M & A Law Prof Blog

RBS Et Al. Stays The Course

Fortis, RBS and Santander announced today that they intend to proceed with their proposed offer for ABN AMRO. The consortium left the consideration per ABN AMRO share being offered unchanged at €38.40 but raised the cash component to approximately 93% (€35.60 in cash plus 0.296 New RBS Shares for each ABN AMRO share).  The offer values the equity of ABN AMRO at €71.1 billion or $98.03 billion.

The prior bid has been 79% cash. It was also conditioned upon a shareholder vote with respect to the LaSalle Bank sale and withheld €1 a share to cover costs for litigation over ABN's LaSalle bank unit.  This condition and the withholding have been dropped in this bid in the wake of the Dutch court ruling upholding the sale of LaSalle Bank to Bank of America.  Instead, RBS issued a press release today stating that the net cash received from the LaSalle sale will go to RBS.  The new RBS consortium offer puts significant pressure on Barclays to raise its competing all-share bid which currently values ABN AMRO at about €65 billion.

ABN AMRO's securities are registered with the SEC and it has greater than 10% of its shareholders resident in the United States disqualifying the RBS-led group from using the SEC's cross-border exemptions.  Accordingly, there will be two offers made by the RBS consortium:  one to U.S. shareholders and ADS holders wherever located governed by U.S. rules and one to all other shareholders governed by Dutch rules.  In connection with the U.S. bid, RBS will need to prepare and file with the SEC a registration statement on Form F-4.  However, unless ABN AMRO cooperates, the RBS consortium will not need to include in the F-4 the usually required U.S. GAAP pro forma financial information for the combination.  This omission is permitted by Rule 409 of the Securities Act since the information is reasonably unavailable (usually required ABN AMRO auditor consents can also be omitted under Rule 437).  And it is a way for hostile bidders in cross-border transactions to gain timing parity by having to avoiding the time-consuming process of preparing this financial information.   

Biomet Tender Offer Succeeds

The tender offer for Biomet closed last night at midnight.  According to the acquiring private equity consortium press release, 82.85% of Biomet’s outstanding shares were tendered in the offer.  The deal had had a 75% minimum tender condition due to the vagaries of Indiana law where Biomet is organized and which requires a 75% vote to approve a merger.  The Biomet merger agreement had a top-up option -- a provision which permits the consortium to now purchase, at a price per share equal to the offer price, a number of newly issued shares that will constitute 90.0005% of the total shares then outstanding.  Accordingly, the acquiring group will exercise this option to bring their holdings up to 90% of the company and initiate a short-form merger under Indiana law.  This will spare the consortium the shareholder vote and proxy requirements of a long-form merger permitting the deal to close today rather than in another month or two.  Practitioners should take note. 

The Return of the Tender Offer

The tender offer is starting to make a come-back.  According to MergerMetrics.com, in the first five months of 2007, 15.5 percent of negotiated transactions were accomplished through tender offers.  While that is a low figure, it is more than three times higher than in the same period last year. 

The tender offer is likely reemerging due to the SEC's amendments to the best price rules which took effect on December 8, 2006.  These amendments clarified that the best-price rule does not  cover employee compensation, severance or other employee benefit arrangements.   Previously, there was a circuit-split on this issue, and many bidders preferred merger transactions in order to avoid litigation and potential liability over the issue. 

But the 15% figure is still a low one.  Perhaps one reason why is the increasing use of go-shops in private equity deals.  In cash deals, tender offers have a timing advantage over mergers.  Tender offers can be consummated in 20 business days from the date of commencement compared to 2-3 months for a merger.  However, if a go-shop is utilized the timing advantage of a tender offer is lost due to the need for the 45-60 day go-shop period.  Accordingly, in this case a merger is likely a preferable option because it assures that minority shareholders can be entirely squeezed out in the merger provided the necessary number of shareholders (typically 50%) approve the merger.  This compares to a tender offer, where if 90% of shareholders do not tender the squeeze-out threshold is not reached, and a back-end merger must still take place making the process longer than a single-step merger.

To address this last issue, transaction participants are adding top-up provisions to tender offers.  A top-up provision provides that so long as x% of shareholders tender in the offer, the target will issue the remaining shares to put the acquirer over the 90% threshold.  The minimum number of shares triggering the top-up varies but the target share issuance can be no more than 19.9% of the target's outstanding shares due to stock exchange rules.  And according to MergerMetrics.com, in 2007 more than two-thirds of negotiated tender offers included a top-up agreement, up from 55.6 percent in 2006 and more than double the number in 2005 and 2004.

