Tender Offer Considerations For Cash Repurchases And Exchange Offers (Part 1)

A key consideration in developing any liability management strategy is the extent to which the SEC's tender offer rules apply to contemplated transactions, given that these rules can substantially affect the manner in which a transaction is conducted, the timing of the transaction, as well as the issuer's ability to conduct other transactions in its securities around the time of the tender offer. The tender offer rules can apply when a company is offering securities and/or cash for its outstanding securities, and the level of regulation of the offer (in terms of timing and mandated procedural protections) varies depending on the type of security that is the subject of the offer. In the case of exchange offers, the tender offer rules may apply in addition to the requirement that the issuer must either register the transaction or meet the conditions for an exemption under the Securities Act of 1933, as amended (the "Securities Act"). We discuss other federal securities law and tax considerations for liability management transactions in our News Bulletin titled "Liability Management: Is Now the Time to Rebalance Your Balance Sheet." In this news bulletin, we focus on the applicability of tender offer rules to potential liability management alternatives, including cash tender offers and exchange offers for outstanding securities.¹

I. Tender Offer Requirements

A. Defining the Tender Offer

The comprehensive regulation of tender offers came about with the enactment of the Williams Act in 1968. The Williams Act and the SEC's implementing regulations are designed to require the dissemination of material information about a tender offer, while providing sufficient procedural protections so that security holders get the opportunity to consider the disclosure when making a decision about whether to tender their securities in the offer. The tender offer rules apply in the case of a third-party tender offer for the securities of another issuer, as well as to a tender offer by an issuer for its own securities.

The term "tender offer" is not specifically defined in the statute or in the SEC's regulations. The lack of a specific definition has permitted the SEC and the courts to apply tender offer rules to a broad range of transaction structures. The analysis of whether an offer constitutes a tender offer begins with the often-cited "eight factor" test cited in the case of Wellman v. Dickinson²:

1. An active and widespread solicitation of public shareholders for the shares of an issuer;

2. A solicitation is made for a substantial percentage of the issuer's securities;

3. The offer to purchase is made at a premium over the prevailing market price;

4. The terms of the offer are firm rather than negotiable;

5. The offer is contingent on the tender of a fixed number of shares, often subject to a fixed maximum number to be purchased;

6. The offer is open only for a limited period of time;

7. The offeree is subjected to pressure to sell his or her security; and

8. Public announcements of a purchasing program concerning the target issuer precede or accompany a rapid accumulation of large amounts of the target issuer's securities.

These eight factors need not all be present for a transaction to be deemed a tender offer, and the weight given to each element varies with the individual facts and circumstances. While these factors were cited in the context of an offer for equity securities, the principles would equally apply to tender offers involving debt securities or equity securities other than common stock. The eight factor test may be applied both in the context of third-party offers, as well as offers by an issuer for its own securities.

Courts have also applied a "totality of the circumstances" test in determining whether a transaction involves a tender offer that should be subject to the statutory requirements and the SEC's rules. In this context, the courts have examined whether, in the absence of disclosure and procedures required under the tender offer rules, there will be a substantial risk that the offeree will lack the information needed to make an investment decision with respect to the offer.³ The SEC Staff has historically focused on whether a tender offer involves an investment decision on the part of the offeree, particularly where the protections afforded by the tender offer requirements would appear to be necessary based on the nature of the transaction.

B. Requirements Applicable to All Tender Offers

Section 14(e) of the Securities Exchange Act of 1934 (the "Exchange Act") is an antifraud provision that establishes the "baseline" for tender offer regulation. Section 14(e) prohibits an offeror from making any untrue statement of a material fact, or omitting to state any material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. Section 14(e) also prohibits any fraudulent, deceptive or manipulative acts in connection with a tender offer. Section 14(e) applies to cash tender offers, as well as to exchange offers subject to the tender offer requirements.

