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Whole Business Acquisitions: Tender Offers

Historically, uttering the words “tender offer” would conjure images of corporate infighting and various other scenes expected in a hostile takeover. When an acquiring company wanted to rapidly accelerate the takeover timeline and avoid formalities that increased the risk of failure, a tender offer followed by a back end merger was the weapon of choice. Also know as a two step merger, this tactic was employed somewhat infrequently because the DGCL required acquiring 90% of the target’s outstanding shares in order to consummate the squeeze out merger. Two years ago, updates to the Delaware General Corporation Law (DGCL) completely changed the game.

The outstanding shares threshold has been reduced to a 50% trigger point; if achieved, the acquirer can make use of a short form squeeze-out merger to capture all remaining shares without any vote by the stockholders. This change has greatly simplified the deal process, and created a whole new approach to tender offers. Recently, there has been a sharp increase in the frequency of tender offers to facilitate negotiated acquisitions. One of the driving forces behind this is the ability of the two-step process to lower transaction costs and raise certainty for both parties.

Tender offers present a unique vehicle that can shortcut the process required by a single step merger. The two-step process accomplishes the same goal much more quickly. In a tender offer, the disclosure documents are less involved and typically require less time to prepare than a proxy statement, which is required in a traditional single step merger. Proxy statements would require full audited financial statements whereas in an all cash tender offer those full audited statements are purely discretionary.

Another advantage of a tender offer is that the bidder does not have to file SEC disclosure documents before making the offer. In contrast, a traditional merger requires the bidder to file a proxy statement, observe a waiting and commentary period, and then provide responses. The process of taking comments and providing responses often repeats several times, drawing out the process substantially. And upon the conclusion of the process, the bidder is required to mail a merger proxy to stockholders one month in advance of the stockholder meeting. This timeline will generally last three to five months, leaving the transaction vulnerable to competing bidders who seek to interfere with the deal.

The potential closing timeline of a tender offer is so short that is has actually given rise to the practice of incorporating negotiated offer terms that automatically or voluntarily extend the offer period to accommodate any delays in securing financing or regulatory approval. Such negotiated tender offer acquisitions rely heavily on confidentiality agreements between the parties that seek to limit the bidder’s use of knowledge about the target gained from the deal inspection and negotiation, and establish a waiting period before the bidder can go hostile. The usual method of accomplishing is this through use restrictions, disclosure restrictions, standstill provisions, and liability or non-reliance disclaimers.

As with any transaction of significant value, it is common for both parties to vigorously negotiate each part of the confidentiality agreement in their own favor. Candid and forthright negotiations are key factors that prevent collaborative tender offers from turning hostile or litigious. Despite their pedigree, negotiated tender offers can be smooth and quick deals that represent an economical alternative to traditional one step mergers.

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