The Williams Act In Depth
In a previous article, we discussed the basics of the Williams Act. We have discussed in detail how it came to be, who made this Act possible, and how it helps companies and corporations protect themselves against takeovers.
In this article, we will talk about the Time Period of the Williams Act. But first, let’s have a quick refresher. The Williams Act was created and designed to protect both parties in a possible acquisition.
There have been a few changes and alterations to the Williams Act to make it better for everybody. Now, it’s time to move on to the Time Periods of the Williams Act and other details of the Act.
Time Periods of the Williams Act
Let us discuss the time periods of the Williams Act and when these periods should take place. We will also talk about how the process is for each period.
Required Time of Bid
Any tender offer must be kept open for at least 20 business days, in compliance with the William Act. 20 business days is the bare minimum. During that period, it is a must for all acquiring firms to accept all the shares that are tendered.
However, that doesn’t mean that they must actually buy any of these shares until the offer period ends. This minimum offer period was added and designed to discourage shareholders from being pressured into tendering their shares. This is an option rather than risking losing out on the offer.
With the help of the minimum offer period, shareholders and both parties can actually have the time to consider the offer. This time can be spent comparing the terms of the offer with other offers and other options.
Additionally, on the 20-day offer period, the offering firm has the option to get an extension. For instance, if the offering firm highly believes that there is a better chance of getting the shares it needs should they have an extension, then it will be granted.
Tendered Shares at the Offer Price
The shares tendered at the offer price must be purchased by the acquiring firm as well. At least on a pro-rate basis, this can be achieved. This is true unless the firm does not receive the total number of shares it requested in the terms of the tender offer. However, the acquirer still has the option or the choice to purchase the tendered shares.
Moreover, a tender offer may also be written and worded to contain other escape clauses. For instance, when there is an issue with antitrust considerations, there may be a contingency option on attaining the regulatory agencies’ approval. If that is the case, the offer night is so worded as to state that the bidder is not bound to buy if there is an objection to the merger by the Justice Department or the FTC.
You’re probably thinking that if there is a minimum offer period, there should also be a maximum offer period. While that may be true in other countries, it is not the same in the United States. In the U.S., there is no maximum offer period.
Exchange Offers
This term usually refers to an offer that is a stock-for-stock. There is an exchange between both parties, hence the exchange offer. It can also refer to a cash and stock combination for a stock transaction.
After a registration statement for the shares being offered has been filed with the SEC, an exchange offer can commence according to the rules. At the time, the offered is not yet in effect or “effective,” the commencement will be considered as “early.”
However, in order for the early commencement to take place, the bidder must be the one to do the filing, disseminates a prospectus to all the security holders and file the Schedule TO.
Keep in mind that there shouldn’t be any actual purchase of the shares yet. They still have to wait until the 20-day minimum offer period is done after the commencement.
Withdrawal Rights
The shareholders also have their own withdrawal rights thanks to the Williams Act. This act has given the shareholders to power to withdraw their shares at any given time during the entire period as long as the offer remains open.
As we said in a previous article, the Williams Act gives the shareholders an ample amount of time to evaluate the offer. That is the goal of the Withdrawal Rights rule. With this rule in effect, shareholders can evaluate the offeror offers (should there be multiple bids.)
After the expiration of the 20-day period, the bidder may also provide an option to extend for an additional three days to accept additional shares tendered. This is all under the new 14d-11 Rule of the Williams Act. This is all assuming that the bidder promptly pays for the shares that are already tendered. It is also a must for the bidder to give the shareholders who tender during the same three-day period the same consideration and prompt payment.
Partial and Two-Tiered Tender Offers
Now we have the partial and two-tiered tender offers. Partial tender offers are when there is a bid for less than 100%. For instance, the bidder bids for 51% of the company. This will usually afford the acquirer control of the target firm, but it is still considered a partial offer.
On the other hand, we have two-tiered tender offers which are bids that provide one type of compensation for the first tier and other compensation for the remaining shares. Generally, courts consider these types of bids to be coercive and opposing the spirit of the Williams Act.
This is because the shareholders in the backend may find that their shares trade for less than before the bid. It also means that the shareholders will be in constant fear that their stock positions will be frozen out. Fortunately, the Best Price Rule exists, and when combined with similar state laws as well as other similar corporate charter amendments, coercive offers such as the ones mentioned above are much less effective.
These coercive rules and types of bids are not illegal in the United States. However, courts have found that targets may be freer to take aggressive defensive measures should they face such offers.
