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From PLI’s Course Handbook

Doing Deals 2006: Understanding the Nuts & Bolts of Transactional Practice

#8440

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CHOOSING A DEAL STRUCTURE,

POWERPOINT PRESENTATION

Igor Kirman

Wachtell, Lipton, Rosen & Katz

Choosing a Deal Structure

Igor Kirman

891782_3.ppt

Acquisition Methods

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Broad Categories of Acquisition Agreements

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Purchase of Stock

Shareholders ofT

T(factory)

Purchaser

100% of stockof T

100%$50,000,000

FormerShareholders of

T($50,000,000)

After the closing:

Purchaser

T(factory)

100%

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Purchase of Assets

Shareholders ofT

factory andbank debt

100%

agreement by Purchaserto assume $30,000,000

bank debtT

(factory)Purchaser

$20,000,000

FormerShareholders of

T

After the closing:

Purchaser(factory)

100%

T($20,000,000)

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Forward Merger

Shareholders ofT

T(factory)

Purchaser T merges intoPurchaser

100%$50,000,000

FormerShareholders of

T($50,000,000)

After the merger:

Purchaser(factory)

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“Forward Subsidiary” Merger

Shareholders ofT

T(factory)

Sub T mergesinto Sub

100%

$50,000,000Purchaser

100%

FormerShareholders of

T($50,000,000)

After the merger:

Purchaser

Sub(factory)

100%

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“Reverse Subsidiary” Merger

Shareholders ofT

T(factory)

Sub Sub mergesinto T

100%

$50,000,000Purchaser

100%

FormerShareholders of

T($50,000,000)

After the merger:

Purchaser

T(factory)

100%

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Deal Structure driven by many factorsBasic Questions about Target .................... (a) Public Company/Private Company

(b) State of Incorporation

(c) What is Acquiror buying?

Corporate Law

(a) Target shareholder approval

(b) Acquiror shareholder approval

(c) Appraisal Rights

Tax

Considerati on is................................ ........... (a) Cash

(b) Stock

(c) Hybrid cash & stock /Other

Timing

Other ................................ ............................ (a) Third Party/Other Consents

(b) State Statutes

(c) Optical/political considerations

Acquiring a Public Company

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Short Form Merger

Long Form Merger

Short Form Merger

Long Form Merger

Acquisition Completed

Acquisition Completed

Acquisition Completed

Acquisition Completed

Acquisition Completed

Acquisition Completed

4-8 weeks

< 40 business days

3-5 months

5-12 weeks

3-6 months

2-3 months (all cash)

3-4 months (part/all stock)

1-2 months

Timing

Tender Offer/ Share Exchange

Offer

100% Cash

Part Cash/Part Stock

90%

< 90%

(but more than 50%)

90%

< 90%

(but more than 50%)

Filing of Articles of Merger

> 50% vote

of all shareholders

Filing of Articles of Merger

> 50% vote

of all shareholders

Merger(any form of

consideration)

Post Proxy

SECReview

NoSEC Review

Post Proxy

> 50% shareholder vote

> 50% shareholder vote

Methods of Acquisition of a Public Company

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Issues Tender/Share Exchange Offer Long Form Merger

Timing Shorter time to achieve control Maybe shorter time to achieve 100% ownership

Complexity Less complex than merger if 100% cashoffer

May be less complex than share exchange offerand “back end” merger if offer is all/part shares

Documentation Simpler documentation if 100% cash Detailed documentation proxy statementrequiring SEC pre-clearance

Success Does not guarantee immediateacquisition of 100% of target stock inthe tender offer

Achieve 100% ownership, or acquisition/mergerfails

Market practice Generally achieve control of target after20–40 business days

Achieve control after 2–4 months(4 months for SEC review of stock deal)

Regulatory clearance HSR waiting period is 15 days for a cashtender

HSR waiting period is 30 days for a merger

Tender offers are frequently used as the first step in the acquisition of all of a Target’s common equity and are typically followed by a “back-end” merger

