new zealand takeovers code versus usa williams act and delaware corporate law

Stephen Bainbridge

University of Auckland Faculty of Law

May 22, 2014

USA M&A Law Compared to the NZ Takeovers Code

USA Basics

Part I

3

Federal Law State Law (Delaware)

Securities Exchange Act of 1934

Williams Act of 1968

§ 13(d): Beachhead Acquisitions

§ 14(d): 3rd Party Tender

Offers

§ 14(e): Anti-fraud

provisions

Com

mon

Law Takeover Defenses

Freeze-Out Mergers

Fiduciary Duties

Corporate Federalism

© Stephen M. Bainbridge 2014

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Federal Law State Law

Securities and Exchange Commission:• Division of Enforcement

Private party litigation• No express private right of action• Courts have created “implied

private rights of action” for both both bidder and target to seek equitable relief– E.g., injunctions when other side has

violated disclosure or procedural rules

In both cases, federal courts have exclusive jurisdiction

Law of state of incorporation typically controls

Most litigation in Delaware Chancery Court• No juries• Corporate law experts

Appeal to Delaware Supreme Court

Enforcement


Key Provisions Compared

Part II

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Williams Act:• Ensure a level playing field between

bidder and target.• “Investors have no right to receive tender

offers. More to the point … the Williams Act does not create a right to profit from the business of making tender offers.” Amanda Acquisition Corp. v. Universal Foods Corp., 877 F.2d 496 (7th Cir. 1989)

Purpose of Regulation

Delaware state common law:• Because of the “omnipresent specter”

that target management may act from self-interested motives, use enhanced scrutiny to ensure they comply with their fiduciary duties.

Takeovers Code:• Equal treatment of shareholders• Ensure that shareholders are able

to make an informed decision as to whether or not to accept an offer.


Section 13(d): Requires disclosure by persons or groups who acquire beneficial ownership of more than

5% of any publicly traded equity securities.

Section 13(e): Regulates purchases by an issuer of its own publicly traded securities, including purchases

subsequent to commencement of a tender offer or a self-tender offer.

Section 13(f): Requires disclosure by institutional investment managers exercising investment discretion

with respect to accounts holding Section 13(f) securities if the aggregate fair market value

of such account exceeds $100 million.

Section 13(g): Requires disclosure by institutional investors who acquire beneficial ownership of more

than 5% of any publicly traded equity securities and elect to file a Schedule 13G in lieu of a

Schedule 13D.

Section 14(d): Regulates substantive aspects of, and requires disclosure in connection with, tender offers

by bidders who, upon consummation of the tender offer, would beneficially own 5% or more

of a publicly traded equity security.

Section 14(e): Prohibits fraud and certain other practices in connection with a tender offer; including

establishing specific time periods for, and a target company’s disclosure obligations with

respect to, a tender offer.

Section 14(f): Requires disclosure if, other than at a shareholder meeting, majority control of a target

company’s board of directors is to be changed subsequent to a transaction subject to

Section 14(d) or 13(d).

OVERVIEW OF THE WILLIAMS ACT

7 Stephen M. Bainbridge © 2014

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Williams Act:• Disclosure within 10 days of

acquiring 5% or more of target stock (§ 13(d)

• Regulate disclosure/procedures for tender offers for > 5% of target stock

• Only regulates tender offers

Fundamental Rule

Delaware state law:• Authorizes poison pills

– 20% ownership threshold upheld (Moran v. Household International Inc.)

– 4.9% ownership threshold upheld in NOL pills (Versata Enterprises, Inc. v. Selectica, Inc.)

Takeovers Code:• No person can:

– acquire more than 20% of the voting rights in a code company; or

– increase an existing holding of 20% or more of the voting rights in a code company.

• Except via code-approved methods, such as:– a "full offer" in accordance with the Code;– a "partial offer" in accordance with the Code;– under an acquisition approved by an

ordinary resolution of the code company in accordance with the procedure set out in the Code;

– under a "creeping" acquisition which allows a shareholder who already holds between 50% and 90% of a code company to acquire up to an additional 5% in a twelve month period; or

– by means of a compulsory acquisition if a shareholder holds 90% or more of the shares in the code company.


