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You’re the general counsel of a public company and your CEO calls you to tell you that he is interested in acquiring another public company. He’s already asking you how quickly this can get done and what the company needs to do. What are the first steps you should take?
Board of Directors
Generally, the CEO should call each of your board members individually to gauge their initial reaction toward the acquisition and schedule a special board meeting to discuss a potential transaction. At the board meeting, the directors should confirm whether they agree with the CEO’s position to proceed with evaluating the acquisition. After consulting with outside legal counsel, you and the members of the executive team should be prepared to address the following issues:
- What is the business purpose of the acquisition?
- Is the target company financially healthy, or is it operating in or near the “zone of insolvency”?
- What risks does the target company pose once it is integrated with your company?
- What are the target company’s material liabilities?
- Do any of your company’s executive officers or directors have a conflict of interest with the target company?
- Should your board form a special committee to evaluate the transaction?
- Should your company obtain a fairness opinion from a reputable investment banking firm?
- What is the current status of your D&O indemnification agreements and insurance policies?
Initial Due Diligence
Even before signing a letter of intent or term sheet, you will want to conduct initial due diligence to better understand the target and any potential obstacles. Because the target is a public company, a great deal of information, such as its material agreements, incentive plans and compensatory arrangements with its executive officers, will be available on the SEC’s website at www.sec.gov. In addition to a review of materials that will be obtained in response to diligence requests, a member of your in-house M&A group, in-house legal team or outside counsel should initially review the target’s SEC filings to determine the following:
- Does the target have a poison pill?
- What is the target company’s capital structure?
- What is the potential impact of the change in control provisions in each of the target’s credit facilities, outstanding bonds and/or other forms of outstanding debt?
- Do any of the target’s material agreements have change in control provisions that would be triggered by the proposed transaction?
- What are the target company’s material liabilities, including outstanding litigation and potential environmental issues?
- Who are the target’s major stockholders?
- Does the target have employment agreements with its named executive officers and/or change in control agreements?
- What are the terms of the target company’s executive officer, director and employee incentive and/or severance plans?
- Based on the law of the state of incorporation and the target’s charter documents, what level of stockholder approval may be required for the acquisition, and do these statutory and contractual requirements present any other impediments?
- Will the acquisition require a consent or an amendment to your credit facility?
- Is the acquisition permitted under the terms of any indenture(s) governing your bonds and/or other financing instruments?
- What are the potential tax implications of the proposed structures for the transaction?
Additionally, in connection with the due diligence phase, the target company will require that your company enter into a confidentiality agreement prior to disclosing information and materials to you beyond what is publicly available. Similarly, if you will be providing the target company with information that is confidential or proprietary in nature, the obligations to keep such information confidential should be mutual. It is also likely that the target will require that the confidentiality agreement include a “standstill” provision, whereby you agree not to acquire the target’s securities or engage in certain other transactions for a specified period of time. You (as the acquiror) will want to consider whether a mutual standstill is appropriate to restrict the target and its affiliates from acquiring your securities during such period.
Purchase Price Consideration
When acquiring the stock of another public company, there are typically three options for what form of consideration the purchase price will consist of: cash, stock or a combination of the two. If any portion of the purchase price is going to consist of cash, you must determine if the cash will be provided through your company’s available cash on hand or through external financing, which could include drawing down on your existing credit facility, bridge or long-term financing and/or issuing debt or equity securities.
If financing is going to be involved, the time required to secure financing commitments can delay a transaction and you will want to impose necessary conditions to ensure you have adequate time and/or have the right to walk if the financing cannot be obtained. Additionally, if the purchase price includes issuing shares of your company’s stock to the target’s stockholders, then you also need to be cognizant of the possible need to obtain stockholder approval under the rules of your stock exchange and to register the shares with the SEC, a process that will require the preparation and filing of a registration statement, or a combined proxy/registration statement.
One-Step Versus Two-Step Structure
Both parties will need to evaluate whether to proceed with a traditional one-step merger (most likely a reverse triangular merger) through a proxy statement or a tender offer structure. Whereas the traditional merger will require obtaining approval from the target’s stockholders, a stockholder vote is not required for the tender offer. Instead, stockholders are solicited and asked to tender their shares, and if enough shares are tendered, your company will be the majority stockholder to complete the second-step merger.
If you decide to do a one-step merger and obtain approval from the target’s stockholders, this will require the preparation and distribution of a proxy statement for the purpose of holding a special meeting to vote on the proposed transaction. This process, which may include a series of SEC comments, can take several months and there is no guarantee that stockholder approval will be obtained.
Alternatively, you may consider launching a tender offer to facilitate the acquisition. Although in some cases an acquisition can be completed more quickly using a tender offer, there are a host of factors and tender offer structures to consider. These options include using a “top-up” option after acquiring a specified percentage of the outstanding stock of the target company and using a back-end, short-form merger to complete the transaction, once your company acquires at least 90 percent of the outstanding securities of the target.
A primary reason to choose the tender offer structure over the traditional one-step merger is the potential to complete the acquisition more quickly. Assuming the SEC staff does not issue any comments with respect to an acquiror’s tender offer documents, it may be possible to complete the acquisition in as few as 30 days from execution of the merger agreement. In contrast, a one-step merger with a proxy statement may take more than three months from signing of the merger agreement to close, in part due to the nature of the SEC’s comment process with respect to merger proxy statements.
As with any acquisition, you will need to consider whether the acquisition will require approval under the Hart-Scott-Rodino Act and from any other applicable governmental agencies. Similarly, if the target has international operations, you would need to also consider any potential foreign regulatory or logistical hurdles.
An acquisition can be a very effective and profitable strategy for your company, but as you can see, when the CEO comes to you with that simple question, the process is just beginning. The foregoing can help you organize your team as you proceed towards a transaction, which is a key factor in making the acquisition successful and efficient for you and your company.
For further questions, please contact any of the following attorneys. You may also view the alert in the PDF linked below.
PDF - DealThink_Lets_Go_Shopping.pdf