Us Takeover Guide 6010059

A Guide to Takeovers in theUnited States

Clifford Chance

International law firm Clifford Chance combines the highest global standard with localexpertise. Leading lawyers from different backgrounds and nationalities come togetheras one firm, offering unrivalled depth of legal resources across the key markets of theAmericas, Asia, Europe and the Middle East. The firm focuses on the core areas ofcommercial activity: corporate and M&A; capital markets; finance and banking; realestate; tax, pension and employment; and litigation and dispute resolution.

Through a strong understanding of clients’ businesses, cultures and objectives,Clifford Chance draws on the full breadth of its legal skill to provide results drivencommercial advice.

Visit our website—www.cliffordchance.com—to discover more about us.

U.S. M&A Practice

Our U.S. M&A practice is a leader in domestic and cross-border M&A, providing clients with highvalue strategic and structuring advice and superior project management and coordinationability. Our team is part of a global practice which is a recognized market-leader for M&A and isknown for our business-oriented legal approach to M&A transactions.

We provide advice across the full spectrum of M&A products and services…n Strategic planning and structuring advice

n Mergers & acquisitions (public & private)

n Financial advisor representation

n Tender offers

n Corporate reorganizations

n Private equity

n Negotiated transactions

n Unsolicited bids

n PIPES

n Complex cross-border M&A

n Leveraged buyouts

n REITs and real estate related M&A

n Joint ventures

n Recapitalizations

n Proxy contests

n Disclosure advice

n Advance anti-takeover preparation

n Distressed investing

...and are supported by strong regulatory and other specialist capabilities. We work closely with ourtax, real estate, competition/antitrust, employee benefits and other practice areas and industrygroups both domestically and globally to provide clients with the full spectrum of requisite legaladvice for each transaction.

For further information about this Guide or our U.S. M&A capabilities, please contact any of thefollowing partners:John Healy, Partner/Co-Head of Americas M&A, T: +1 212 878 8281, E: [email protected] Hoffmann, Partner/Co-Head of Americas M&A, T: +1 212 878 8490, E: [email protected] Berman, Partner, T: +1 212 878 3460, E: [email protected] Brinton, Partner, T: +1 212 878 8276, E: [email protected] Jones, Partner, T: +1 212 878 3321, E: [email protected] Medwick, Partner, T: +1 212 878 8168, E: [email protected] Meyer, Partner, T: +1 212 878 8176, E: [email protected] Sibbett, Partner, T: +1 212 878 8491, E: [email protected] Singer, Partner, T: +1 212 878 3288, E: [email protected] Williams, Partner, T: +1 212 878 8010, E: [email protected]

Introduction

This Guide to Takeovers in the United States provides a summary overview of the principal legalconsiderations with respect to takeovers of U.S. public companies. It considers, from both a legaland regulatory perspective, the various stages of a takeover from the initial approach to, through toobtaining control of, the target company. It addresses several key areas–the applicable regulatoryframework (Chapter One), preliminary takeover activity, including stakebuilding, preliminaryagreements and seeking support from the target’s shareholders (Chapter Two), primary acquisitionstructures (Chapter Three), deal protection, including “no-shop,” “no-talk” and “go-shop” provisionsas well as “fiduciary outs” and break fees (Chapter Four), fiduciary duties applicable to a targetcompany’s board of directors in the M&A context (Chapter Five), takeover defenses (Chapter Six),antitrust/merger clearance (Chapter Seven) and U.S. regulation of non-U.S. investment in the UnitedStates (CFIUS) (Chapter Eight). This Guide does not, however, address any financial, tax oraccounting matters or the application to takeovers of securities and other laws of jurisdictions outsidethe United States.

Many of the legal issues discussed in this Guide are potentially applicable to takeovers of non-U.S.companies that have shares traded or held in the United States. While the Guide touches briefly onsome of the issues that arise in that context, its principal focus is on takeovers of U.S. publiccompanies. Other issues that are not covered in this Guide must also be addressed when the targetcompany is a non-U.S. company.

The Guide does not purport to be comprehensive, but rather provides a summary overview of aseries of complex topics. It is not intended to, and does not, constitute legal advice.

The information contained in this Guide is accurate as of October 2010.

cont

ents

1. Regulatory Framework 1

State Corporate Laws 2

Federal Securities Laws 2

Securities Act 2

Proxy Rules 4

Tender Offer Rules 4

Other Primary Regulations 5

Federal Securities Laws Applicable to Stakebuilding 5

Antitrust/Merger Clearance 5

Exon-Florio/CFIUS 5

Regulated Industries 5

2. Preliminary Activity 6

Approaching the Target 7

Confidentiality 7

Stakebuilding 7

Management Team and Outside Advisers 9

Due Diligence 9

Financing 10

Preliminary Agreements Between Acquirer and Target 10

Confidentiality Agreements 10

Standstill Agreements 10

Exclusivity/Expense Reimbursement Agreements 11

Letters of Intent 11

Seeking Support From Shareholders 11

3. Acquisition Structures 12

Choice of Acquisition Structure - Two-Step or Single-Step 13

Two-Step Structure 13

Single-Step Structure 14

Summary Comparison of Structuring Alternatives 14

Provisions Commonly Included in the Merger Agreement 14

Implementation of a Two-Step Transaction 15

Implementation of a Single-Step Transaction 16

Additional Structuring Considerations 17

Registration Under the Securities Act 17

Required Board and Shareholder Approvals 17

Appraisal Rights 17

Disclosure of Financial Statements 18

Minimum Offer Period; Withdrawal Rights 18

All Holders/Best Price Rule 19

Target Company’s Obligations 19

Arrangements Between the Acquirer and Members of Target’s Management Team 19

Trading Restrictions 20

Foreign Private Issuers 21

4. Deal Protection 22

“No-Shop,” “No-Talk” and “Go-Shop” Provisions 23

Fiduciary Outs and Break-Up Fees 24

Stock Option Agreements 24

Voting/Support Agreements 25

cont

ents

5. Fiduciary Duties of a Target Company’s Board of Directors 26

Principal Components of Directors’ Fiduciary Duties 27

Fiduciary Duties in the M&A Context 27

6. Takeover Defenses 30

“Poison Pill” Shareholder Rights Plans 31

Charter and Bylaw Provisions 31

Antitakeover Statutes 31

7. Antitrust/Merger Clearance 33

8. The Committee on Foreign Investment in the United States (CFIUS) 36

Appendix A Indicative Timeline for Single-Step and Two-StepCash Acquisitions of U.S. Public Companies 39

Appendix B Deal Structure Considerations in Acquiring a U.S. Public Company -The Relative Advantages and Disadvantages of the Single-Step and Two-Step Structures 41co

nten

ts

1. Regulatory Framework

1 A Guide to Takeovers in the United States, Clifford Chance US LLP

State Corporate Laws 2

Federal Securities Laws 2

Securities Act of 1933 2

Proxy Rules 4

Tender Offer Rules 4

Other Primary Regulations 5

Federal Securities Laws Applicable to Stakebuilding 5

Antitrust/Merger Clearance 5

Exon-Florio/CFIUS 5

Regulated Industries 5

State Corporate LawsMost domestic U.S. publicly traded businesses are organized ascorporations. With very limited exceptions, the laws under whichU.S. corporations are organized are state (not federal) laws. Statecorporate laws dictate what shareholder approvals are requiredfor a particular form of transaction.1 State corporate laws alsoestablish the duties of a target company’s board of directorsduring the takeover process. Accordingly, state corporate lawsgovern the ability of a target company’s board of directors toreject or resist unsolicited takeover proposals, as well as theboard’s responsibilities when negotiating the terms of a takeoveror choosing from among competing proposals.

When we discuss corporate laws in this Guide, unless otherwiseindicated, we are referring to Delaware law. According to recentstudies, more than 50% of the corporations in the Fortune 500are incorporated in Delaware.

Federal Securities LawsThe primary U.S. federal securities laws that are potentiallyapplicable to takeover transactions are:

n the registration requirements of the Securities Act of1933 (the “Securities Act”), which potentially apply to M&Atransactions when the consideration to be received by thetarget’s shareholders includes securities;

n the provisions of the Securities Exchange act of 1934 (the“Exchange Act”) and related rules governing proxysolicitations in respect of shares registered under theExchange Act (generally referred to as the proxy rules); and

n the portions of the Exchange Act and related rules governingthe conduct of tender offers (generally referred to as thetender offer rules).

Securities Act

The registration requirements of the Securities Act potentiallyapply to share-for-share acquisitions and other transactions inwhich the target’s shareholders are offered securities. Theregistration requirements of the Securities Act do not applyto all-cash M&A transactions.

For purposes of the Securities Act, an M&A transaction in whichthe consideration to be received by the target company’sshareholders consists in whole or in part of securities is deemedto involve an offer and sale of securities, regardless of whetherthe transaction is effected pursuant to a tender offer or ashareholder vote. Under the Securities Act, unless an exemptionis available, (i) an offer to sell securities cannot be made until aregistration statement covering the proposed offering has beenfiled with the SEC, and (ii) a sale (defined to include a bindingcontract of sale) cannot be effected until the registration

Section 1: Regulatory Framework

A Guide to Takeovers in the United States, Clifford Chance US LLP 2

In this chapter, we provide a brief overview of the more significant regulatoryrequirements likely to be relevant to an acquisition of a U.S. public company.

1 In one situation, stock exchange rules also are relevant to shareholder approval requirements: if the acquirer in a share-for-share transaction is listed on a U.S. exchangeand as a result of the transaction will increase the number of its outstanding shares by 20% or more, the acquirer will be required under stock exchange rules to obtain theapproval of its own shareholders.

statement has become effective (which, generally, means clearedby the SEC).

For most share-for-share acquisitions of U.S. publiccompanies, no exemption from registration will beavailable and, as a result, a share-for-share acquisition of aU.S. public company almost certainly will have to beregistered under the Securities Act. If the target company in ashare-for-share transaction qualifies as a foreign private issuerunder the SEC’s rules2 or is closely held, exemptions fromregistration under the Securities Act may be available.

The SEC’s rules prescribe various forms of registration statementsfor use in registering different kinds of transactions under theSecurities Act. For a share-for-share transaction, the requiredform of registration statement is Form S-4 or, if the acquirerqualifies as a foreign private issuer, Form F-4. For any share-for-share acquisition of a U.S. public company, in addition to theregistration requirements of the Securities Act, the transactionalso will be subject to either the proxy rules or the tender offerrules because the transaction will be effected either pursuant to a“single-step” merger that requires a vote of the target’sshareholders, or pursuant to an exchange offer.3 Accordingly, thedisclosure document required to be included in the registrationstatement must satisfy both of the applicable sets of rules (theSecurities Act rules and either the proxy rules or the tender offer

rules). The disclosure document to be sent to the targetcompany’s shareholders4 must contain detailed disclosureregarding, among other things, the terms of the transaction, thenegotiations between the parties, the target board of directors’deliberations, fairness opinions of financial advisors, historicalfinancial information with respect to the target and acquirer and,depending on the size of the target relative to the acquirer, proforma financial information giving effect to the transaction. TheSEC’s legal and accounting staff normally will review andcomment on a registration statement prior to the SEC declaringthe registration statement effective under the Securities Act.