Pursuant to the authority specified in Section 14(e), the SEC has adopted Regulation 14E.⁴ Regulation 14E specifies requirements applicable to all tender offers, and for those tender offers where additional requirements apply (such as tender offers for equity securities), the requirements of Regulation 14E must still be satisfied. Regulation 14E applies to cash tender offers, as well as exchange offers subject to the tender offer requirements. In addition, Regulation 14E applies to both third-party tender offers as well as issuer tender offers.

1. What is Required by Regulation 14E?

Regulation 14E sets forth certain requirements for tender offers that must be carefully followed throughout the course of an offer. These requirements seek to prevent practices that would be deemed fraudulent, deceptive or manipulative acts in connection with a tender offer. Regulation 14E requires that:

• A tender offer must be held open for at least 20 business days;
• The percentage of the class of securities being sought or the consideration being offered may not be increased or decreased unless the tender offer remains open for at least 10 business days from the date that the notice of such increase or decrease is first published or sent or given to security holders, subject to certain exceptions;
• The offer or promptly pay the consideration, or return tendered securities, upon termination or withdrawal of the tender offer;
• Public notice be provided in connection with the extension of a tender offer, and such notice must include disclosure of the amount of securities already tendered;
• The issuer subject to a tender offer disclose to its security holders its position with respect to the offeror's tender offer;
• Certain trading be avoided when a person is in possession of material nonpublic information relating to the tender offer;
• Tendering persons must have a net long position in the subject security at the time of tendering and at the end of the proration period in connection with partial tender offers (and not engage in "short-tendering" and "hedged tendering" in connection with their tenders); and
• No covered person directly or indirectly purchase or arrange to purchase any subject securities or any related securities except as part of the tender offer, from the time of public announcement of the tender offer until the tender offer expires.

Each of these requirements is described in more detail below.

a. Minimum Offer Period

Rule 14e-1(a) provides that a tender offer must remain open for at least 20 business days from the date the tender offer commences.⁵ Rule 14e-1(b) provides that the offer must also stay open for at least ten business days from the date a notice is first published or sent or given to the holders of the subject securities of an increase or decrease in: (i) the percentage of securities to be acquired pursuant to the tender offer (if the change exceeds two percent of the original amount); (ii) the consideration offered, without any de minimis exception; or (iii) any dealermanager's solicitation fee. The SEC has stated that a tender offer subject only to Regulation 14E must remain open for a minimum of five business days for any other material change to the offer or waiver of a material condition.⁶

b. Prompt Payment

Rule 14e-1(c) provides that the offer must either pay the consideration offered, or return the securities tendered, promptly after termination or withdrawal, respectively, of the tender offer. The SEC Staff has generally taken the view that "prompt payment" under Rule 14e-1(c) requires the payment of consideration or the return of tendered securities no later than three business days after the conclusion of the tender offer.

c. Extension of Offering Period

Rule 14e-1(d) provides that any extension of the offer period must be made by a press release or other public announcement by 9:00 a.m., Eastern Time, on the next business day after the scheduled expiration date of the offer, and the press release or other announcement must disclose the approximate number of securities tendered to date. If the securities are registered on one or more national securities exchange, the announcement must be made by the first opening of any one of such exchanges on the next business day following the scheduled expiration date of the tender offer.

d. Disclosure of Position Regarding the Offer

Rule 14e-2 requires that an issuer that has securities subject to a tender offer disclose to its security holders its position with respect to the offeror's tender offer, i.e., whether the issuer recommends the offer, expresses no opinion with respect to the offer or is unable to take a position. The disclosure must be provided no later than ten business days after the tender offer is first disseminated to security holders. In the event of any material change in the disclosure, the subject company must promptly disseminate a statement to security holders noting the material change. Given that Rule 14e-2 is not expressly limited to third party tender offers, it is common for an issuer conducting an issuer tender offer to include in its tender offer materials a statement that the issuer makes no recommendation as to the tender.