© image credits to Johannes Plenio
State Antitakeover Laws
In the United States alone, there are plenty of laws with regards to running a business. These laws also differ from state to state, so there is a lot of stuff to memorize and get familiar with. However, if you have studied laws and business administration, you already know a majority of these laws. But as for non-Americans, it can get a little confusing as most of these laws are conflicting sometimes. It refers in general to government anti-takeover legislation.
The combination of federal laws and state laws creates some conflicts sometimes. For instance, under the current federal and state takeover laws, there is still a possibility that you are violating certain state laws by conforming to some aspects of federal laws.
With this in mind, you are probably asking yourself, where do we draw the line? Well, the line of demarcation has something to do with the focus of both federal takeover laws and their state counterparts. There is a thin line in between.
Federal Laws vs State Laws
First things first, you need to distinguish federal laws and state laws when it comes to running a company. For instance, federal laws are more directed towards security regulations, antitrust considerations and tender offers
On the other hand, state laws are focused more on governing corporate charters and their bylaws. To this day, there is still a lot of inconsistency when it comes to state laws. And that’s all across the U.S.
Why were these laws passed?
When particular corporations found themselves as the object of interest by potential acquirers, the pressure was on. Picture this: a local firm finds out that they are the target of an acquirer? What is the next logical step?
They petition the state legislature to pass an antitakeover law or amend the current one. By doing so, it is more difficult for the acquirer to take over. And so, the passing of state antitakeover laws commenced. We will discuss more this in a little bit.
Politics and Pressure
Allegations that a takeover by a “foreign raider” will result in a significant loss of jobs put a lot of political pressure on the state legislature. Not only will millions of hard-working Americans lose their jobs, but also community support such as charitable donations by the local corporation.
This is not only happening in the United States but in other countries as well. Take the EU for instance. They also have a system of differing state laws. The country has worked to achieve a common set of merger rules. In the end, they only achieved approval for a limited set of rules.
In the EU, countries have the right not to abide by the new EU merger rules and apply their own differing country-specific laws. It is somewhat similar to what is happening in the United States.
Laws for both the United States and the United Kingdom emphasize the rights of shareholders. On the other hand, certain European countries such as Italy, Germany, Austria, and France the creditors’ rights are more emphasized.
Additionally, in the United States and the United Kingdom, in the hands of families and insiders, shareholdings are less concentrated. This sheds some light on why the laws have evolved differently in these two great nations, to some extent.
Difference between US & UK
However, while there are plenty of similarities between the United States and the United Kingdome when it comes to the security markets and laws, there are also significant differences.
For instance, there are plenty of states in the U.S. that allow management to engage in aggressive antitakeover actions. On the other hand, the laws of the United Kingdom forbid management from engaging in such evasive actions without the approval of the shareholders first. There are also plenty of differences between the United States and the United Kingdom’s antitakeover laws, but that is another topic for another day
History of the State Antitakeover Laws in the United States
We have previously talked about how state antitakeover laws came about. Let’s discuss the history. In 1968, the state of Virginia was the first to adopt an antitakeover law.
Shortly after, many states started following and applied antitakeover laws. Typically, it is required for these statuses for disclosure materials to be filed following the initiation of the bid.
However, the process was not as smooth as it was intended. The “first-generation” state antitakeover laws had flaws and problems on its own. One of the major problems with these first state antitakeover laws was that they applied to firms that did only a small amount of business in that state.
As you can imagine, this did not go down well with bidding corporations. It just seemed unfair to the bidding corporations. And so, the stage was set and a legal challenge ensued.
Key Court Decisions Relating to Antitakeover Laws
As one would expect, legal challenges take place in court, and certain court decisions have defined the types of state antitakeover laws that are acceptable and those that are not. Most of these decisions were recorded back in the 1980s, but they are still relevant to this day.
Challenges to State Antitakeover Laws
As previously mentioned, the first-generation antitakeover laws had some flaws. In 1982, the constitutionality of these first-generation antitakeover laws was successfully challenged in the famous Edgar v. MITE decision. The United States Supreme Court ruled that the Illinois Business Takeover Act was unconstitutional on the grounds that it violated the commerce clause of the U.S. Constitution.
In 1987, the first-generation antitakeover laws were once again challenged in the Dynamics v. CTS and again in November 1989 in the Amanda Acquisition Corporation v. Universal Foods Corporation.
