Tender Offer Revival - Evolution of the Best Price Rule June 21, 2007

Introduction SEC recently amended its tender offer “best price rule” (effective December 8, 2006). SEC acted in order to address the uncertainty that various interpretations by courts have produced. SEC intended to reduce the regulatory disincentive to structuring M&A transactions as tender offers. The amendments have generally been enthusiastically received.

Tender Offers Section 14(d) of the Exchange Act generally regulates tender offers. Tender offer – not defined in statue or rule. Wellman test (not all need to be present): Active and widespread solicitation Solicitation for a substantial percentage An offer made at a premium Firm terms that are not negotiable Contingent on a fixed minimum Limited time offer Element of pressure to sell Public announcement

Williams Act Section 14(d)(7) of the Exchange Act requires equal treatment of security holders Williams Act adopted in 1968 to further regulate tender offer and address discriminatory practices. “Saturday Night Specials” First come, first serve offers

All Holders, Best Price Rule Adopted in 1986: Rule 13e-4(f)(8) (issuer tender offers) Rule 14d-10 (third-party tender offers) Codified positions that both an issuer tender offer and third-party tender offer: Must be open to all holders of the class of securities. All security holders must be paid the highest consideration paid to any security holder.

M&A Usage of Tender Offers Two-step transactions (tender offer) versus one-step (statutory merger). Generally, cash tender offers can be completed more quickly and efficiently: days versus days Target and acquiring companies generally prefer speed of closing

Judicial Interpretations A 1995 federal court decision made application of the best price rule an intensely factual analysis. Courts generally applied “integral-part” test or a “bright-line” test to determine if arrangements notionally outside the tender offer violated the best price rule. Integral-part test Ninth Circuit, Second Circuit, Eleventh Circuit Looked beyond the technical beginning and end of the tender offer Agreements or payments made at or about the same time? Bright-line test Seventh Circuit Looked simply at what happened during the tender offer itself

Decline in Tender Offer Usage in M&A Differing judicial interpretations made tender offer usage unattractive. Potential liability from claims that compensation payments violate best price rule Claimants could select a favorable jurisdiction in which to bring a claim SEC noted that a regulatory disincentive did not serve shareholders’ best interests Most major law firms advised clients to avoid using tender offer structure.

SEC Steps In SEC publicly stated that it did not subscribe to any then-current judicial interpretations. The SEC wanted to reduce the regulatory disincentive to using the tender offer structure. Proposed amendments in December comment letters received – one signed by 7 major law firms. Amendments adopted in October Amendments effective December 8, 2006.

Amendments as Proposed Clarified that best price rule applied only to consideration paid in a tender offer. Exempted from Rule 14d-10 (third-party) compensation arrangements with employees and directors if amounts payable: Relate solely to performance of past or future services Are not based on number of securities owned or tendered by the employee Created safe harbor under Rule 14d-10 to allow independent compensation committee of target or bidder board, as applicable, to approve compensation arrangement and thereby have it deemed to satisfy the proposed exemption.

Principal Changes from the Proposed Rules Compensation arrangements extended to any target shareholder – not just employees and directors. Approval of directors of target company will satisfy safe-harbor regardless of whether the target company is a party to the compensation arrangement. Any committee comprised solely of independent directors may approve the compensation arrangement. Accommodations for foreign private issuers. Expanded to cover issuer tender offers (Rule 13d).

Overview of Final Rules— Rule 14d-10(a)(2) Rule 14d-10(a)(2) amended to read: “(2) The consideration paid to any security holder for securities tendered in the tender offer is the highest consideration paid to any other security holder for securities tendered in the tender offer.”

Overview of Final Rules— Rule 14d-10(d)(1) New paragraphs designated under Rule 14d-10(d)(1) were added: “Paragraph (a)(2) of this section shall not prohibit the negotiation, execution or amendment of an employment compensation, severance or other employee benefit arrangement, or payments made or to be made or benefits granted or to be granted according to such an arrangement, with respect to any security holder of the subject company, where the amount payable under the arrangement: Is being paid or granted as compensation for past services performed, future services to be performed, or future services to be refrained from performing, by the security holder (and matters incidental thereto); and Is not calculated based on the number of securities tendered or to be tendered in the tender offer by the security holder.”

Overview of Final Rules— Rule 14d-10(d)(2) New paragraphs designated under Rule 14d-10(d)(2) were added: ”The provisions of paragraph (d)(1) of this section shall be satisfied and, therefore, pursuant to this non-exclusive safe harbor, the negotiation, execution or amendment of an arrangement and any payments made or to be made or benefits granted or to be granted according to that arrangement shall not be prohibited by paragraph (a)(2) of this section, if the arrangement is approved as an employment compensation, severance or other employee benefit arrangement solely by independent directors as follows: The compensation committee or a committee of the board of directors that performs functions similar to a compensation committee of the subject company approves the arrangement, regardless of whether the subject company is a party to the arrangement, or, if the bidder is a party to the arrangement, the compensation committee or a committee of the board of directors that performs functions similar to a compensation committee of the bidder approves the arrangement; or If the subject company's or bidder's board of directors, as applicable, does not have a compensation committee or a committee of the board of directors that performs functions similar to a compensation committee or if none of the members of the subject company's or bidder's compensation committee or committee that performs functions similar to a compensation committee is independent, a special committee of the board of directors formed to consider and approve the arrangement approves the arrangement; or If the subject company or bidder, as applicable, is a foreign private issuer, any or all members of the board of directors or any committee of the board of directors authorized to approve employment compensation, severance or other employee benefit arrangements under the laws or regulations of the home country approves the arrangement.”

Open Issues and Points of Concern Commercial Arrangements Lock-ups Financing Roll-overs