e. Prohibited Trading

Rule 14e-3 contains an antifraud prohibition on activities of a person conducting a tender offer. If such person is in possession of material non-public information that he or she knows or has reason to know is non-public, and knows or has reason to know was acquired from the offering person, the issuer or any of its directors, officers or employees, it is unlawful for that person to purchase or sell or cause to be purchased or sold any of the securities that are the subject of the tender offer. The prohibition applies even if the trading does not occur in breach of a duty of trust or confidence. In the case of an issuer tender, an issuer must be careful not to conduct a tender at a time when it possesses material non-public information. Material non-public information for this purpose may include unreleased earnings, a potential change in an issuer's credit ratings or an unannounced merger. The issuer should, to avoid any issues, disclose any such material non-public information prior to commencing a tender offer.

f. Prohibited Transactions in Connection with Partial Tender Offers

Partial tender offers typically involve the risk to security holders that not all of the securities that the security holder tenders will be accepted in the tender offer (commonly referred to as "proration risk"). Rule 14e-4 prohibits security holders from engaging in the practice of "short tendering," which occurs when the security holder tenders more shares than they own in order to avoid or mitigate the proration risk, or "hedged tendering," which occurs when a security holder tenders securities but then sells a portion of their shares before the proration deadline to a person that could then tender those shares. Under Rule 14e-4, a tendering person must have a net long position in the subject security at the time of tendering and at the end of the proration period.

g. Prohibited Purchases Outside of a Tender Offer

Rule 14e-5 provides that, subject to certain exceptions, no covered person may directly or indirectly purchase or arrange to purchase any subject securities or any related securities except as part of the tender offer. The prohibition in Rule 14e-5 applies from the time of public announcement of the tender offer until the tender offer expires, but does not apply to any purchases or arrangements to purchase made during the time of any subsequent offering period as provided for in Rule 14d-11, as long as the consideration paid or to be paid for the purchases or arrangements to purchase is the same in form and amount as the consideration offered in the tender offer.

For the purposes of Rule 14e-5, the term "covered person" is defined broadly to include: (i) the offeror and its affiliates; (ii) the offeror's dealer-manager and its affiliates; (iii) any advisor to any of the persons specified in paragraphs (i) and (ii) above, whose compensation is dependent on the completion of the offer; and (iv) any person acting, directly or indirectly, in concert with any of these persons in connection with any purchase or arrangement to purchase any subject securities or any related securities. "Subject securities" are defined for the purposes of Rule 14e-5 to include the securities or class of securities that are sought to be acquired in the transaction or that are otherwise the subject of the transaction.

The period during which purchases outside of the tender offer are prohibited runs from the potentially earlier date of "public announcement" as compared to commencement of the tender offer. The term "public announcement" is defined for the purposes of Rule 14e-5 as "any oral or written communication by the offeror or any person authorized to act on the offeror's behalf that is reasonably designed to, or has the effect of, informing the public or security holders in general about the tender offer."

Given the potentially broad reach of this definition, offerors must be very careful about what is stated in advance of any potential cash tender offer or exchange offer, particular when it is contemplated that purchases of subject securities or any related securities may occur in advance of commencement of the offer. Exceptions to the Rule 14e-5 prohibition on purchases outside of the tender offer include:

• The exercise, conversion or exchange of related securities into subject securities, as long as the related securities were held prior to public announcement of the tender offer;
• Purchases or arrangements to purchase by or for a plan that are made by an agent independent of the issuer;
• Purchases during odd-lot offers;
• Purchases by or through a dealer-manager or its affiliates that are made in the ordinary course of business and made either on an agency basis not for a covered person, or as principal for its own account if the dealer-manager or its affiliate is not a market maker, and the purchase is made to offset a contemporaneous sale after having received an unsolicited order to buy from a customer who is not a covered person;
• Purchases or arrangements to purchase a basket of securities containing a subject security or a related security under specified conditions;
• Purchases or arrangements to purchase to cover a short sale or the exercise of an option by a non-covered person, if (i) the short sale or option transaction was made in the ordinary course of business and not to facilitate the offer; (ii) the short sale was entered into before public announcement of the tender offer; and (iii) the covered person wrote the option before public announcement of the tender offer;
• Purchases or arrangements to purchase pursuant to a contract, if an unconditional and binding contract was entered into before public announcement of the tender offer, and the existence of the contract and all material terms including quantity, price and parties are disclosed in the offering materials;
• Purchases or arrangements to purchase by an affiliate of a dealer-manager under specified conditions;
• Purchases by connected exempt market makers or connected exempt principal traders under certain conditions; and
• Purchases made during cross-border tender offers under specified circumstances.

