Public M&A

Question 1

2 main means of obtaining control of a public company are through?

Answer 1

1. Cash tender offers or exchange offers.

2. One-step statutory mergers.

Question 2

Section 13(d) of the Exchange Act, requiring the disclosure of an acquisition of ___% of a class of voting equity in a public company

Answer 2

Five percent

Question 3

The five most common types of anti-takeover laws are:

Answer 3

1. Control share acquisition statutes.
2. Business combination or moratorium statutes.
3. Fair price statutes.
4. Constituency statutes.
5. Endorsements of defensive action.

Question 4

What is a control share acquisition statute? (An anti-takeover law.)

Answer 4

26 states deny voting rights to a bidder that acquires more than a specified percentage of target’s stock unless the target’s shareholders that are unaffiliated with the bidder approve the acquisition.

Question 5

What is a business combination or moratorium statute? (An anti-takeover law.)

Answer 5

Business combination or moratorium statutes. 33 states restrict a bidder that acquires > [X]% of a target’s stock from doing force out merger of minority SH who did not tender. Usually only applies for LIMITED PERIOD and subject to FAIR PRICE EXEMPTIONS.

Question 6

What is a fair price statute? (An anti-takeover law.)

Answer 6

Fair price statutes. 28 states prevent a bidder who crosses a specified ownership threshold (usually 10% - 20%) from engaging in a merger or other combination with the target unless the bidder either:
(A) pays a fair price in the second-step merger (e.g., highest price paid for the target’s shares by the bidder during the past 2 years); or
(B) before crossing the threshold, obtains approval from the board and/or from a supermajority of outstanding shares.

Question 7

What is a constituency statute? (An anti-takeover law.)

Answer 7

Constituency statutes. 28 states permit a board to consider the interests of other related groups (such as employees, customers, suppliers and communities served by the company) in addition to the interests of the shareholders, in deciding whether to approve a merger or bid.

Question 8

What is an endorsement of defensive action law? (An anti-takeover law.)

Answer 8

Endorsements of defensive action. 35 states authorize, either by statute or case law, a target’s board to defend against a hostile bid, including adopting a shareholders’ rights plan (a poison pill) without shareholder approval.

Question 9

The DGCL prohibits an acquirer of 15% or more of a company’s outstanding stock from engaging, for a three-year period following the acquisition, in any business combination with the company. The prohibition does not apply if any of these three things occur:

Answer 9

1. The business combination is approved by unaffiliated owners of two-thirds of the outstanding shares.
2. The target’s board approves either the 15% acquisition or the proposed business combination, in each case before the shareholder acquires the 15% stake.
3. On completion of the transaction resulting in the 15% acquisition, the shareholder acquires at least 85% of the target’s shares outstanding at the time such transaction commenced.

Question 10

Confidentiality agreements for public company diligence of non-public company info typically contain a standstill provision, which provides…

Answer 10

A standstill prevents the bidder from acquiring the target’s shares without the target’s consent.

Question 11

In general, you want a shareholder lockup voting agreement (which has to be disclosed in proxy), but the Omnicare lockup was invalid b/c preclusive for two reasons…

Answer 11

Omnicare invalidated b/c preclusive b/c:

1. voting agreement had majority shareholders agree irrevocably to vote their shares in favor of a merger.
2. A merger agreement that required the merger to be submitted to a vote of the shareholders despite the board’s withdrawal of its recommendation of the transaction in light of a higher third party offer.

Question 12

Even though Omnicare lockup was preclusive, a DE court allowed ____ in 2004 (Orman v Cullman).

Answer 12

A court held to be acceptable a voting agreement with majority shareholders that required those majority shareholders to vote against any alternative acquisition proposal for 18 months following the proposed transaction (Orman v Cullman (Del. 2004)). In that case, the proposed transaction was subject to “majority of the minority approval”; so not preclusive.

Question 13

What are the three factors the SEC and courts consider w/r/t whether an accumulation of direct or derivative interests in target is “creeping tender offer”?

