexander B. Johnson

June 2007

Overview of Tender Offers
Various types of transactions may implicate the tender offer rules, including acquisition transactions, debt or equity repurchases and certain debt restructurings. As such, practitioners should have a general familiarity as to what may constitute a tender offer and some of the rules applicable to tender offers.
 
A. Definition of Tender Offer. The Williams Act was passed in 1968 to protect shareholders in the course of takeovers and tender offers by granting the SEC and the courts the power to manage problems that arise. The Act does not, however, define what constitutes a "tender offer." This has allowed the SEC and the courts to continue to apply the tender offer rules to novel transaction structures that might not have been covered by a conventional definition.
 
1. Wellman Test. In Wellman v. Dickinson, 475 F.Supp. 783, 823-24 (S.D.N.Y. 1979), aff'd on other grounds, 682 F.2d 355 (2d Cir. 1982), cert. denied, 460 U.S. 1069 (1983), the court set forth and approved the use of eight factors suggested by the SEC to determine whether a series of purchases constitutes a "tender offer" (the so-called "Wellman test"). Not all of the following eight factors need be present:
 
a) Active and widespread solicitation of public shareholders;
 
b) Solicitation made for a substantial percentage of the target's stock;
 
c) Offer is at a premium to the prevailing market price;
 
d) Terms are fixed rather than negotiable;
 
e) Offer contingent on the tender of a fixed minimum number of shares to be purchased;
 
f) Offer is only open for a limited period of time;
 
g) Offerees are subjected to pressure to sell their stock; and
 
h) Public announcements of a purchase program for the target's securities precede or accompany rapid accumulation of large amounts of the target's securities.
 
2. Other Factors. Other courts have also focused on whether there is a likelihood that, unless the tender offer rules are complied with, there will be a substantial risk that persons solicited will lack information needed to make a carefully considered appraisal of the bidder's proposal. See Rand v. Anaconda-Ericsson, Inc., 794 F.2d 843, 848-49 (2d Cir. 1986), cert. denied, 479 U.S. 987 (1986) (citing Hanson Trust PLC v. SCM Corp., 774 F.2d 47 (2d Cir. 1985)).
 
B. Applicable Rules.
 
1. Third Party Tender Offers. Section 14(d)(1) of the Securities Exchange Act of 1934 requires compliance with certain disclosure and filing requirement in connection with any tender offer for more than five percent of a class of equity security registered pursuant to Section 12 of the Securities Exchange Act of 1934, as well as certain securities of insurance and investment companies. The principal filing, dissemination and disclosure requirements with respect to third party tender offers are set forth in Regulation 14D under the Securities Exchange Act of 1934.
 
2. Issuer Tender Offers. The provisions of Section 14(d) and Regulation 14D do not apply to a tender offer by an issuer for its own the securities. Such tender offers are instead subject to Rule 13e-4 which, in addition to prescribing filing, disclosure and dissemination requirements for tender offers by an issuer for its own equity securities, also duplicates some of the antifraud provisions contained in Regulation 14E. Rule 13e-4 applies to issuers with any class of equity security registered pursuant to Section 12 of the Securities Exchange Act of 1934 or that are required to file periodic reports under Section 15(d) of the Securities Exchange Act of 1934, as well as to certain investment companies.
 
3. General. Regulation 14E under the Securities Exchange Act of 1934 contains procedural and antifraud provisions applicable to all tender offers - i.e., not just to tender offers involving registered securities.
 
C. Commencement and Dissemination of Tender Offers.
 
1. Date of Commencement of a Tender Offer - Rule 14d-2:
 
a) A bidder is considered to have commenced its tender offer on the date it has first published, sent or given the means to tender to security holders.
 
b) However, a communication by a bidder will not constitute commencement of the tender offer if:
 
(1) The communication does not include the means for the target's shareholders to tender; and
 
(2) All written communications from and including the first public announcement of the tender offer are filed on a Schedule TO no later than the date of the communication. The bidder must also deliver to the target and any other bidders its first communication relating to the tender offer filed with the SEC.
 
(A) Any communications in connection with registered exchange offers need only be filed under Rule 425 under the Securities Act of 1933 and will be deemed filed for purposes of Rule 14d-2.
 
