United States: Corp Fin Posts Update To Tender Offer CDIs

Corp Fin has posted an  update to the CDIs related to the tender offer rules and schedules. Below are brief summaries.

Section 101. General Questions

• Tender offers may be subject only to conditions based on objective criteria and otherwise not within the offeror's control; subjective criteria might be considered manipulative or deceptive acts or practices under Section 14(e). If an offeror could arbitrarily determine or control whether an offer condition has been triggered (e.g., by stating that determination of whether a condition has been triggered is in the offeror's “sole” discretion instead of its “reasonable” discretion), the offer would be illusory.  Whether or not each condition has been triggered should be objectively verifiable; however, once triggered, the offeror can then lawfully decide, in its sole discretion, to assert or waive that condition.
• Conditions, such as regulatory approvals, that may be invoked and the offer terminated “regardless of the circumstances giving rise to such conditions,” including the offeror's own actions or inaction, may be illusory and thus undertaken in contravention of Section 14(e). For example, the offeror might intentionally fail to take the requisite steps to obtain the regulatory approvals.
• Where a press release announces the termination of an offer, failure of the press release to disclose the specific basis for the termination may constitute a material omission under Section 14(e) and raises the possibility that the offer might have been illusory.
• Although priority is given to review of transactions that have commenced, the staff will review a Schedule TO filing even if it does not include a transmittal form, issue and clear comments, and then allow a bidder to disseminate its tender offer materials. Bidders must have a bona fide intent to commence a tender offer once a Schedule TO has been filed; if filed before commencing the offer, the materials should make it clear that the offer has not yet commenced in order to avoid confusing investors. The Schedule TO filed should be filed using EDGAR tag “SC TO-C,” and not EDGAR tag “SC TO-I” or “SC TO-T.”
• The determination of who is the “bidder” for purposes of Regs 14D and 14E includes both the entity used to make the offer and purchase the securities as well as the  persons “on whose behalf” the tender offer is being made. The staff views the acquisition entity as the nominal bidder and the parent company as the real bidder.
• The fact that the parent company or other persons control the purchaser through share ownership does not mean that the entity is automatically viewed as a bidder. Bidder status requires a facts-and-circumstances analysis of the parent's or control person's role in the tender offer.  The CDI identifies a number of non-exclusive factors to be considered. If a named bidder is an established entity with substantive operations and assets apart from those related to the offer, the staff ordinarily will not, but may, go further up the chain of ownership to analyze whether that entity's control persons are bidders.
• A person who qualifies as a bidder under Rule 14d-1(c)(1) must be included as a bidder on the Schedule TO; failure to include the bidder could require an extension of the offer to provide a full 20-business day period for shareholders to consider the new information.
• Form S-3 is not available for registration of an exchange offer.
• Under Section 14(d)(1),  tender offers for private companies exempt from registration under Section 12(g)(2)(G) must still be made in compliance with Section 14(d) and Reg 14D, but Rule 13e-3 would not apply unless the company is required to file periodic reports under Section 15(d). 
• Where an issuer's employee stock ownership plan (ESOP) will conduct a tender offer for a class of equity securities of the issuer,  and, assuming the offer is fully subscribed, the ESOP will be the beneficial owner of more than 5% of the class, the tender offer will be subject to Section 14(d) and Reg 14D.  The offer will not be subject to Rule 13e-4, unless the ESOP is a wholly owned subsidiary of the issuer.   In either case, the tender offer will be subject to Section 14(e) and Reg 14E.
• The “odd-lot” preference available for issuer tender offers governed by Rule 13e-4 is not available for Reg 14D tender offers.
• In a tender offer subject to Reg 14D or Rule 13e-4, a bidder or issuer cannot exclude a security holder from participating in a tender offer because the security holder holds restricted securities; the offer must be open to all holders of the class.
• A statutory merger is not a tender offer and is not subject to Regs 14D and 14E.
• Exchange offers by newly formed investment companies, unitary trust funds and other investment vehicles for the equity securities of a public company are considered tender offers unless an affirmative statement is made in the offering materials that the amount to be acquired, when added to the securities already beneficially owned, will not exceed 5% of the outstanding securities in the class.
• The proration, withdrawal and other provisions set forth in subsections (1) through (8) of Section 14(d) are applicable only to Reg 14D tender offers and do not apply to Reg 14E tender offers.
• Where a limited partnership's GP makes a tender offer for a class of the partnership's registered units and, after consummation of the tender, the GP will be, directly or indirectly, the beneficial owner of more than 5% of the class, the tender offer will be subject to Reg 14D and the GP will be required to file a Schedule TO. If the GP speaks on behalf of the limited partnership, the GP must also comply with Rules 14e-2 and 14d-9(b), which can be accomplished by including a statement in the offering materials on behalf of the partnership and incorporating the statement by reference into the Schedule 14D-9 filed by the partnership.