Expect the number of cash tender offers to increase as practitioners again become re accustomed to the structure.  Also expect exchange offers to reappear.  The SEC took steps in the 1999 M&A Release to put stock and cash tender offers on parity by permitting pre-effective commencement of exchange offers.  But despite expectations of its widespread use, the exchange offer never caught on in friendly transactions.  This was likely due to the same reasons for the decline in cash tender offers (exchange offers are also a terrible amount of work in a very compressed time for M&A lawyers).  But with the new SEC rules, this transaction structure is one worth exploring for acquirers who want to quickly consummate friendly stock transactions.   

Danone Intends to Bid for Numico

Groupe Danone S.A. yesterday announced its intentions to make a € 55.00 in cash per ordinary share bid for all of the outstanding shares of Royal Numico N.V., a Dutch company listed on Euronext Amsterdam.  The Supervisory Board and Executive Board of Numico also announced that it would unanimously recommend that Numico shareholders accept the offer.  The price values baby-food maker Numico at $16.8 billion dollars, and is a 44% premium to Numico's average closing price over the last three months. 

Analysts were highly critical of the price being paid by Danone.  “This is the most expensive large-cap deal in the global consumer space ever,” stated Andrew Wood, an analyst at Sanford C. Bernstein in New York.  And many are speculating that the price and large acquisition are an anti-takeover maneuver by Danone to discourage takeover bids. “This is a defensive operation for Danone,” said Chicuong Dang, an analyst at Richelieu Finance. “They are making themselves bigger and less attractive to bidders such as PepsiCo or Coca-Cola.”  (quotes as reported by Bloomberg).

Danone and Numico have yet to reach a definitive agreement on the making of the offer.  But the parties announced that the offer is expected to commence in August 2007 and would be subject to at least 66 2/3% minimum condition.  Interestingly, Numico has agreed to restrictions on its ability to initiate or encourage discussions with third parties in respect of any proposal that may form an alternative to the Offer.  And Danone is entitled to a break fee of EUR 50 million in the event (i) the Numico Boards withdraw their recommendation; or (ii) an unsolicited offer is declared unconditional.  Though the break-fee is small, these are American style transaction defense provisions that you do not normally see in Dutch deals.  But the Dutch government has opted out of the 13th EU Company Law Directive on public takeovers to permit Dutch companies to utilize lock-ups of this nature.  As takeover activity increases in the Netherlands, expect Dutch companies to further utilize American-style transaction defenses. 

The Obsolescence of Rule 14e-5

One of the frustrations often expressed with the 1968 Williams Act governing tender offers is that many of its provisions and the SEC rules thereunder no longer make sense.  I'm currently finishing up an article on this topic entitled The Failure of Federal Takeover Regulation (read a draft here).  When it is finally published, I intend to post a longer series concerning the issues and problems with current federal takeover law.  But for today, I would like to talk about the obsolescence of one particular rule:  Rule 14e-5.   

Rule 14e-5 was promulgated in 1969 as Rule 10b-13 to prohibit bidder purchases outside of a tender offer from the time of announcement until completion.  The primary reason put forth by the SEC for barring these purchases in 1969 was that they “operate[] to the disadvantage of the security holders who have already deposited their securities and who are unable to withdraw them in order to obtain the advantage of possible resulting higher market prices.”  This is no longer correct; bidders are now obligated to offer unlimited withdrawal rights throughout the offer period.  Moreover, Rule 10b-13 was issued at a time when targets had no ability to defend against these bidder purchases.  They were yet another coercive and abusive tactic whereby the bidder could obtain control through purchases without the tender offer, thereby exerting pressure on stockholders to tender before the bidder terminated or completed its offer on the basis of these purchases. This is not feasible today.  Poison pills and second and later generation state takeover statutes act to restrict these purchases to threshold non-controlling levels without target approval.  In the wake of these developments, the original reasons underlying the promulgation of Rule 10b-13 no longer exist.

Moreover, Rule 14e-5, by its terms, acts to confine bidder purchases to periods prior to offer announcement.  However, a bidder’s capacity to make preannouncement acquisitions has been adversely effected by a number of subsequent changes in the takeover code, such as the Hart-Scott-Rodino waiting and review period requirements.  These have combined to chill a bidder’s ability to make preannouncement acquisitions or forthrightly precluded such purchases.  Consequently, one study has recently reported that at least forty-seven percent of initial bidders have a zero equity position upon entrance into a contest for corporate control.