2. Cash Tender Offers and Exempt Securities Offers - Rule 14d-4(a). As soon as practicable on the date of commencement of a tender offer, a bidder must publish, send, or give the disclosure required by Rule 14d-6 by complying with any of (a), (b) or (c) of the following:
 
a) Long Form Publication. The bidder may publish a long form publication that includes all of the information that is required to be filed on the Schedule TO (with the exception of the exhibits thereto).
 
b) Summary Publication. The bidder may (except in connection with a tender offer subject to Rule 13e-3) publish a summary advertisement of the tender offer and promptly furnish the bidder's tender offer materials to any shareholder who requests them. The summary advertisement must at least contain the following information:
 
(1) The identity of the bidder;
 
(2) The identity of the target;
 
(3) The amount and class of securities sought and the type and amount of consideration offered;
 
(4) The scheduled expiration date of the tender offer, whether a subsequent offering period will be offered, whether the tender offer may be extended and, if so, the procedures for extension of the tender offer;
 
(5) Withdrawal right dates and the method of withdrawal or payment;
 
(6) The manner in which the securities will be accepted for payment;
 
(7) An explanation of any material differences in the rights of the shareholders as a result of the transaction, if material;
 
(8) A statement regarding the accounting treatment of the transaction, if material;
 
(9) The federal income tax consequences of the transaction, if material;
 
(10) For partial tender offers, the pro rata selection period and selection intentions of the bidder if oversubscribed and whether the bidder intends to acquire or influence control of the target;
 
(11) A statement that certain items of Schedule TO are incorporated by reference;
 
(12) Instructions as to how to obtain the bidder's tender offer materials; and
 
(13) If the tender offer materials will be sent to shareholders pursuant to use of a shareholder list, a statement that such dissemination will occur and that a shareholder list has been requested.
 
c) Use of Stockholder Lists and Security Positions Listings. If the bidder chooses to use either security position listings or stockholder lists obtained from the target pursuant to Rule 14d-5 to disseminate the information directly to shareholders, it must also either satisfy the long-form publication or summary advertisement requirements on or before the date of the bidder's request.
 
d) Adequate Publication. Adequate publication for purposes of long form or summary publication depends on the facts and circumstances involved; publication in all editions of a daily newspaper with a national circulation is adequate.
 
3. Registered Securities Offers - Rule 14d-4(b).
 
a) Basic Rule. For tender offers where the consideration consists solely or partially of securities registered under the Securities Act of 1933 (so-called "exchange offers"), a registration statement must have been filed and a preliminary prospectus (or a prospectus meeting the requirements of Section 10(a) of the Securities Act) must be delivered to the shareholders. As such, a registration statement need not have become effective for an exchange offer to be commenced (this was not the case prior to amendments to the tender offer rules in January 2000).
 
b) Going-private transactions. Unlike the basic rule, for going-private transactions (as defined by Exchange Act Rule 13e-3) and roll-up transactions (as described by Item 901 of Regulation S-K), a registration statement must have become effective and only a prospectus that meets the requirements of Section 10(a) may be delivered to shareholders on the date of commencement.
 
4. Obtaining a Shareholder List - Rule 14d-5.
 
a) Rule 14d-5. A target must respond within two business days of a bidder's written request for a shareholder list, with notice of the target's election to either mail the tender offer materials or provide a shareholder list to the bidder. If the target elects to mail the tender offer materials, it must do so within three business days of receiving those materials.
 
b) State law. Under the law of many states, a bidder may obtain a shareholder list upon proper request.
 
D. Disclosure and Filing Requirements.
 
1. Regulation M-A. To promote consistency in filings with the SEC, disclosure requirements for issuer tender offers, third-party tender offers and going-private transactions are set forth in Regulation M-A, which is cross-referenced throughout the applicable rules.
 
2. Filing and Disclosure - Rule 14d-3. A bidder may not make a tender offer unless it:
 
a) Files a Schedule TO with the SEC (amendments must be filed promptly if material changes occur in the information set forth in the Schedule TO);
 
b) Delivers a copy of the Schedule TO to the target and any other bidders who filed a Schedule TO; and
 
c) Gives oral notice of certain information required by Rule 14d-6 and mails a copy of the Schedule TO to any exchange on which the target's securities are listed (e.g., NYSE, AMEX) and the NASD if the securities are traded on NASDAQ.
 