These challenges brought forward the second-generation antitakeover laws. Changes have been made to the anti-takeover laws of the first century. Most of the second-generation laws incorporate some incredible provisions such as fair price provision, control share provision, business combination provision, and cash-out statute.
There are also constituency provisions in some state laws (with the exception of Delaware) mentioned in the article Type of Merger: Short-Form Merger. These provisions allow the board to take into account the impact of a certain deal on other relevant stakeholders.
© image credits to Steve Johnson
Williams Act
When it comes to Mergers and Acquisitions in the United States (and in any country for that matter), there are several law regulations, like we also discussed in previous article “Type of Merger- Short-form Merger“. These laws are there to govern the merger and acquisition process. Today, there are three main groups of laws: securities laws, state corporation laws, and antitrust laws. In this article, we will focus more on securities laws, more specifically the Williams Act.
These laws were put in place or both target companies and acquiring firms. Some target companies use some of these laws as a defensive tactic when there is a chance of takeover. Because of this, an acquiring firm must take careful notes of legal considerations.
Securities Laws
In the field of M&As, there are a wide variety of important securities laws. The Williams Act is one of these statutes. If you haven’t heard about William’s Act or are generally curious about this law, we will discuss it in detail in this article.
The Williams Act
In 1968, the Williams Act was passed, and to this day, it remains one of the most important pieces when it comes to securities regulations in the field of mergers and acquisitions. This law had a major impact on merger activities between the 1970s and 1980s.
Before the Williams Act
In the 1960s, tender offers were largely unchecked. It simply wasn’t a major concern before the 60s because there were only a small number of tender offers made.
However, the 60s came and tender offers became more popular in the field of M&As. It was a famous way to take control of corporations. Tender offers were also a way to ousting entrenched management, and so plenty of corporations started using it.
The disclosure requirement of the Securities Act of 1933 provided some regulation (albeit limited) in tender offers that used securities as the consideration. However, no such regulation was found in cash offers.
Clearly, there was a gap in the law, the SEC sought to fill this gap. This is where Senator Harrison Williams came in. As the chairman of the Senate Banking Committee at the time, Senator Williams proposed legislation for that specific purpose in 1967.
By July 1968, the bill won congressional approval and so the Willaims Act was born. This law provided an amendment to the Securities Exchange Act of 1934 which is a legal cornerstone of securities regulations.
The government’s concern for greater regulation of the securities market inspired the combination of the Securities Act of 1933 and the Williams Act. As a result, both acts eliminate some of the abuses that a lot of people believe contributed to the stock market crash of October 1929.
Both these laws also provide greater disclosure of information by firms that issue securities to the public. For instance, under the Securities Act of 1933, companies that go public are required to file a detailed disclosure statement. Additionally, the same act proscribed certain activities of the securities industry. This includes wash sales and the churning of customer accounts.
Moreover, the Act provided an enforcement agency, specifically the SEC. The SEC was established to enforce federal securities laws. The Williams Act added five new subsections to the law. This is in an amendment to the Securities Exchange Act of 1934.
The Four Major Objectives of the Williams Act
Upon passing the Williams Act, it had four major objectives which are stated below. These objectives have played a crucial role in the field of mergers and acquisitions. Read more about these objectives below:
To regulate tender offers
Stockholders of target companies were rushed into tendering their shares before the Williams Act was passed. They were stampeded to do so to avoid receiving less advantageous terms.
To provide procedures and disclosure requirements for acquisitions
Thanks to the Williams Act, there is now greater disclosure. This allows stockholders to make more enlightened decisions when it comes to the value of a takeover offer. With greater disclosures, the target shareholders gain more knowledge of the potential acquiring company.
For instance, in a stock-for-stock exchange, the target company stockholders would become stockholders in the acquiring firm.
To provide shareholders time to make informed decisions with regards to tender offers
Target company stockholders still need some time to analyze the data even if the necessary information is available. Through the Williams Act, they are now allowed to make more informed decisions.
To increase confidence in the securities market
The Williams Act also increases investor confidence. As a result, securities markets can attract more capital. Thanks to this Act, investors will be less worried about being placed in a position of incurring losses when they make decisions based on limited information.
Section 13(d) of the Williams Act
Thanks to the Williams Act, specifically Section 13(d), stockholders and target management have an early warning system. This system alerts them to the possibility that a threat to control may soon occur.