Section 13(e) and Rule 13e-4

• Issuer exchange offers that are conducted for compensatory purposes need not comply with Rules 13e-4(f)(8)(i) and (ii), the all holders and best price rules, so long as the issuer complies with all the conditions in the 2001 exemptive order. For issuers that are subject to Rule 13e-4, the remaining provisions of Rule 13e-4, as well as Reg 14E, apply to these exchange offers. “A Schedule TO-I must be filed at the time the exchange offer commences, and the disclosure required by the schedule must be disseminated to option holders in accordance with Rule 13e-4. The disclosure items of the Schedule TO-I must be complied with in the offer to purchase only to the extent applicable. The disclosure should set forth clearly the essential features and significance of the exchange offer, including risks that option holders should consider in deciding whether to accept the offer. The disclosure also should include financial information about the issuer, which generally is material to the option holders' investment decisions. See Item 10 of Schedule TO. The financial information in the disclosure may be in summary form if the issuer incorporates its financial statements by reference into the schedule and offer to purchase. See Instruction 6 to Item 10 of Schedule TO.”
• An issuer makes a tender offer for its debt securities that are convertible into registered common stock of another unaffiliated issuer. The issuer making the tender offer currently owns none of the common stock of the unaffiliated issuer. The common stock represents less than 5% of the class and had been purchased and placed in escrow at the time the debt securities were issued. The offer is not subject to Rule 13e-4 because, to the extent the offer is for an equity security, it was issued by another company, not the bidder. Section 14(d) is also inapplicable because the bidder will not own more than 5% of the subject class.  The offer is, however, subject to Section 14(e) and the Reg 14E rules. 

Section 14(d) and Regulation 14D

• In a tender offer for convertible debt securities, with the debt unregistered but the underlying common registered under Section 12, the tender offer is not subject to Section 14(d) and Reg 14D. Although the conversion feature results in the debt securities being a class of “equity securities” within the meaning of Exchange Act Section 3(a)(11) and Rule 3a11-1, the tender offer is not subject to Section 14(d) and Reg 14D because the class of debt securities itself is not registered under the Exchange Act.
• In the context of competing tender offers by X and Y subject to Section 14(d) and Reg 14D for the shares of common stock of Z, where X decides to tender to Y the shares of Z it owns or expects to acquire in the tender,  X's tender offer materials must be reviewed “to determine if there are any statements or conditions in X's Schedule TO-T (or Schedule 14D-9 if one has been filed by X pursuant to Rule 14d-9(b) relating to X's recommendations concerning whether the subject shareholders should tender to Y) which state that X will not tender to Y (or another party) or that set forth a condition that would be triggered by such a tender. In addition, X must (1) announce its decision to tender to Y as soon as possible after the decision; (2) amend its Schedule TO-T to reflect this material change and disseminate any other additional material changes in the information prompted by the need to comply with Section 14(e), including, but not limited to, changes relating to the merits of X's offer as promptly as possible in accordance with Rule 14d-4(d); and (3) make a determination whether an offer condition has been triggered, and, if so, whether or not X intends to waive or assert the offer condition.”
• A bidder in a tender offer subject to Section 14(d) and Reg 14D may not accept and pay for tendered shares prior to the end of the withdrawal periods specified in Section 14(d)(5) and Rule 14d-7. The purchase is also subject to the offeree's right of rescission.  Although the right of rescission is merely a contractual right under state law, the right of withdrawal is a right created by federal statute and also governed by a rule promulgated under the Exchange Act.
• Where an affiliate conducting a third-party tender offer subject to Rule 13e-3 will disseminate the tender offer materials and Rule 13e-3 disclosures by mail to security holders, the bidder may, after validly commencing the tender offer via other permissible means, publish a summary advertisement complying with Rule 14d-6(b) and noting that the offer will result in the issuer's “going private,” even though Rule 14d-4(a)(2)(i) does not authorize a summary advertisement to be used to commence a tender offer subject to Rule 13e-3.
• Where a foreign bidder and U.S. target with a registered class of equity securities enter into an MOU for the foreign bidder to buy shares from insiders and engage in a cash tender offer to acquire the rest of the shares, a joint statement by the bidder and target setting forth the identities of the parties, the consideration to be paid, and the amount and class of securities being sought would be considered a pre-commencement communication and is subject to Rules 14d-2(b)-(c) and 14d-9(a).
• A bidder makes three separate contemporaneous offers for three different classes of the target's stock, each conditioned on a separate minimum condition. The bidder cannot waive the minimum condition with respect to one class without extending the offers for all the classes so that at least five business days remain prior to the time of expiration. Minimum conditions are material, and changes in or waivers of the minimum condition for each offer would be considered material changes or developments with respect to the other two offers.
• A bidder makes a written request for a security holder list in connection with the dissemination of its initial tender offer materials pursuant to Rule 14d-5 and elects to disseminate amendments under Rule 14d-5(f)(1) itself (rather than requiring the subject company to do so). The target elects to mail the materials for the bidder under Rule 14d-5(a)(3), rather than furnish a stockholder list to the bidder. The bidder, prior to delivering the materials to the target for mailing, increases the tender offer price, and the materials delivered to the subject company reflect this increased price. Although the target is not responsible for disseminating amendments, it is required, having once elected to mail the initial tender offer documents, to mail the amended materials in this case because they were amended prior to the initial delivery to the target of the initial offering materials.
• Rule 14d-7 provides that any tendering security holder has the right to withdraw its tendered securities “during the period such offer request or invitation remains open.” If a bidder extends an offer period, it cannot limit the availability of withdrawal rights, even for a select group of security holders who tendered prior to the extension of the offer period; withdrawal rights required under Rule 14d-7 must be made available to all security holders during any extension of the offer period.
• A bidder cannot condition acceptance of shares from the controlling shareholder on the grant of specific reps and warranties by that shareholder.  Although the bidder could condition the entire offer on the grant of those reps and warranties, it could not impose conditions on the acceptance of one individual shareholder's tender without violating the “all-holders” provision of Rule 14d-10.
• Item 10 of Schedule TO requires disclosure of financial information concerning a bidder when the bidder's financial condition is material to a decision by a security holder whether to sell, tender or hold securities sought in a tender offer. That requirement may apply to a natural person in certain circumstances. For example, bidders who are natural persons may be required to disclose information concerning their net worth in accordance with Instruction 4 to Item 10 of Schedule TO. (See footnote 22 of Release No. 34-13787 (July 21, 1977).)