2. What is Not Required by Regulation 14E?

Under Regulation 14E, an issuer is not required to file any tender offer documents with the SEC, and Regulation 14E does not prescribe any form requirements with respect to offering materials. Any offer to purchase, and other tender offer documentation, is subject, however, to the general antifraud provisions of the Exchange Act, notably Section 10(b), Rule 10b-5 and Section 14(e), and, therefore, may not contain any material misstatement or omission.

Regulation 14E does not specifically require that an offeror provide withdrawal rights to offerees.⁷ Similarly, the proration, "best price," "all holders" and other provisions set forth in Section 14(d) and Rule 13e-4 of the Exchange Act are only applicable to tender offers conducted pursuant to Regulation 14D and Rule 13e-4, and do not apply to tender offers subject only to Regulation 14E.

C. Requirements Applicable to Issuer Tender Offers for Equity Securities

Pursuant to Rule 13e-4 under the Exchange Act, an issuer with equity securities registered under Section 12 of the Exchange Act or that is required to file periodic reports with the SEC pursuant to Section 15(d) of the Exchange Act is required, in connection with any tender offer for its own equity securities, to file a tender offer statement (on Schedule TO) and to make certain disclosures to offerees. Rule 13e-4 is intended to prevent fraudulent, deceptive or manipulative acts in connection with issuer tender offers.

In general, Rule 13e-4 imposes disclosure, filing, and procedural requirements on issuers and their affiliates in connection with issuer tender offers. For the purposes of this rule, the term "issuer tender offer" is defined as a tender offer for, or a request or invitation for tenders of, any class of equity security made by the issuer of that class of security or by an affiliate of that issuer. An soon as practicable on the commencement date of the issuer tender offer, the issuer or affiliate making the offer must comply with the filing, disclosure and dissemination requirements specified in the rule.

1. Applicability of Rule 13e-4 to Equity Securities

The term "equity securities" used in Rule 13e-4 is not defined in the rule. Section 3(a)(11) of the Exchange Act provides a general definition of the term "equity security," which includes "any stock or similar security; or any security future on any such security; or any security convertible, with or without consideration, into such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right; or any other security which the Commission shall deem to be of a similar nature and consider necessary or appropriate, by such rules and regulations as it may prescribe in the public interest or for the protection of investors, to treat as an equity security." Under the statute, the SEC has discretion to evaluate the "nature" of a security and to consider public policy implications in determining the characterization of the security. Based on this definition, the term "equity securities" for the purposes of the applicability of Rule 13e-4 includes debt securities convertible or exchangeable for equity securities.

In the past, the Staff has provided limited no-action letter relief in respect of offers that should be excluded from the application of Rules 13e-3 and 13e-4 based on whether the subject securities were deemed "equity securities" for the purposes of those rules. In a no-action letter to American Financial Corporation,⁸ the Staff concluded it would not recommend enforcement action if, in reliance on an opinion of counsel, the issuer proceeded with an exchange offer relating to non-voting, non-participating, mandatorily redeemable preferred stock without compliance with either Rule 13e-3 or Rule 13e-4. Counsel to the issuer had concluded that, in economic substance, the preferred stock was equivalent to a debt security. The Staff later affirmed this view in a subsequent no-action letter issued to American Financial Corporation.⁹ In between these two letters, the Staff issued noaction letter guidance to Republic New York Corporation.¹⁰ In Republic New York Corp., the Staff concluded that it could not assure the company that it would not recommend enforcement action if the issuer were to undertake purchases of shares of its cumulative preferred stock without compliance with Rule 13e-3. The Staff will not necessarily take the same view today as was expressed in the American Financial Corporation letters with respect to preferred stock, particularly in situations where preferred stock which has debt-like characteristics has not been treated as debt for the purposes of matters such as compliance with the Trust Indenture Act of 1939 (the "Trust Indenture Act") and legality opinions.

