The following 10 practice points are intended to help you in assisting an issuer with a proposed debt tender offer for cash. Often, issuers of debt securities seek to manage their liabilities through liability management transactions, including debt tender offers for cash. Given the current economic downturn and market volatility resulting from the COVID-19 pandemic, companies with cash on hand may consider repurchasing their outstanding debt for cash. A cash tender offer consists of a public offer by the issuer to purchase all or a portion of the outstanding principal amount of the relevant debt securities from the holders at a specified price, and subject to conditions, set forth in the issuer's offer to purchase.
- Consider whether the issuer has enough cash and whether there are more effective liability management alternatives. Prior to undertaking a debt tender offer for cash, an issuer will need to determine whether it has sufficient cash on hand to effect the repurchases. If an issuer does not have enough cash on hand or views the use of cash to effect a tender offer as an inefficient alternative under the circumstances, the issuer may consider a liability management transaction that does not require deploying cash, such as an exchange offer. In an exchange offer, the issuer offers to exchange new debt or equity securities for certain of its outstanding debt securities. This approach would allow the issuer to achieve a similar result as a debt tender offer by retiring or refinancing outstanding debt securities for non-cash consideration in the form of new securities, thereby obviating the need to deploy cash.
- Determine whether the class of debt securities is widely held. In connection with choosing the appropriate liability management approach, the issuer should consider whether the debt securities are widely held as well as the status (retail versus institutional) and location of the holders. If the debt securities are widely held, privately negotiated or open market purchases may not be efficient for an issuer. In such a situation, a tender offer may be the best way to restructure the issuer's indebtedness. A tender offer allows an issuer to approach or make an offer to all of the holders of a series of its debt securities. Because tender offers do not have to close until specified (and disclosed) conditions are satisfied (including, in some cases, receipt of consents from debt holders to modify the terms of the debt securities that remain outstanding, completion of any necessary financing for the tender offer, and receipt of other necessary consents from third parties), it may be possible to conduct a tender offer and achieve the issuer's objectives.
- Consider whether the tender offer
rules would apply. A key consideration in formulating a liability
management strategy is the extent to which the Securities and
Exchange Commission's (SEC) tender offer rules apply to the
contemplated transaction, given that these rules affect the manner
in which the transaction must be conducted. 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
and whether certain conditions necessary for an abbreviated process
are satisfied.
An issuer repurchasing its debt securities, either in privately negotiated transactions or in open market purchases, runs the risk that it may inadvertently trigger the SEC's tender offer rules. The term "tender offer" is not specifically defined in statute or in the SEC's regulations. The lack of a specific definition has permitted the SEC and the courts to apply the tender offer rules to a broad range of transactions. Any analysis of whether an offer constitutes a tender offer begins with the often-cited eight-factor test in the Wellman v. Dickinson case:
- An active and widespread solicitation of public shareholders for the shares of an issuer.
- A solicitation made for a substantial percentage of the issuer's securities.
- The offer to purchase is made at a premium over the prevailing market price.
- The terms of the offer are firm rather than negotiable.
- The offer is contingent on the tender of a fixed number of shares, often subject to a fixed maximum number to be purchased.
- The offer is open only for a limited period of time
- The offeree is subjected to pressure to sell his or her security
- " 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 based on the facts and circumstances
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 lacks the information needed to make an investment decision with respect to the offer. 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.
For debt repurchases, it is generally possible to structure repurchases in order to avoid the application of these rules. To the extent that an issuer would prefer to avoid the application of the tender offer rules, any repurchase should:
- Be undertaken for a limited amount of securities
- Made to a limited number of holders who are sophisticated
- Not specify a time period or expiration time for the offer
- Be made at prices that are privately and individually negotiated (i.e., the same terms should not be imposed on all offerees) –and–
- Not be conditioned on the issuer having attained a specific principal amount
- Determine whether the target class of
debt securities is nonconvertible. The issuer's structuring
options also will depend, in part, on the characteristics of the
outstanding security. A repurchase or tender for straight debt
securities typically will be less complex than a repurchase or
tender relating to convertible debt securities. This is because
convertible debt securities are treated like equity securities for
purposes of the tender offer rules. Specifically, in connection
with tenders for convertible debt securities, issuers must comply
with the requirements of Rule 13e4. The obligation to comply with
these provisions makes tender offers for convertible or
exchangeable debt securities more complicated and time-consuming,
and subject the offer to SEC review, which could result in time
delays.
In addition, the requirements of Rule 13e-4 result in less flexibility for tenders for convertible or exchangeable debt securities compared to tenders for straight debt securities. A good illustration of this reduced flexibility is that it is not possible for issuers to sweeten the tender offer for convertible or exchangeable debt securities with an early tender premium as would be possible for straight debt securities.
There also may be some accounting issues in connection with repurchasing or tendering for convertible or exchangeable debt securities. While some effects (such as the elimination of the retired debt from the issuer's balance sheet) may be more intuitive, others may not be. Issuers may wish to consult their accountants early in the process. Issuers that intend to restructure their outstanding convertible debt also should consider the effects of such tender on any of their related call spread transactions or share lending agreements.
Finally, under certain circumstances, repurchases of convertible debt securities could be deemed a forced conversion and therefore a distribution of the underlying equity security for purposes of Regulation M. Therefore, it is important to identify early on whether the subject debt securities are convertible debt securities and to structure the tender offer accordingly.
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