Amendments to the best price rule applicable to tender offers for securities registered under the Securities Exchange Act of 1934 became effective in December 2006. The best price rule requires that the consideration paid to any security holder in a tender offer be the highest consideration paid to any other security holder in the tender offer with the result that all shareholders are to be treated equally.
The amendments to the best price rule adopted by the SEC:
- clarify that the best price rule applies only to the consideration paid for the securities tendered in the tender offer and not to other consideration such as changes to compensation arrangements;
- add a specific exemption from the best price rule for employment compensation, severance and employee benefits arrangements with any shareholder of the target company (including any director, officer or employee); and
- include a safe harbor provision for compensation arrangements approved by a committee of the board of directors made up of independent directors, such as the compensation committee or other special committee.
Many commentators believe that as a result of these amendments, tender offers may become a viable structure for a business recombination.
The amendments to the best price rule applies to both third party tender offers and issuer tender offers. They provide that a bidder may not make a tender offer unless "the consideration paid to any security holder for securities tendered in the tender offer is the highest consideration paid to any other security holder of securities tendered in the tender offer." The change to the best price rule clarifies that the best-price rule applies only to the consideration paid for securities tendered and not to the consideration paid for other purposes such as compensatory arrangements so long as certain requirements are met as discussed below. Prior to the amendments, certain courts interpreted the best price rule to apply to changes made to the target company’s executive compensation and severance arrangements in contemplation of the sale of the company.
The amendments expressly exempt from the best price rule employment compensation, severance and other employee benefit arrangements entered into by the bidder or target company with any holder of securities of the target company as well as payments made or to be made in connection with those arrangements, provided that such payments are being paid or granted for services performed or to be performed and are not calculated based on the number of shares tendered or to be tendered.
The amendments also contain a non-exclusive safe harbor provision excluding the compensation, severance and benefit arrangements from the best price rule if they are approved by the target company’s independent directors. The safe harbor is also available for a third-party tender offer if the bidder is a party to the arrangement and the arrangements are approved by the bidder’s independent directors. It is also available for an issuer tender offer if the compensatory arrangement is approved by the independent directors of the issuer’s affiliate if the affiliate is a party to the arrangements.
The compensation arrangements must be approved by the approving entities compensation committee or a committee that performs similar functions composed of independent directors. If the company does not have a compensation committee or the committee is not composed of independent directors, the compensatory arrangements may be approved by a special committee of the approving entity composed of independent directors formed for the purpose of approving the arrangements.
Director’s independence is determined for a listed company if the director satisfies the independence standards of the applicable exchange listing standards. For a non-listed company, director independence is determined by the company using a definition of independent director of a selected exchange and applying such definition to all members of the committee.
Foreign private issuers may utilize the safe harbor by having the arrangements approved by members of the board of directors, or any committee of the board of directors authorized to approve the arrangement under the law or regulations of the issuer’s home country. The members of the board or committee need not be independent under U.S. listing standards, but must be independent under the laws, regulations, codes or standards of the issuer’s home country.
The board or committee that approves the compensatory arrangements need not determine that the compensation arrangements meet the requirements that the payments are being paid or granted for services performed or to be performed and are not calculated based on the number of shares tendered or to be tendered to qualify for the safe harbor.
For further information, please contact Tom Hopkins at (805) 879-1813.