Answer 13

1. There was active and widespread solicitation of public shareholders (for example, through public statements or mailings).
2. The offer price included a premium.
3. The terms of the offer were non-negotiable, with a specified deadline for its acceptance.

Question 14

The use of derivative positions to mask stakebuilding DOES or DOES NOT violate the SEC’s reporting requirements?

Answer 14

It MAY violate reporting requirement (see CSX Corporation v The Children’s Investment Fund Management (UK) LLP et al (SDNY 2008)).

Question 15

Two common triggers for Target’s break fee

Answer 15

1. Where the target’s shareholders decline to approve the merger (or to sell their shares pursuant to the tender offer) while a competing proposal is outstanding (often with the additional requirement that some other agreement is reached with another party within a defined period).
2. The fiduciary out.

Question 16

Typical termination fee range?

Answer 16

Termination fees range from 2% to 4% of the equity value of the transaction, with larger transactions mostly at the lower end of this range and smaller transactions at the higher.

Question 17

Other mechanisms besides break fees used to discourage competing offers and/or to compensate the bidder for its expenses and lost opportunity, include two categories:

Answer 17

1. Stock options given to bidder.

2. Commercial arrangements, such as cross licences, asset sales and joint ventures.

Question 18

Size of reverse break fees?

Answer 18

Typically ranging from 1.5% to 7% or more of deal value.

Question 19

Cash tender offers are subject to these four key requirements

Answer 19

1. Minimum offer period of 20 business days with mandatory extensions on changes to the terms or disclosures.
2. Withdrawal rights. Target shareholders can withdraw tendered shares any time before offer’s expiry date or within 60 days from the offer’s commencement, if the tendered shares have not been purchased.
3. All holders/best price rule. The terms of the offer (including price) must be same for all owners of a class of securities.
4. No purchases outside of offer by bidder until expiry of offer.

Question 20

In statutory merger, three-step process for approval and docs to SHs?

Answer 20

1. Enter into merger agreement subject to the approval of SHs.
2. Target sends a proxy statement (which is subject to pre-approval by the SEC) to its shareholders.
3. SH vote.

Question 21

Do you have to give target SH’s all holders/best price treatment in merger?

Answer 21

No. There is a specific exemption from the all holders/best price rule for amounts offered or paid in accordance with employment compensation, severance or other employee benefit arrangements so long as such amounts are both:

1. Paid or granted as compensation for past services performed, future services to be performed, or future services to be refrained from performing, by the shareholder.
2. Not calculated based on the number of securities tendered or to be tendered in the tender offer by the shareholder.

Question 22

A hostile bid usually has 2 prongs

Answer 22

1. a tender or exchange offer
2. accompanied by a proxy contest in which the bidder attempts to convince the target’s shareholders to replace the target’s incumbent directors with the bidder’s nominees at an annual or special meeting (these friendly directors cancel poison pill and other defenses).

Question 23

What is a bear hug letter? Is it public or private?

Answer 23

Usually a private letter (which the target can choose to disclose) containing a preliminary offer to acquire the target. Sometimes the acquirer publishes with price terms to pressure target.

Question 24

Three ways hostile takeovers are initiated?

Answer 24

1. Private bear hug letter to target.
2. Bear hug letter to target + publication to get SH support.
3. Go directly to SHs with tender or exchange offer.

Question 25

In the absence of regulatory approvals or other restrictions, _________ is generally the quickest way to acquire control of a public company? Why?

Answer 25

A cash tender offer is usually fasted because the offer documents are not subject to the SEC’s prior review.

Question 26

How long does cash tender take with recommended transaction (i.e., board approved)?

Answer 26

In a recommended transaction, a cash tender offer can commence shortly (usually within a week) after the execution of the merger agreement and can often be completed within five or six weeks.

Question 27

Why is one-step merger longer than cash tender or exchange offer?

