acquisition techniques: choosing between one step … · acquisition techniques: choosing between...
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Acquisition Techniques: Choosing Between One Step vs. Two Step Mergers Marilyn Mooney, Dan Wellington and Anita Tarar Partners Fulbright & Jaworski LLP November 14, 2013
Speaker Marilyn Mooney
Partner – Washington, DC Marilyn Mooney is a partner in the Washington, D.C. office. She heads the Mergers and Acquisitions practice group in the United States and is the Partner-in-Charge of the Corporate and Securities practice in the Washington office. Marilyn serves on several committees, including the Internal Audit Committee, the Audit Response Committee and our Diversity and Inclusion Committee.
For over 25 years she has engaged in a wide-ranging corporate and securities practice typically for major multinational companies. Marilyn is known for running complex worldwide acquisitions, often in regulated industries. Her transactional practice includes mergers and acquisitions, joint ventures, tender and exchange offers, purchases and sales of assets and securities, public and private offerings of debt and equity securities, and counseling Boards of Directors and Special Committees in regard to proposed transactions. She led the team with respect to a transaction that received the 2010 Deal of Distinction Award in the Life Sciences Sector from the Licensing Executives Society (US and Canada), Inc.
Previously, Marilyn practiced at DuPont for over 9 years where she worked in one of the country's largest corporate legal departments. She was a member of DuPont's acquisition team for the then largest takeover battle in US history, the acquisition of Conoco, Inc.
She holds a J.D. from the University of Pennsylvania Law School and a B.A., summa cum laude, also from the University of Pennsylvania.
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Speaker Anita Tarar
Partner – Dallas, TX Anita Tarar is a partner in the Dallas office. A member of the corporate group, Anita's practice focuses on finance and commercial transactions, representing both borrowers and lenders in a variety of debt financings, including private equity acquisition financings, working capital facilities, cash flow and asset-based facilities, mezzanine financings, loan restructurings, loan workouts and bankruptcy debtor-in-possession and exit facilities.
At Stanford Law School, Anita served as treasurer and as a member of the Stanford Technology Law Review. Following graduation, she served on a review panel for the Stanford Law School Fellowship in Conflict Resolution. Anita was a University Scholar at the University of Texas, where she taught undergraduate Latin courses.
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Speaker Dan Wellington
Partner – Washington, DC Dan Wellington, a partner in the Washington, D.C., office, handles antitrust and trade regulation matters, including representing parties in mergers, acquisitions, and joint ventures. A substantial portion of his practice involves counseling health care providers, including hospitals, physicians, and provider networks. He has helped to form joint ventures involving high technology, health care, communications, energy, and other industries; has defended corporations, partnerships, trade associations, and others in federal and state antitrust investigations, involving allegations of price fixing, market allocation, vertical restraints, price discrimination, and advertising; and has developed compliance programs. Mr. Wellington was an attorney in the Federal Trade Commission's Bureau of Competition for eleven years.
Mr. Wellington received his B.A. and M.A. from The Catholic University of America and his J.D., with honors, from The National Law Center at George Washington University. Mr. Wellington is admitted to practice before the United States District Court for the District of Columbia and the District of Columbia Court of Appeals.
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• Everything we say today is opinion. We are not dispensing legal advice, and listening does not establish an attorney-client relationship. This discussion is off the record. You may not quote the speakers without our express written permission. If the press is listening, you may contact us, and we may be able to speak on the record.
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One-Step Merger
• A combination of entities authorized by state statute and effective upon filing a certificate confirming compliance with statutory prerequisites
• Requires board approval • Requires stockholder approval • Not an available acquisition technique in a hostile deal • This is fundamentally a friendly deal technique • Begins with a merger agreement between the parties
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One-Step Merger
• The merger agreement must allow the target board to change its recommendation to meet its fiduciary duty (fiduciary out clauses)
• Generally speaking, once a target board decides to sell the company, it has a fiduciary duty to achieve the best available price through, e.g., a “market check” (period following announcement) or an auction process
• Merger agreements are allowed to provide appropriate deal protection mechanisms to the acquiror, e.g., • No-shop covenant whereby target agrees not to “shop” the
company after the merger agreement is signed • Break-up fees payable to the acquiror in the event the
company is sold to a competing party which surfaces after the merger agreement is signed
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Voting Agreements
• Theoretically there can be an unlimited number of voting agreements
• As a practical matter, institutional investors will likely not enter voting agreements
• The obligation to vote in favor of the transaction is not ironclad; instead, the obligation tracks the fiduciary out clauses in the merger agreement
• Voting agreements are practically limited to directors and officers and founders
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2 months
4-6 months
2 months
Indicative Timetable: One-Step Merger
1) No SEC review 2) SEC review
Private Company (1)
Public Company (2)
(1) Voting is governed under state law.