The process of preparing the registration statement and dealingwith the SEC staff’s comments typically would be expected totake not less than six weeks, and sometimes much longer,especially for a first-time registrant (a company that has never fileda registration statement with the SEC). Particularly for a non-U.S. acquirer whose shares are not already listed on a U.S.exchange, complying with these Securities Act registrationrequirements can be time-consuming and expensive.

For an acquirer that is not already subject to the ongoingreporting requirements of the Exchange Act, the use of aSecurities Act registration statement to effect an M&A transactionwill trigger a requirement to comply with those ongoing reportingrequirements from the time the registration statement is declared



2 The SEC’s definition of a foreign private issuer is set out on page 21.3 Some states expressly permit compulsory share exchanges that eliminate the need for a merger. See footnote 8 on page 19 for a more detailed explanation of thisstructuring alternative.4 In U.S. practice the disclosure document used in a transaction subject to registration under the Securities Act is called a prospectus; the disclosure document used tosolicit proxies is called a proxy statement; and the disclosure document used in a tender offer is called an offer to purchase. Hybrid disclosure documents have hybridnames–for example, a disclosure document used in a share-for-share transaction to be voted on by the target company’s shareholders is called a proxystatement/prospectus.



effective by the SEC. The ongoing reporting requirements include,in the case of a U.S. domestic issuer, the requirement to fileannual reports on Form 10-K, quarterly reports on Form 10-Q andinterim reports on Form 8-K, and in the case of a foreign privateissuer, the requirement to file annual reports on Form 20-F andinterim reports on Form 6-K. If the acquirer’s shares are notsubsequently listed on a U.S. exchange, it may be possible at alater date to deregister the shares and thereby end the obligationto comply with the SEC’s periodic reporting requirements.5

Proxy Rules

Some public company acquisition structures require a vote byeither or both of the target’s or the acquirer’s shareholders. If theclass of shares to be voted is registered under Section 12 of theExchange Act (which will always be the case if the shares to bevoted are listed on a U.S. exchange), the process of solicitingthose votes will be subject to the SEC’s proxy rules unless theissuer of the shares qualifies as a foreign private issuer under theSEC’s rules.6 The proxy rules set forth detailed disclosurerequirements that are similar in many respects to the SecuritiesAct disclosure requirements described above. A proxy statementcannot be sent to shareholders in definitive form until it has beenon file with the SEC for at least 10 days. If the SEC staff providescomments on the proxy statement, there may be a longer delaybefore it can be sent to shareholders in definitive form.

Tender Offer Rules

If the proposed takeover is structured to involve an offer topurchase shares directly from the shareholders of the target, thetender offer rules will be applicable. An offer for shares that arenot registered under Section 12 of the Exchange Act is subjectonly to the (relatively limited) requirements imposed by Section14(e) of, and Regulation 14E under, the Exchange Act. Bycontrast, an offer for shares that are registered under Section 12of the Exchange Act also is subject to the more extensiverequirements imposed by Section 14(d) of, and Regulation 14Dunder, the Exchange Act. Shares that are listed on the NYSE,Nasdaq or another U.S. exchange must be registered underSection 12 of the Exchange Act. For tender offers subject toRegulation 14D, detailed disclosure requirements apply.

An offer for shares of a foreign private issuer will be exempt frommost of the requirements imposed by Regulations 14D and 14E ifthe percentage of the class of the target’s shares being sought inthe offer that is held by U.S. holders is not more than 10%,pursuant to the “Tier I” exemption. If the U.S. ownership level isover 10% but is not more than 40%, a more limited set ofexemptions, the “Tier II” exemptions, may be available. Thecalculation of the 10% and 40% thresholds are notstraightforward exercises and must be done in accordance withSEC-prescribed rules.

All-cash acquisitions of U.S. public companies commonlyare structured as “two-step” transactions–a tender offer

5 This can present a difficult choice. A decision by an acquirer not to list its shares on a U.S. exchange in order to facilitate subsequent deregistration may make itsacquisition proposal less attractive to the target company and its shareholders, or could lead to flowback that puts pressure on the acquirer’s share price.6 Solicitations in respect of shares of foreign private issuers are exempt from the proxy rules under Exchange Act Rule 3a12-3(b).



followed by a merger that “squeezes out” any untenderedshares, typically by converting them into the right toreceive the same cash price per share offered in the tenderoffer. The two-step approach usually has timingadvantages over the alternative single-step transactionstructure. These alternative acquisition structures are discussedin more detail in Chapter 3 of this Guide.

Other Primary RegulationsFederal Securities Laws Applicable to Stakebuilding

Would-be acquirers seeking to acquire stakes in target companiesmust take into account the restrictions on insider trading imposedpursuant to Rule 10b-5 under the Exchange Act; the potentialrequirement to report beneficial ownership of shares in excess of5% on Schedule 13D; and the “short-swing profits” rules imposedunder Section 16(b) of the Exchange Act (which potentially canrequire disgorgement of profits from trading after the acquirer’sposition in the target’s shares exceeds 10%).7 Stakebuilding andrelated matters are discussed in Chapter 2 of this Guide.

Antitrust/Merger Clearance

Many U.S. M&A transactions are subject to the clearanceprocess imposed under the U.S. Hart-Scott-Rodino AntitrustImprovements Act (commonly referred to as the “HSR Act”). TheHSR clearance process and other antitrust matters are discussedin Chapter 7 of this Guide.

Exon-Florio/CFIUS

The Exon-Florio provision of the Defense Production Act grantsthe President of the United States the authority to suspend or

prohibit acquisitions of U.S. businesses by non-U.S. investors thatthreaten to impair the national security. The authority to administerthe Exon Florio provision has been delegated to the Committee onForeign Investment in the United States (“CFUIS”). The Exon-Florioprovision contemplates that parties to a transaction can voluntarilysubmit to a review of their proposed transaction by CFIUS.Despite the voluntary nature of the notification, acquirers thatbelieve their transaction could possibly give rise to nationalsecurity concerns typically choose to follow the notificationprocess because acquisitions by non-U.S. investors that fall withinthe Exon-Florio provision but are not cleared by CFIUS remainindefinitely subject to the imposition of divestment or otherrequirements by the President. The Exon-Florio provision andCFIUS are discussed in Chapter 8 of this Guide.

Regulated Industries

Various federal and state regulatory requirements may apply totransactions of targets operating in particular industries, including:

n Registered Investment Funds/Advisers

n Banking/Financial Institutions

n Energy

n Natural Resources

n Public Utilities

n Telecommunications

n Gaming

n Defense

n Insurance

7 Under Exchange Rule 3a12-3(b), Section 16 does not apply to acquisitions of shares of foreign private issuers.

Approaching the Target 7

Confidentiality 7

Stakebuilding 7

Management Team and Outside Advisers 9

Due Diligence 9

Financing 10

Preliminary Agreements Between Acquirer and Target 10

Confidentiality Agreements 10

Standstill Agreements 10

Exclusivity/Expense Reimbursement Agreements 11

Letters of Intent 11

Seeking Support From Shareholders 11

2. Preliminary Activity


Approaching the TargetBoards of directors of U.S. public companies have greaterlatitude than their counterparts in many other parts of the worldto actively resist takeover proposals they disfavor. For this reason,if discussions are to be initiated by the acquirer, the initialapproach to the target should be handled carefully. Of course, ifthe acquirer’s approach is not unsolicited but is instead inresponse to an approach by the target or an announcement bythe target that it is “exploring strategic alternatives” (generallyunderstood to mean seeking takeover proposals), then the initialapproach is likely to be less sensitive.

ConfidentialitySubject to a handful of exceptions, early disclosure oftakeover discussions with a U.S. public company targetgenerally is not required. In many cases, the first publicannouncement of a takeover of a U.S. public company occursonly after acquirer and target have entered into a definitivemerger agreement. The situations in which disclosure of takeoverdiscussions is required before the parties have entered into adefinitive agreement include:

n situations in which the target has reason to believe that a leakhas occurred and that at least some trading in the target’sshares is being conducted by persons in possession ofinformation regarding the target’s takeover discussions; and

n situations in which disclosure of takeover discussions isnecessary in order to prevent other public statements by thetarget from being misleading.

If a U.S. public company responds to an inquiry about whether itis in takeover discussions at a time when discussions of that typeare in fact occurring, the target cannot deny the existence ofthose discussions (because doing so would violate the SEC’sRule 10b-5) but may be able to respond with “no comment.”

StakebuildingAcquirers sometimes make open-market or negotiated blockpurchases of a target company’s shares before beginningnegotiations with the target or before a negotiated transactionwith the target is announced (these are sometimes called“toehold” purchases). There are several possible reasons topursue toehold purchases. Such purchases are likely to be at aless expensive price per share than the transaction price finallyagreed with the target, thereby helping lower the total cost of theacquisition. If the acquirer is outbid by a third party, the profit onthe toehold share position will help defray transaction costs thatotherwise would be borne by the would-be acquirer. Alternatively,a sizeable toehold might help defeat a competing bid. And, finally,if the approach has the potential to turn hostile, the acquirer mayneed to hold shares in order to have standing to sue the target orits board of directors.

Section 2: Preliminary Activity


The early stages of an acquisition of a U.S. public company can be crucial. Keyquestions to be decided include whether and how to approach the target; whetherand how to preserve confidentiality; and whether and how to build a “toehold” positionin the target’s shares. These questions are discussed in more detail in this chapter.



There is no mandatory offer regime in the United Statesrequiring that a person who acquires a specificpercentage of shares in a target company must make anoffer for the remaining shares. Accordingly, toeholdpurchases (even substantial ones) will not trigger an obligation tomake a follow-on offer.