A bidder’s preannouncement purchase of a stake in the target, known as a toehold, can be beneficial. The toehold purchase defrays bidder costs, incentivizes the bidder to complete the takeover, and reduces free-rider and information asymmetry problems.  This can lead to higher and more frequent bids.  Meanwhile, market purchases amidst a tender offer can provide similar benefits while providing market liquidity and confidence for arbitrageurs to fully act in the market. 

Since the initial premise for this rule is no longer valid and recent research supports encouragement of these purchases, the SEC should accordingly consider loosening restrictions on bidder toeholds and postannouncement purchases.  Bidder toeholds and off-market purchases, however, do have a potentially corrosive effect if the stake is significant.  To dampen this possibility, a relaxation of these purchase rules could be combined with provisions similar to those in the U.K. Takeover Code which permit pre- and post-announcement purchases but require the bidder to pay for a set period thereafter no less than that price paid for all subsequently acquired shares.  Alternatively, the SEC could wholly deregulate and leave the possibility or actuality of bidder toeholds and  postannouncement purchases to be regulated by targets through a low-threshold poison pill or other takeover defenses as well as through bargaining with potential bidders.

Finally, Rule 14e-5 has never applied to bar purchases while a merger transaction is pending. Presumably, this path dependency was set in 1969 because a bidder in a merger situation requires acquiree agreement; the acquiree can therefore contractually respond to and regulate this conduct. But whatever the reason, today a bidder who runs a proxy contest without a tender offer is permitted postannouncement purchases during the contest. Unsolicited bidders will therefore initially characterize their offers as mergers in order to leave the option of such purchases. The result is preferential bias towards mergers over tender offers, discrimination which no longer seems sensical in a world where a takeover transaction will not succeed unless the original or replaced acquiree board agrees to it. Any prohibition on outside purchases should apply to both merger and tender offer structures or to neither.

More on Biomet's Tender Offer

Following up on my post yesterday on the Biomet deal and its structural switch from a merger to a tender offer, Dealbook today notes another added benefit:

The use of a tender offer also removes from the equation proxy advisory firms such as Institutional Shareholders Services, which criticized the earlier offer. The recommendations of such firms hold great sway over institutional investors.  An I.S.S. spokeswoman told DealBook that the firm generally did not issue recommendations in tender offers, though it would provide an analysis for its clients.

Private equity buyers making controversially low offers take note. 

The New York Times also makes the point that tenders offers are now a more palatable structure for private equity buyers since the SEC adopted a safe-harbor for employee compensation from the all-holders best price rule.  Tender offers permit quicker deal consummation; a tender offer can be completed in twenty business days as opposed to two-three months for a merger.  The Times is right, but you haven't seen, and likely won't see, more tender offers in private equity deals because of the pervasive use of go-shops in these transactions and the extra time they require anyway, making a merger a preferred option.   

Also, Biomet has filed its revised agreement for the transaction.  In the agreement, the minimum condition for the offer is set at 75% of the outstanding shares or that:

number of Shares that is not less than the number of such Shares . . . . that, when added to the number of Shares beneficially owned . . . . by Parent, any of its equity owners or any of their respective Affiliates, and any Person that is party to a voting agreement with Parent or Purchaser obligating such Person to vote in favor of Merger . . . . represents at least 75% of the total number of Shares outstanding immediately prior to the expiration of the Offer.   

So, it appears that Biomet did not effectively lower the minimum condition to approve the transaction by changing its structure.  Good for them.

Biomet's Tender Offer

Biomet, Inc., the orthopedic company, announced today that it had agreed to an increased offer from a private equity consortium to acquire Biomet for $46.00 per share in cash, for an equity value of $11.4 billion.  The increase comes on the heels of a recommendation by Institutional Shareholder Services that Biomet shareholders vote against the transaction.  ISS based this recommendation on that fact that "[a]lthough the deal terms appear fair as of the time of the deal's announcement in December, the rally of the peer group" and Biomet's main joint reconstruction business "imply that there is little takeover premium in the [previous] $44 offer price." (For more on this recommendation, see my previous blog post ISS Recommends Against Biomet Deal)

In connection with the increase, Biomet also revised the structure of the acquisition from a merger to a tender offer.  The amended merger agreement now requires the consortium – which includes affiliates of the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co. and TPG – to commence a tender offer on or before June 14, 2007, to acquire all of the outstanding shares of Biomet’s common stock.  Biomet previously planned to have a shareholders meeting to vote on the merger agreement on June 8, 2007.  That meeting is now canceled.    

