The Rise of Tender Acquisitions
Two years ago, the Delaware General Corporation Law (DGCL) was amended in a way that has dramatically changed the use of tender offers. Historically, tender offers were the province of hostile takeover bids. Acquirers of public companies could greatly accelerate the takeover timetable and avoid risk-increasing formalities through use of a tender offer followed by a back end merger. This two-step tactic was employed somewhat infrequently, however, because the DGCL required acquisition of 90% of the target’s outstanding shares in order to consummate the squeeze-out merger.
Now, that threshold has been reduced to 50% of outstanding shares to trigger 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 given rise to the use of tender offers in negotiated acquisitions. The two-step merger process can lower transaction costs and raise certainty for both parties. 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. The proxy statement would require fully audited financial statements, whereas with an all cash tender offer those fully audited statements would not be required.
In a tender offer structure, the bidder also 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. Often, this comment and response process repeats several times, drawing out the process substantially. Once the process concludes, the bidder must mail a merger proxy to stockholders one month in advance of the stockholder meeting. During this long timeline of three to five months, the transaction is vulnerable to competing bidders who seek to interfere with the deal.
The potential closing timeline of a tender offer is in fact so short that is has led to incorporation of negotiated offer terms that automatically or voluntarily extend the offer period to accommodate any delays in securing financing and 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. Those agreements typically accomplish this through use restrictions, disclosure restrictions, standstill provisions, and liability or non-reliance disclaimers.
Although it is not uncommon for both parties to vigorously negotiate each part of the confidentiality agreement in their own favor, forthright negotiations and candid signals of intent are key factors that prevent collaborative tender offers from turning hostile or litigious. With appropriate guidance from outside counsel, negotiated tender offers can be smooth and quick deals that represent an economical alternative to traditional one step mergers.
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