[Last updated: 1 June 2022, unless otherwise noted]
The principal methods of acquiring 100% of a target company are tender offers (followed by a second-step "short-form" merger to squeeze out non- tendering shareholders) and "long-form" negotiated mergers that are submitted for approval by the target company's (and, in certain circumstances, the acquirer's) shareholders pursuant to a proxy solicitation in accordance with the SEC's proxy rules (Section 14 of the Exchange Act and SEC Regulations 14A and 14C). A friendly tender offer is generally carried out pursuant to a negotiated merger agreement in which the acquirer agrees: (i) to conduct a tender offer for the target company's shares at the price stipulated in the agreement in lieu of the target company seeking shareholder approval of the merger; and (ii) provided that the acquirer receives tenders of a sufficient number of target company shares (90% in most states but in Delaware an absolute majority of the outstanding voting shares unless a higher percentage of the target company's voting shares is required to approve a merger), to effect a squeeze-out merger of the target company's non-tendering shareholders.
4.1 Preliminary matters
No mandatory offers; no minimum pricing – Unlike the takeover rules in certain non-US jurisdictions, neither US federal securities laws nor state corporate laws require a bidder to commence a tender offer for the shares of a company as a consequence of acquiring a specified percentage of a public company's outstanding shares. However, three states (Maine, Pennsylvania and South Dakota) have "control share cash-out" requirements under which a bidder that acquires a specified percentage of voting power must notify remaining shareholders, who can then require that the bidder purchase their shares. Similarly, US federal securities laws do not impose any minimum price at which a tender offer is to be conducted or minimum amount of merger consideration that must be paid, subject to certain limited exceptions for squeeze-outs and required disclosure of the price paid in purchases made during a specified period prior to the tender offer. Some states impose "fair price requirements", e.g., highest price paid during a specified "look-back" period, on the consideration in business combinations with holders of more than a specified percentage of the target company's outstanding shares. Certain rules regulate changes to the consideration payable in a tender offer and the consideration payable in squeeze-outs. These are discussed below.
4.2 Making the bid public
Preliminary discussions – As a first step in acquiring the target company, the acquirer's CEO may contact the target company's CEO and set up a meeting between the two CEOs to discuss strategic alternatives available to the two companies. At this meeting, the acquirer's CEO may suggest an offer to purchase the target company for a specified amount per share or premium per share (or range thereof), as well as discuss other matters relevant to the acquisition proposal. If the target company agrees to proceed, then the parties can determine whether the acquisition will be structured as a tender offer or a merger and begin to negotiate a definitive acquisition agreement. In friendly transactions, the parties generally enter into a confidentiality agreement to permit the acquirer to conduct due diligence. This agreement typically restricts public announcements about the negotiations and enables the target company to provide material non-public information to the acquirer without violating SEC Regulation FD, which restricts selective disclosure of such information. Because negotiations and due diligence are conducted pursuant to an agreement that requires confidentiality and restricts public announcements, acquisitions in the US generally become public only upon the signing of a definitive agreement. This may be contrasted with the practice in other jurisdictions where such announcements are made earlier, particularly if the acquirer builds up its holdings to a level that obligates it to offer to purchase publicly held shares. If the target company is unwilling to proceed with negotiating a ‘friendly’ transaction, then the acquirer may consider whether to proceed on a ‘hostile’ basis, which generally means that the acquirer will make public its intentions regarding an acquisition of the target company.
Even at this preliminary stage, a potential acquirer will need to keep a record of its contacts and discussions with the target company. If the parties reach agreement for an acquisition of the target company, the disclosure document prepared for the target company's shareholders – a definitive proxy statement for a long-form merger or an offer to purchase for a tender offer – will include a detailed discussion of past contracts, transactions or negotiations between the target company (and its affiliates) and the acquirer or their respective representatives, generally including the nature of the contact, e.g., a meeting, letter, or telephone conversation, the principal participants and the substance of the contact. This disclosure is usually presented in the target company's proxy statement or the acquirer's offer to purchase under an appropriate heading, such as "Background of the Merger."
