Guest Article: New Rules for Pitching Yout Deal

The Securities and Exchange Commission (SEC) has significantly revised its rules covering takeover transactions in what it hailed as “the most sweeping reform in the area of mergers and acquisitions in a generation.” The new rules became effective January 24 of this year. The revisions: * Reduce the restrictions on communications with investors prior to filing the transaction disclosure documents with the SEC; * Balance the treatment of cash and stock tender offers; and * Conform the disclosure requirements applicable to various transaction structures. New Safe Harbor for Pre-Filing Communications Once a transaction is announced, both companies usually experience tremendous pressure to “defend or sell the deal” and share with investors information about the benefits and impact of the deal, often long before any required disclosure documents are filed with the SEC. Despite the pronounced demand for information, prior SEC rules permitted disclosure of only limited information until formal disclosure documents were filed. For instance, in the typical stock-for-stock merger, the SEC has been tight on early disclosure. It has viewed the acquirer’s substantive discussions with shareholders, analysts, and the financial press about expected synergies, pro forma projections of earnings accretion or dilution, planned restructurings, and the like as impermissible “gun-jumping” if the discussions preceded the filing of a registration statement. Similar concerns arose under the proxy and tender offer rules even if there was not a requirement for a registration statement to be filed. The SEC also has repeatedly expressed concern that these discussions may constitute impermissible “selective disclosure” if the information is not available to all investors. To satisfy both the stock market and the SEC, most companies walked a tightrope by engaging in discussions with the financial community for a short period – commonly two to seven days – after the announcement, followed by a “quiet period” until the registration statement was filed. In general, the SEC tolerated this practice, although the agency never officially sanctioned it. Under the new m&a rules, companies may share information with investors and analysts about the deal at any time if certain safe-harbor precautions are taken. The new safe harbor applies to cash tender offers, stock tender offers (i.e., exchange offers), and mergers. Targets of tender or exchange offers have the same communication rights as bidders under the safe harbor. However, targets must continue to take a position with respect to the offer and file with the SEC a formal recommendation statement within 10 business days after the offer begins. The new rules should be particularly useful for a target in a hostile situation in which it wants to get its message out before a raider formally commences its tender offer. Companies taking advantage of the safe harbor must: * File all written communications with the SEC on or prior to the date they are first used; * Include a legend on all written communications advising investors to read the applicable disclosure document; and * Forego the ability to make preliminary proxy filings with the SEC on a confidential basis in cases in which a proxy statement is required. Merging companies will need to monitor closely what they say and how they say it if they wish to use the safe harbor. For example, the SEC has indicated that written scripts read to analysts at the beginning of a conference call are “written communications” that are required to be filed with the agency. The SEC also has said that other media such as slide shows, videos, and CD-ROMs must be filed as written communications. As technology evolves, the SEC in all likelihood will be providing further guidance on what constitutes a written communication. Changes to the initial disclosure also must be filed with the SEC under the new rules. For instance, companies that conduct quarterly analyst calls while a transaction is pending may be required to file scripts or slides used in the call to discuss information about the deal that was not previously filed. Acquirers will have to monitor these and other communications as they refine their plans for the target between announcement and closing. Because written communications must be filed with the SEC on or prior to “first use,” the companies will need to carefully coordinate their public communications. In the fast-paced world of m&a, this immediate filing requirement may prove to be a logistical challenge for some companies. The filing requirements apply only to written communications made in connection with a proposed transaction. Factual business information relating only to ordinary business matters does not have to be filed. Under the old rules, preliminary proxy statements for merger transactions could be filed confidentially with the SEC. According to the new rules, companies that prefer to file confidentially are limited to “bare-bones” pre-filing communications. As a practical matter, it is likely that market forces will push many companies to communicate in a manner that goes well beyond these highly restrictive limits and therefore to pass up the confidential filing option. Firms with sensitive disclosure issues that they prefer to discuss with the SEC before a public filing may have to resort to informal means, such as pre-filing conferences with the SEC staff. Although there are no content restrictions under the new safe harbor, merging companies should be aware that all communications regarding the deal are subject to the anti-fraud and anti-manipulation provisions of U.S. securities laws. In addition, when filing of a registration statement is required, such as in stock deals, pre-filing oral communications and all written communications will be considered “offers” and “prospectuses” subject to the liability provisions of the securities statutes. As a technical matter, this arguably has always been the case. But the special filing requirements for written communications under the new rules are likely to focus the attention of the plaintiff’s bar, as well as competing bidders and besieged targets, on these communications. Communications Under The Proxy Rules The SEC also liberalized the restrictions on communications with shareholders involving proxy solicitations. Under the new rules, both written and oral communications are permitted before the proxy statement is filed as long as: * All