Per the Biomet Certificate of Incorporation, a merger must be approved by at least 75% of Biomet’s common shares.  Since the vote is based on the number of common shares outstanding rather than the number of votes cast, this would have meant that any failure to vote and broker non-votes would effectively have been votes against the transaction. 

In converting to a tender offer structure Biomet has fiddled with the minimum condition.  According to Biomet: 

Completion of the tender offer is subject to the condition that at least 75% of the Biomet common shares have been tendered in the offer – the same percentage approval requirement as with the previous merger structure. The amended merger agreement permits the investor group to revise the condition regarding minimum acceptance of the tender offer to decrease the minimum acceptance threshold to a number that, together with shares whose holders have agreed to vote to approve the second-step merger, represents at least 75% of the Biomet common shares.

The second sentence is a bit unclear to me and Biomet has yet to file the amended agreement.  But it likely means that the private equity group and Biomet agreed to the provision in order to obtain agreements to vote from management in connection with the tender offer.  If this is the intention, I'm still not sure why there was a need to convert to a tender offer -- the transaction could have closed quicker had Biomet simply postponed or adjourned the shareholder meeting and management could have also voted for the transaction then.  But my hunch is that in this language there is an effective lowering of the required shareholder approvals.  I'll have more once the amended agreement is actually filed. 

Note to Biomet shareholders: there are no dissenter's rights available under Indiana law for this transaction (a different result than in Delaware; Biomet is organized under the laws of Indiana).   

The RBS Consortium's Offer for ABN Amro

The Royal Bank of Scotland Group plc, Fortis and Santander today announced the terms of their proposed €71.1 billion offer for ABN Amro.  If completed, it would be the largest financial services deal in history.  According to the consortium, its bid is at a 13.7% premium to the competing €64 billion bid from Britain's Barclays plc supported by ABN Amro. The consortium is offering €38.40 per ABN share comprising 79% cash with the remainder consisting of new RBS shares.  But the group will also hold back €1 a share in cash (or $2.5 billion) as a reserve against litigation costs and damages that might arise from the Bank of America's lawsuit against ABN Amro to enforce the sale of LaSalle Bank to it.  In a just world this would be money that would come out of the pocket of ABN Amro CEO, Rijkman Groenink and the ABN Amro Supervisory Board for mucking up this sale process instead of their shareholders. 

The group detailed the financing arrangements for the bid, and also detailed their plans to break-up ABN Amro upon its acquisition:  RBS will acquire ABN Amro's Global Wholesale Businesses (including the Netherlands but excluding Brazil), LaSalle Bank and International Retail Businesses for a consideration of €27.2 billion. The full offer document can be accessed here.  The group will now proceed to have their required shareholder meetings and expect to commence the full offer in August of 2007. However, this is a pre-conditional offer -- certain conditions must be satisfied before the full offer can commence.  The most significant pre-condition is one requiring a favorable ruling on the currently pending litigation over the LaSalle matter.  It requires that:

The preliminary ruling of the Dutch Enterprise Chamber that the consummation of the Bank of America Agreement should be subject to ABN AMRO shareholder approval has been upheld or otherwise remains in force, whether or not pursuant to any decision of the Dutch Supreme Court, or of any other judicial body, and ABN AMRO shareholders have failed to approve the Bank of America Agreement by the requisite vote at the ABN AMRO EGM.

Thus, like many a U.S. takeover, the final disposition of ABN Amro will be decided by the courts.  The Dutch Supreme Court is expected to rule in July or August.  Until then, there will continue to be significant uncertainty in the market over the RBS-bid and the future of ABN Amro.   

NB.  The RBS group has also decided to take a different course in this offer document with respect to the acquisition of LaSalle Bank.  The consoritum offer itself, once it commences, is now conditioned upon "ABN AMRO shareholders hav[ing] failed to approve the Bank of America Agreement by the requisite vote at the ABN AMRO EGM convened for that purpose."  The group's previous offer was cross-conditional on ABN Amro reaching an agreement to sell LaSalle directly to RBS.  Now, it appears RBS is content to acquire only ABN Amro, and subsequently purchase LaSalle.   

Blackstone Agrees to Acquire Alliance Data

Alliance Data, the marketing services company, today announced an agreement to be acquired by Blackstone.  The transaction is valued at approximately $7.8 billion, and Blackstone will pay $81.75 per share in cash, an approximate 30 percent premium over Alliance Data's closing share price yesterday.  Blackstone's deal comes only one-day after the AFL-CIO sent a letter to the SEC attempting to halt Blackstone's initial public offering; looks like they are continuing on full speed ahead.   