3. Schedule TO. Schedule TO, by reference to sections of Regulation M-A, generally requires disclosure of the following information:
 
a) A summary term sheet with the material terms of the transaction;
 
b) The target's identity, address, and telephone number;
 
c) Information about the target's securities subject to the tender offer including the title and number outstanding, and the securities' trading market and price on that market;
 
d) The filer's identity, address, telephone number, business and background;
 
e) The information required for summary publication in C.2.b)(3)-(11) above;
 
f) If an issuer tender offer, the details of any purchases of securities from officers, directors or affiliates of the target;
 
g) Certain contacts, transactions and negotiations between the bidder and the target company;
 
h) The purpose of the tender offer and the plans or proposals of the bidder with respect to the target;
 
i) The source of the bidder's funds or other consideration for the purchase of the securities;
 
j) The amount of securities of the target beneficially owned (identifying those shares for which there is a right to acquire) and any transactions in such class of securities within the preceding 60 days by such persons or their executive officers, directors or subsidiaries;
 
k) Persons employed, retained or to be compensated by the bidder to make solicitations or recommendations in connection with the tender offer;
 
l) The financial statements of the bidder if it is an entity, or net worth if a natural person;
 
m) Financial information concerning the bidder if it is material;
 
n) Information about material agreements, regulatory compliance, litigation and antitrust laws or margin requirements;
 
o) Certain exhibits, including disclosure materials, loan agreements, tax opinions, prospectuses, and instructions to solicitors; and
 
p) If a Schedule TO is combined with Schedule 13E-3 (for going-private transactions), the filer must provide the information required by Schedule 13E-3 that is not included in the Schedule TO.
 
4. The bidder must file with the SEC a final statement on Schedule TO reporting the results of the tender offer.
 
E. Regulation of Bidder Tender Offer - "Traffic Rules."
 
1. Expiration Date - Rule 14e-1(a). A tender offer is required to remain open at least until midnight on the 20th business day from the date of commencement. For an offer to be "open," the bidder must be willing to accept shares for deposit each day during the 20 business-day period. In a hostile tender offer, the 20 business-day period begins on the date when the bidder files a Schedule TO and begins dissemination of the offer by making a request to the target under Rule 14d-5 to obtain a shareholder list and, in the case of an exchange offer, files a registration statement containing all required information
 
2. Pro-Ration - Rule 14d-8. Where a tender offer is over-subscribed, a bidder who commences a partial tender offer must accept all securities tendered during the entire period the tender offer remains open on a pro rata basis according to the number of shares tendered by each tendering shareholder.
 
3. Withdrawal Rights - Rule 14d-7 and Section 14(d)(5). Withdrawal rights must be provided to shareholders during the entire period the tender offer is open, but not during a subsequent offering period.
 
4. Amendments.
 
a) Specified Material Changes - Rule 14e-1(b). A tender offer must remain open at least 10 business days from the date there is an increase or decrease in the consideration offered, the percentage of securities sought in the tender offer (other than increases of 2% or less) or the dealer's soliciting fee.
 
b) Other Material Changes. The minimum period during which an offer must remain open following other material changes in the terms of the tender offer or information concerning the tender offer will depend upon the facts and circumstances of the change, but is generally a minimum of five business days unless the change rises to the level of significance of the types of items requiring a 10 business day extension.
 
5. All Holders Rule - Rule 14d-10. A tender offer must remain open to all shareholders of the class of securities subject to the tender offer.
 
6. Best-Price Rule.  Under Rule 14d-10, the consideration paid to any shareholder must be the highest consideration paid to any other shareholder during the offer. Because conflicting court decisions have created uncertainty about the rule's application to some compensatory and commercial arrangements with parties who are also security holders, on December 16, 2005 the SEC proposed long-awaited amendments to the best-price rule to clarify that it applies only with respect to consideration offered and paid for securities tendered in a tender offer and not to these other arrangements.
 
7. Prompt Payment Requirement - Rule 14e-1(c). A bidder is required to pay the consideration offered or to return the securities deposited by shareholders promptly after the termination or withdrawal of the tender offer.
 
8. Subsequent Offering Period - Rule 14d-11. A bidder may elect to provide a subsequent offering period of 3 to 20 business days during which tender offers will be accepted if certain requirements are satisfied.
 