In general, toehold acquisitions are permissible, subject to thefollowing considerations:

n If the acquirer holds material nonpublic information regarding thetarget, purchases of the target’s shares may violate Rule 10b-5.For this purpose, the acquirer’s plans to acquire the target donot disqualify the acquirer from making purchases. In addition, ifthe takeover is to be implemented by way of a tender offer theSEC’s Rule 14e-3 will prohibit certain third parties who learn ofthe tender offer, including the acquirer’s advisers but not theacquirer itself, from acquiring the target’s shares before theacquirer’s plans have been publicly announced.

n If any discussions with the target occur, the target almostcertainly will insist that the acquirer enter into a confidentialityagreement in which the acquirer agrees to use informationprovided by the target solely to negotiate an acquisitionagreement with the target, and agrees (through a “standstill”clause) to refrain from purchasing the target’s shares.

n Share purchases beyond specified levels are permitted onlyafter compliance with the merger clearance processdiscussed in Chapter 7 of this Guide.

n A person or group of persons that acquires “beneficialownership” of more that 5% of the outstanding shares of anyclass of equity securities registered under Section 12 of theExchange Act (which would include any shares listed on aU.S. exchange) in anticipation of pursuing an acquisitionproposal will be required to file a Schedule 13D with the SEC(within 10 days after crossing the 5% threshold) thatdiscloses, among other things, information about theacquirer’s share position and intentions with respect to thetarget. The person or group is permitted to acquire moreshares after passing the 5% threshold during the 10-dayperiod prior to filing the Schedule 13D. The Schedule 13D ispublicly available immediately upon filing. The definition of“beneficial ownership” for this purpose is broad and includesnot only direct ownership but also, potentially, shares held bythird parties that are the subject of options or votingcommitments in favor of the acquirer, and some types of longpositions established though use of derivatives.

n If the target has adopted a “poison pill” rights plan, theacquirer should take care to limit its ownership of the target’sshares to below the level at which the (disastrously dilutive)provisions of the pill are triggered. Pill triggers frequently areset at 10% or 15% of outstanding shares of common stock,but some are lower. Poison pill shareholder rights plans arediscussed in greater detail in Chapter 6 of this Guide.



n Various state antitakeover statutes can be triggered by shareaccumulations. In Delaware, the trigger level is 15% (Section203 of the Delaware General Corporation Law). Toeholdacquisitions should remain below the applicable trigger levels.These statutes typically use broad concepts of beneficialownership borrowed from the SEC’s Schedule 13D rules. Thismeans they can be inadvertently triggered if, for example, anacquirer enters into support agreements with majorshareholders of the target. State antitakeover statutes arediscussed in greater detail in Chapter 6 of this Guide.

n The “short-swing profits” rule, contained in Section 16(b) ofthe Exchange Act and related rules, will require disgorgementof any profit deemed made on the basis of purchases andsales made within 6 months of one another by a person thatowns 10% or more of a class of publicly traded shares.8

n If the acquirer’s share position exceeds 10%, the acquirermay be deemed to be an “affiliate” of the target company,which would cause any subsequent acquisition transaction tobecome subject to the heightened disclosure obligationsimposed pursuant to Rule 13e-3 under the Exchange Act.

Management Team and Outside AdvisersThe acquirer must empower its management team with sufficientauthority to make quick and effective decisions, and engageappropriate outside advisors with expertise to assist in theprocess. In addition to legal counsel, it may also be advisable for

an acquirer to engage various other outside advisers, includinginvestment bankers, independent accountants and, potentiallydepending on the nature of the transaction, proxy solicitationfirms, public relations firms, industry experts or other consultants.

Due DiligenceIn order to ensure that the proposed acquisition will satisfactorilyaddress the acquirer’s financial and strategic objectives, anacquirer will want to perform due diligence on the target prior tomaking its decision to proceed. Due diligence is typicallyconducted with respect to the business, financial and legalaspects of the target. Due diligence, if well conducted, enablesthe acquirer to gain insight into, among other things, the potentialtarget’s capital structure and operating characteristics and tobetter assess the risk profile of the potential investment. Duediligence also provides a basis for establishing the acquisitionprice and structure (including any appropriate price adjustments)and informs negotiation of the risk allocation and other provisionsof the transaction documents. Contractual protections, such asrepresentations and warranties with respect to the target’sbusiness9 conditions to closing and covenants governing theoperations of the target between signing and closing, often needto be tailored based on the due diligence findings. Due diligencemay also reveal important information with respect to post-acquisition integration. Due diligence is not a “one-size-fits-all”process. Each prospective acquirer must decide for itself howmuch time and expense to dedicate to due diligence activitiestaking into account, among other things, the requirements of the

8 Under Exchange Act Rule 3a12-3(b), Section 16 does not apply to acquisitions of shares of foreign private issuers.9 As indicated elsewhere in this Guide, in a U.S. public company acquisition, the target company’s representations and warranties typically will not survive the closing, so ifthe acquirer discovers a problem after the completion of the transaction, it has no right to be indemnified or recover damages.

acquirer’s funding sources and the acquirer’s comfort level with,and knowledge of, the target company and its business.

FinancingIf the purchase of shares of a publicly-traded U.S. target companyis to be financed by borrowings that are secured directly orindirectly by the acquired shares, the financing arrangements maybe subject to the Federal Reserve Board’s margin regulations—Regulations T, U and X. Those regulations generally limit thepermitted amount of financing to 50% of the current market valueof the purchased shares. There are various transaction structuresthat can be used to avoid these margin regulations. In a single-step transaction structure, a secured lender’s collateral will be theassets of the target company, not the acquired shares, and so themargin regulations will not apply. In a two-step transactionstructure where the acquirer borrows to finance the purchase oftendered shares, the margin regulations will not apply if theacquirer borrows on an unsecured basis and no “negative pledge”or similar restrictions apply to the acquired shares.

Whether a single-step structure or a two-step structure is used,the collateral for secured acquisition debt ultimately will be theassets of the target. Unlike in some other jurisdictions, in theUnited States this type of secured acquisition financing can beaccomplished without the use of elaborate “whitewash” or similarprocedures. U.S. law does not contain the prohibitions found insome other jurisdictions with respect to subsidiaries providingfinancial assistance to parent companies (so long as thesubsidiary is 100%-owned by the parent). The laws of many U.S.states do, however, contain prohibitions on “fraudulentconveyances”—generally defined as transfers of property

(including grants of security interests) at a time when thetransferring company is insolvent or is rendered insolvent as aresult of the transfer. In highly-leveraged transactions, lendersmay insist on extensive analyses to support the conclusion thatthe target company remains solvent immediately following thecompletion of the acquisition, taking into effect the targetcompany’s assumption of the acquisition debt.

Preliminary Agreements Between Acquirer and TargetDepending on the circumstances, several different types ofpreliminary agreements may be utilized.

Confidentiality AgreementsA confidentiality or non-disclosure agreement typically requiresthe recipient of confidential information to keep the informationconfidential and to use the information solely in connection withits evaluation of the proposed transaction. Frequently this is a“one-way” agreement covering only information provided by thetarget. If the contemplated transaction is share-for-share, thetarget typically also will wish to perform diligence on the acquirer,and in that case the confidentiality obligations will be mutual.

Standstill AgreementsIf the target is a public company, the target company usually willinsist on including a standstill agreement in the confidentialityagreement. Standstills prohibit the prospective acquirer fromacquiring or offering to acquire shares, other securities or assets ofthe target or its subsidiaries both during negotiations and for aspecified time thereafter (sometimes targets request standstillperiods as long as three years, but 12-24 months is more typical).Standstill provisions also typically contain broad prohibitions onother potentially-disruptive behavior by acquirers, including





participation in proxy contests and other public or private attemptsto influence the management of the target. Some acquirerssuccessfully negotiate the right to be released from their standstillobligations in certain circumstances in order to compete with otherbidders seeking to acquire the target company.

Exclusivity/Expense Reimbursement AgreementsAcquirers sometimes fear they will invest a significant amount oftime and expense in conducting due diligence and negotiations inconnection with a takeover only to then see the target sold to athird party. To address this concern, acquirers sometimes try topersuade the target to enter into an exclusivity agreement (in whichthe target promises to refrain from takeover discussions with thirdparties for a specified period) and/or an expense reimbursementagreement (in which the target promises to pay the prospectiveacquirer’s expenses if a transaction is not completed). Well-advisedpublic target companies rarely agree to these requests. Exclusivityagreements are slightly more common, however, when theproposed transaction is a management-led buyout.

Letters of IntentParties sometimes sign a letter of intent, which describes thematerial terms of a proposed transaction. A letter of intent createsa roadmap for proceeding to the definitive agreement and helps toexpose any “deal breakers” early in the discussions. Letters ofintent are not commonly used in connection with acquisitions ofU.S. public companies. When they are used, they typically arenon-binding.

Seeking Support From ShareholdersWould-be acquirers should take great care in seekingsupport agreements from major shareholders of the targetcompany. Agreements of this type could trigger Schedule 13Dfiling obligations, state antitakeover statutes and poison pill rightsplans, in some cases with devastatingly adverse consequences.Support agreements without the consent of the target company’sboard of directors typically also will violate the form of standstillclause customarily contained in confidentiality agreements.

Choice of Acquisition Structure - Two-Step or Single-Step 13

Two-Step Structure 13

Single-Step Structure 14

Summary Comparison of Structuring Alternatives 14

Provisions Commonly Included in a Merger Agreement 14

Implementation of a Two-Step Transaction 15

Implementation of a Single-Step Transaction 16

Additional Structuring Considerations 17

Registration Under the Securities Act 17

Required Board and Shareholder Approvals 17

Appraisal Rights 17

Disclosure of Financial Statements 18

Minimum Offer Period; Withdrawal Rights 18

All Holders/Best Price Rule 19

Target Company’s Obligations 19

Arrangements Between the Acquirer and Members of Target’s Management Team 19

Trading Restrictions 20

Foreign Private Issuers 21

3. Acquisition Structures


Choice of Acquisition Structure - Two-Step or Single-Step

Two-Step Structure

In a two-step structure, the merger agreement providesfor a tender offer by the merger subsidiary followed by a“second-step” merger between the merger subsidiary andthe target. In the tender offer, the merger subsidiary offers tobuy any and all of the shares of the target that have beentendered before the expiration of the offer, provided theconditions to the offer are satisfied at that time. Those offerconditions customarily include, among others, a sufficient

number of shares having been tendered so that the acquirer canvote through the second-step merger alone (without needing thevotes of any other shareholders). The second-step merger(sometimes also called a “squeeze-out” merger) is used toeliminate the shares not tendered in the tender offer byconverting them into the right to receive the same amount ofconsideration per share that is paid in the tender offer. Even ifthe second-step merger takes some time to complete, theacquirer controls the target company from the time it completesits tender offer. Acquirers in all-cash transactions often


10 By contrast, hostile takeover bids usually involve a tender offer by the acquirer made without the benefit of a merger agreement or a favorable recommendation from thetarget company’s board of directors. If the acquirer obtains enough shares through the tender offer, then it can remove and replace the existing directors and vote throughthe second-step merger without requiring the approval of any remaining target shareholders.11 A compulsory share exchange is an alternative to a traditional merger structure in many states, including New York, Illinois and Texas, but not Delaware. In these cases,the applicable state statute typically authorizes a compulsory exchange of all outstanding shares of the target company for cash, stock or other securities pursuant to a planof share exchange that is approved by the target’s board of directors and shareholders, the acquirer’s board and, if required by the statute, the acquirer’s shareholders.Unlike exchange or tender offers, which require no shareholder vote but do not directly affect untendered shares (i.e., they remain outstanding), state statutes that permitcompulsory share exchanges provide that a plan of share exchange is subject to a target shareholder vote, triggers appraisal rights and, if approved, converts all of theoutstanding shares of the target company into the right to receive the exchange consideration. As a result, because there is no merger there is no need to establish atemporary merger subsidiary.

