Joseph Frumkin and Krishna Veeraraghavan of Sullivan & Cromwell assess the M&A regulatory framework in the United States
Section 1: GENERAL OUTLOOK
1.1 What have been the key recent M&A trends or developments in your jurisdiction?
Recent US public M&A activity has been characterised by an increase in the frequency of so-called mega-deals. In 2015, many of these deals were announced, spanning the pharmaceuticals, technology, consumer goods and other sectors.
Another recent trend has been the continuing rise in prominence and mainstream acceptance of shareholder activism.
1.2 What is your outlook for public M&A in your jurisdiction over the next 12 months?
In the next 12 months, we expect activity levels in US public M&A to remain strong, driven by an appetite among public companies for growth through strategic acquisitions. Additionally, we expect activists to continue to apply pressure to the boards of directors of public companies to engage in M&A transactions to maximise value.
Section 2: REGULATORY FRAMEWORK
2.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
US public M&A activity is governed both by federal laws and the laws of the states where the companies are incorporated. Within the federal government, the Securities and Exchange Commission (SEC) regulates public securities and the conduct of companies with respect to such securities, including with respect to disclosure of tender offers. The US Department of Justice (DOJ) and Federal Trade Commission (FTC) regulate the antitrust implications of M&A transactions. M&A transactions in certain industries are subject to regulation from additional federal agencies. State statutes typically regulate the corporate governance of companies incorporated in the state, including duties of directors. Rules promulgated by national securities exchanges also contain regulations that govern certain aspects of M&A transactions.
2.2 How, by whom, and by what measures, are takeover regulations (or equivalent) enforced?
Typically, the SEC enforces federal takeover statutes and regulations. Some federal statutes confer a right of action on private parties to bring action in federal courts for alleged violations of laws. State takeover regulations, primarily based on fiduciary duties, are generally enforced in legal actions by shareholders alleging breaches by directors of their fiduciary duties.
Section 3: STRUCTURAL CONSIDERATIONS
3.1 What are the basic structures for friendly and hostile acquisitions?
The basic structures are the statutory merger, tender offer, and exchange offer. In a statutory merger, the target company is typically merged with a subsidiary of the acquiring company or the acquiring company itself. The target shareholders receive cash, stock of the acquirer or both. In a tender offer, the acquiring company purchases the target company's stock directly from shareholders. If the acquiring company's stock is used as consideration, the offer is referred to as an exchange offer. Tender offers are used in hostile acquisitions.
Often after a tender offer or exchange offer in which less than 100% of the target company shares were tendered or exchanged (but at least the amount required to approve a merger), the acquiring company can effect a merger to acquire the remaining shares of the target company with no further action of the target company shareholders. Regardless of the structure, in friendly transactions, the target and acquirer will enter into a transaction document (merger agreement) that details the chosen structure for the deal along with representations, warranties and covenants.
3.2 What determines the choice of structure, including in the case of a cross-border deal?
The choice of structure is based on many factors, including: tax considerations; operational considerations; the anticipated timeline for receiving antitrust or regulatory approvals for the transaction; and whether the bid is friendly or hostile.
3.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
Acquisitions of control usually cannot be completed until the necessary competition law and regulatory approvals are obtained. Absent issues, competition law approvals can be obtained in less time than a tender offer or merger timeline. Timelines for other regulatory approvals vary widely by regulator and the nature of the transaction. However, if applicable, they often extend well beyond even the merger approval timeline.
Tender offers have the shortest timelines, requiring a minimum of 20 business days from commencement to completion. Mergers require time for preparing and receiving SEC approval for shareholder meeting materials, calling a shareholder meeting and soliciting votes. This typically takes three to four months.
A transaction is open to competing transactions in a tender offer until the tendered shares are accepted for payment according to the tender offer (which happens at the conclusion of the offer). A merger not preceded by a tender offer is open to competing transactions until shareholder approval of the merger is obtained.
3.4 Are there restrictions on the price offered or its form (cash or shares)?
Acquiring companies are free, subject to anti-fraud principles, to offer consideration in any form and in any amount without regard to price or the form of consideration paid in prior acquisition of target shares.
