Tender offer, a form of acquisition .
The tender offer, or takeover bid, involves A Inc. (the bidder) making an offer directly to the shareholders of B Inc. (the target) to buy their shares.
If A Inc. is able to purchase at least 51% of the shares, A Inc. will control B Inc. through its selection of B Inc.'s directors. As a consequence, B Inc. will be a subsidiary of A Inc.
The tender offer usually takes place when B Inc. is a publicly traded corporation. If B Inc. were a private corporation, the offer to buy B Inc's shares would probably involve a privately negotiated sale.
The tender offer requires the board approveal of A Inc. to make the offer but requires no board approval from B Inc. since the offer is made directly to the shareholders. A Inc's shareholders do not usually note and B Inc's shareholders can either accept or reject the offer.
When is it usedEdit
THis acquisition technique is the only one where the corporate statutes do not require the approval of B Inc.'s board and allows for an acquisition that they oppose. Thus, some tender offers may be classified as hostile in the sense that B Inc.'s management disapproves or resists the offer.
bidder does not generally acquire a target by purchasing a contorlling amount of share in the public securities markets; instead, a bidder uses a tender offer to all sharehodlers to gain control.
Bidders in a tender offer are subject to the disclosure and timing requirements imposed by federal securities law. Biders are not generally requried to tender for all teh share of a corporation, but most bidders at least seek enoguh share s to gain control (usually at least 51%) to avoid beign a minority sharehodler owning a large percentage of shares wihtout the benefits of control.
Bidders often want the benefits of 100% contorl of the target. Owning all the shares means no minroity sharehodlers and allows the bidder to use the assets freely, including borrowing against them to help pay for the acquisition. Since there will always be some holdouts who do not tender their shares, the bidder will notify the target sharehodlers in teh tender offer that it will ne to acqurie those shares not tendered in a second-step freeze out merger afte rteh first step tender offer is complete.
There are many forms
Some tactics require amendments to the corporate articles and, thus, invovle a sharehodler vote. For example,
- Staggering the terms of directors so that some (such as one-third) of the directors are elected each year, immediate control of the baord is prevented until the bidder can elect a majority.
- Other article amendments try ot make it more difficult for the bidder to acquire shares that are not tendered or to finance the bid. For example, an amendemnt can require a super-majority or disintersted sharehodler vote befreo a successful bidder can sell assets to finance the bid or implement a freezeout merger to eliminate the minroity sharehodlers who do not tedner.
- Articles provisions may also establsi ha fair price for all sahres in a tedner offer or compulsory redemption fo sahres not tendered at a fair rpice even if the bidder does not want to acquire those shares.
- There can als be a racapitalziation of the cororpation tbrough amendeing the articles to create two classes of shares from an existing single calss. This tactic can be the ultimate defesnse, ebcaseu one class of sahres held by the publci can have limtied voting rights and another supervoting class of shares holds the signficant voting power. If the latter shares are owned by the managers, a hostile tender offer is virtually impossible
- poison pills
In 1968, Congress enacted the Williams Act, which amended Sections 13 and 14 of the 1934 Exchange Act. Much of the legislation, like federal securities regulations in general, focuses on disclosure. However, the Williams Act and the rules promulgated thereunder contain a variety of both procedural and substantive rules that govern the conduct of tender offers, by either a bidder or self tender by the target.
The disclosure cheme starts with Section 13(d), which requires any person who acquiries more than % of a class of equity securities of a public corporation to file a disclosure statement with the SEC within 10 days of the purchase.
Generally speaking, once a tender offer is commenced, it must remain open for the receipt of share tenders for at least twenty business days, which may be extended by the bidder and will be automatically extended din the even the bidder changes its terms.
Section 14(e) is an anti-fraud provision that prohibits material misstatements and omissions and manipulation and fraudulent practices "in connection with any tender offer." Section 14(e) was often a major focus of hostile tender offer litigation, given its broad language and the usual claim that the parties have failed to fully disclose all material facts.
Management of targets has devised a broad range of defensive tactics in repsonse to hostile tender offers. Litigation was brough under section 14(e), claiming that its prohibition of manipulative, deceptive and fraudulent acts or practices should work to prohibit the use of some of these tactics or provide a cause of actino for shareholders for damages when a tender offer was withdrawn or chagned as a result of the target's defensive actions. Bidders and target shareholders have aruged that defensive tactics artificially affected that market for the target's shares and constituted manipulative conduct under section 14(e). They have also argued that actions depriing shareholders of an opportunity to tender were fraudulent under section 14(e).
State legislatures reacted to the rise of hostile tender offers by enacting statutes that generally have the effect of restricting such offers.
The most recent generation statutes do not directly try to regulate the tender offer but allow the bidder to tender for as many as it likes but severely restrict the use of those shares unless the target board approves the offer.