(2) Public companies solicit proxies to obtain the required shareholder vote through a proxy statement cleared in advance by the SEC.
Pre-public announcement
Post-public announcement
Public announcement Execution of
Merger Agreement
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4-8 Weeks (or
more if SEC Review)
4 Weeks File
Proxy Statement(3)
Mail Statement
Shareholder Meeting
Complete Merger
Announce Deal
One-Step Merger: Public Company
File HSR HSR waiting period expires
(30 calendar days post filing absent second request)
Sign Merger Agreement
Same day(1)
Illustrative Post-Announcement Timetable One-Step Merger
Mail Statement
Shareholder Meeting
Complete Merger
Announce Deal
Sign Merger Agreement
(1) Subject to satisfaction of any pending regulatory approvals.
4 Weeks
Mail Statement
Shareholder Meeting
Complete Merger
Announce Deal
Sign Merger Agreement
Same day(1) Mail
Information Circular
Equityholder Meeting
Announce Deal
One-Step Merger: Private Company
File HSR HSR waiting
Period expires (30 calendar days post filing absent second request)
Sign Merger Agreement
File Proxy
Statement Mail
Statement Shareholder
Meeting Complete
Merger Announce
Deal
2–3 Weeks
Sign Merger Agreement
Mail Statement
Shareholder Meeting
Complete Merger
Announce Deal
Sign Merger Agreement
2-8 Weeks Mail
Statement Shareholder
Meeting Complete
Merger Announce
Deal Sign Merger Agreement
Mail Information
Circular
Equityholder Meeting
Announce Deal
Sign Merger Agreement
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Additional Deal Structure Available for U.S. Public Companies: Two-Step Merger • Two-Step Merger, i.e., a first step tender offer followed by
a merger • Used in friendly deals with target board support to gain
control of the target faster than a one-step merger and thereby thwart potential competitors
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First Step Tender Offer
• An offer made directly to target shareholders bypassing the target board – used as both a hostile and friendly technique
• Obligation to accept tendered shares would be subject to the satisfaction of conditions set by Acquiror, e.g., • Regulatory requirements – HSR/CFIUS • Threshold percentage of shares tendered
• Tender offers are SEC-regulated but no advance SEC clearance is required to commence • Must be open for 20 business days • Best price offer must be offered to all shareholders • A tendering shareholder has withdrawal rights until
expiration of the tender offer • Target board required to file a response with the SEC
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First Step Tender Offer
• Tender offer alone will never achieve a 100% acquisition • Tender offers are always conditioned on obtaining at a
minimum the requisite number of votes required to control effectuating a follow-up merger
• Statistical success of hostile tender offers is very low • Although unlimited extensions of a tender offer are
theoretically possible, a tender offer may be impractical if a prolonged regulatory approval period is expected, e.g., HSR Second Request
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Structural Considerations
• Pros: • Achieves 100% ownership directly by
merging one company into another • Dissenters rights apply but closing of
merger can be conditioned on less than 10% of shares exercising such rights
• Pros of first step tender offer: • Faster process than one-step allowing
less time for competing bidder • It is a direct offer to shareholders and
secures outcome of shareholder vote where bidder gets over 50%
• Bidder controls tender offer documents and their filing at SEC
• Bidder can commence tender offer without SEC clearance, but SEC reviews after commencement
• Allows bidders to control target sooner with less than 100%, but also means representations and warranties effectively expire sooner
• Opportunity to avoid calling a shareholder meeting to vote on a subsequent merger and to avoid prior SEC clearance (in case >90% tendered) or 50%<x<90% tendered if certain conditions are met
One-Step Merger Two-Step Merger
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Structural Considerations
• Cons: • Slower process (by 1-3 months) than two-
step allowing more time for a competing bidder
• Requires shareholder vote of target • Target controls proxy statement
preparation and filing at SEC • SEC must clear proxy statement in
advance of its mailing • Takes longer for bidder to control target,
but the requirement for the target to comply with representations and warranties stays in place longer as does the opportunity for due diligence
• Cons of first step tender offer: • Withdrawal rights apply until tender offer
expires – allows topping bid until tender offer expires