On the other hand, the Staff has recently provided informal, oral advice that trust preferred securities are sufficiently "debt-like" so that tender offers for trust preferred securities would be subject to the requirements applicable to debt tender offers or exchange offers, and not the more restrictive requirements applicable to equity tender offers or exchange offers under Rule 13e-4. The Staff's position is predicated on the applicable instruments being qualified under the Trust Indenture Act.¹¹

Further, in a no-action letter for BBVA Privanza International Limited and Banco Bilbao Vizcaya Argentaria, S.A.,¹² BBVA and Banco Bilbao proposed to make a cash tender offer for all of the outstanding Non-Cumulative Guaranteed Preference Shares, Series D of BBVA Privanza International (Gibraltar) Limited, including Preference Shares represented by American Depositary Shares. It was a condition to the tender that all such shares be validly tendered and not withdrawn. The intention was to price the tender offer based on a stated fixed spread over the yield on a specified benchmark U.S. Treasury security as of 2:00 p.m. New York time, on the second business day immediately preceding the expiration date of the tender offer (the 18th business day of the offer period).

BBVA and Banco Bilbao described that the tender offer would be made consistent with the principles established in prior no-action letters relating to formula pricing in issuer tender offers for equity securities, and that the offer would be substantially similar to the tender offers covered by no-action letters relating to the use of fixed spread pricing methodologies for non-convertible, investment grade debt tender offers.

The Staff stated that it would not recommend enforcement action under Rule 14e-1(b) against BBVA or Banco Bilbao if the tender offer uses the pricing mechanism described and if the tender offer was otherwise conducted in the manner represented.

In granting the requested relief, the Staff noted, in addition to the typical conditions for fixed spread transactions, that:

• the subject securities are represented as being valued by investors on the basis of their yield, taking into account the issuer's credit spread, compared to a benchmark yield, and the yield of the subject securities fluctuates in response to changes in prevailing interest rates;
• the final offer price will be set at least two trading days prior to the scheduled expiration of the offer; and
• the offerors will issue a press release to publicly announce the final offer price prior to the close of business on the pricing date.

2. Filing Requirements

Unlike under Regulation 14E, Rule 13e-4 requires that an issuer¹³ engaged in an issuer tender offer must file a tender offer statement on Schedule TO with the Commission as soon as practicable on the commencement date of the offer.¹⁴ In addition, the issuer is required to file:

• Any of its written communications relating to the issuer tender offer, from and including the first public announcement, as soon as practicable on the date of the communication;
• An amendment to the Schedule TO reporting promptly any material changes in the information disclosed in the previously filed Schedule TO and amendments thereto;¹⁵ and
• A final amendment to the Schedule TO reporting promptly the results of the issuer tender offer.

A significant amount of disclosure is required to be filed under cover of Schedule TO.¹⁶ Most of the specific line item requirements are satisfied by reference to a separate Offer to Purchase or Offer to Exchange document that is filed as an exhibit to the Schedule TO. The information required by Schedule TO includes:

• A summary term sheet;
• Information about the issuer;
• The identity and background of filing persons;
• The terms of the transaction;
• Any past contacts, transactions and negotiations;
• The purposes of the transactions and plans or proposals;
• The source and amount of funds or other consideration for the tender offer;
• Interests in subject securities;
• Persons/assets retained, employed, compensated or used;
• Financial statements;
• Additional information;
• Exhibits; and
• To the extent applicable, information required by Schedule 13E-3.