A “back-end” merger is where the Bidder squeezes out the remaining shareholders for the same consideration offered to shareholders in the offer

– where at least 90% of Target’s stock is acquired, the Bidder can proceed to a short-form merger which only requires a filing of articles of merger with the Secretary of state of incorporation (and a mailing of an Information Statement) in order to squeeze out a minority interest; no shareholder vote is required

– where less than 90% is acquired, a >50% vote of the shareholders is required (a long-form merger)

Issues

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Illustrative Timelines

Share ExchangeOffer

Cash Tender Offer(minimum period)

(no subsequentoffering period)

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15Method ofAcquistion

Merger (Long Form)

Announcement Weeks from Announcement

Schedule TOand 14-D-9

mailed

HSRwaitingperiod

expires

Short-formor Long-form

merger

Tender offerexpires (shares

acquired)

Exchangeoffer mailed

andsubmitted to

SEC forreview

SEC reviewof S-4

SECcomments

Offerclosed

Short-formor Long-form

merger

Additional infocirculated

(if necessary)

Documentsdrafted

Draft S-4submitted

to SEC

SECcomments

IncorporateSEC

comments

ProxyStatement/Prospectus

mailed

Shareholdervote

Transactioncompletes

SEC reviewof S-4

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Benefits of a Tender Offer vs. a One-Step Merger

No Pre-Clearance. SEC pre-clearance of cash tender offer materials is not required.

Speed. A cash tender offer can be completed relatively quickly — 20 business days in the case of a friendly deal not involving any regulatory issues.

Direct. A tender offer is made directly to shareholders and does not require a shareholder meeting or board approval.

Freeze Out. A tender offer between parent/subsidiary can avoid entire fairness heightened review so long as certain conditions (e.g., majority of minority) are met.

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Benefits of a One-Step Merger vs. a Tender Offer 100% Ownership. A merger accomplishes 100% ownership in a single

step, which may be important for financing the transaction. A tender offer will require a second-step merger to acquire 100% of a public company.

Possible Timing Advantage. If regulatory approvals or other conditions delay consummation of a tender offer for more than approximately three to four months, a one-step merger can be completed more quickly than a two-step tender offer/merger that does not obtain tenders sufficient for a short-term merger.

Acquisition of Target Shares in the Market. A bidder is prohibited from acquiring shares outside of a tender offer. An acquiror not making a tender offer may acquire target shares during the pendency of its proposal subject to any applicable legal or contractual restrictions.

Best Price Litigation Risk. Bidders may be subject to litigation seeking extraordinary monetary damages for alleged violations of the “Best Price Rule.” SEC has recently proposed rule that would offer protection (includes safe harbor for determinations by target company committee that compensation type arrangements should be outside the rule).

The Impact of the Tender Offer Rules

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OVERVIEW OF THE WILLIAMS ACT

Section 13(d): Requires disclosure by persons or groups who acquire beneficial ownership of more than

5% of any publicly traded equity securities.

Section 13(e): Regulates purchases by an issuer of its own publicly traded securities, including purchases

subsequent to commencement of a tender offer or a self-tender offer.

Section 13(f): Requires disclosure by institutional investment managers exercising investment discretion

with respect to accounts holding Section 13(f) securities if the aggregate fair market value

of such account exceeds $100 million.

Section 13(g): Requires disclosure by institutional investors who acquire beneficial ownership of more

than 5% of any publicly traded equity securities and elect to file a Schedule 13G in lieu of a

Schedule 13D.

Section 14(d): Regulates substantive aspects of, and requires disclosure in connection with, tender offers

by bidders who, upon consummation of the tender offer, would beneficially own 5% or more

of a publicly traded equity security.

Section 14(e): Prohibits fraud and certain other practices in connection with a tender offer; including

establishing specific time periods for, and a target company’s disclosure obligations with

respect to, a tender offer.

Section 14(f): Requires disclosure if, other than at a shareholder meeting, majority control of a target

company’s board of directors is to be changed subsequent to a transaction subject to

Section 14(d) or 13(d).