• Tender offer never achieves 100% ownership directly, so subsequent shareholder approval may be necessary (merger without shareholder approval if >90% of shares acquired in tender or 50%<x<90% if certain conditions met)
• No dissenters rights apply to tender offers but dissenters rights in subsequent merger may be available to all non-tendering shareholders
One-Step Merger Two-Step Merger
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HSR TIMING CONSIDERATIONS Hart-Scott-Rodino: An Overview
• Applies to acquisitions of assets, voting securities, and non-corporate interests
• Certain size thresholds must be met
– Transaction: $50 million (as adjusted; currently $70.9 million)
– Persons: $100 million/ $10 million (as adjusted; currently $141.8 million/ $14.2 million) (Exception: Transactions valued at $200 million or more (as adjusted; currently $283.6 million)
• Observe waiting period before closing
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HSR TIMING CONSIDERATIONS Hart-Scott-Rodino: Waiting Periods
• Initial waiting period
– Most transactions: 30 days
– Begins when both parties file
– All-cash tender offers: 15 days
– Begins when acquiring person files
• Second Request
• Additional waiting period
– Most transactions: 30 days
– All-cash tender offers: 10 days
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HSR TIMING CONSIDERATIONS Hart-Scott-Rodino: Waiting Periods in Two-Step Transaction
• Tenders for 50 percent or more followed by merger:
– 15/10-day waiting period
– No filing required for Step Two (merger)
• Tenders for less than 50 percent followed by merger:
– Two waiting periods:
– 15/10-day period for tender beginning when acquiring person files
– 30/30-day waiting period for merger beginning when both parties file
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HSR TIMING CONSIDERATIONS Hart-Scott-Rodino: Practical Considerations
• Is the shorter waiting period a benefit?
– Transactions that do not raise substantive antitrust issues
– Transactions that raise substantive antitrust issues
• Benefit of shorter period may be lessened if foreign filings are required
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Follow-Up Merger after a Tender Offer
• Requires a shareholder vote unless an exception is available
• No shareholder vote is required if: • The tender offer achieves over 90% • The tender offer achieves more than the required
merger vote and several conditions are met • The tender offer achieves more than the required
merger vote and offeror is able to exercise a top up option from available authorized but unissued shares of the target to reach over 90%
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Follow-Up Merger after a Tender Offer with Less than 90% • Acquiror must be a corporation • Target listed on national securities exchange, or
>2,000 record holders • Merger agreement states that it is governed by §
251(h) and is effected as soon as practicable following the tender offer
• Tender offer is for all of target’s outstanding shares • After tender offer, buyer owns at least such
percentage of target’s stock that would have been required to adopt the merger
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Follow-Up Merger after a Tender Offer with Less than 90%
• When target’s board approves the merger agreement, no other party to such agreement is an “interested stockholder” (15% holder) of target
• Buyer merges with or into target pursuant to the merger agreement
• Outstanding shares of target’s stock that are not being cancelled in the merger are converted into the same amount and kind of consideration paid for shares of such stock of target upon consummation of the tender offer
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Top Up Options
• Stock option granted by target to acquiror in a merger agreement that can be exercised by acquiror after obtaining a majority of the target’s common stock through a tender offer
• Stock option allows acquiror to increase its ownership level to at least 90% to allow a merger without a target stockholder vote
• Without the top up option, the second step merger still requires stockholder approval if less than 90% ownership is achieved in the tender offer even though the acquiror controls the outcome of the vote
• Number of authorized but unissued shares of target company is a key consideration
• Tender offers may be coupled with a consent solicitation for target stockholder approval to increase the number of authorized shares to a number sufficient to underpin a top up option that enables the acquiror to reach the 90% threshold
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Top Up Options