Section 14(e) and Regulation 14E

• Reg 14E applies to tender offers for securities of non-reporting companies. Under Rule 14d-1(a), Reg 14E applies to tender offers for any securities (other than exempted securities, as defined by Section 3(a)(12)), including issuer and third-party tender offers, (i) whether for debt or equity securities, (ii) whether or not the securities belong to a class registered under Section 12, and (iii) whether or not the subject company, as defined in Item 1000(f) of Reg M-A, is required to file periodic reports under Section 15(d).
• In two competing tender offers, the bidders describe their intent to acquire any shares remaining after completion of their offers through second-step “squeeze-out” transactions.  If the type or the amount of the consideration to be paid in the squeeze-out changes from the consideration disclosed in the initial offer materials, the bidders are obligated to keep the first-step tender offers open for a minimum of ten business days from the date that a change is first published, sent or given to security holders, and the bidders must extend the offers if needed to ensure this minimum period of time. Although Rule 14e-1(b) is not directly implicated because the terms of the first-step tender offer are unchanged, the type or amount of consideration to be offered in the “squeeze-out” may be material to shareholders' decision to participate in the first-step tender.  A material change to the consideration offered in the second-step may therefore be comparable in significance to a material change in consideration offered in a tender offer subject to Rule 14e-1(b). See footnote 70 in Release No. 23421 (July 11, 1986).
• Rule 14e-1(c) requires that an offeror in a tender offer either pay the consideration offered or return the securities tendered “promptly” after the withdrawal or termination of the tender offer. Depending on the length of the delay, the staff will not object if the offeror delays payment because it must obtain regulatory approvals before completing the purchase, provided the tender offer materials fully disclose the possibility of the delay.
• In a third-party tender offer, the target may satisfy its requirement to publish, send or give to security holders the statement required by Rule 14e-2 by attaching its solicitation/recommendation statement to materials sent by the bidder to security holders. If the tender offer is subject to Reg 14D, the target must also comply with its obligations under Rule 14d-9.
• Before commencement by the issuer of a  Rule 13e-4 tender, the issuer would not violate Rule 14e-3 if the issuer purchased in the open market some of the securities that will be the subject of the tender offer. Under Rule 14e-3, if an issuer has taken a substantial step to commence, or has commenced, a tender offer, “any other person” in possession of MNPI relating to the tender and acquired from the issuer or any of its officers, directors, partners or employees or any other person acting on the issuer's behalf must “disclose or abstain from trading.” “Any other person” means “someone other than the offering person, or in the case of an issuer tender offer, the issuer.” (See fn 34 in Release No. 34-17120 (September 4, 1980). To the extent the issuer had publicly announced its intention to commence a tender offer, the issuer would have to consider the application of Rule 14e-5 to its proposed open market purchases.
• An arrangement under which directors of an acquired company become directors of the acquiring company without an election is not subject to Rule 14f-1. Rule 14f-1 would apply only in the converse situation where there is an arrangement for the acquiring company to appoint directors of the acquired company without an election.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.