Section 3: Acquisition Structures

In the United States, a negotiated acquisition of a public company invariably is effectedpursuant to a merger agreement.10 The merger agreement typically has three parties –the acquirer, the target and a subsidiary of the acquirer (commonly referred to as amerger subsidiary), specially formed for the purpose of the transaction, usually under thelaws of the same jurisdiction as the target. The merger agreement will provide either for a“two-step” transaction structure that begins with a tender offer, or a “single-step” mergertransaction structure. In this chapter, we discuss these alternative structures, theirrespective attributes and the processes typically followed to implement them.11



prefer the two-step structure because (assuming the offeris well-received by the target’s shareholders) it reducesthe period of time that the transaction is potentiallyexposed to competing bids and to risks of adversedevelopments that could threaten a closing.

12

The process to implement a two-step acquisition is described ingreater detail below.

Single-Step Structure

In a single-step structure, no tender offer is made andinstead the merger is submitted to a vote of the target’sshareholders. in the merger, the target company’s shares allare converted at the same time, when the merger becomeslegally effective, into the right to receive the per shareconsideration being offered by the acquirer. Situations inwhich a single-step merger might be preferred include (i) whenthere are regulatory or other approvals that cannot be satisfiedquickly (such as, for example, antitrust approvals, or registrationwith the SEC if the consideration being offered to the targetcompany’s shareholders consists in whole or in part of shares ofthe acquiring company) so that the timing advantage of the two-step structure is eliminated, (ii) when the acquiring company isfinancing the transaction with loans and the lenders do not wish toprovide bridge financing for the purchase of shares in a first-steptender offer, (iii) when the transaction will include an equity roll-over

by management or other target shareholders, and the acquirerwishes to avoid the technical difficulties presented by theapplication of the SEC’s tender offer rules to those kinds ofarrangements,13 and (iv) when the target’s board of directorswishes to expose the transaction to competing bids for a longerperiod of time than would be available in a two-step transaction.

The process to implement a single-step transaction is described ingreater detail below.

Summary Comparison of Structuring Alternatives

A summary timeline for each of the single-step and two-stepacquisition techniques is provided in Appendix A to this Guide. Asummary of the relative advantages and disadvantages of the twotechniques is provided in Appendix B to this Guide.

Provisions Commonly Included in the Merger AgreementThe merger agreement will specify the transaction terms (e.g.,price per share, treatment of options, tender offer/mergermechanics). The merger agreement also will containrepresentations and warranties, provisions for conduct of thetarget’s business both before and after completion of thetransaction, the conditions to the obligations of the parties tocomplete the transaction and termination provisions. Customarilyin a U.S. public company acquisition, the target company’srepresentations and warranties will not survive the closing, so if

12 If the consideration to be offered to the target company’s shareholders includes securities and the transaction must be registered under the Securities Act, the timingadvantage of the two-step structure is lost. As a result, most Securities Act-registered acquisitions of U.S. public company targets use the single-step structure.13 Equity roll-over arrangements present technical issues under Rule 14d-10 (the “all holders/best price” rule) and Rule 14e-5 (which prohibits purchases outside the tenderoffer). Because those rules only apply to tender offers, they do not apply to single-step transactions (in which no tender offer is used). Of course, even in a single-steptransaction any special arrangements such as equity roll-overs must be fully disclosed to the target company’s shareholders.



the acquirer discovers a problem after the completion of thetransaction it has no right to be indemnified or recover damages.

The merger agreement commonly will include a “no-shop”provision (prohibiting the target from soliciting competing bidsbetween announcement and closing) and a “break fee” provision(providing for a payment by the target to the acquirer in certaincircumstances, including if the target determines to abandon thetransaction in favor of a competing bid). The permissible extent ofprotection from these provisions is limited by Delaware law.Generally, break fees in the range of 2.0-3.5% of transactionvalue are common (although there may be instances where,because of the specific facts of the case, lower amounts arerequired, and in some cases, higher fees may be permissible).No-shop clauses must be tempered with the qualification that thetarget can respond to a bona fide unsolicited proposal thatappears to be superior to the one already agreed to. Acquirerssometimes also receive commitments from significantshareholders of the target to support the transaction. Chapter 4of this Guide contains a more detailed discussion of these andother deal protection provisions.

Implementation of a Two-Step TransactionAs described above, a two-step transaction structure, beginningwith a tender offer, often is used to accelerate the process ofgaining control of a target company. Unlike a single-step merger,which requires the preparation of a proxy statement that, asdescribed below, must be pre-cleared by the SEC beforedissemination, an all-cash tender offer requires no prior SECclearance. Also, the preparation of the disclosure document usedin a tender offer, and the process of addressing any SECcomments, is controlled principally by the acquirer. The merger

agreement in a two-step transaction will provide that the mergersubsidiary must commence a tender offer for the target company’sshares within a specified period (usually 10 business days)following the signing of the merger agreement. Under the SEC’srules, the tender offer must remain open for at least 20 businessdays following its first publication and the offer period may berequired to be extended if material changes are made to the termsof the offer within a short time before its scheduled expiration. Forexample, the offer must remain open for at least 10 business daysafter any change in the price per share being offered.

The bidder’s obligation to accept and pay for shares tendered inresponse to the tender offer customarily is subject to a series ofconditions, including a requirement that at least enough sharesmust have been tendered so that the bidder will be able when itowns those shares to vote through the second-step mergerwithout the votes of any other shareholders (a simple majority ofthe outstanding shares entitled to vote in Delaware, unless agreater percentage is specified in its certificate of incorporation). Byacquiring the requisite percentage of the target company’s shares,the acquiring company gains control over the target company andcan give the requisite shareholder approval of the second-stepmerger by voting the shares acquired in the tender offer. Themerger agreement for a two-step transaction typically will requirethe acquirer to complete the second-step merger if it closes itstender offer, regardless of subsequent adverse developments.

If the shares owned by the merger subsidiary at thecompletion of the tender offer represent 90% or more ofthe target company’s outstanding shares, then the acquirerwill be able to take advantage of the statutory “short-form”merger procedure, which permits the acquirer to increase



its ownership of the target company to 100% within amatter of a few days. Delaware law provides that if a companyowns at least 90% of the shares of another company, it canmerge with the subsidiary company without a vote of thesubsidiary company’s shareholders. In these cases, the second-step merger can be completed without preparing or distributing aproxy statement or calling a meeting of the target’s shareholders.If more than a majority but less than 90% of the target company’sshares are acquired in the tender offer, however, in order tocomplete the merger an information statement (or proxystatement) must be prepared, cleared with the SEC and deliveredto the other remaining shareholders of the target (even thoughtheir vote is not needed to effect the merger). It has become fairlycommon in tender offer transactions for the target to grant theacquirer a “top-up option,” which permits an acquirer that isbelow but fairly close to the 90% threshold to buy sufficientshares from the target to achieve the 90% ownership level,although some recent court decisions suggest these top-upoptions should be designed and used carefully.14

Implementation of a Single-Step TransactionIn a single-step transaction, following execution of the mergeragreement, the parties (acquirer and target) prepare the proxymaterials that are required to be delivered to the targetcompany’s shareholders before the meeting to be held toapprove the transaction. The proxy materials must be filed inpreliminary form by the target company with the SEC. If theSEC’s staff decides not to review the proxy materials, they can besent to the target’s shareholders beginning 10 days after the

preliminary proxy materials were filed. If the materials are reviewedand commented on by the SEC staff, the process of obtainingand resolving the comments will most likely take 4-6 weeks(although longer or shorter periods are possible). The SEC’s rulespermit preliminary proxy materials (but not a proxy card) to besent to shareholders before they are cleared by the SEC staff, butthis is rarely done except in hostile or contested takeovers.

After the proxy materials are cleared by the SEC, they are sent toshareholders, thereby commencing the proxy solicitation process.The acquirer often engages the services of a proxy soliciting firmto assist in this process. In order to assure a favorable result,proxy solicitation firms typically recommend a solicitation periodof at least 35 days before the meeting. Delaware law requires thenotice of the meeting to be given not less than 20 and not morethan 60 days before the meeting date.

The merger agreement for a single-step acquisition typicallyincludes covenants on the part of the target company to makethe necessary SEC filings, complete the SEC clearance processand hold its shareholders’ meeting as soon as reasonablypracticable, and to consult with the acquirer about SEC filings,submissions, comments and other developments. Subject tothese contractual provisions, though, in a single-steptransaction the process of preparing the key disclosuredocument and dealing with SEC comments is controlled bythe target company.

14 See, e.g., Olson v. ev3, Inc. (Del. Ch. 2010) (court found top-up option could be coercive because of its potential effect on the price obtainable in a statutoryappraisal proceeding).

Additional Structuring Considerations

Registration Under the Securities Act

As discussed in Chapter 1, in the case of a share-for-shareacquisition or, if the consideration to be offered to the targetcompany’s shareholders otherwise includes securities, thetransaction will be subject to the registration requirements of theSecurities Act.

If the acquirer is not already an SEC reporting company, the filingof a registration statement will trigger a requirement or the part ofthe acquirer to comply subsequently with the continuousreporting requirements of the U.S. securities laws, including, inthe case of a domestic issuer, to file annual reports on Form 10-K, quarterly reports on Forms 10-Q and interim reports on Form8-K, and in the case of a foreign private issuer, to file annualreports on Form 20-F and interim reports on Form 6-K.

Required Board and Shareholder ApprovalsUnder Delaware law, the merger agreement must be approved bythe boards of directors of the two companies that will be merged(the target company and the acquirer’s merger subsidiary) and bythe shareholders of both those companies. The merger subsidiarywill have only one shareholder (typically the acquirer or one of itswholly-owned subsidiaries) and the approval of that shareholdercan be given by a short, written consent signed by an authorizedofficer of the company that is the merger subsidiary’s soleshareholder. In a single-step transaction, and in a two-steptransaction in which the second-stage merger does not qualify forthe “short-form” merger process (because the acquirer does notown 90% or more of the target company’s outstanding shares

following the completion of the tender offer), the approval of thetarget company’s shareholders must be obtained to approve themerger. For a Delaware target company, unless its certificate ofincorporation provides for a greater percentage, the approval mustbe by a majority of all outstanding shares entitled to be voted.

If shares are being offered as part of the acquisition considerationand the acquirer’s shares are listed on a U.S. stock exchange,then the acquirer’s shareholders will have to vote to approve theissuance of the acquirer’s shares in the transaction if the numberof shares to be issued will be 20% or more of the number of theacquirer’s shares outstanding immediately before the transaction.