written communications related to the proxy solicitation contain a legend advising shareholders to read the proxy statement and are filed on or before the date of first use; * There is adequate disclosure of the participants in the solicitation; and * A definitive proxy statement is furnished to shareholders when a form of proxy is either given to or requested from shareholders. These changes should be particularly welcomed by companies that want to mount solicitations. Under the prior rules, they had little room to maneuver in most instances short of filing a full-blown proxy statement. As part of its deliberations on the new rules, the SEC rejected a more liberal approach that would have permitted companies to make both oral and exempt solicitations as long as no form of proxy was requested or sent. However, the new rule is broad enough to accommodate solicitations with respect to proposals before proxy statements are filed. That should permit companies in some situations to orally “road-test” potential actions with selected shareholders in a confidential manner. Key Revisions Of Tender Offer Rules Repeal of the “Five-Day Rule” for Cash Tenders Before the changes took effect, a tender offer began when it was publicly announced unless the bidder filed and disseminated a tender offer disclosure document within five business days of announcement or publicly withdrew the offer. As a result, bidders had to file or withdraw the offer within the five-day period. To encourage dissemination of information about the transaction and put cash tender offers on the same footing as exchange offers and mergers, the SEC rescinded the “five-day” rule. But as a quid pro quo, companies now are required to file all written communications on the offer starting with the first public announcement. In addition, the SEC adopted a special anti-fraud rule dealing with tender offer announcements. Since the tender offer format is used to facilitate a swift closing, elimination of the five-day rule is unlikely to materially affect the typical friendly tender. The real bite of the change should come in contested or fluid settings where hostile or late-arriving bidders attempt to freeze the landscape by announcing a deal without having to incur the time and expense of filing tender offer documents within the five-day period. In addition, the new rule could be helpful in deals in regulated industries (e.g., banking, telecommunications, and utilities) that may go through a prolonged government approval process and for which there is little incentive to launch an immediate tender offer. The elimination of the five-day rule also obviates the need to obtain exemptive relief in cross-border transactions in which foreign regulations delay commencement of the offer. Subsequent Offering Period SEC rules require that tender offers remain open for at least 20 business days. Target shareholders have withdrawal rights while the offer is open. And when the offer expires, the bidder must promptly purchase and pay for the tendered shares if the conditions it imposed in the offer are satisfied or waived. Borrowing a page from tender offer practice in some foreign countries, such as the U.K., the new rules give bidders the option of extending the initial tender offer after it expires. The bidder is allowed to add a period of between three and 20 days – beginning immediately after the initial offer ends – to purchase additional shares. However, if the bidder gives the proper advance notice, shareholders who tender in the subsequent offering period will not have statutory withdrawal rights. This rule should have some marginal utility for bidders. State laws typically require a shareholder vote for “long-form” mergers unless the bidder owns a supermajority of the target shares (such as 90% for a Delaware company). If there is such a majority, the bidder can quickly do a “short-form” merger that bypasses a shareholder vote. If the bidder falls short of obtaining the minimum number of shares required to do a short-form merger and wants to buy the target’s remaining stock, it can go through the long-form merger process, which includes preparing and mailing the proxy or information statement required under proxy rules, or purchase additional shares via a new tender offer or open market or privately negotiated purchases to obtain the shares needed to complete a short-form merger. Alternatively, the bidder can extend the initial offer to obtain additional shares that would put it over the short-form threshold. This is the most frequent choice, but the move is undesirable because it delays completion of the tender offer and can even jeopardize the deal, since all tendering shareholders retain withdrawal rights during the extended offer period. The new rule now permits solicitation of shareholder “stragglers” without affecting the timing or completion of the initial offer. One downside of the new provision is that its prior-notice requirement may reduce the pressure most target shareholders experience when deciding whether to tender into an offer. This can create an inadvertent holdout problem for the bidder. If the shareholder believes the price is inadequate and does not tender in the initial period, a subsequent offering period assures it of another bite at the apple. A possible technique for minimizing the holdout problem is to impose conditions for extending the initial offering period, such as a condition that an extension be granted only if a minimum number of shares, just shy of the number needed to complete a short-form merger, is tendered in the initial period. However, the SEC staff recently indicated in informal discussions that this type of condition may not be acceptable. Exchange Offers May Commence on Filing A cash tender offer for all shares is usually the quickest transaction structure for acquiring a widely held target. Cash tender offer documentation is relatively simple and can be prepared quickly. No time is lost waiting for an SEC review of the filing because the offering period of 20 business days can start immediately upon filing. Second-step “cleanup” mergers usually can be accomplished fairly quickly after the tender offer is completed, especially if a short-form merger is available. Exchange offers involving stock generally take longer to complete. Applicable registration rules require more elaborate documentation and there is a waiting period while the SEC reviews and comments on the filing before the deal can be launched. Under current