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Schedule 13D Any person who acquires beneficial ownership of 5 percent or more of a class of equity

securities registered under Section 12 of the Exchange Act must file with the SEC a Schedule 13D within ten days.

A person “beneficially owns” any registered security if he either has or shares direct or indirect power to vote, sell, or determine the disposition of that security. A person is also deemed the beneficial owner of any securities that such person has the right to acquire within sixty days, e.g., upon exercise of an option or conversion or exchange of another security.

Section 13(d)’s filing requirements also apply to any “group” who beneficially owns 5 percent or more of a class of an issuer’s equity securities. A group is formed when two or more persons agree to act together to acquire, hold, vote, or dispose of securities.

The Schedule 13D must disclose information about: identity and background of each

filing person; number of shares of the target company that it beneficially owns; its purpose in acquiring those shares; any plans or proposals with respect to the issuer or its shares, etc.

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What is a Tender Offer? The Williams Act does not define the term “tender offer.”

The courts have used two tests to determine whether a series of purchases or offers constitutes a “tender offer” within the meaning of the Williams Act:

• Eight Factor Test — No single factor dispositive and you need not have all eight

factors.

– active and widespread solicitation of public shareholders; – solicitation for a substantial percentage of target’s stock; – offer made at a premium over the prevailing market price; – terms are firm rather than negotiable; – offer contingent on the tender of a minimum number of shares; – offer open for a limited period of time; – offeree subjected to pressure to sell stock; and– public announcements precede or accompany rapid accumulation of large amounts of

target’s stock.

• Totality of Circumstances Test

Some circuits focus on the totality of the circumstances to determine whether there is a likelihood that, unless Section 14(d) is complied with, there will be a substantial risk that shareholders will lack information needed to make a carefully considered appraisal of the bidder’s proposal/offer.

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Exchange OffersRules now permit third-party exchange offers to commence upon

filing of the registration statement. To commence offer early (before effectiveness), the bidder must: – file a registration statement including a preliminary prospectus

containing all information (including price) necessary to allow holders to make an informed investment decision;

– disseminate the preliminary prospectus to all security holders; and

– file a tender offer statement (Schedule TO) with the SEC.

Any securities tendered in the offer may not be purchased until after the registration statement becomes effective and the minimum 20 business day tender offer period (from commencement) has expired.

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Minimum & Subsequent Offering Period

Rule 14e-1(a) requires that a tender offer be held open to receive tenders for not less than 20 business days from the date it is first published or sent or given to security holders. There is no maximum offering period.

Rule 14e-1(d) provides that the only way a bidder may extend its offer is by issuing a public notice of extension, including disclosure of the approximate number of securities tendered to date, no later than 9:00 a.m., Eastern time (or if the class of subject securities is listed on any national securities exchange, the opening of trading on such exchange) on the next business day after the scheduled expiration date of the offer.

New Rule 14d-11 permits a bidder to provide an optional subsequent offering period after completion of a tender offer during which security holders may tender their shares without withdrawal rights (similar to extended offering period under U.K. law).

The requirements for a subsequent offering period:

• Initial tender offer must be for all outstanding shares.

• Bidder must announce results of initial offering period (shares tendered) and must accept and promptly pay for all securities tendered during the initial offering period at the closing of such period.

• The subsequent offering period is at the option of the bidder and, if provided, must be open at least 3 business days and not more than 20 business days. Bidder is not required to state in its initial tender offer whether or not it will provide a subsequent offering period.

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Announcement of Target’s Position

“Stop, Look and Listen” Communication - requests that shareholders defer making any determination whether to accept or reject the tender offer until they have been advised of the target company’s position with respect to the offer.

Rule 14e-2(a) requires the target, no later than 10 business days from date of commencement, to disclose its position with respect to the offer on Schedule 14D-9.

This applies whether the tender offer is friendly or hostile. However, it is customary in friendly deals for the target’s response to be filed and mailed simultaneously with the bidder’s materials.