Additionally, when these holdings reach 5% of the target market’s firm total common stock outstanding, this section also provides for disclosure of a buyer’s stock holdings. Stockholders and target management can see if a buyer has come from open-market purchases, tender offers or private purchases.
The threshold level was original 10% when the law was first passed. However, changes were made because the 10% was later considered to be too high. And so, it embraced the more moderate 5 percent.
Even when there is no tender offer, under the rules of Section 13(d), the disclosure of the required information is still necessary. It is necessary for the buyer to disclose the required information if he or she intends to take control of a corporation. This follows the attainment of 5% holding in the target.
The buyer is required to file a Schedule 13D to make this disclosure. Even though no one individual or firm actually owns 5% of another firm’s stock, filing of Schedule 13D may still be necessary. Additionally, if a group of investors acts in concert, their combined stockholdings are considered as one group under this law.
© image credits to Anni Roenkae
Reverse Mergers
When a private company may go public by being one with a public company that is usually a corporate shell or an inactive one, the term for this is a reverse merger. Shell company, on the other hand, is a company that went public in the past but no longer conducts business operations and has few, if any, physical assets and its assets consist mainly of cash and cash equivalents. Although they can be a great opportunity for investors, there are disadvantages in addition to the pros.
The public company, which was once private, has greatly enhanced liquidity for its equity. The process can also be faster and more reasonably priced than a traditional initial public offering. This means it’s not only shorter but it is also simpler in terms of the process than that of a conventional initial public offering where private companies hire an investment bank to underwrite and issue shares of the new soon-to-be public entity. Reverse takeovers and reverse IPOs are also commonly referred to as such. The bank also helps develop value in stock s and advise on suitable initial pricing.
Processing Reverse Mergers
As said earlier, a reverse merger is quick to process also tackled in another article (Tender Offers vs. Long-Form Merger). It may take between two and three months to complete, whereas an IPO is more is a more involved process that takes more months. Reverse mergers, unlike IPOs, also do not require dilution which may involve investment bankers requiring the company to issue more shares than what it would prefer. This saves a lot of time and money for the company, making sure the business is running efficiently enough.
Furthermore, reverse mergers are less dependent on the state of the IPO market. When the market is weak, reverse mergers are unaffected as they can still be viable. Because of this, there is usually a steady flow of reverse mergers, which explains why it is common to see in the financial media corporate “shells” advertised for sale to private companies seeking this avenue to go public.
Because reverse fusions only serve as a tool for conversation market conditions have little effect on the bid. Instead the process is followed to try to realize the benefits of being a public entity.
Unlike the traditional IPO, a reverse merger is also not a capital raising event. Here, the shares are exchanged but commonly not cash. However, with reverse mergers, the shares are usually very thinly traded after the deal. Because of this, insiders usually cannot use a reverse merger to cash out their ownership in the firm, whereas in an IPO this may be possible.
They are indeed an attractive strategy for corporate managers and investors alike. For example, a majority of the shares of the public shell company are acquired by private company investors, which are then combined with the buyer. Investment banks and financial institutions typically use shell companies as vehicles and tools to complete these deals
Another benefit of doing a reverse merger is that it allows the company to have more liquid shares to use in order to purchase other target companies. This may be appealing to corporate managers or investors whose goal is to finance stock-for-stock acquisitions.
The reverse merger has often been associated with stock scams since market manipulators have often merged private companies with little business activity into public shells and tried to “hype” up the stock to make short-term fraudulent gains, but the conventional IPO process does not guarantee that the company will ultimately go public. Managers may prepare for a typical IPO for hundreds of hours. But if stock market conditions are detrimental to the planned bid, the contract can be canceled, and all these hours will be a waste of effort. This risk is reduced by seeking a reverse merger. Hence, it defeats the goal of converting the private company into a public entity. Private firms, typically those with $100 million to several million in revenue, often use this technique. Having settled on this, the company’s shares are listed on an exchange and enjoy higher liquidity. The original investors gain the ability to liquidate their investments, offering a convenient alternative to buying back their shares from the firm. The business has more access to capital markets, as management now has the ability to issue additional stocks via secondary offers.
Reverse mergers increased from 2003 to 2010 but declined from 2011 to 2016. For many companies, going public through a reverse merger may seem attractive and interesting, but it actually lacks some of the important benefits of a traditional IPO. These benefits of the IPO actually make the financial and time costs of an IPO worthwhile.
