December 20, 2005
Tender Offer Best-Price Rule Amendments Proposed
Sections 14d-10(a)(2) (for third party offers) and Rule 13e-4(F)(8)(ii)(for self tender offers) require bidders making public tender offers to offer the same price to all target shareholders in the targeted class. Several target shareholders had successfully challenged employment agreements, severance agreements and non-compete contracts for target senior executives under the rule as a violation of the rule. The plaintiff shareholders argued that the agreements were disguised compensation for the senior executive's stock that enabled the executives to sell their shares at prices in excess of those paid the ordinary shareholders. The claim, as reported here, significantly chilled the use of negotiated tender offers in acquisitions; parties used the more expensive (and longer) statutory merger form instead. Lawyers did not want special provisions for senior executives to fail in the deals. The SEC has proposed rules that will stop the uncertainty. Basically, the employment agreements are exempt for the best price rules as long as they are based on past or future services and not on the executives number of shares. A safe harbor is available if an independent compensation committee makes the appropriate finding. The rule leaves problems with the size of the employment agreements to the state doctrines of fiduciary duty: If a target board negotiates arrangements that pay too much (as a disguised bribe), it remains a violation of the board of directors fiduciary duty to the firm and its shareholders.
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