Appraisal RightsUnder Delaware law and except for certain stock-for-stockmergers15 shareholders of a target company in a merger have theright (usually called “dissenters’ rights” or “appraisal rights”) todissent from the merger and elect to have the Delaware ChanceryCourt appraise the fair value of their shares, in which case theappraised value in cash (and not the per share price specified inthe merger agreement) is what the shareholders who exercisethose rights are entitled to receive. The “fair value” to bedetermined by the court does not include a takeover premium.The exercise of dissenters’ rights does not affect the validity ofthe merger, nor does it prevent the acquirer from owning 100% ofthe target’s equity immediately upon completion of the merger(and before the appraisal claims are resolved). An appraisal awardaffects only the shares of shareholders who properly exercisetheir rights to appraisal. Shareholders who tender their shares tothe acquirer, or vote in favor of the merger, are not eligible toexercise dissenters’ rights.



15 Appraisal rights do not apply to the first step tender offer in a two-step transaction. They would apply, however, to the second-step merger. Accordingly, shareholders whotender their shares in the offer are not entitled to exercise appraisal rights.



Disclosure of Financial StatementsIn all-cash transactions, both the tender offer rules (in a two-stepacquisition) and the proxy rules (in a single-step acquisition)require inclusion of the acquirer’s financial statements in thedisclosure document sent to the target company’s shareholders ifthe financial condition of the acquirer is material to the targetcompany shareholders’ decision to tender their shares or vote infavor of the merger, as applicable. This can be particularlyimportant for acquirers who cannot readily produce financialstatements of the type required by the SEC’s rules. The proxyrules provide that the acquirer’s financial statements will bematerial (and therefore must be provided) if the acquisition willrequire financing and the financing is not assured. The tenderoffer rules provide that the acquirer’s financial statements will bepresumed not material (and therefore not required) if (i) theconsideration offered consists solely of cash; (ii) the tender offer isnot subject to any financing conditions; and (iii) either (x) theacquirer is an SEC-reporting company or (y) the offer is for alloutstanding securities of the subject class. Despite the slightlydifferent formulations, the financial statement requirements of thetender offer rules and the proxy rules are essentially the same–toavoid including financial statements in the documents sent to thetarget’s shareholders, the acquirer must have its financingcommitted or otherwise clearly available and cannot have anexpress financing contingency.

In share-for-share transactions and other transactions in whichthe consideration being offered by the acquirer to the target’sshareholders includes securities, historical audited and unauditedfinancial statements of the acquirer and the target (prepared inaccordance with, or in certain cases reconciled to, U.S. GAAP),together with, in some cases, pro forma financial statements

giving effect to the proposed business combination, must beincluded in the disclosure documents.

The SEC has adopted rules that permit foreign private issuers touse financial statements that are prepared in accordance withInternational Financial Reporting Standards (IFRS) as issued bythe International Accounting Standards Board (IASB). These rulesrelax prior requirements that would have mandated disclosure inU.S. GAAP or, at a minimum, reconciliation to U.S. GAAP.

Minimum Offer Period; Withdrawal RightsUnder the SEC’s rules, a tender offer must remain open forat least 20 business days after it commences. The tenderoffer “commences” when the acquirer first publishes, sends orgives the target’s shareholders the means to tender securities inthe tender offer. All persons tendering securities in response tothe tender offer have the right to withdraw them while the offer isopen and at any time after 60 days following the commencementof the offer. A “follow-on” offer period of 3-20 business days ispermitted during which no withdrawal rights apply and securitiesmust be purchased as and when tendered for the same form andamount of consideration as ultimately offered to shareholders inthe initial offering period.

The SEC’s rules also require that a tender offer mustremain open for at least 10 business days following apublic announcement of a change in the percentage ofsecurities being sought or in the consideration beingoffered. The SEC staff takes the position that other changes ofcomparable significance require the same treatment and thatother material changes to the offer require the offer to remainopen for at least five business days.



All Holders/Best Price RuleA tender offer must be open to all shareholders of the subjectclass of securities and all holders must be paid the highestconsideration paid to any other security holder during the offer(Rule 14d-10, which is commonly known as the “all holders/bestprice rule”). The offer can, however, provide the target’sshareholders with the right to choose among different forms ofconsideration (e.g., all-cash vs. part cash and part securities), solong as all holders have the same choice. Rule 14d-10 wasinterpreted by some U.S. courts to apply when members of thetarget company’s management team negotiate to receive specialbenefits following completion of the takeover (such as, forexample, new employment contracts). The uncertainty caused bythese court decisions led acquirers to make greater use of thesingle-step acquisition structure. In 2006, however, the SECamended the rule to provide that the negotiation and receipt ofemployment benefits will not violate the rule provided certainprocedures are followed. While the 2006 amendments didprovide a workable “safe harbor” for management compensationarrangements, the amendments failed to address some other,potentially problematic situations. Accordingly, in a transaction inwhich the target company’s management is expected to “rollover” its equity position in the target, for example, the acquirermay be prudent to use a single-step acquisition structure (therebyaltogether avoiding the rule, which only applies to tender offers)because equity rollovers were not specifically addressed in the2006 amendments and could be deemed to violate the rule.

Target Company’s ObligationsWhether a tender offer is unsolicited or recommended by the

target’s board of directors, the target company must publish orsend to the target’s shareholders its recommendation or positionwith respect to the tender offer within 10 business days aftercommencement of the tender offer. That recommendation orposition also must be filed with the SEC on a Schedule 14D-9.The SEC’s rules require the target company’s board to(i) recommend acceptance or rejection of the offer, (ii) express noopinion and remains neutral toward the offer, or (iii) state that it isunable to take a position with respect to the offer. The documentsent to shareholders and filed with the SEC also is required toinclude a description of the reasons for the board’s position, aswell as specified additional information, including the history ofdealings and negotiations with the bidder, the substance of anyreport, presentation or advice received from any financial adviserretained by the target or its board, details of all purchases andsales of the target company’s shares during the previous 60 daysby the target company itself and by its officers and directors andany change-in-control arrangements or other executivecompensation arrangements that will be affected by the offer. Inrecommended offers, the target’s Schedule 14D-9 setting forththe target board of director’s recommendation is typically mailedto its shareholders together with the acquirer’s offer materials.

Arrangements Between the Acquirer and Members of Target’sManagement TeamThere may be commercial reasons for an acquirer to reachagreement at an early stage with the key members of a targetcompany’s management team on terms that incentivize thosemanagers to stay with the business following the acquisition.Before holding any such discussions, transaction participants

must carefully consider the possible consequences under U.S.securities laws because the substance of any proposals oragreements between the parties are generally required to bedisclosed to the target’s shareholders. In addition, if sucharrangements would give any existing director or executive officerof the target a significant equity interest or rights in the entityformed to acquire the target, the takeover transaction maybecome subject to the SEC’s “going private” rule, Rule 13e-3.Rule 13e-3 requires additional disclosure and, in particular,requires the acquirer (and the target, if the target’s boardrecommends in favor of the transaction) to affirmatively statewhether or not the terms of the transaction are fair to theunaffiliated shareholders of the target and to give detailed reasonsfor that conclusion. The additional required disclosure includesany valuation requests or analyses prepared by third parties forthe transaction participants.16

An acquirer seeking to engage in discussions with members ofthe target company’s management team also should bear in mindthat if those members hold significant amounts of the target’sstock, an agreement, arrangement or understanding with themcould cause the acquirer to be deemed a “beneficial owner” ofthe target and could inadvertently trigger one or more of theanti-takeover provisions described in Chapter 6.

Trading RestrictionsThe SEC’s Rule 14e-5 prohibits purchases outside of a tenderoffer of shares of the class being sought in the offer. Theprohibition applies from the announcement of the tender offer untilits expiration. It covers both purchases and arrangements to

purchase, and extends to the acquirer, its dealer manager, theirrespective affiliates and anyone acting on behalf of any of them.The rule also covers “related securities” (i.e., securities immediatelyconvertible into or exchangeable for shares of the class beingsought in the offer). The rule does not apply during the time of anysubsequent offering period if the consideration is the same in formand amount as offered in the original tender offer. Changes to thecross-border tender offer rules adopted by the SEC in 2008 makeit easier for parties to comply with Rule 14e-5 in the context of atakeover offer for shares of a foreign private issuer that hasU.S. shareholders.

Regulation M prohibits certain trading activity regardless ofwhether the persons trading have an intent to manipulate prices.It applies to “distributions” of securities, including public offeringsfor cash. Regulation M treats a share-for-share transaction as a“distribution,” and imposes restrictions on bids for, and purchasesof, shares of the class being offered to the target’s shareholders.The restrictions apply to “distribution participants” (including theacquirer) and “affiliated purchasers.” An acquirer’s investmentbank is potentially subject to these restrictions, althoughpurchases on the other side of an information barrier within theinvestment bank are permitted. The period during which theserestrictions apply begins on the day of mailing the proxysolicitation materials and continues through the time of the vote.Competing share-for-share bids can raise additionalcomplications under Regulation M, because the SEC staff takesthe position that a restricted period may begin for a hostilecompeting acquirer before it mails its own offer materials, if theacquirer also is soliciting “no” votes on the first transaction.



16 Rule 13e-3 also will apply if the acquirer already is an “affiliate” of the target company (which would be the case if the acquirer holds 10% or more of the target company’sshares or has a board seat).



Foreign Private IssuersIf a tender offer is made for shares of a foreign private issuer thetender offer may not be subject to all of the SEC’s tender offerrules, because the acquirer may have the benefit of the “Tier I” or“Tier II” exemptions. The availability of the Tier I and Tier IIexemptions is based principally on the level of U.S. shareownership in the target company, measured by the percentage ofthe target company’s shares being sought in the offer that areheld by U.S. holders. To qualify for the Tier I exemption, nomore than 10% of the shares being sought in the offer maybe held by U.S. residents and certain other conditions mustbe satisfied. To qualify for the Tier II exemption, no morethan 40% of the shares being sought in the offer may beheld by U.S. residents and certain other conditions must besatisfied. The calculation of the 10% and 40% thresholdsare not straightforward exercises and must be done inaccordance with SEC-prescribed rules.

The Tier I and Tier II exemptions are available only whenthe target company is a foreign private issuer. All non-U.S.issuers (other than governmental issuers) qualify as foreign privateissuers unless: (a) more than 50% of the issuer’s outstandingvoting securities are directly or indirectly held of record byresidents of the United States and (b) any of the followingconditions are satisfied: (i) the majority of the issuer’s executive

officers or directors are U.S. citizens or residents; (ii) more than50% of the assets of the issuer are located in the United Statesor (iii) the business of the issuer is administered principally in theUnited States. A corporation organized under the laws of aU.S. jurisdiction (such as Delaware) can never qualify as aforeign private issuer.