One drawback is that due diligence is required. Managers need to thoroughly examine the public shell company’s shareholders. They must know the motivations for the merger and if they have done their homework to make sure the shell is not tainted. Pending liabilities, like those from litigation and other “deal warts” that hound the, shall also be considered. Public shell shareholders should also carry out due diligence on the private company.
It should be important to know if the shareholders really get enough liquidity after the private company completes the reverse merger. Smaller companies might not be prepared to be a public company since there may be a lack of operational and financial scale. On the contrary, the traditional IPO allows the company going public to raise capital and usually provides an opportunity for the owners of the closely held company to liquidate their previously illiquid privately held shares.
Last but not least, mergers are typically inexperienced in the regulatory and enforcement aspects of being a public traded company when a private company goes public. These time-and-money related constraints and costs can be severe, and the initial effort to comply with additional regulations may results in a slow and underperforming company when managers devote much more time to administrative issues than business management.
Appraisal Arbitrage
When large investors, typically hedge funds, purchase a company’s shares after the announcement of a merger, this is called an appraisal arbitrage. This is done to question the sufficiency of the value of the offer and potentially get more respect for their shares. According to Delaware’s legislation, any investor is entitled to evaluate those forms of merger transaction as long as they meet the statute’s procedural criteria that will be listed.
Appraisal Arbitrage In Detail
Over the past years, there has been a rise in the number of appraisal actions filed in the court, an amount close to 25% of all transactions where the appraisal is possible. And the rise of evaluation arbitrageurs continues to be a major factor.
A majority of shareholders, usually 51%, should provide their approval before a merger can be completed. Those who have not accepted are required to tender their shares to the controlling shareholders, also known as the minority shareholders. They are frozen out of their position, in other words.
Primary to the need to protect minority shareholders from majority abuse, especially in transactions involving a perceived conflict of interest or the potential for self-dealing, was to compensate stockholders for the loss of veto power and to give dissenters the right to exit the corporation and recover the cash value of their shares as the original purpose of appraisal.
A classic example of the type of merger in which concern for minority shareholders abounds and one of the types of mergers granted appraisal rights in Delaware’s appraisal statute is the short-form merger. A short form merger takes place when a subsidiary merges into a parent who already owns most of the stock of the subsidiary, typically about 90%. In such a scenario, there is a risk that the parent company will offer the subsidiary’s shareholders a price for their shares that is less than the fair value because the transaction does not require a shareholder vote meaning there is less incentive to pay a competitive price. The appraisal can serve as a defense in the sales process against sloth, incompetence, or unconscious bias.
Those who think that their shares are worth more than the terms of the merger are offering may go to a judge and ask them to decide what a fair price for the target company would be and make the acquirer pay for it. However, there is only a certain time to dissent and proper procedures to follow. The assessment legislation of Delaware gives rise to an absolute right to evaluate only certain forms of fusions, such fusions involving cash consideration, short term fusions and interesting transactions. Additionally, other enumerated conditions may be defined by companies that will trigger assessment rights in their charters.
The dissenting investors or the minority were asking the court to decide its interest for 120 days of judicial manner. Before the vote on the transaction, any investor seeking to seek an assessment must send a written request to the company. We should also remember that voting strictly against the merger does not protect one’s right of assessment.
Analysts may then use various valuation methods to determine the acquired company’s fair share price and value, including asset-based methods, sales or cash flow methods, and equivalent market data models and hybrid or equation methods. While most appraisal rights events are based on mergers or fusions, they may also refer to a situation where the company takes any unusual action that investors find detrimental to their interests.
The valuation fees are buyer’s post-closure duty and this mechanism has been followed as in investment strategy by certain hedge funds. Hedge funds that own shares are allowed by the appraisal system to pursue their higher value and get it on the original deal price less than the appraisal costs. The law allows the plaintiffs to receive interest in the amount they are ultimately rewarded.
It is rare for courts to determine a value less than the offer price, so it is likely that those seeking appraisal rights will get the offer price or more and then also interest on what they receive. The interest rate is set at 5% above the Federal Reserve’s discount rate and that can be attractive in a low-interest-rate environment because of attractive investment opportunities promising returns that typically outflanked the risk-adjusted returns of similar investments. Hedge funds are also allowed to purchase shares in the market after the deal announcement date, and also after the record date for voting on the offer, and up to the effective date of the deal.
There is an approach for arbitrators that they can employ where they can wait to buy shares and carry out assessment actions until information about the transaction is revealed that can provide a better understanding of both the target’s value and the risk of not closing an agreement, information that increases the likelihood of bringing about a profitable assessment actions.