3.5 What level of acceptance/ownership and other conditions determine whether the acquisition proceeds and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
Tender offers and exchange offers are typically subject to minimum tender conditions, whereby the offer is subject to a minimum number of shares being tendered equal to at least the voting power sufficient to enable the acquirer to effect a squeeze-out merger. For tender offers and exchange offers, if certain conditions are met under the Delaware General Corporation Law (DGCL) section 251(h), minority shareholders can be squeezed out without a meeting if the percentage of shares tendered exceeds the vote required for a merger. If DGCL section 251(h) does not apply, an acquiring company can still eliminate minority shareholders without a meeting under DGCL section 253 if it acquires at least 90% of the target company's shares or if it follows the process to call a shareholder meeting and votes to approve the merger.
3.6 Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for selected shareholders, and partial acquisitions, for example by mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
Under Rule 14d-10 of the Securities Exchange Act, a tender offer or exchange offer must be made to all target company shareholders. The greatest amount of consideration offered in the tender offer for any one share must be offered for each of the other shares in the tender offer. If the target shareholders tender more shares than the acquiring company intends to purchase (if its offer is for less than 100% of the target company's shares), the acquiring company must purchase the tendered shares on a pro rata basis.
Minority investors do not enjoy many of the statutory protections found in other jurisdictions, and controlling shareholders may sometimes receive a higher price for their shares than the publicly owned shares. The litigation environment around US public companies creates an avenue by which some practices that arise out of alleged breaches of fiduciary duty can be challenged.
In the case of mergers, some states, including Delaware, provide that dissenting shareholders of the target company in a cash merger can exercise appraisal rights to receive a court-determined fair value in lieu of the agreed-upon merger consideration.
3.7 To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
Friendly M&A transactions in the US, including those effected through tender offers, may be subject to conditions to which the parties agree. SEC rules limit, to some extent, the scope of tender offer conditions to avoid what the SEC considers conditions within the control of the bidder. Certain funds are not required.
Section 4: TAX CONSIDERATIONS
4.1 What are the basic tax considerations and trade-offs?
The basic tax considerations are whether to structure the transaction as tax-free or taxable, and if taxable, whether to structure it as a stock acquisition or asset acquisition for tax purposes. The trade-offs generally involve whether gain or loss is recognised by the target company or its shareholders, and whether the acquiring company's basis in the target company's stock or assets has been stepped up to the purchase price.
4.2 Are there special considerations in cross-border deals?
In cross-border deals, an important consideration is the tax domicile and organisational structure of the resulting entities. Such tax planning is typically aimed at having income taxed at the lowest effective rate, and particularly, avoiding double taxation and minimising withholding tax on distributions.
Section 5: ANTI-TAKEOVER DEFENCES
5.1 What are the most important forms of anti-takeover defences and are there any restrictions on their use?
Takeover defences in the US include: shareholder rights plans (so-called poison pills; voting rights statutes; and staggered elections for directors. Target company boards of directors may also take strategic action to thwart a takeover attempt, including by acquiring a third party or incurring additional debt to make itself a less attractive target; seeking a third party (so-called white knight) to acquire it; or attempting to acquire the acquiring company itself (so-called pac-man defence).
Delaware courts have held that takeover defences are permissible as long as the target company board has reasonable grounds for believing there is a threat to corporate policy and effectiveness and the board's action is reasonable in relation to the threat.
5.2 How do targets use anti-takeover defences?
Takeover defences are primarily used to gain time to persuade shareholders that the acquisition proposal is not in their best interests or to seek out alternative transactions.
5.3 Is a target required to provide due diligence information to a potential bidder?
No, it is within the discretion of the target company's board of directors (subject to its fiduciary duties to its shareholders) to determine how much due diligence information to provide a potential bidder.
5.4 How do bidders overcome anti-takeover defences?
Bidders can overcome takeover defences by effecting a change in the board of directors, through proxy contests, offering better deal terms or by using public pressure to cause a board to withdraw its defences.
5.5 Are there many examples of successful hostile acquisitions?
Yes, but given the deference courts give to a target company board's decision to employ takeover defences, the risk that initiating a hostile transaction will result in the sale of the target to a third party and the intensive effort and considerable expense associated with hostile takeovers, successful hostile acquisitions are much less common than friendly transactions.
Section 6: DEAL PROTECTIONS
6.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
Possible deal protections include non-solicitation of alternative transaction covenants, a right to match third-party offers and break-up fees.
6.2 To what extent are deal protections prevented, for example by restrictions on impediments to competing bidders, break fees or lock-up agreements?
Delaware courts require that deal protections not be coercive or preclusive. Courts regulate deal protections on a case-by-case basis.
