Speech by SEC Staff:
Opening Statement at the Commission Open Meeting
Mara L. Ransom
Special Counsel, Division of Corporation Finance
U.S. Securities and Exchange Commission
October 18, 2006
CHANGES TO THE TENDER OFFER BEST-PRICE RULE
We are recommending adoption of amendments to the tender offer best-price rule. This rule provides that no one may make a tender offer unless the consideration paid to any security holder during the tender offer is the highest consideration paid to any other security holder. This provision is intended to assure fair and equal treatment of all security holders in tender offers. The current rule has been the subject of differing interpretations among federal circuit courts, some of which have applied this rule to compensatory arrangements entered into by employees or directors of the target company in contemplation of an acquisition.
The amendments we recommend this morning are intended to clarify that the best-price rule applies only with respect to the consideration offered and paid for securities tendered. The amendments to the best-price rule reflect this premise and provide that any consideration offered and paid to a security holder of a target company pursuant to an employment compensation, severance or other employee benefit arrangement is not consideration that should be captured by the best-price rule. We believe these amendments are necessary to help alleviate the uncertainty that the various circuit court interpretations of the best-price rule have produced. We also intend for the amendments to reduce any regulatory disincentive to structuring an acquisition of securities as a tender offer.
On December 16, 2005, the Commission proposed amendments to the tender offer best-price rule. We received 11 comment letters on the proposed amendments. The commenters generally supported the proposed changes. Many of the commenters, however, requested modifications and additions to the proposed amendments to increase their clarity and certainty. We recommend that the Commission adopt the changes to the best-price rule substantially as proposed, but with a number of modifications that address the commenters' suggestions.
Specifically, we recommend revising the language of the existing issuer and third-party best-price rules as proposed. Currently, the rule reads: "No bidder shall make a tender offer unless
the consideration paid to any security holder pursuant to the tender offer is the highest consideration paid to any other security holder during such tender offer." As revised, the rule would replace the phrases "pursuant to the tender offer" and "during such tender offer" with the phrase "for securities tendered in the tender offer." This change would clarify that the rule applies to payments for securities and would properly focus the determination of the consideration that the rule captures.
In addition to changing the language of the best-price rules, we recommend adding a new exemption to those rules for the negotiation, execution or amendment of employment compensation, severance or other employee benefit arrangements entered into with security holders of the target company. This exemption acknowledges that critical personnel decisions which generally are made independent of the consideration paid for tendered securities often must be made concurrently with the decision to pursue a transaction.
We recommend that this exemption be adopted with the following three modifications that clarify the intent of the exemption:
First, the parties to compensatory arrangements that qualify for the exemption would be expanded to include all security holders of the target company as opposed to only employees or directors of the target company.
Second, the exemption would be added to the issuer tender offer rules, not just the third-party rules.
Third, the two requirements that must be met in order to qualify for the exemption would be modified slightly. With respect to the first requirement, rather than provide that the arrangement must "relate solely to" services rendered or to be rendered, we recommend that the phrase "relate solely to" be replaced with the phrase "is being paid or granted for." As a result of this change, the exemption will be satisfied if the arrangement "is being paid or granted as compensation for" services rendered or to be rendered. As to the second requirement, we recommend adding the word "calculated" and removing the word "owned" to make it clear that an arrangement will satisfy the exemption if it "is not calculated based on the number of securities tendered or to be tendered
Finally, we recommend that the Commission adopt a safe harbor provision, as proposed, that would allow an independent compensation committee to approve an employment compensation, severance or other employee benefit arrangement and, in doing so, satisfy the requirements of the exemption to the best-price rule. We believe that the fiduciary duties of board members, combined with the added assurance of director independence listing standards, provide the necessary safeguards for purposes of satisfying the safe harbor. We also believe this safe harbor will provide greater certainty to bidders and target companies at the planning stage of a tender offer.
In response to suggestions from commenters, we recommend that the safe harbor be adopted with the following five modifications:
First, we recommend that the safe harbor, like the basic exemption, apply to both the issuer and the third-party best-price rule.
Second, we recommend that the safe harbor make clear that it is satisfied in all cases by approval of the target company directors and, where the bidder is a party to the transaction, by approval of the bidder company directors.
Third, we recommend that the safe harbor may include arrangements approved by a special committee of the board of directors that is comprised solely of independent members and formed to approve the arrangement. Approval by such a committee would be sufficient if the company does not have a compensation or similar committee or the company has such a committee, but none of its members are independent.
Fourth, we recommend that the safe harbor accommodate arrangements involving foreign private issuers, which may have different board structures and independence requirements from domestic companies. For these issuers, arrangements could be approved by any members of the board of directors or any committee of the board of directors that is authorized to approve the arrangement under the laws or regulations of their home country. Members of the board or committee would need to be independent in accordance with the laws, regulations, codes or standards of their home country.
Finally, we recommend that an instruction be added to the safe harbor to provide that a determination by the board of directors that the members of the board approving an arrangement are independent in accordance with the provisions of the safe harbor will satisfy the independence requirements of the safe harbor.
We would be pleased to answer any questions.