Answer 27

In the absence of any regulatory approvals or other restrictions, a one-step merger usually takes significantly longer to acquire control of a target than a cash tender offer because the SEC must clear the proxy statement before it can be mailed to the target’s shareholders.

Question 28

What four conditions precedent are usually attached to a takeover offer?

Answer 28

1. Minimum tender/shareholder approval. Requires minimum number of target shares (usually the # to do second-step merger) to have been tendered or, in a merger, the necessary shareholder approval to have been obtained, meaning bidder never has to purchase less than a controlling stake in a target.
2. No material adverse effect between announcement of offer/signing of a merger agreement and the time at which the bidder is to purchase the shares.
3. Merger agreement compliance: no breach of target R&W’s or covenants in the merger agreement.
4. Regulatory approvals.

Question 29

What four documents do the target’s shareholders receive on a recommended and hostile cash bid? (Exchange offer req’s all the same plus more info re bidder due to payment in bidder securities.)

Answer 29

1. A Schedule TO, which is filed with the SEC and which generally incorporates information by reference to an offer to purchase.
2. An offer to purchase, which sets out the terms of the transaction and is the primary disclosure document provided to the target’s shareholders.
3. A letter of transmittal and other documents providing instructions and means for tendering shares.
4. A Schedule 14D-9, which is prepared by the target and sets out the target board’s position in relation to the offer.

Question 30

What documents do the target’s shareholders receive in a one-step merger?

Answer 30

Target delivers a proxy statement and proxy card (the written power of attorney authorizing a specific vote on SH’s behalf) before the SH meeting. The proxy statement, which also serves as a prospectus if the bidder is issuing securities, is the primary SEC disclosure document and includes similar info to offer to purchase.

Question 31

What documents do the target’s shareholders receive in a second-step merger?

Answer 31

If the bidder has already acquired sufficient voting power to guarantee the outcome of the vote, it can choose to make the target send to the shareholders only a short-form information statement (rather than a proxy statement).

Question 32

How do you get a tax-free acquisition?

Answer 32

Generally, an exchange of stock of one company for stock of a second company is tax-free to the target’s shareholders if the transaction qualifies as a “reorganisation” under section 368 of the Code or a transfer to a controlled corporation under section 351 of the Code.

Question 33

Faster to close: cash or securities as consideration?

Answer 33

Cash is faster. Securities usually require additional SEC legwork.

Question 34

What does it take for SH to maintain his appraisal rights? Exercised often?

Answer 34

SH who do not tender in a cash tender offer (in the case of a two-step transaction, that is, a tender offer followed by a second-step merger) and who do not vote in favor of a merger, may be entitled to appraisal rights.
Appraisal proceedings can take years to complete and their outcome is uncertain, so appraisal rights are rarely exercised.

Question 35

Post-bid, can a bidder compulsorily purchase the shares of remaining minority shareholders?

Answer 35

1. In long-form merger, all SH are bought out.
2. In tender or exchange, no compulsory offer mechanism, but a bidder can use a second-step merger to buy out the remaining minority shareholders.

Question 36

If a bidder fails to obtain control of the target, are there any restrictions on it launching a new offer or buying shares in the target?

Answer 36

33 states have statutory freeze-out provisions that require a bidder that surpasses a certain ownership threshold in a company (usually 10% - 20%) to wait 2-5 years before gaining control of the company.

Question 37

What is a poison pill?

Answer 37

A shareholder rights plan allowing the issuance of rights to the company’s SHs to acquire additional securities in the company at a below-market price on certain trigger events, thereby diluting the voting power of the bidder.

Question 38

Three takeover defense changes to organizational docs?

Answer 38

1. staggered terms for directors;
2. prohibitions on removing directors without cause; and
3. limitations on shareholders’ ability to call meetings or to act by written consent.

Question 39

Takeover defense by changing target’s capital structure means what?

Answer 39

Capital structure in a recapitalisation by exchanging its shares for a substantial cash payment, a debt instrument or preferred stock