Tender offers that qualify for the Tier I exemption are exemptfrom almost all of the disclosure, filing and proceduralrequirements of the tender offer rules. In addition, if the offer is ashare-for-share offer that qualifies for the Tier I exemption,pursuant to Rule 802 under the Securities Act the transactionwill be exempt from the registration requirements of theSecurities Act.

Tender offers that qualify for the Tier II exemption have limited relieffrom a number of the tender offer rules, and do not qualify for anyrelief from the registration requirements of the Securities Act.

If, notwithstanding the availability of the Tier I and Tier IIexemptions, transaction participants are unable to reconcile theU.S. tender offer rules with the rules of the jurisdiction in whichthe target company is organized, it may nonetheless be possibleto obtain specific exemptive relief directly from the SEC.

“No-Shop,” “No-Talk” and “Go-Shop” Provisions 23

Fiduciary Outs and Break-Up Fees 24

Stock Option Agreements 24

Voting/Support Agreements 25

4. Deal Protection



Section 4: Deal Protection

Between the time a merger agreement is entered into and publicly announced and thetime it is voted on by shareholders (in the case of a single-step transaction) or the timethe first-stage tender offer is completed (in the case of a two-step transaction), there isa risk that a competing third-party offer may emerge that could prevent the transactionprovided for in the merger agreement from being consummated. To help alleviate thisrisk, discourage competing offers and compensate the would-be acquirer if anegotiated deal is broken up as a result of a competing offer, merger agreementsproviding for the acquisition of a U.S. public company invariably contain “deal protection”provisions. In this chapter, we discuss the deal protection mechanisms mostcommonly used in U.S. practice.

“No-Shop,” “No-Talk” and “Go-Shop” Provisions“No-shop” and “no-talk” provisions restrict target companies fromsoliciting, encouraging, initiating discussions with, providinginformation to, or negotiating with, third parties with respect tocompeting transactions. Virtually every U.S. public companymerger agreement contains a form of no-shop/no-talk clause.Customarily, the restrictions imposed by these provisions aresubject to exceptions which allow a target company to respondto an unsolicited proposal that the target’s board believesrepresents (or reasonably may be expected to lead to) a superiortransaction, by providing non-public information to the interloperand discussing potential contract terms with it. The mergeragreement typically provides that if the discussions over theunsolicited competing offer result in a definitive agreement withthe competing acquirer, the target can terminate the merger

agreement (frequently only after giving a right to match to theacquirer under the first merger agreement, and invariably onlyupon immediate payment of a break fee).

In some situations, the target company’s board of directors maybe concerned that a grant of broad deal protection rights to anacquirer may appear inconsistent with the target board’sfiduciary obligation to maximize shareholder value. Theseconcerns might arise, for example, if the target board is beingasked to approve a management-led buyout transaction that hasnot been preceded by any auction or other market checkprocess. In these situations, the target board and its adviserssometimes modify the customary no-shop/no-talk agreementsby adding a “go-shop” provision. A “go-shop” provision permitsa target to actively solicit competing offers for a specified, limited

period of time after the merger agreement has been signed andthe transaction has been announced and, usually, provides for aonly a relatively modest break fee if the merger agreement isterminated to allow a transaction with a new bidder whoemerged during the go-shop period.

Fiduciary Outs and Break-Up FeesA “fiduciary out” provision gives the target’s board the right toterminate the merger agreement if the board determines that itsfiduciary duties require it to do so. In most cases, the right islimited to a situation in which the target’s board has approved acompeting transaction after complying with the no-shop/no-talkprovision contained in the merger agreement. Invariably, themerger agreement provides that the exercise of a fiduciary outtriggers payment of a break fee by the target to the acquirer.

Termination or “break” fees are payments required under amerger agreement if the merger agreement is terminated for oneor more specified reasons. Typically, the size of the terminationfee and the events that trigger an obligation to pay it are thetopics of significant negotiation. Delaware courts have approvedtermination fees ranging from 1% to 6% of the transaction value.Termination fees in the 2.0-3.5% range are common.

The termination fee payable by the target when it terminates inorder to enter into a new merger agreement with a competingacquirer invariably is payable immediately. Some other terminationfees, however, are customarily payable on a deferred orcontingent basis. For example, it is quite common to provide thatif the target company’s shareholders vote down a transaction at a

time when a competing proposal has been announced, and as aresult of the vote-down the merger agreement is terminated, atermination fee will be payable by the target, but only if the targetsubsequently agrees to a competing transaction within acontractually-agreed period after the termination (12 monthswould be typical).

“Reverse break fee” provisions require the acquirer to pay a fixedamount to the target if the merger agreement is terminated forone or more specified reasons, which might include failure toobtain antitrust/merger control clearances by a specified date orfailure to obtain financing by a specified date. Many mergeragreements contain no reverse break fee provision. Someacquirers (particularly private equity-backed acquirers) structurereverse break fees so as to give them an option to terminate themerger agreement for any reason upon payment of the reversebreak fee.

Stock Option AgreementsStock options are sometimes granted by target companies andgive the acquirer the right to purchase a specified amount ofstock, usually at the deal price per share. To avoid shareholderapproval requirements under relevant stock exchange rules, theamount of stock issuable, in the case of an agreement with thetarget itself, generally does not exceed 19.9%. The optiontypically becomes exercisable only upon the occurrence ofspecified triggering events, such as a competing third-party offeror acquisition by a third party of a specified percentage of thetarget’s stock.17



17 These types of defensive stock option agreements are different from the “top-up” options discussed earlier in this Guide, which sometimes are granted to help the acquirerqualify to use the short-form merger procedure after a first-stage tender offer.



18 The conditions include requirements that the offer is made to (in the case of an exchange offer), or votes are solicited from (in the case of a merger), all holders of the subjectsecurities and that all holders are offered the same amount and form of consideration.19 Omnicare v. NCS Healthcare, 818 A.2d 914 (Del. 2003).

Voting/Support AgreementsAcquirers sometimes obtain commitments from significantshareholders of the target company to support the transactionagreed with the target by tendering or voting their sharesaccordingly. While these types of support arrangements generallyare permissible, some technical considerations apply:

n In share-for-share transactions, the support commitmentsmay constitute impermissible “gun-jumping” under theSecurities Act. The SEC staff takes a “no-action” position (i.e.,it permits these support arrangements) with respect tosituations in which the support commitments are providedonly by corporate insiders and certain other conditionsare met.18

n If the transaction involves a tender offer, the supportcommitments must comply with Rule 14e-5 (which prohibitspurchases–including contracts to purchase–after a tenderoffer is publicly announced and before it is completed), whichmeans that tender commitments should be obtained beforethe first public announcement of the tender offer.

n The Delaware Supreme court has held that it is notpermissible to obtain voting commitments covering enoughshares to vote through the proposed merger without anyother shareholder support unless the target company’s boardof directors has the right to terminate the merger agreementor prevent the transaction from being put to a vote.19

n As discussed earlier in this Guide, shareholder supportcommitments also may trigger poison pill rights plans or stateantitakeover statutes unless the target company’s board hastaken action (before any discussions with the applicableshareholders with respect to the proposed acquisition havetaken place) to disapply those antitakeover defenses.

Principal Components of Directors’ Fiduciary Duties 27

Fiduciary Duties in the M&A Context 27

5. Fiduciary Duties of a Target Company’sBoard of Directors


Principal Components of Directors’ Fiduciary DutiesThe duty of care requires directors to act on an informed anddeliberate basis and with the degree of care that an ordinarilyprudent person would use under similar circumstances. Inessence, this duty requires directors to make well-informedbusiness decisions.

To satisfy the duty of care in connection with making decisionson behalf of the corporation, a director must inform himself of allmaterial, relevant information that is reasonably available to him.This is typically accomplished by, among other things, attendingand participating in meetings of the board of directors; askingquestions; probing assumptions and studying materialsnecessary to vote or act in an informed manner; taking time toevaluate the action under consideration; considering the adviceof experts; and making deliberate decisions after thorough andcandid discussions.

The duty of loyalty requires directors to act in good faith in thebest interests of the corporation and its stockholders withoutregard for personal interests. Simply put, this means that eachdirector must put the interest of the corporation and itsstockholders ahead of his own. This duty is not an absoluteprohibition on insider transactions. If the transaction is fair to thecorporation and the self-interested director discloses his personal

stake in the outcome, the director will not be held to havebreached the duty of loyalty.

The duty of candor requires directors to disclose fully and fairly allmaterial information within a board’s control and to provide abalanced, truthful account of all matters disclosed incommunications with stockholders. Courts have invoked this dutyto impose disclosure requirements that are distinct from, andoccasionally greater than, the disclosure obligations imposedunder the U.S. federal securities laws.

Fiduciary Duties in the M&A ContextUnder the business judgment rule, decisions of directors arepresumed to have been made on an informed basis, in good faithand in the honest belief that the action taken was in the bestinterest of the corporation. When the business judgment ruleapplies, courts decline to substitute their own views for those ofthe directors or to second guess the outcome of directors’decisions. Subject to the exceptions discussed below, underDelaware law the actions taken by a board in the context of abusiness combination transaction, if challenged, will be reviewedunder the deferential standard of the business judgment rule.Even with the benefit of the business judgment rule, a board maybe found to have breached its fiduciary duties if the court findsthat the directors of a target company in an M&A transaction


Section 5: Fiduciary Duties of a Target Company’s Board of Directors

In acquisitions of U.S. public companies, the standards of conduct required of thetarget company’s board of directors are imposed principally as a result of statecorporate law through the imposition of fiduciary duties. In this chapter, we brieflyreview those fiduciary duties under Delaware law.

approved a sale of the company without taking the time tosufficiently inform themselves of all the relevant facts, the terms ofthe transaction, the possible alternatives and the relevantvaluation considerations. In several important situations, thebusiness judgment rule is not initially applied and the board’sconduct instead is subject to enhanced judicial scrutiny. Thosesituations are:

n When taking defensive actions in the face of a potentialchange of control of the corporation, board actions maybecome subject to the Unocal standard discussed below.

n If directors are contemplating a sale or break-up of thecorporation, board actions may become subject to the Revlonstandard discussed below.

n If there is a controlling or otherwise dominating shareholder onboth sides of the transaction, or if directors are found to haveviolated their duties of care or loyalty, board actions maybecome subject to the entire fairness standard.

The scheme of takeover regulation applied under Delaware law(and the laws of other U.S. jurisdictions) differs significantly from thetakeover regulations of many other jurisdictions around the world.Delaware law does not impose a general prohibition ondefensive actions by target companies’ boards of directors.Instead, Delaware law grants directors broad latitude to implementmeasures that deter or even completely prevent takeover proposalsof which they disapprove, subject only to the requirement that in

implementing defensive actions the directors must comply withtheir fiduciary obligations. The standard of review applied byDelaware courts in considering shareholder challenges to board-implemented defensive actions is not entirely deferential. Instead ofapplying the same deferential business judgment rule standard ofreview that applies to most board actions, Delaware courts applythe “heightened scrutiny” standard first articulated by the DelawareSupreme Court in Unocal Corp. v. Mesa Petroleum Co.20 The courtin that case stated that because of the “omnipresent specter that aboard may be acting primarily in own interests, rather than those ofthe corporation and its shareholders, there is an enhanced dutywhich calls for judicial examination at the threshold before theprotections of the business judgment rule may be conferred.” Inorder to be afforded the protections of the business judgment rulewith respect to defensive action, the directors must show that (i)they had reasonable grounds for believing that a danger tocorporate policy and effectiveness existed and (ii) the action theboard took was reasonable in relation to the threat posed.Delaware courts typically grant boards a fair amount of latitude insatisfying this standard.

