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SEC proposes amendments to tender offer best-price rule21/06/2006. Source: Dechert.
 The proposed amendment has been prompted by the existing split among federal courts on how the rule should be applied to compensatory arrangements entered into with employee and director shareholders of target companies, says Dechert’s mergers and acquisitions group.
At its open meeting, the Securities and Exchange Commission voted to issue proposed rules to amend the tender offer "best-price" rule. The proposed amendment has been prompted by the existing split among federal courts on how the rule should be applied to compensatory arrangements entered into with employee and director shareholders of target companies.
Rule 14d-10 under the 1934 Act provides that no bidder may 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." Although this rule appears to be simple in concept, courts have struggled when applying it to the variety of arrangements that exist or are entered into with executives of a target company (who are usually stockholders as well) in connection with an M&A transaction. These arrangements often include severance payments, stay bonuses, non-compete payments, and other cash and equity compensation arrangements designed to retain and provide incentive to key management.
The courts have applied different tests in analyzing these arrangements. For example, the Ninth Circuit has focused on whether these arrangements are "integral" to the tender offer transaction (e.g., are the arrangements conditioned upon completion of the deal). Epstein v. MCA, Inc., 50 F.3d 644 (9 th Cir. 1995). The Seventh Circuit has focused more on the timing of such arrangements (e.g., were they made "during such tender offer," and thereby prohibited by the rule). Lerro v. Quaker Oats Co., 84 F.3d 239 (7 th Cir. 1996).
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