• “Burger King structure” • Minimum condition to the front-end tender offer is set at the
percentage that, when added to the maximum available top up option, will ensure that the buyer will cross the 90% short-form merger threshold
• If the tender offer fails to meet that higher minimum condition (which is often much higher than 50%), the parties abandon the tender offer and proceed with a one-step merger using a proxy statement that is prepared and filed while the tender offer is pending
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Financing Considerations
• One step merger • Typical financing arrangement
• Tender offer with short-form merger (>90% tender) • More appealing to banks because of transaction
certainty • Less appealing to bidders and targets as a condition to
completion of tender
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Financing Considerations
• Tender offer with a follow-up merger requiring a stockholder vote • Less appealing to lenders (possibly resulting in less
favorable financing terms) because of uncertainty of process
• Lack of access to target’s assets to secure financing • Considerations regarding target’s credit facility • Margin regulation compliance
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Financing Considerations
• New Delaware Section 251(h) Framework • Appealing to both lenders and transaction parties
• Financing/Funding condition • Need to structure documents appropriately
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2 months
2-6 months (1)(2)
2 months
4-6 months (1)
Pre-public announcement
Post-public announcement
Public announcement Execution of
Merger Agreement
Indicative Timetable: U.S. Public Company
1) Tender offer achieves >90% 2) Tender offer achieves 50%<x<90% and meets all conditions 3) Tender offer plus top up
option achieves >90%
4) Tender offer achieves <90% and 2 and 3 above do not apply
Two-Step Merger
One-Step Merger
(1) Depending on requirement for SEC review and on level of SEC comments. (2) Acquiror may approve the merger by consent where permissible and send an information statement to
non-consenting stockholders at least 20 days before merger becomes effective
1) No SEC review 2) SEC review
2 months
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2 months
4-8 Weeks (or
more if SEC Review)
4 Weeks
Launch Tender Offer
File Proxy
Statement(3)
Mail Statement
Shareholder Meeting
Complete Merger
Purchase Stock
Short Form Merger
Purchase > 50% / < 90% voting shares
Purchase > 90% voting shares
20 Business Days(1) Announce
Deal
Announce Deal
2 – 3 Weeks
Two-Step Merger
10-14 Days
File HSR HSR waiting period expires
(30 calendar days post filing absent second request)
File HSR HSR waiting
period expires (15 calendar days post filing absent second request)
Sign Merger Agreement
Sign Merger Agreement
1-3 Days
Same day(2)
Launch Tender Offer
File Proxy
Statement Mail
Statement Shareholder
Meeting Complete
Merger
Purchase Stock
Merger Announce Deal
Announce Deal
One-Step Merger
Sign Merger Agreement
Sign Merger Agreement
Illustrative Post-Announcement Timetable Two-Step Merger vs. One-Step Merger
A two-step merger allows for a quicker time to completion from launch relative to a one-step merger. (1) Tender offer period may be extended by the buyer.
(2) Subject to satisfaction of any pending regulatory approvals.
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Approval Process-Target
• No target board approval required for Offeror to launch.
• Hart-Scott-Rodino (HSR) antitrust filing at time of commencement, with initial 15 day expiration for cash tender offer, 30 days for exchange after.
• Board approval required to sign merger agreement.
• Shareholder approval may be required if Offeror owns less than 90% or owns more than 50% but fails to meet other conditions.
• Advance SEC filing required to solicit any shareholder vote.
• Hart-Scott-Rodino (HSR) antitrust filing to be made upon signing, with initial 30-day waiting period.
Tender Offer Merger
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Approval Process-Offeror
• No advance SEC filing required for Offeror to launch cash tender offer for a public company.
• Hart-Scott-Rodino (HSR) antitrust filing at time of commencement, with initial 15 day expiration for cash tender offer, 30 days for exchange offer.
• [Committee on Foreign Investment In the United States (CFIUS) filing with initial thirty (30) day review period.]
• Board approval required to sign merger agreement.
• Hart-Scott-Rodino (HSR) antitrust filing upon signing, with initial 30-day waiting period.
• [Committee on Foreign Investment In the United States (CFIUS) filing with initial thirty (30) day review period.]
Tender Offer Merger
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