F. Target's Response to Tender Offer.
 
1. Rule 14e-2 requires the target company to state its position on a tender offer within ten business days of the commencement of the offer. Specifically, the target must disclose that the target:
 
a) Recommends acceptance or rejection of the offer;
 
b) Expresses no opinion and is remaining neutral toward the offer; or
 
c) Is unable to take a position with respect to the offer.
 
2. Rule 14d-9 requires the management of a target company and certain other non-bidder groups or persons who make recommendations or solicitations with respect to an offer to file with the SEC and deliver to the bidder and target company shareholders a Tender Offer Solicitation/Recommendation Statement (Schedule 14D-9). A Schedule 14D-9 includes the following disclosure:
 
a) The target's identity, address, and telephone number;
 
b) Information about the target's securities subject to the tender offer including the title and number outstanding;
 
c) The filer's identity, address and telephone number;
 
d) Identify the tender offer and class of securities to which it relates, the name of the bidder, and the bidder's address;
 
e) Any material agreements, arrangements or understandings and any actual or potential conflicts of interest between the filer and the target or bidder;
 
f) The nature of the recommendation or solicitation, whether the recommendation is for acceptance or rejection of the tender offer, whether the person expresses no opinion, or is unable to take a position with respect to the tender offer, and the reasons for that position;
 
g) To the extent known by the filer, whether the filer, any executive officers, directors, affiliates or subsidiaries intend to tender their shares;
 
h) The identity of any persons employed, retained or to be compensated by the filer to make solicitations or recommendations;
 
i) Any transactions in the subject securities within the past 60 days by the filing person and its executive officers, directors and affiliates;
 
j) If the filer is the target, whether any negotiation is being undertaken or is underway by the target in response to the tender offer which relates to or would result in an extraordinary transaction, purchase, sale or transfer of a material amount of assets of target or its subsidiaries or material change in the target's capitalization or dividend policy; and
 
k) Exhibits include: disclosure materials, documents regarding conflicts of interest, and instructions to solicitors.
 
3. Amendment. Schedule 14D-9 must be amended to promptly disclose any material change in information previously filed.
 
4. "Stop-Look-and-Listen" Announcements. Rule 14d-9(f) excludes preliminary public announcements made by a target to its shareholders from the filing and dissemination requirements of Rule 14d-9 provided such announcement does not include anything other than the following information:
 
a) Identification of the tender offer by the bidder;
 
b) Statement that the tender offer is under consideration by the target's board of directors and/or management;
 
c) Statement that on or before a specified date (no later than 10 business days after the commencement date of such tender offer) the target will advise its shareholders either of its recommendation or its decision not to express an opinion toward such tender offer and the reasons for its recommendation or neutral position; and
 
d) Request that the shareholders defer decision until learning the target's recommendation.
 
G. Regulation of Issuer Purchases of Its Own Securities - Rule 13e-1.
 
After receiving notice of a bidder's tender offer, a target may not repurchase its own equity securities during the tender offer unless the bidder has filed with the SEC a disclosure statement that contains the following information:
 
1. The title and amount of securities to be purchased;
 
2. The persons from whom purchases are to be made;
 
3. The market on which the securities are to be purchased;
 
4. The purpose of the purchases;
 
5. The treatment of the securities to be purchased (e.g., retirement, treasury stock); and
 
6. The source and amount of funds used to make the purchases.
 
H. Antifraud Provisions.
 
1. Section 14(e). Section 14(e) provides a cause of action for material misrepresentations and omissions made in connection with a tender offer. The Supreme Court has held that Section 14(e) is not a basis for regulating the substantive fairness of tender offer terms beyond issues of misrepresentation and nondisclosure.
 
a) Rule 14e-3(a) provides that after a bidder takes a substantial step toward commencing a tender offer, any person other than the bidder in knowing possession of material, nonpublic information relating to the tender offer may not purchase or sell the tender offer securities unless within a reasonable time prior to any such purchase or sale the information is publicly disclosed.
 
b) Rule 14e-3(d) provides that the bidder, the target and their officers, directors, partners, employees, advisors and persons acting on their behalf may not communicate material, nonpublic information relating to the tender offer to any other person where it is reasonably foreseeable that the communication is likely to result in a violation of the antifraud provision, unless the communication is made in good faith.
 