In addition to the Schedule TO filing, an issuer conducting an issuer tender offer must file any precommencement written communications under cover of Schedule TO, marking the box on the cover page to note the status of the materials as pre-commencement communications.¹⁷ Pursuant to Instruction 3 to Rule 13e-4(c), each pre-commencement written communication must include a prominent legend in clear, plain language advising security holders to read the tender offer statement when it becomes available because it contains important information, that the tender offer statement and other materials are available for free at the SEC's website, and identify which documents are available for free from the issuer.

If pre-commencement communications are made in connection with an exchange offer that is registered under the Securities Act, then the issuer can file the communications solely under Rule 425 under the Securities Act, and such communications will be deemed filed for the purposes of Rule 13e-4.

3. Disclosure Requirements

An issuer making an issuer tender offer under Rule 13e-4 must publish, send or give to security holders:

• the summary term sheet required by Item 1 of Schedule TO; and
• the information required by the remaining Schedule TO items for issuer tender offers, except for Item 12 (exhibits), or a fair and adequate summary of the information.

To the extent that there are any material changes to the information previously disclosed to shareholders, paragraphs (d)(2) and (e)(3) of Rule 13e-4 require that the issuer disclose those changes promptly to shareholders in a manner reasonably calculated to inform them of the change.

In the event that an the issuer disseminates the issuer tender offer by means of summary publication as discussed below, any summary advertisement used by the issuer must not include a letter of transmittal that would permit shareholders to tender securities, and the advertisement must disclose at least the following information:

• the identify of the issuer (or affiliate) making the tender offer;
• the material terms and purposes of the transaction, as specified in Items 1004(a)(1) and 1006(a) of Regulation M-A;
• instructions as to how shareholders can promptly obtain a copy of the disclosure statement required by Rule 13e-4(d)(1), at the issuer's expense; and
• a statement that the information contained in the disclosure statement, i.e., the Offer to Purchase or the Offer to Exchange, is incorporated by reference.

4. Dissemination Requirements

With respect to issuer tender offers in which the consideration offered consists solely of cash and or securities exempt from registration under Section 3 of the Securities Act, an issuer must disseminate the required disclosure to security holder by one or more of these methods: long form publication of the information, the use of security holder lists or through summary publication.

Rule 13e-4(e)(1)(i) provides that dissemination may occur by making adequate "long form" publication of the tender offer in a newspaper or newspapers on the commencement date of the issuer tender offer. For this purpose, the Instruction to paragraph (e)(1) specifies that adequate publication may require publication in a newspaper with a national circulation, a newspaper with a metropolitan or regional circulation, or a combination of the two, depending on the specific facts and circumstances.

Alternatively, Rule 13e-4(e)(1)(iii) permits publication of a summary advertisement in a newspaper or newspapers on the commencement date including the disclosures referenced above, and by mailing or otherwise furnishing promptly the Rule 13e-4(d)(1) disclosure statement and a transmittal letter to any security holder upon request.

Tender offer materials may also be disseminated by using security holder lists and security position listings. Under the procedures specified in 13e-4(e)(1)(ii), the materials may be distributed by:

• Mailing, or otherwise furnishing promptly, the disclosure required by Rule 13e-4(d)(1) to each security holder whose name appears on the issuer's most recent security holder list;
• Contacting each participant on the most recent security position listing of any clearing agency within the possession or access of the issuer, and inquiring of each participant as to the approximate number of beneficial owners of the subject securities held by the participant;
• Furnishing to each participant a sufficient number of copies of the Rule 13e-4(d)(1) disclosure statement for transmittal to the beneficial owners; and
• Agreeing to reimburse each participant promptly for its reasonable expenses incurred in forwarding the statement to beneficial owners.

In an exchange offer where the consideration consists solely or partly of securities that are registered under the Securities Act, then Rule 13e-4(e)(2) provides that the issuer must:

• File a registration statement containing all of the required information, including pricing information; and
• Deliver to shareholders a preliminary prospectus or a prospectus that meets the requirements of Section 10(a) of the Securities Act, along with a letter of transmittal.¹⁸

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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