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Takeovers Code Williams Act

Shareholder commitments• Bidder may seek firm commitments

from existing shareholders to accept an intended Offer.

Pre-bid purchases:• Bidder may obtain a pre-offer stake

(up to 20%) by acquiring shares on-market.

Disclosure of substantial holdings:• Disclosure required by securities law

as soon as the Bidder has a "relevant interest" in 5% or more of a class of voting securities, and subsequent disclosures will be required for movements of 1% or more.

Shareholder commitments• Shareholder lock-ups allowed.

Pre-bid purchases:• Bidder may acquire as many shares

as it wishes on open market, up to 100%.

Disclosure of substantial holdings:• File Schedule 13D within 10 days

after acquiring 5% or more of a class of equity securities

• Amend “promptly” after a material change– Acquisition or disposition of 1% of

same class of equity security presumptively material

Beachhead Acquisitions


Any person who acquires beneficial ownership of 5 percent or more of a class of equity securities registered under Section 12 of the Exchange Act must file with the SEC a Schedule 13D within ten days.

• A person “beneficially owns” any registered security if he either has or shares direct or indirect power to vote, sell, or determine the disposition of that security. A person is also deemed the beneficial owner of any securities that such person has the right to acquire within sixty days, e.g., upon exercise of an option or conversion or exchange of another security.

– Section 13(d)’s filing requirements also apply to any “group” who beneficially owns 5 percent or more of a class of an issuer’s equity securities. A group is formed when two or more persons agree to act together to acquire, hold, vote, or dispose of securities.

The Schedule 13D must disclose information about: identity and background of each

filing person; number of shares of the target company that it beneficially owns; its purpose in acquiring those shares; any plans or proposals with respect to the issuer or its shares, etc.

Schedule 13D

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Williams Act Sections 14(d) and 14(e) triggered when any person commences a tender offer for more than five percent of a class of a target’s equity securities.

• The provisions of Section 14(d) and Regulation 14D do not apply to a tender offer by an issuer for its own the securities.– Such tender offers are instead subject to Rule 13e-4 which, in addition to prescribing

filing, disclosure and dissemination requirements for tender offers by an issuer for its own equity securities, also duplicates some of the antifraud provisions contained in Section 14(e).– Rule 13e-4 applies to issuers with any class of equity security registered pursuant

to Section 12 of the Securities Exchange Act of 1934 or that are required to file periodic reports under Section 15(d) of the Securities Exchange Act of 1934, as well as to certain investment companies.

Tender Offers and Self-Tender Offers

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What is a Tender Offer?

Wellman v. Dickson (SDNY 1979):1. active and widespread solicitation of

public shareholders;2. for a substantial percentage of the

issuer’s stock;3. at a premium over the prevailing market

price;4. offer terms fixed, rather than negotiable;5. offer contingent on the tender of a fixed

minimum or limited to a maximum number of shares to be purchased;

6. offer open for only a limited time period;7. offeree subjected to pressure to sell; and8. public announcement of a purchasing

program preceding or accompanying a rapid accumulation of a large amount of the target’s securities

Hanson Trust PLC v. SCM Corp. (2d Cir. 1985):• Look at the totality of the

circumstances to determine whether there is a likelihood that, unless Section 14(d) is complied with, there will be a substantial risk that shareholders will lack information needed to make a carefully considered appraisal of the bidder’s proposal/offer.


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Takeovers Code Williams Act

Takeover notice to target and registered exchange

Target must give offeror a copy of the securities register

Target Company Statement

Offeror must file a Schedule TO with SEC• In an exchange offer, must also register

securities to be issued as consideration with SEC under Securities Act of 1933

Target must either give offeror stockholder list or agree to mail offer to shareholders• Offeror may be able to get stockholder list

via state law shareholder inspection rights

Target management must file a Schedule 14D-9

Disclosures


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Procedures

Takeovers Code

Rule 20: Same terms for all securities of same class

Rule 20: Same consideration for all securities of same class

Full offer must extend to all voting and non-voting classes

Partial offer must extend to all voting classes

Not less than 30 nor more than 90 days.