2. Partial Offers and Rule 14e-4. Rule 14e-4 prohibits certain transactions (e.g., short tendering and hedged tendering) in connection with partial tender offers.
 
a) "Short tendering" occurs where a person tenders securities that the person does not own or have the right to acquire. This typically occurs in a partial tender offer in order to hedge against pro rata acceptance.
 
b) "Hedged tendering" occurs where a person tenders to a partial tender offer and then sells those shares that such person estimates will be returned unaccepted by the bidder.
 
3. Prohibited Pre-Commencement Communications - Rule 14e-8. This rule prohibits bidders from announcing a tender offer:
 
a) Without the intention to commence the offer within a reasonable time and complete the offer;
 
b) With the intention of manipulating the price of the bidder or target's stock; or
 
c) Without a reasonable belief that the person will have the means to purchase the securities sought.
 
4. Mini-Tender Offers. A mini-tender offer is a tender offer that results in the bidder holding not more than five percent of a company's securities. Such offers are structured to avoid the filing and disclosure requirements mandated by Section 14(d) and Regulation 14D. They are, however, subject to the disclosure requirements of Section 14(e) and Regulation 14E. The SEC is concerned that these disclosure requirements are inadequate in disseminating relevant information to shareholders. Consequently, the SEC has recommended that bidders consider specific issues in preparing disclosure documents for shareholders. See Exchange Act Release No. 43069 (July 24, 2000).
 
5. Limited Partnership Tender Offers. Similar to mini-tender offers above, the SEC believes that more adequate disclosure requirements are needed in disseminating information to shareholders. Specifically, bidders should disclose the particular risks and conflicts of interest that arise in such tender offers. See Exchange Act Release No. 43069 (July 24, 2000).
 
6. Other Antifraud Rules.
 
a) Rule 10b-5 prohibits any person by the use of interstate commerce, the mails, or a facility of a national securities exchange to defraud, make an untrue statement of material fact, omit a statement of material fact necessary to prevent a statement from being misleading, or engage in any practice operating as a fraud or deceit, in connection with the purchase or sale of a security.
 
b) Rule 102 of Regulation M generally prohibits an issuer from purchasing any of its securities when it is engaged in a distribution of those securities.
 
c) Rule 10b-18 provides a safe harbor from the anti-manipulation provisions of the federal securities laws for issuers and certain related purchasers who comply with certain conditions in connection with open market purchases of the issuer's equity securities.
 
I. Cross-border Tender and Exchange Offers, Business Combinations and Rights Offerings.
 
The SEC has adopted exemptive rules for tender and exchange offers, business combinations and rights offerings relating to the securities of foreign issuers. These rules are intended to encourage issuers and bidders to extend such offers to U.S. shareholders of foreign private issuers. In the past, U.S. shareholders were often excluded from these types of transactions so that bidders could avoid application of the U.S. securities laws. The new rules, however, are intended to encourage foreign private issuers to treat U.S. shareholders similarly to other shareholders. There are five specific exemptions.
 
1. Tier I Exemptions - Tender offers for the securities of foreign private issuers are exempt from most provisions of the Exchange Act and rules governing tender offers when U.S. shareholders hold 10% or less of the subject securities, excluding all 10% and greater security holders and all securities held by the bidder from both the numerator and denominator in the calculation. Anyone who has an obligation to file Schedule 14D-9, including bidders, the target company, officers and directors, may rely on the exemption.
 
2. Tier II Exemptions -- When U.S. shareholders hold 40% or less of the class of securities of the foreign private issuer sought in the offer, certain exemptions exist to eliminate frequent areas of conflict between U.S. and foreign regulatory requirements.
 
3. Rule 801 - Equity securities issued in rights offerings by foreign private issuers are exempt from the registration requirements of the Securities Act, if U.S. shareholders own 10% or less of the issuer's securities that are the subject of the rights offering on the 30th day before commencement..
 
4. Rule 802 - Securities issued in exchange offers or business combinations for foreign private issuers are exempt from the registration requirements of the Securities Act, if U.S. shareholders hold 10% or less of the target securities on the 30th day before commencement.
 
4. Rule 14e-5 - Tender offers for the securities of foreign private issuers that fall within the Tier I Exemption will also be exempt from Rule 14e-5 (formerly Rule 10b-13) of the Exchange Act, which prohibits a bidder from purchasing securities except as part of the tender offer.
 
5. To the extent that a foreign private issuer needs additional relief from the tender offer rules, the SEC has indicated that it will also consider applications for exemptive relief on a case-by-case basis.