Originally published in Securities Law360
As a result of current market uncertainties encouraging buyers and sellers to close deals more quickly and the Securities and Exchange Commission's (SEC's) clarification of the "all holders/best price" rule, tender offers have been increasing as a percentage of overall U.S. public M&A activity over the past couple of years. In a negotiated transaction whereby the buyer has the support of the target company, recently buyers have been electing more frequently to use a cash tender offer as the first step in acquiring a target company. About one out of every three negotiated transactions in 2009 valued over $100 million were structured as front-end tender offers.
Parties in a two-step merger must plan for several factors that are unique to those transactions. Of primary importance is the need to comply with SEC rules governing tender offers, especially requirements that govern the timing and method of disclosure to target shareholders. Recent tender offers in the United States tend to share the following common features:
- All-cash consideration
- Buyer's operational control over target post–tender offer/pre-closing
- Conditions precedent to closing the tender offer, particularly the acquisition of a majority of the target's outstanding shares
- Support agreements with significant stockholders to "lock up" a large block of the target's outstanding shares
A recent trend in two-step acquisitions is for the parties to include a "top-up" option in the merger agreement that allows the buyer to purchase a number of new target company shares that, when combined with the stock acquired in the tender offer, meets the 90% threshold typically required to complete a short form merger. In some cases, there has been no threshold of target shares required to be tendered in order for the top-up option to be available, whereas in others there has been (typically, that between 75% and 85% of the target's outstanding shares are taken up and paid in the tender offer). Buyers exercised top-up options, where available, in more than half of the two-step tender offer transactions in 2009 valued over $100 million in order to complete a second-step short form merger.
In an Agreement and Plan of Merger dated as of January 20, 2010 by and between Trustmark Mutual Holding Company (Parent), its wholly owned subsidiary (Purchaser) and Health Fitness Corporation (Seller, and collectively with Purchaser and Parent, the Parties), Purchaser agreed to launch a cash tender offer at a price of $8.78 per share for all of Seller's outstanding shares of common stock, subject to the "minimum condition" that at least a majority of Seller's shares are validly tendered and not withdrawn prior to the expiration of the offer. To assure Purchaser that a second-step short form merger can be completed if the tender offer is successful, the Seller irrevocably granted to Purchaser a top-up option to purchase from Seller during the 20-business-day period following the tender offer the lowest number of shares that, when added to the number of shares owned by Parent and Purchaser at the time of exercise, would constitute one more share than 90% of the total outstanding shares of Seller, at a price equal to the tender offer price. The top-up option is thus designed to facilitate the acquisition by Parent of Seller in a two-step transaction in which the Parent locks up the acquisition in the shortest possible amount of time following execution of the definitive acquisition agreement.
A cash tender offer is also a formidable weapon in a hostile acquiror's arsenal because it can be completed in the United States in as little as 20 business days. The target company board is required to respond within 10 business days after an offer is launched with a recommendation to the target's shareholders as to whether they should tender their shares and the reasons for the recommendation. In the face of an all-cash, fully financed tender offer for all shares at a significant premium to market, the target's board has little time to find a better alternative and generally is unwilling to "just say no." A hostile acquiror typically will apply additional pressure on the target's board by filing a lawsuit shortly after commencing a tender offer to force the target's board to negotiate with the acquiror and to remove any shark repellents and block any initiatives by the target to thwart the offer. The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 for cash tender offers is only 15 days (compared with 30 days for a negotiated transaction), and regulatory impediments in most cases are minimal unless the target is in a highly regulated industry or has classified contracts with the U.S. government.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