Section 7: ANTITRUST/REGULATORY REVIEW
7.1 What are the anti-trust notification thresholds in your jurisdiction?
Effective in 2016, the parties must notify the FTC and DOJ of a proposed transaction if:
the acquiring company will hold an aggregate amount of voting securities, non-corporate interests (interests in any unincorporated entity with rights to profits or assets upon dissolution), or assets of the target company greater than $312.6 million at the time of closing; or
such amount will be $312.6 million or less but greater than $78.2 million, one party has sales or assets of at least $156.3 million and the other party has sales or assets of at least $15.6 million (based on each company's last regularly prepared annual income statement and last regularly prepared balance sheet).
7.2 When will transactions falling below those thresholds be investigated?
A transaction that falls below these thresholds can still be challenged by the FTC and DOJ under federal antitrust laws. This challenge can be brought either before or after the transaction is consummated.
7.3 Is an antitrust notification filing mandatory or voluntary?
The Hart-Scott-Rodino (HSR) Act requires filing by both companies if the transaction meets the thresholds discussed above.
7.4 What are the deadlines for filing, and what are the penalties for not filing?
There are no deadlines for filing, but a transaction cannot close until the expiry of the mandated waiting period after filing, or early approval is granted. In addition to equitable remedies, any company, or any officer, director or partner of such company, will be liable for a civil penalty of up to $16,000 per day that the company is in violation of the HSR Act.
7.5 How long are the ant-trust review periods?
The HSR Act review period typically lasts 30 days for most M&A transactions, and 15 days in the case of cash tender offers or bankruptcy sales. The FTC or DOJ may request an additional 30-day period (10 days for a cash tender offers or bankruptcy sales) to conduct further review and this period is often extended further as parties comply with document requests.
7.6 At what level does your anti-trust authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
For any failure to file if the transaction meets the HSR Act thresholds.
7.7 What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
M&A transactions in certain industries are subject to additional approvals. Acquisitions of control by foreign entities are also subject to national security review by the Committee on Foreign Investment in the US (Cfius).
Section 8: ANTI-CORRUPTION REGIMES
8.1 What is the applicable anti-corruption legislation in your jurisdiction?
Federal anti-corruption legislation in the US includes the general federal bribery statute (18 USC section 201) and the Foreign Corrupt Practices Act of 1977 (FCPA).
8.2 What are the potential sanctions and how stringently have they been enforced?
Under the bribery statute, a violator may be fined up to three times the amount of the bribe and imprisoned for 15 years. Under the FCPA, entities may be fined up to $5 million, or twice the gain or loss caused by the violation; individuals may be imprisoned for up to 20 years. Both statutes have been stringently enforced.
Section 9: OTHER MATTERS
9.1 Are there any other material issues in your jurisdiction that might affect a public M&A transaction?
US companies commonly have change of control provisions in executive compensation arrangements.
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Sullivan & Cromwell
About the author
Joseph Frumkin is the managing partner of Sullivan & Cromwell's M&A group and has provided legal counsel on many of the largest M&A transactions in history representing buyers, sellers and special committees of independent directors. His practice focuses on US and cross-border acquisitions, leveraged buyouts, corporate preparedness and proxy contests as well as corporate governance, cybersecurity and general corporate representation.
Frumkin is consistently recognised as a leading lawyer by widely referenced legal guides including Chambers, Euromoney, IFLR, The Legal 500, and The International Who's Who. In 2015, he was named 'Dealmaker of the Week' by The American Lawyer for his work on the Teva-Allergan Generics transaction and was previously named 'Dealmaker of the Year' by The American Lawyer for his work on the Cingular-AT&T Wireless transaction. In 2008, he was named to the BTI Transactions All-Star Team.
Sullivan & Cromwell
About the author
Krishna Veeraraghavan is a partner and member of Sullivan & Cromwell's M&A group, regularly representing US and non-US companies in M&A, corporate governance and private equity matters world-wide.
In 2015, Veeraraghavan was named 'Dealmaker of the Week' by The American Lawyer for advising Synageva BioPharma in its $8.4 billion acquisition by Alexion and in 2014 for advising LabCorp in its $6.1 billion acquisition of Covance. He is consistently recognised by legal industry publications such as IFLR 1000, Law360, Legal 500 and Chambers.
He is a member of the American Bar Association's Committee on Mergers and Acquisitions, the American India Foundation's board of trustees, South Asian Youth Action's board of directors and was a 2013 Fellow of the Leadership Council on Legal Diversity. He frequently speaks and writes on corporate governance and M&A matters and is an adjunct professor at Columbia Law School.