There are many critiques of the arbitration of the assessment. Others claim that it exacerbates the risk already inherent in appraisal proceedings where judges fail famously to discern and decide between highly technical and divergent assessment opinions offered by dueling litigant-retained experts. It is indeed an uncomfortable topic because it assumes inefficient markets. The only reason one would seek an appraisal is that they think that the market got the wrong price for a company, but that a judge will get the right price, which, of course, is higher.
It is also seen as intended to protect the existing stockholders who are or will be forced to sell their shares in the merger. But the real puzzle is why assessment arbitration is lucrative since the purpose of an assessment agreement is to decide the fair price of the target securities using the same valuation methods used by financial professionals who advise the parties to such deals.
This solution has drawn many opponents mainly based on who is making such cases and buying them, saying that even non-appraisal arbitrators are no longer using the law for liquidity purposes.
•In order to ensure that arbitrators can continue to bring meritorious claims, the legislature must refrain from implementing additional legislative restrictions, particularly those relating to the record date and holding requirements.
Freezouts and the Treatment of Minority Shareholders
Have you ever wondered what happens to minority shareholders in the event of a freezeout or a merger? Well, if this has already happened to you several times before, or if you have a lot of experience when it comes to handling share, you probably already know.
However, if you are still finding your footing in the corporate and stockholders world, you are in the right place. Today, we will discuss a lot about freezeouts and the treatment of minority shareholders.
Freezeouts and the Treatment of Minority Shareholders
Usually, the approval of a majority of the shareholders is needed before a merger can be completed. The most common majority threshold is a 51% margin. Now, when the majority shareholders approve the deal, what happens to the minorities?
The minority shareholders are now required to tender their shares to the controlling shareholder. This remains true even though they may not have voted in favor of the deal, unfortunately. Most of the time, minority shareholders are said to be frozen out of their positions. It is just how mergers and acquisitions work.
Voting Approval
In a previous article, we have discussed voting approval and the process in which shareholders go through voting to close out or approve a deal. The approval of the shareholders is needed in able to close the deal.
Why does this happen and what is the reason behind this? Well, the majority approval is required so holdout problems can be avoided in the future. Usually, holdout problems can occur when a minority attempts to hold up the completion of any transaction unless they receive some type of compensation over and above the acquisition stock price. This happens in a lot of merger deals, so the majority approval was designed to help put a stop to this problem.
However, the majority approval doesn’t mean that the dissenting shareholders don’t have any rights to the deal. Those shareholders who highly believe that their shares are worth a lot more than what the terms of the merger are offering do have the option to go to court.
In court, dissenting shareholders can pursue their shareholder appraisal rights. One must remember that the dissenting shareholders must follow the proper procedures in able to successfully pursue these rights.
The dissenting shareholders are also required to object to the deal within the designated period of time – this is a big deal to these procedures and must be followed. The minority shareholders who pursue their shareholder appraisal rights will then demand a cash settlement for the difference between the fair value of their shares and the compensation they actually received should they choose to do so.
When the dissenting shareholders want to ask a court to judicially determine the value of their shares, they are given 120 days to file suit. In essence, the potential appraisal payments are a post-closing obligation of the buyer. And there are certain hedge funds who have pursued this appraisal process as an investment strategy which is more commonly known as appraisal arbitrage. We will discuss appraisal arbitrage in another article for another time.
As expected, most corporations resist these maneuvers because the payment of cash for the value of shares will raise some problems. Most of the time, the problems are related to the positions of other stockholders. At the end of the day, suits like these are difficult for dissenting shareholders to win.
Dissenting shareholders may also choose to file a suit only if the corporation does not file suit to have a fair value of the shares determined. This is after having been notified of the dissenting shareholders’ objections. In the event that there is a suit, the court may then choose to appoint an appraiser to assist in the determination of the fair value.
Additionally, freezeouts can also occur after tender offers as well as controlling the shareholder closeouts in going-private transactions. Let’s take the 2001 Siliconix decisions for instance. Prior to this decision, all freezeout bids in Delaware were then subject to the demanding “entire fairness” standard governing such transactions.