- For example, a voting rights statute requires a disinterested shareholder vote to give voting rights to a bidder who bought a substantial number of shares without board approval (the board may also force a redemption of the sahres by the corporation). The additional time requried for hte sharehodler vote adn the possibility of purchasing shares without voting rights made hostile bids more difficult.
There is also a business combination statutes that requires board approval of purchases of shares over a certain percentage otherwise the bidder may be precluded from a subsequent business combination with the target for many years. The bidder is free to make a tender offer, but after acquiring shares over the percentage, failure to get board approval limits the bidder's options.
- For example, the bidder could not effectuate a business ocmination (such as a freezeout merger) to acquire the shares that were not tnedered in order to own 100% of the arget. Even if the tender offer seeks 100% of the sahres, there will always be some shareholder who do not tender. COmeptle ownership may be necessary to faciliate borrowing (that is, leveaging) to finance the bid. Udner these stautes the bidder has to wait years before being able to d o a business combination.
The Edgar case
In Edgar v. Mite Corp ., a majority of the Court found a first generation Illinois statute violated the commerce clause. The statute gave power to a state official to enjoin a nationwide tender for being unfair or for lacking full disclosure. The statue was found to impose an excessive burden upon interstate commerce when compared to the State's interests. The burden was the statute's interference with nationwide tender offers, which adversely affected sharehodler through the country and the economy overall. The Court's analysis accepted the benefits espoused by those favoring the market for corporate control, and viewed the statute's interference with that market as impermissible. Illinois argued it had an interest in protecting investors, but the Court found that Illinois had no legitimate interest in protecting the nonresident shareholders affected by the statute. The State also argued it had an interest in regulating the internal affairs of corporations incorporated in Illinois. The Court indicated that whil at state has an interst in the internal affairs of companies incorporated there, a tender offer invovled transfers of shares by or among shareholders, was not a matter of internal affairs of the target. In addition, the statute could paply to corporations not incorporated in Illinois but which ahd a significant prsence in the state (e.g., location of its principal executive officers and 10% of its capital in Illinois). However, a majority did not find the statute preempted by teh Williams Act.
The CTS Case.
Five years later, in CTS Corp. v. Dynamics Corp. of America , the Crout upheld an Indiana state that different from the Illinois statue, but had the practical effect of limiting a bidder's ability to conduct a hostile tender offer. The statute only applied to corporations incorporated in Indiana and did not involve direct regulation to the tender offer. Instead the statute was a third generation statute directed at what happens after the shares are acquired by the bidder. The statute dealt with voting rights, a matter within the internal affairs of a company and traditionally regulated by the incorporating state.
The Indiana statute provided that if anyone bought more than a certain percentage of shares, constituting "control shares," they would need to get shareholder approval from the other disinterested shareholders in order to have shareholder approval from the other disinterested shareholders in order to have voting rights in those shares. The rational for the law as to allow the shareholders to act collectively, by voting to ensure a fair tender offer and possible to avoid coercive bids.
Thus, the statute did not eegally prohibit a tender offer as the Illinos statutes in Edgar did. Yet, it effecitvley limited acquisitions because, without voting rights, control is divorced from the acquistion of even a majority of the shares. If the shareholders voted to permit the acqusition and allow voting rights, sharehodler approval could take up to 50 days creatign delays, uncertainty and rising costs for a bidder.
The Court upheld the statute. It rejected the preemption argument because the tender offer could take palce within the time requirements of the Williams Act. The statute did not favor the rside in the tender offer, but instead protected shareholders, which was the basic prupsoe of the Williams Act. The statute was also found not to unreasonably burden intersate commerce because although the law could hinder tender offers, voting rights weree a traditional state corporate law concern. So long as both residents and nonresidents had equal access to shares, the Court would not itnerfer with stater eulgation of a corporation's internal affairs since that oculd also affect other corporate governance regulation.
The CTS decisions means that most state tender offer statutes that do not direclty regulate the tedner offer and which apply to targets incoroprated in the state will be constitutional.
It is itneresteing to note that Edgar was decided in 1982 when tender offers were accelerating and deregulation was in vogue. CTS was decided in 1987 when the general attitude towards hostile tender offers and their effects was beocming more negative. Contemporaneously, there was notorious insider trading scandals involving individuals who misused tender offer information. The attitude of the opinions in the two Supreme Court cases reflects the evolution of the broader debate over hsotile tender offers. In Edgar, the Court accepted the market for corporate control rationale, while in CTS the Court says that the Constitution "does nto requires the States to subscribe to any particular economic theory."
After the CTS case, the most significant judicial view of state takeover statutes has been the Seventh Circuit decision in Amanda Acquisition Corp. v. Universal Foods Corp. The court upheld a business combination statute against attack on both preemption and commerce clause grounds. The business combination statute limited a bidder, who had not recieved the target directors' approval, from merging with the target or using the target's assets for three years. This delay substantially afffected a bidder who planned to use the target assets to fund the offer and to restructrue the target. While hte court cearly did not like the