Delaware courts apply an even more stringent standard of reviewwhen analyzing the conduct of a target’s board of directors afterthe board has decided to pursue a change-of-control transaction.In Revlon, Inc. v. MacAndrews & Forbes Holdings,21 the DelawareSupreme Court held that once the directors decide to sell controlof the corporation, their role changes from being “defenders of thecorporate bastion to auctioneers charged with getting the bestprice for the shareholders at a sale of the company.”



20 493 A.2d 946 (Del. 1985).21 506 A.2d 173 (Del. 1986).

Under Revlon, the board of a public company cannot, for example,decide to approve a sale to a favored bidder in the face of a higherand equally credible bid from a third party, even on grounds thatthe favored bidder will be a better steward of the target company,or more likely to maintain the target’s current levels of employmentor corporate philanthropy. The board can decide not to pursue anysale transaction at all, but once it decides to sell, it is required tofollow a process that it reasonably believes in good faith shouldyield the best value for shareholders.

Court decisions subsequent to Revlon helped to define its scope.Most notably, a share-for-share merger in which the combinedcompanies will not have a controlling shareholder is not subject tothe Revlon standard. The board’s decision to pursue such atransaction is entitled to deferential review under the businessjudgment standard, and attempts by the board to fend offcompeting bids are subject only to the Unocal standard of review.22

If the board of a target company is pursuing a sale of thecompany, it may seek to satisfy its Revlon obligation to maximizevalue for shareholders by running an auction or market checkprocess. Delaware courts have said, however, that while anauction or market check process may be desirable, it is notinvariably required. Nonetheless, if the target’s board decides tonegotiate with a single acquirer without running any kind of auctionor market check process, the board should be prepared to showwhy that approach is consistent with its duty to maximize the saleprice. A well-advised board in this situation typically will seek to

protect its decision-making process from judicial criticism (i) bycreating a good record as to why it believes dealing with a singlebidder was appropriate and (ii) by limiting the extent of the “dealprotection” rights granted to the acquirer in the merger agreementso that if a competing bid unexpectedly emerges the barriers tothe competing bid will not be preclusive. Sometimes, a board thatdecides to forego any kind of pre-announcement auction ormarket check will request a “go-shop” provision, allowing it toactively “shop” (seek bids for) the company for a limited period oftime after the transaction is announced, subject to only a modest-sized break fee requirement.

Delaware courts have evolved some elaborate rules for cases inwhich a controlling or dominant shareholder engages in M&Atransactions affecting the company, but those rules typically donot apply to the arms’-length third party transactions that arethe subject of this Guide. In addition, many states’ corporatelaws are more deferential than Delaware’s to the conduct ofdirectors of target companies in change-of-control situations.Maryland’s corporate statute, for example, contains provisionsintended to counter Unocal and Revlon by applying a uniformbusiness judgment presumption and Pennsylvania’s statutespecifically authorizes the board of a target company to takeinto account the interest of constituents other than thecompany’s shareholders.



22 Compare Paramount Communications v. Time Inc., 571 A.2d 1140 (Del. 1990) (Revlon duties did not apply in a share-for-share deal that did not result in control of thecombined company by a single shareholder) with Paramount Communications v. QVC Network, 637 A.2d 34 (Del. 1994) (a share-for-share transaction that would result in asingle individual controlling the combined company was subject to Revlon).

6. Takeover Defenses


“Poison Pill” Shareholder Rights Plans 31

Charter and Bylaw Provisions 31

Antitakeover Statutes 31

“Poison Pill” Shareholder Rights PlansShareholder rights plans (commonly referred to as “poison pills”)function by causing shares acquired by an unwanted acquirer(once the acquirer reaches a prescribed ownership threshold,typically 15%) to be massively diluted by causing share purchaserights held by all shareholders (other than the unwanted acquirer)to become exercisable at a substantial discount to the then-prevailing market price. In Delaware and many other states,shareholder rights plans can be adopted by the board of directorswithout the consent of the company’s shareholders. In anegotiated transaction, care should be taken to ensure that atarget’s rights plan is not inadvertently triggered. This typically isaccomplished by having the target’s board of directors takeaction (which is expressly permitted under the typical rights plan)to amend the rights plan in advance of the triggering event thatotherwise would occur as a result of the negotiated transaction.

Charter and Bylaw ProvisionsA company may adopt provisions in its charter and/or bylaws thatreduce its vulnerability to an unsolicited offer. The only provisionsof this type likely to be relevant to a negotiated transaction arethose requiring a special or supermajority vote of shareholders,although other less common antitakeover provisions (such as “fairprice” provisions) conceivably could appear also. Any prospective

acquirer of a U.S. public company should carefully check thetarget’s organizational documents to confirm what vote isrequired and that no other provisions will affect theproposed transaction.

Antitakeover StatutesMany states have enacted antitakeover statutes, which consistprimarily of business combination statutes and control shareacquisition statutes. Each of these statutes is designed todiscourage or prevent takeovers that have not been approved bythe target’s board of directors. Even in negotiated transactions,these types of statutory provisions must be carefully consideredin order to avoid inadvertently triggering their application.

Business combination statutes prohibit certain types of businesscombination transactions between an acquirer and a target for aperiod of time (typically three years) after the acquirer hasacquired beneficial ownership of more than a specified thresholdamount of the target’s shares (typically 15%). Exceptions to thisprohibition generally include if, before consummation of thetransaction pursuant to which the acquirer exceeded thethreshold amount, that transaction was, or the businesscombination then being pursued is, approved by the target’sboard of directors. Control share statutes deny voting rights to

Section 6: Takeover Defenses


A prospective acquirer of a U.S. public company should take into account the variousantitakeover provisions or devices that the target company may have adopted or to whichit may be subject under applicable state law. In this chapter, we briefly review some of theprincipal antitakeover defenses potentially available to a U.S. public company.

shares of a target’s stock held by an acquirer once the acquirer’sshare ownership exceeds a specified threshold (typically 15%).Exceptions to this prohibition generally include if, prior to thetransaction pursuant to which the acquirer exceeded thethreshold amount, the target’s board of directors approves thetransaction or the target’s remaining shareholders approve theproposed transaction. With respect to this shareholder approvalrequirement, state statutes typically set forth a period of timewithin which a target must convene a special meeting ofshareholders if requested by the acquirer.

Acquirers should take care to avoid inadvertently triggering thesestatutory provisions through share accumulation activity or byseeking shareholder support agreements.

Section 6: Takeover Defenses


7. Antitrust/Merger Clearance


The merger clearance process in the United States is governedby the Hart-Scott-Rodino Antitrust Improvements Act of 1976(the “HSR Act”). Under the HSR Act, the merger clearanceprocess is jointly administered by the U.S. Federal TradeCommission and the U.S. Department of Justice. Notification tothose agencies is required if the transaction will result in theacquirer holding assets or voting securities of the target with avalue that is re-set annually. The 2010 value is $63.4 million. Fortransactions valued between $63.4 million and $253.7 million(again using the 2010 values), a filing is required only if a secondcondition is satisfied–one party must have assets or revenuesexceeding $12.7 million, and a second party must have assets orrevenues exceeding $126.9 million.23 For purposes of determiningwhether these values are exceeded, a “party” is viewed as theactual acquirer, together with its parents, subsidiaries and othercontrolled affiliates. The HSR rules include various exemptionsthat may render transactions non-reportable, even if these “size-of-transaction” and “size-of-persons” tests are satisfied. Notably,although worldwide activity is used when applying the thresholds,transactions are exempted unless they have a material nexus withthe United States.

For transactions that are subject to HSR, each party mustcomplete a form and submit certain documentary attachments,most significantly certain documents prepared by or for officers ordirectors for purposes of evaluating the transaction with respectto certain competition-related factors enumerated in the rules.

These so-called “4.c documents” (named after the section of theform on which they are indexed) are the single most commontrigger for follow-on questions from government investigators;hence, parties should take care when preparing officer- andboard-level materials. To complete the filing, the acquirer is alsorequired to pay a filing fee, which currently ranges from $45,000to $280,000, depending on the value of the transaction. Once thefiling has been perfected, the statute grants the government a30-day “waiting period” in which to review the transaction,although a shorter period of 15 days applies for cash tenderoffers and certain acquisitions in a bankruptcy setting. The partiesare barred from closing during the waiting period unless thegovernment grants early termination, which may be requestedand is often granted in situations that clearly present nosubstantive antitrust concerns. At the end of the waiting period,the parties are free to close unless the government issues arequest for additional information, commonly referred to as a“second request.” In the roughly 5% of transactions where such asecond request is made, the waiting period is extended for anadditional 30 days (10 days in case of cash tender offers) afterthe parties have supplied the requested information. Because therequested information is typically substantial, compiling andsubmitting it often requires months. In determining whether atransaction warrants detailed investigation or challenge, thegovernment analyzes whether the transaction, if consummated,would substantially lessen competition or tend to create amonopoly in any line of commerce.


Section 7: Antitrust/Merger Clearance

In this chapter, we briefly review the U.S. merger clearance requirements and process.

23 Filings are required for transactions valued at more than $253.7 million regardless of whether the size-of-persons condition is satisfied.

Parties to negotiated transactions commonly negotiate theallocation of antitrust risk and specify their obligations to addressantitrust investigations and challenges. Covenants in mergeragreements typically specify the level of effort that the parties arerequired to undertake to obtain antitrust clearances—”commercially reasonable efforts,” “reasonable best efforts,” “bestefforts” or some other formulation—and in transactions that facepotential antitrust exposure, covenants and closing conditionsmay be used to define more specific obligations, such as whetherthe acquirer will be required to agree to divestitures or otherremedies or whether the parties will be required to engage inlitigation to defend the legality of the transaction. The most target-favorable formulation is a “hell-or-high-water” provision thatobligates the acquirer to agree to any obligations or divestituresthat regulators require to complete the transaction, regardless ofcost and consequence.