As noted above, a party filing a Schedule 13D is obligated to disclose its "plans and proposals" regarding the subject company, and to amend its Schedule 13D for "material changes" in the information in the Schedule. If a potential acquirer has a stake in the target company that has been disclosed in a Schedule 13D, execution of a confidentiality agreement and the conduct of due diligence entails a significant risk that the parties' discussions – even at this preliminary stage – must be disclosed as such a material change, particularly if the acquirer's initial filing stated simply that it acquired its stake "for investment," without any reference to seeking a possible business combination or other transaction with the target company.4.3 Form of consideration and pricing rules
As noted above, an acquirer in an all-cash transaction will have a timing advantage over a rival bidder offering its securities. This can be especially important when the board of the target of a hostile bid determines that an all-cash acquisition of the target by a "white knight" is preferable to the hostile bidder (subject to compliance with the directors' fiduciary duties (see "4.7 Fiduciary Duties of Directors," below).
4.4 Conditional and unconditional offers
US tender offer law and practice does not provide that tender offers become "unconditional" after the passage of a specified interval after commencement or another event. In a non-hostile transaction, the conditions to an acquirer's obligation to accept and pay for tendered shares are generally negotiated between the acquirer and the target company. In a hostile bid, such conditions are determined by the acquirer. Conditions may be waived by the party whose obligations are subject to satisfaction of the condition. Typical conditions to an acquirer's obligation are:
4.5 Financing requirements
Neither US federal securities laws nor state corporate laws expressly require that an acquirer have financing available or committed at the commencement of a tender offer. However, under SEC Rule 14e-8, it is fraudulent for a person to announce its intention to conduct a tender offer if the person does not have a reasonable belief that it will have the means available to purchase securities to complete the tender offer. Schedule TO requires that an acquirer provide information regarding the source and amount of funds it will use to acquire the target company. The offer to purchase (or a definitive proxy statement for a long-form merger) will include a description of the acquirer's financing arrangements, including the terms of the financing documents. The financing agreements will typically be filed as exhibits to the acquirer's Schedule TO. As indicated above, receipt of financing for the acquisition can be a condition to an acquirer's obligation to accept and pay for tendered shares (or, in a long-form merger, to complete the merger). However, the existence of a financing condition will be significant factor considered by the board of a target company that receives multiple offers, since "deal certainty" is a factor that a board may consider in its evaluation of competing offers. In addition, the SEC rules dispense with the need to provide financial information for the acquirer in an all-cash tender offer for all of the outstanding shares of the target company if the offer is not subject to a financing condition. The proxy rules afford similar relief. They provide that in an all cash acquisition, specified information for the acquiring company, including its financial statements, need not be provided unless the information is material to an informed voting decision, e.g., the security holders of the target company are voting and financing is not assured. These provisions can be attractive to an acquirer that has not previously published its financial statements and wishes to continue to avoid doing so.
4.6 Recommended and hostile offers
In all tender offers, the target company must take a formal position (which may include a statement that it makes no recommendation) with respect to the tender offer within 10 business days after the tender offer commences. It does so by including its position in a Schedule 14D-9 disclosure statement filed with the SEC. Prior to the filing of Schedule 14D-9, the target company may issue statements regarding the offer as long as it files any written communications with the SEC on the date they are issued and includes a clear legend advising its shareholders to read the target company's formal recommendation statement when it is available. In a friendly transaction, the content of the target company's position is usually negotiated in advance and the offer to purchase or target company's proxy statement will include information regarding the board's consideration and approval of the transaction, its recommendation that target company shareholders accept the offer and tender their share or vote in favor of the merger, as the case may be, and the reasons for the board's recommendation. In a friendly tender offer, the target company's Schedule 14D-9 will be prepared in coordination with the acquirer and filed and disseminated at the time the offer commences.
4.7 Fiduciary duties of directors
Directors must act in the best interests of the corporation and its shareholders. They must exercise the degree of care that a reasonable person would employ in similar circumstances and place the interests of the corporation and its shareholders ahead of any self-interest. In the context of a "change of control transaction", the board is required to act reasonably to seek the transaction that offers the best value reasonably available for the company's shareholders.
In Delaware, courts have stressed the importance of the board being adequately informed when negotiating the sale of control of the company. This generally requires that the target company's board:
Some of the suggested methods for the target company's board to accomplish these ends include conducting an auction, conducting an "active" market check of other potential buyers before entering into an agreement, negotiating for inclusion of a "go-shop" clause allowing the target company to solicit interest from potential buyers for a limited period of time after signing a definitive agreement with an initial buyer or, if that is not acceptable to the acquirer, including in the definitive agreement an exception to a "no-shop" clause (a prohibition on the target company's soliciting a purchase proposal from any other party) permitting the target company to terminate the agreement with the acquirer to accept a superior, unsolicited competing offer made by a third party (the so-called "fiduciary out"), the exercise of which generally requires payment of a break-up fee by the target company to the acquirer. Usually, the target company's board will seek a "fairness opinion" from its investment bankers before approving a change of control transaction. For significant acquisitions, an acquirer may consider retaining its own investment banker to provide a similar opinion.