Alliance Data also filed the merger agreement today, an admirable two business days ahead of schedule.  A quick scan finds it to be a pretty clean deal.  No financing provision, a relatively reasonable $170 million termination fee, and no apparent management involvement.  The only question appears to be why, given that this is a cash deal, the parties structured it as a merger rather than a tender offer.  A merger takes two-three months to complete whereas a tender offer takes 20 business days from commencement complete.  In cash deals parties typically prefer the quicker route of a tender offer when they do not have regulatory or other conditions which may require more time to fulfill.  This is particularly true since the deal does not include a "go-shop", a provision which permits the target to undertake market solicitations for a higher offer for a limited period of time after the deal.  I am not  sure of the answer, but I would speculate that the extended provisions in the agreement concerning the marketing of the deal financing likely required more time than the 20 business days a tender offer would take, and so they defaulted into a merger.  Alterntaively, the extended period allowed by a merger here is intended to function as a limited "go-shop" permitting offers to be made without the solicitation aspect.  Please let me know if you have another explanation.

   

Alcan, Alcoa and the Pacman Defense

On Monday, an analyst at Prudential Equity Group, John Tumazos, sketched out the benefits of a reverse takeover by Alcan of Alcoa.  Alcoa has commenced an unsolicited offer to acquire Alcan in a transaction valued at $33 billion.  A reverse takeover, known as the pacman defense, whereby a target turns the tables on an acquirer and offers to acquire it instead, has not been used in the United States since the 1980s (most notably in the Bendix/Martin Marietta wars) [correction: a reader pointed out that in 2000 Chesapeake Corp. employed a successful pacman defense against Shorewood Corp.; details of that transaction are here).  As reported by DealBook, the analyst highlighted the political benefits of a reverse-takeover; it will increase business by relocating the combined company outside the United States thereby stemming anti-American sentiment against Alcoa in other countries and be more politically palatable to the Quebec authorities where Alcan is headquartered and based.  And so it goes . . . .

The analyst may have been a bit too hasty in his calculus as to the balance of local politics.  Aloca is organized under the laws of the state of Pennsylvania.  Pennsylvania has the strictest anti-takeover laws in the country, including a constituency statute, business combination statute, control share acquisition statute, fair price statute, and employee severance statute.  For a good description of the Pennsylvania law and each of these provisions, see the article by William G. Lawlor, Peter D. Cripps and Ian A. Hartmann of Dechert LLP, Doing Public Deals in Pennsylvania:  Minesweeper Required.  Alcoa had the option to opt-out of these anti-takeover provisions when they were first enacted in 1990, but chose not to.  The company also has in its Certificate of Incorporation an anti-greenmail provision.  Although Alcoa doesn't currently have a poison pill, it could adopt one if Alcan made an offer.  Pennsylvania courts, unlike courts in Delaware and New York, have allowed targets to utilize no-hand provision in these pills.  The Pennsylvania courts also haven't yet considered the validity of a dead hand provision.  Any pill adopted by Alcoa to fend off an Alcan bid would therefore also likely contain these powerful anti-takeover devices.  Moreover, the Pennsylvania state legislature has been more than willing to change its laws to help a Pennsylvania organized company fight off an unwanted suitor when its current laws appeared insufficiently protective (most recently it acted to protect Sovereign Bancorp). 

The effect of all of this would be to permit Alcoa to effectively undertake a "Just Say No" defense to any Alcan pacman bid.  And while shareholder pressure may, if Alcan's bid goes high enough, force the Alcoa board to accept an offer this will likely take time and more consideration than Alcan, which is slightly smaller than Alcoa, can offer.  And Alcoa, also has a staggered board making a proxy contest a multi-year affair (and still facing the problem of Pennsylvania's antitakeover laws making any proxy contest win moot).  Compare this with Quebec law which permits Alcan to keep its poison pill for only a short period of time and has similar time limitations on other explicit anti-takeover maneuvers (see my previous blog post on this here).  In light of the comparative advantage of Alcoa, a pacman would have a small chance of succeeding against any protracted resistance by Alcoa and before Alcoa could complete its offer for Alcan.

Addendum:  Shares of Pennsylvania companies which have not opted out of the Pennsylvania anti-takeover statutes have been found to trade at a discount to their market comparables.  For more on this point, see P.R. Chandy et al., The Shareholder Wealth Effects of the Pennsylvania Fourth Generation Anti-takeover Law, 32 Am. Bus. L. J. 399 (1995).