Until a transaction has closed, parties should be cautious aboutthe information they exchange and the steps they take tointegrate their operations. Statutory “gun jumping” provisionsprohibit the premature implementation of transactions before theyhave been approved by antitrust regulators. In general, good faithdue diligence and transition planning are fine, but parties shouldavoid engaging in activities that go beyond these areas and stepssometimes will need to be taken to firewall information that iscompetitively sensitive. Covenants in merger agreements thatgive the acquirer rights to control any commercial activities of thetarget during the period between signing and closing should beexamined with particular care to assure that they are reasonablynecessary and justifiable and that they will not cause interimcompetitive harm or provoke an adverse government response.


Section 7: Antitrust/Merger Clearance

8. The Committee on Foreign Investment inthe United States (CFIUS)


The Committee on Foreign Investment in the United States, orCFIUS, is an inter-agency committee, chaired by the Secretary ofthe U.S. Treasury Department, authorized to review transactionsthat could result in control of a U.S. business by non-U.S.persons to determine the effect of such transactions on thenational security of the United States. By broadly interpreting theconcept of control, CFIUS has asserted jurisdiction over minorityas well as majority investments. CFIUS regulations define“control” to include “the power, direct or indirect” by any meansto “cause decisions” of importance to a U.S. business. CFIUSregulations do not, however, define “national security.”Accordingly, CFIUS identifies potential national security risks on acase-by-case basis by considering whether the identity,background or nationality of the purchaser presents a threat tothe national security of the United States in the context ofpotential vulnerabilities arising from the nature and role of thetarget U.S. business. The likelihood of intervention by CFIUSincreases with the sensitivity of the acquirer’s profile24 and thestrategic importance of the industry in which the proposedacquisition will be made.25

In addition to the Secretary of the U.S. Treasury Department,CFIUS has six other permanent voting members: the Secretariesof the U.S. Departments of State, Defense, Homeland Security,Commerce and Energy, and the Attorney General; and twopermanent non-voting members: the Secretary of the U.S.Department of Labor and the Director of National Intelligence. Inaddition, by Executive Order 11858, the President of the UnitedStates appointed to CFIUS the U.S. Trade Representative and theDirector of the U.S. Office of Science and Technology Policy. TheExecutive Order also provided observer status for several otherWhite House officials. CFIUS designates a lead agency for eachof its reviews depending on the nature of the business at issue.

In addition to its general authority to review acquisitions of U.S.businesses by non-U.S. persons, as a result of the U.S. ForeignInvestment and National Security Act of 2007, or FINSA, CFIUS ismandated to conduct a full investigation of two specific types oftransactions: (i) acquisitions by a non-U.S.-government-owned orcontrolled entity of any U.S. business and (ii) acquisitions of U.S.“critical infrastructure” regardless of whether the non-U.S.acquirer is non-U.S.-government-owned or controlled but only if


Section 8: The Committee on Foreign Investment in the United States (CFIUS)

Non-U.S. acquirers of public companies that operate in sensitive areas (notably defenseand advanced technology, and sometimes infrastructure, transportation and naturalresources) should consider the applicability of the review process operated by CFIUS. Inthis chapter, we briefly review the CFIUS process.

24 Acquirers that are controlled by non-U.S. governments, or that are based in countries that are not close allies of the United States, have more sensitive profiles for thispurpose.25 While not an exhaustive list, industries such as defense, energy, technology and infrastructure have historically been of particular interest to CFIUS.

CFIUS determines that “the transaction could impair nationalsecurity and that risk has not been mitigated.” Thus, CFIUS canclear an acquisition of critical infrastructure by a non-government-controlled entity without conducting a full investigation if itdetermines that the transaction presents no national securityrisks. With respect to certain acquisitions by government-controlled entities, however, CFIUS may waive the fullinvestigation requirement only if the U.S. Secretary of theTreasury, as Chair of CFIUS, together with the head of the leadagency responsible for reviewing the transaction, jointly determinethat the acquisition does not present a national security risk.

In contrast to an HSR filing, which, if required, is mandatory inorder to close an acquisition, CFIUS filings are voluntary. Byobtaining a pre-closing clearance, parties can mitigate the riskthat CFIUS might unilaterally initiate its own review, either pre- orpost-closing, and seek to impose national security undertakingsand/or recommend that the President of the United States block

or unwind the transaction. The greater the likelihood that CFIUSwill express serious interest in a transaction unilaterally, thegreater the incentive for parties to notify CFIUS voluntarily in orderto demonstrate cooperation and attempt to establish a positivetone for the ensuing national security review.

If, during a review or investigation, CFIUS identifies an unresolvednational security concern, it may seek to resolve such concernthrough the imposition of contractual undertakings on the parties,including in the form of commitment letters on specific issues ormitigation agreements addressing a broader range of securityobjectives. Parties that enter into these types of arrangements doso in exchange for a clearance from CFIUS, and to avoid the riskof presidential intervention. On occasion, however, CFIUS hasrejected any solution other than the divestiture of U.S. assets oroperations deemed too sensitive for the particular non-U.S.acquirer to retain.


Section 8: The Committee on Foreign Investment in the United States (CFIUS)

Indicative Timeline for Single-Step and Two-Step Cash Acquisitions of U.S. Public Companies

Appendix A



Appendix A

Single-Step Transaction Day(s) Activity

1 Announcement

2-15 Prepare proxy statement (Target with Acquirer’s input)

16 File preliminary proxy materials with SEC

26-50 Receive and resolve SEC comments26

55 Print and mail proxy materials

90 Target shareholders’ meeting to vote on merger

91 Complete merger (provided requisite vote of targetshareholders is obtained)

ACQUIRER NOW CONTROLS (AND OWNS 100% OF)TARGET

Two-Step Transaction Day(s) Activity

1 Announcement

2-15 Prepare Offer to Purchase (Acquirer) and Schedule14D-9 (Target)

15 Commence tender offer; file definitive tender offermaterials with SEC; mail materials to target’sshareholders

15-43 Address any comments provided by SEC staff

43 Close tender offer (if minimum tender and otherconditions satisfied)

ACQUIRER NOW CONTROLS TARGET

47 If Acquirer now owns at least 90% of Target’soutstanding shares – file short-form merger certificate.

ACQUIRER NOW OWNS 100% OF TARGET

47-77 If Acquirer own less than 90% of Target’s outstandingshares – prepare and file proxy materials with SEC relatingto “squeeze-out” merger

88 Mail proxy materials27

108 Target shareholders’ meeting to vote on squeeze-outmerger

109 Complete merger.

ACQUIRER NOW OWNS 100% OF TARGET

If the consideration being offered in the takeover consists in whole or in part of securitiesof the acquirer, then the timeline is subject to extension by as much as several moreweeks in order to prepare a U.S. registration statement and obtain SEC clearance

26 The SEC’s staff sometimes elects not to review and provide comments on a proxy statement, in which case the process is shortened by approximately 30-35 days from thatindicated; conversely, SEC review sometimes can take longer than indicated.27 Squeeze-out merger proxy materials are relatively unlikely to be reviewed and commented on by the SEC, but may not be mailed for at least 10 days after they are filed withthe SEC.

Deal Structure Considerations in Acquiring a U.S. Public Company – The Relative Advantages and Disadvantages of the Single-Step and Two-Step Structures

Appendix B


Appendix B


Single-Step Transaction(Merger Voted on by Target’s Shareholders; Single Closing atWhich Bidder Acquires 100% of Target’s Shares)

Summary:

n Potentially vulnerable to competing bids for a longer period oftime than a two-step transaction. In a single-step transaction,it will take no less than 2 months, and more typically 3 to 4months, to obtain the approving vote of target’s shareholders.The vulnerability to competing bids continues until that vote isobtained. This timing disadvantage is irrelevant, however, ifthe transaction will require regulatory clearances (i.e., share-for-share transaction) taking longer than 3-4 months.

n For private equity acquirers, a single-step structure may bemore attractive because it avoids technical issues relating tomanagement equity rollovers (that affect only tender offers)and because acquisition debt financing is less complicated ina single-step transaction.

Advantages:

n Most often used in share-for-share transactions and whenthere are regulatory or other approvals that cannot besatisfied quickly (i.e., if such approvals are likely to take longerthan 3 to 4 months). In that situation, target’s shareholderscan vote to approve the transaction before regulatory or otherapprovals are obtained, thereby cutting off any competingbids that might emerge later.

Two-Step Transaction(Tender Offer Followed by “Second-Step” Merger in Which BidderAcquires Untendered Target Shares)

Summary:

n If the offer is well received by target’s shareholders andregulatory clearances (including antitrust/competition lawclearances) are likely to be obtained quickly, the two-stepapproach allows the acquirer to take control of the targetsignificantly faster than under a single-step approach. Thistiming advantage should make the transaction less vulnerableto competing bids. Acquirer could obtain working control of,and foreclose competing bids for, target in as little as 5-6weeks after announcement.

n If regulatory clearances are likely to take longer than the 3-4months needed to complete a single-step transaction, thespeed advantage of the two-step approach disappears.

Advantages:

n Acquirer can close its tender offer subject only to (1) the offerbeing open for at least 20 business days (SEC requirement),(2) receipt of antitrust and other regulatory approvals and (3) asufficient number of shares being tendered by targetshareholders (typically 50%).

The relative advantages and disadvantages of using a single-step transaction structure asopposed to a two-step transaction structure are summarized below.


Appendix B

Advantages:

n Timing and funding requirements generally are morepredictable in a single-step transaction. Target’s assets can beused as collateral for acquisition finance borrowings at time ofinitial drawdown.

n The SEC’s “all-holders/best price” rule, Rule 14d-10, applies totender offers (and therefore to two-step transactions) but not tosingle-step transactions. Amendments to that Rule eliminatedsome significant problems associated with Rule 14d-10, butother concerns remain – notably in respect of equity rollovers.This may make the single-step structure more attractive forprivate equity-type acquirers.

Disadvantages:

n Longer period of time to obtain working control of target, incomparison to successful two-step transactions. Fastesttime to completion realistically achievable would be around12 to 16 weeks (which would include preparing proxymaterials, obtaining SEC clearance and soliciting proxies).Time required will be shorter if the SEC decides not toreview the proxy materials, but a minimum of 2 ½ monthsrealistically is required.

n Acquirer has less control over the process because themerger proxy statement legally is the responsibility of target.

Advantages:

n Acquirer has greater control over timing because it preparesall the requisite tender offer documents, which do not need tobe pre-cleared with the SEC.

Disadvantages:

n Achieving 100% ownership may take longer than the 5-6-week period described above if 90% acceptance is notachieved. If more than a majority but less than 90% of theoutstanding shares are tendered in the tender offer, in order tocomplete the merger, a proxy statement must be preparedand delivered to the shareholders of target who have nottendered their shares.

n Financing the transaction may be more difficult if lenders donot wish to provide bridge financing for the purchase ofshares in the first-step tender offer. Target’s assets can beused as collateral only after the second stage of thetransaction is completed.

n The transaction may be modestly more expensive from a legalfees perspective if the acquirer does not obtain sufficientshares in the tender offer to take advantage of short-formmerger procedures.

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Us Takeover Guide 6010059