For those who are confused, allow us to explain further. The Delaware Chancery Court decided that freezeouts in tender offers would not be subject to this standard in Siliconix. Subramanian then analyzed a database of freezeouts in the years immediately following this monumental Siliconix decision. In their analysis, it was revealed that controlling shareholders paid less to minority shareholders in tender offers than they did in mergers. This was discussed in “Post-Siliconix Freeze-outs: Theory, Evidence, and Policy,” Journal of Legal Studies 36, no. 1 (2007): 1–26. By Guhan Subramanian.
Now, following a Merger and Acquisition, it is not uncommon or unusual that there are still shareholders who still have not exchanged their frozen-out shares for compensation months after the deal. This is most common to as much as 10% to 20% of shareholders in a company.
Companies then offer services paid by the shareholders where they locate the shareholders and seek to have them exchange their shares. This is usually done for a fee which is negotiated between shareholders and companies themselves.
Revenue-Enhancing Operating Synergy
When people think or say the term ”synergy”, it is often associated with the physical sciences. Not a lot of people would think about what the term synergy means in the world of economics and finance.
The term itself plays a huge role in the financing and economics world. It means that the profitability of a corporate combination as opposed to the individual parts of the firms that were combined.
Think of it this way, if there is a synergy in both corporations, the anticipated existence of the synergistic benefits will allow both firms to incur the expenses of the acquisition process. In addition to that, both will still be able to afford to give their target shareholders a premium for their shares.
Synergy
Here’s an equation for you: Synergy may allow the combined firm to appear to have a
positive net acquisition value (NAV).
NAV = VAB − [VA + VB] − P − E
where:
VAB = the combined value of the two firms,
VA = the value of A,
VB = the value of B,
P = the premium paid for B, and
E = the expenses of the acquisition process.
If we reorganize the equation above, we get:
NAV = [VAB − (VA + VB)] − (P + E)
Looking closely at the equation above, you will notice that the term in the brackets is the synergistic effect. The effect must always be greater than the sum of the P+E in able to justify going forward with the merger.
However, in any case, that the bracketed term is not greater than the sum of the P + E, the bidding firm will have overpaid for the target. So, what does it really take to be considered synergistic effects?
Well, there are some researchers who view synergy broadly. These researchers include the elimination of inefficient management by installing the more capable management of the acquiring firm.
The Revenue-Enhancing Operating Synergy
Now that we have established what the term synergy means in the financing and economics world, we will discuss the first main type of synergy: the revenue-enhancing operating synergy.
Before we dive in deeper, it is important to know that there are two main types of synergy that are both operating synergy forms. There are revenue enhancements and cost reductions synergy. As stated above, today’s discussion is all about the former. What is revenue enhancing operating synergy?
Revenue enhancements and efficiency gains or operating economies may be derived in horizontal or vertical mergers. These revenue-enhancing operating synergies are not too easy to achieve.
In fact, there was a survey once by McKinsey in which they concluded that 70% of mergers have failed to achieve their expected revenue synergies. So, how do corporations go about this? Well, first, let us establish that these revenue-enhancing synergies can come from different sources which are listed below:
- The pricing power or purchasing power.
- The combination of functional strengths
- The growth from faster-growth markets or new markets
Now, how will two companies merge create synergy? The combination of two companies may lead to greater pricing power or purchasing power. Greater pricing or purchasing power can be achieved only if the two companies are in the same business.
However, it’s success ability will also depend on the degree of competition in the industry both companies are in. It will also depend on the relevant geographic markets as well as the size of the merger partners. With respect to the pricing power, if the combination leads to a more oligopolistic market structure, this can be highly possible.
Increased Concentration
On the other hand, if there are large pricing gains to be achieved through the increased concentration, then the deal may not get regulatory approval. There is research on the source of gains from horizontal mergers that concluded that the gains associated with such deals can be attributed to efficiency improvements and not attributed to the increased market power.
The studies mentioned above have examined the stock market response reactions – or sometimes the lack of a response by every competitor, customer, and suppliers. Additionally, there is another potential source of merger revenue enhancement. This can be the combination of functional strengths.
A great example of this would be if one company has a strong R&D or production abilities while the other company is great at doing marketing and distribution. In every deal, there is a high possibility that each merger partner could be bringing important capabilities that the other company lacks on the table.
There are plenty of great examples of this that have happened in the pharmaceutical industry through the mergers between drug companies with good R&D and large pharmaceutical companies with great manufacturing capacity and quality control as well as global marketing and distribution capabilities.
The pharmaceutical industry has been struggling to improve in R&D areas and quality control. A merger between two companies who have at least one of these capabilities is a surefire revenue-enhancing operating synergy.