practice, even discounting the extra delays because of the SEC’s “plain English” review, the screening process can take up to one to two months. Therefore, the tender offer can lose much of its timing advantage when bidder securities are offered to target shareholders. In addition, many stock deals are designed to be tax-free and an exchange offer with a cleanup merger may be hard to do on a tax-free basis. For these reasons, aside from hostile bids, third-party stock deals structured as exchange offers are relatively rare. The SEC noted the regulatory bias in the favor of cash tender offers and attempted to level the playing field by making exchange offers easier to use. Some of the disclosure requirements affecting different deal structures have been simplified and made more uniform under the SEC’s new Regulation M-A. More importantly, exchange offers not subject to the agency’s “going-private” rules can be commenced, at the bidder’s election, at any time after preliminary documents are filed with the SEC and a preliminary prospectus is distributed to shareholders. This will start the 20-day clock before an SEC review occurs. Under the new rules, bidders using the “file-and-launch” approach may have to disseminate supplements to shareholders if the disclosure documents are amended in response to SEC comments. The new rules also prescribe minimum time periods for which an exchange offer must remain open after dissemination of a prospectus supplement. For a number of reasons, it remains to be seen whether these changes will substantially affect current practice. Disclosure documentation for stock deals, including exchange offers, will continue to be more complex than cash deals. Second, even under the new rules, bidders still cannot purchase target shares in the exchange offer until the SEC has declared the registration statement effective. This will complicate a bidder’s planning because it (and the marketplace) will not know how long the SEC will take to clear the registration statement. Third, depending on the nature of the SEC comments, the bidder may need to extend the offer and distribute costly disclosure supplements. This situation could create potential liability issues as a result of stock market activity occurring before the curative supplements are disseminated. Finally, as previously noted, the capital markets often seek fairly detailed information on expected synergies and other forward-looking information about the transaction. In adopting the new rules, the SEC expressly declined, at least for now, to extend the safe-harbor protections of the Private Securities Litigation Reform Act of 1995 to tender and exchange offers. This law provides broad protection for forward-looking statements made in deals structured as mergers. In some situations a bidder may not want to give up this liability protection to do a tender or exchange offer. In light of these considerations, the cash tender offer probably will remain the preferred deal structure for many bidders. And when stock is used as the acquisition currency, many bidders still may prefer the one-step merger structure rather than the two-step exchange offer/cleanup merger format. Nevertheless, the file-and-launch rule improves the climate for exchange offers. It will often be used in hostile and competitive bidding situations in which even a marginal timing advantage can be critical. It also should find use by bidders who are not deterred by an SEC review after launch, particularly when the deal does not involve sensitive disclosure issues. Because bidders can begin exchange offers at any time after they file preliminary SEC materials, some bidders may elect to wait and gauge the level of the review before going ahead. If the SEC can expedite reviews of exchange offers so that the comment process can be completed and supplemental information distributed to shareholders within the initial 20-day tender period, exchange offers may become even more attractive in the future. Despite its goal of harmonizing the treatment of stock and cash deals and tender offers and mergers, the SEC passed on the opportunity to extend the early commencement concept to shareholder votes on mergers. A bidder can mail a letter of transmittal and solicit tenders by using a preliminary offering document under the tender offer rules. But the bidder may not furnish a proxy card with preliminary proxy materials in a merger. There was no change in the requirement that proxy cards can only be sent to shareholders with definitive proxy materials. The SEC has indicated that it may revisit this discrepancy in the future. From a timing standpoint, the discrepancy makes a difference in states such as Pennsylvania that have control-share acquisition or other antitakeover statutes that often make tender offers unwieldy or impractical. Streamlining Disclosure Requirements In other areas, the SEC simplified and harmonized the sometimes-conflicting disclosure regimes governing different transaction structures, while requiring some additional disclosures by dealmakers. They include: * Creating a new tender offer schedule, which combines the old SEC disclosure forms for third-party and issuer tender offers into one schedule available for all tender offers; * Requiring a “plain English” summary of the deal terms; * Reducing in general the amount of financial information about itself that the bidder must provide in m&a transactions. In cash transactions, bidder financial information now is required only if it is material information for target shareholders (which it rarely is). Bidder information is not required in cash tenders if the offer is not subject to a financing condition and either the bidder seeks all the target shares or is a public company that files reports with the EDGAR system; * Eliminating a requirement for providing financial and other information on the target if the acquirer’s shareholders are not voting on the deal; * Relaxing the requirements to provide financial statements for targets that don’t report to the SEC, such as private companies; * Requiring more detailed disclosure of the bidder’s financing plans; * Requiring bidders planning friendly two-step transactions under certain circumstances – such as a cash tender offer followed by a cleanup merger with securities to be swapped in the merger – to file pro forma financial information; and * Clarifying the limited circumstances under which a bidder or target can purchase securities of the target during a tender offer.