The target board has four options: • it may affirmatively recommend acceptance of the offer; • it may affirmatively recommend rejection of the offer; • it may state that it is expressing no opinion and is remaining neutral; or• it may state (if such is the case) that it is unable to take a position.

The target is prohibited from making a recommendation or solicitation in response to the commencement of the tender offer unless it files its Schedule 14D-9 on the date of such communication.

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Best Price Rule – Rule 14d-10

The Best Price Rule: Rule 14d-10(a)(2) provides that “No bidder shall make a tender offer unless ... [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.”

Courts have differed over interpretations of what consideration is “pursuant to the tender offer” and as to the meaning of “during such tender offer.”

Judicial Approaches• Strict temporal standard• “Integral part of the offer” standard

If bidder violates the Best Price Rule, plaintiffs allege that bidder is required to pay the “higher” price to all shareholders.

• For example, if employee owns 10,000 shares, and receives a payment (e.g. consulting payment) of $1,000,000, plaintiffs allege that all shareholders should receive $100 per share.

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Rule 14d-10 Timing Considerations

Defining the time frame of the tender offer:• “Tender Offer” is not defined in the Federal securities laws.

• Date of Commencement - Under Rule 14d-2(a), a tender offer commences for purposes of the Best Price Rule “at 12:01 a.m. on the date when the bidder has first published, sent or given the means to tender to security holders.”

• Under Rule 14e-5, the prohibition on purchases outside the tender offer begins upon public announcement, not commencement.

• There is no rule that specifies when a tender offer will be deemed to have ended. Although tender offers are required to be kept open for 20 business days under Rule 14e-l, courts have declined to hold that the expiration date constitutes the end of the tender offer for purposes of the Best Price Rule.

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Rule 14d-10 – Selected Cases

Lerro v. Quaker Oats (Seventh Circuit 1996):• Court accepts a bright line rule as to the timing of tender offers for purposes of the

Best Price Rule:– A beverage distributor agreement with the controlling shareholder, executed prior to

commencement of the tender offer but subject to the successful completion of the tender offer, was not subject to the Best Price Rule.

Epstein v. MCA (Ninth Circuit 1995, reversed on other grounds):• A privately negotiated sale was deemed to be an integral part of the offer because the

terms of the privately negotiated sale were “in several material respects conditioned on the terms of the public tender offer.”

In re Digital Island Securities Litigation (Third Circuit 2004):

• Court adopts hybrid approach requiring courts to examine purpose of employment payments.

– Acquirer agreed to pay directors for their options and shares and CEO of the target entered into an employment agreement prior to the commencement of the tender offer. Court stated that plaintiffs must allege facts showing fraudulent intent to provide a premium to the directors and executives, in violation of the Best Price Rule.

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Rule 14d-10 -Selected Cases

In a number of instances, payments have not created Best Price Rule violations:

• Bidder’s failure to object to change in control and accelerated vesting agreements entered into three months before commencement of tender offer

• Agreement to pay retention bonuses after completion of merger• Agreement to cash out recently granted options• New employment agreements

Payments considered acceptable in one judicial circuit not necessarily acceptable in another judicial circuit, and neither bidders nor targets can effectively control the judicial circuit that will hear the case.

Inability to know in advance that complaint will be dismissed without a trial is a major practical problem.

SEC has promised relief, but has indicated that relief will not provide bright line test (as in Lerro v. Quaker Oats).

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SEC Has Proposed 14d-10 Reform

Clarify that the best-price rule applies only to the consideration paid for securities in a tender offer and that there is no time restriction on the rule’s application.

Include a specific exemption from Rule 14d-10 for the negotiation, execution or amendment of an employment, compensation, severance or other employee benefit arrangement if the amounts payable under the arrangement relate solely to past or future services or future services to be refrained from and are not based on the number of shares the executive owns or tenders.

In order to effectuate the above, the amendments would include a safe harbor for Rule 14d-10 to allow the compensation committee or other committee of the target’s or bidder’s board (depending on whether the target or the bidder is the party to the arrangement) to approve an employment, severance or other employee benefit arrangement and thereby have it deemed to satisfy the exemption described above.