Directors of a target company defending a shareholder suit attacking a transaction for alleged violation by the directors of their fiduciary duties will seek to have the court apply the business judgment rule to their actions. Under the business judgment rule, disinterested directors are presumed to have acted in good faith in the belief that their action was in the best interests of the company, and a court will not substitute its judgment regarding the merits of a transaction for that of the directors. That presumption may be overcome by appropriate evidence that the directors did not act on an informed basis, in good faith, and in the belief that their action was in the best interests of the corporation and its shareholders.
Recent case law in Delaware has established conditions under which breach of fiduciary duty claims may be "cleansed," thereby significantly enhancing director's ability to prevail in post-closing challenges to transactions that have been approved by the target's shareholders. Under the Corwin line of cases in Delaware, the highly deferential business judgment standard of review applies to a post-closing action seeking damages for directors' breach of fiduciary duties in transactions that do not involve controlling shareholders, so long as the shareholder approval was "fully informed" and "uncoerced." These decisions apply well-established principles relating to proxy disclosure that only "material" information must be disclosed and a narrow view of "coercion." Accordingly, in most cases applying the Corwin decision, the business judgment rule has been applied and the cases have been dismissed, although several recent cases denying or reversing Corwin dismissals have emphasized an "informed" approval as a prerequisite to a Corwin defense. Subsequent cases have shown that Delaware courts will meticulously review corporate disclosures to ascertain whether the stockholders' decision was truly informed, meaning that all material facts were disclosed completely and accurately.
A key driver behind litigation alleging fiduciary breach has been the availability of counsel fees to plaintiff's counsel for benefits ostensibly provided to the target company's shareholders through their representation of the plaintiff class or the derivative plaintiff, and there are law firms that specialize in conducting such litigation. Generally, class actions and derivative actions cannot be settled without approval of the settlement by the court in which the action is brought, and the plaintiff's counsel's application for fees is considered by the court as part of its review of the settlement terms. The Delaware Supreme Court, in the Trulia case, questioned whether the value of the claimed "benefits" justifies approval of settlements that provide for broad releases of the claims of the plaintiff class and payment of plaintiff's counsel fees, particularly in cases in which the alleged benefit to target company shareholder involves minimal additional disclosure provided to target company shareholders, rather than a tangible benefit to shareholders. In Trulia, the Delaware Supreme Court stated that it would no longer approve "disclosure-only" settlements in which the supplemental disclosures do not address material misrepresentations or omissions. The response to Trulia in other jurisdictions has varied.
Many commentators have remarked that there has been a significant decline in Delaware-based mergers and acquisitions litigation, and have attributed the decline to the Corwin line of cases and the heavy scrutiny now being applied to "disclosure only" settlements under Trulia. In an apparent response to these obstacles, prospective plaintiffs have demanded access to company books and records under Section 220 of the Delaware General Corporation Law, which provides stockholders with the right to inspect corporate records on demand "for any proper purpose." Access is sought as a means of obtaining information and documents to bolster a complaint -- specifically, to anticipate a Corwin defense to the action e.g., by obtaining information relevant to whether the stockholder vote was fully informed, as required by Corwin, or whether the stockholder proposing the transaction to be voted on actually exercised control over the company such that a Corwin defense would be unavailable. The Delaware court has ordered inspection over defendants' objections in such cases. While the court has interpreted the "proper purpose" standard to require that a shareholder seeking access have only a "credible basis" for its request, there must still be a showing of some facts that, if borne out through investigation, could potentially lead to a cause of action.
4.8 Appraisal rights of minority shareholders
Under virtually all US state corporate laws, once a merger is approved by target company shareholders and completed, the merger is binding on all target company shareholders, regardless of whether they voted in favor of the merger (or had no vote because the merger was effected as a short form merger without shareholder approval). However, under most state corporate laws, target company shareholders in an all cash merger who properly exercise any dissenters' rights available to them under applicable state law (which generally requires that such shareholders vote against or refrain from voting on the merger) or the target company's organizational documents will generally have the right to seek appraisal, i.e., a court determination of the fair value of their shares, and to receive the appraised value of their shares, rather than the merger consideration.