Over subscribed partial offer must be taken up pro rata

Bidder who holds < 50% must have >50% minimum acceptance condition, absent rule 10(1)(b) procedure

Same Offer Within Class

Equal Treatment

Equal Treatment

Multiple Classes

Multiple Classes

Offer Period

Pro Rata

Minimum Acceptance Condition

Williams Act

Rule 14d-10(a)(1): All-holders Rule

Rule 14d-10(a)(2): Best price rule

No such requirement

No such requirement

Minimum 20 business days.No maximum.

Over subscribed partial offer must be taken up pro rata

Allowed but not required



Per Section 14(d)(5) and Rule 14d-7, shareholders have right to withdraw tender shares at any time during the period the tender offer remains open• A bidder may not accept for payment and pay for tendered shares prior to the

end of the withdrawal period

• Bidder may not limit an extension of the withdrawal period to a select group of the subject company's shareholders (e.g. only those shareholders who tendered prior to the extension of the withdrawal period)– Any extension of the period for withdrawal must be provided to all shareholders

Withdrawal Rights


Minimum Offer Period

Rule 14e-1: Minimum offer period of 20 business days• Extension for at least 10 business

days after certain material changes in the offer’s terms– 10 day window runs from the date

of the change– E.g., change on day 15 would

extend minimum total offer period to 25 days not 30.

Rule 14d-11 permits a bidder to provide an optional subsequent offering period after completion of a tender offer during which security holders may tender their shares without withdrawal rights. • The requirements for a subsequent

offering period: – Initial tender offer must be for all

outstanding shares.– Bidder must announce results of initial

offering period (shares tendered) and must accept and promptly pay for all securities tendered during the initial offering period at the closing of such period.

– The subsequent offering period is at the option of the bidder and, if provided, must be open at least 3 business days and not more than 20 business days.

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Williams Act• No relevant provisions

Takeover Defenses

Delaware state law:• Allowed, subject to judicial review for

compliance with target board of directors’ fiduciary duties.

Takeovers Code Rule 38(1):

“If a code company has received a takeover notice or has reason to believe that a bona fide offer is imminent, the directors of the company must not take or permit any action, in relation to the affairs of the code company, that could effectively result in—

(a) an offer being frustrated; or

(b) the holders of equity securities of the code company being denied an opportunity to decide on the merits of an offer.


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Golden Parachutes

• Very large severance payments for CEO in the event of a change of control– Other C-Suite officers also usually have them

Staggered board of directors Dual class stock

• One class having supermajority voting rights– E.g., Google: Larry Page, Sergey Brin, and Eric Schmidt hold Class B stock with 10

votes per share. Public investors hold Class A stock with 1 vote/share.– Collectively, control >50% of voting power

Shark repellents

• Require payment of a fair price in a back-end freeze-out merger

• May impose a “freeze period” (e.g., 3 years) before a back-end freeze-out merger is allowed

Poison debt

• E.g., include change of control as an event of default

Common takeover defenses


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Corporation issues rights (a form of option security) with 2 key provisions:

• "Flip-In" feature:– Upon the acquisition of a specified percentage (generally 10-20% of the company's

outstanding common stock, each right, excluding those held by the acquirer, entitles its holder to buy shares of the target issuer's common stock or other securities at half price.– More precisely, the value of the stock received when the right is exercised is

equal to two times the exercise price of the right.

• "Flip-Over" feature:– Upon a merger or sale of some stated percentage (usually 50%) of the company's

assets, each right, excluding those held by the acquirer, entitles its holder to buy shares of the acquirer having a market value equal to some multiple (generally 2x) of the right's specified exercise price.– In other words, once triggered, the flip over pill gives target shareholders the

option to purchase acquiring company shares at a steep discount to market.

Poison Pills


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Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1994):

“The key features of an enhanced scrutiny test are: (a) a judicial determination regarding the adequacy of the decision-making process employed by the directors, including the information on which the directors based their decision; and (b) a judicial examination of the reasonableness of the directors’ action in light of the circumstances then existing.”

Enhanced Scrutiny Standard


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For more information


Mergers and Acquisitions, 3d (Foundation Press Concepts & Insights)

• Stephen M. Bainbridge

http://www.amazon.com/Mergers-Acquisitions-3d-Concepts-Insights/dp/1609301323/ref=as_li_tf_til?tag=corporatilawa-20&linkCode=w00&linkId=EVLSV5HVEYKHWYSW&creativeASIN=1609301323