Slow Growth
In mature markets like Japan and Europe, corporate growth has slowed for a significant number of years. The slowed growth in these markets has made it harder and harder for different companies (small and large) to achieve meaningful growth.
In cases like this, it sometimes means that large companies have to invest greater amounts to increase market share. There are also cases when large companies invest greater amounts only to maintain what they already have.
However, companies like these may be able to achieve a significant increase in growth by moving into a more rapidly growing market such as those in the emerging world. But what do companies do when they struggle to expand their mature markets?
There are plenty of companies who are struggling to expand and reach their rapidly diminishing returns who enter a higher-growth new market. This is one of the fastest ways to realize meaningful growth for a large company.
There you have it for the discussion of revenue-enhancing operating synergy. We hope this article has helped you gain new information on how to improve your company’s growth and do better in your market or industry. Read also: Acquisition: Achieving Growth in a Slow-Growth Industry
Acquisition: Achieving Growth in a Slow-Growth Industry
Business owners are always in constant search of how they can keep achieving growth despite the slow growth of the economy through acquisition. They always aim to make more profit and cater to a larger customer base. However, the problem is which method they shall use best in growing their business in the slow-growth industry at a rapid pace.
One way to keep achieving growth is through mergers and acquisitions (M&A). Many companies utilize this as they seek to expand their products and services (diversification) or their geographic boundaries. For instance, they could expand from one region to another, or even a country to another.
As for the goal of expanding to a geographic region, more factors will have to be considered, such as language, customs barriers, recruiting of personnel, and many more.
Whatever the goal is, these companies are often faced with a choice between internal growth or acquisition. Growth through M&A is surely faster, but other outcomes are unpredictable. For example, Companies may grow within their own industry or they may expand outside their business category.
Advantages and Disadvantages of Acquisition
It is never easy to attain consistent growth in a very small industry. Corporate managers are always pressured on employing strategies for more returns. In fact, there is only one-tenth of 1 percent of the corporations and businesses will reach an annual revenue peak of $ 250 million. There is plenty of research that supports this. It’s even more difficult when the company has been expanding in the past and the products and services soon slow down.
When this occurs, companies often opt for strategies that result in revenue growth and profitability through synergistic gains such as M&A.
Acquisition by a Small Business
Acquisition is usually just a big-business strategy especially when achieving growth because it is only them who can acquire such companies. Small businesses usually can’t afford the large amount to cover the purchase price. And even if they can, the risk that it is a bad purchase is just too big to deal with.
Market Shares
This strategy secures larger market shares and more revenue. With it, you diversify products and services, as well as long-term opportunities for your business. Your business can expand its reach and increase market share with increased economic activity,
When it increases, it becomes harder for your competition to compete. In these cases, there are three options: cease operations, be content with a small market share, or be another acquisition of your company.
The downside to this is that it is much easier to generate sales growth by simply adding the revenues of acquisition targets than it is to improve the profitability of the overall enterprise.
The Global Market
The acquisition enables small industries to achieve growth to establish powerful positions in the market and even encourage them to break geographical boundaries. You can use the distribution channels and/or systems from the business that is being acquired for the existing customer base. This makes it possible to penetrate the existing market while also marketing the existing products and services to the new market.
Efficiency
Acquiring another business is a great way to grow without the necessity to wait for years on marketing and sales strategy to pay off. However, it could also be very demanding to the management despite the immediate growth. Combining both businesses can result in a lot of new issues that were not there before.
There are a lot of requirements such as a bigger customer base, a variety of markets, portfolios that are more complex, and higher people in management and complex operations. This is why a third, or at least 75% of all acquisitions fail to deliver on the predicted value or efficiencies.
Ways of Acquiring
One key factor that could determine the success of your acquisition or integrative growth strategy is the way by which you acquired a company. Here are three ways:
In Horizontal
This involves buying a competing business or businesses. If you want to add to the growth of your company and eliminate another barrier that stands between you and future growth.
In Backward
This involves buying one of your suppliers as a way of controlling your supply chain better.
In Vertical
Part companies that are part of your chain of distribution. For example, you could promote your goods at the cost of your other rivals to start buying retail stores.
Read also: Do Diversified or Focused Firms Do Better Acquisitions?
Making the Decision
There are plenty of decisions that will affect your business’s success and deciding to make any sort of deal is just the first. With this in mind, you start to wonder if a merger and acquisition is the most logical step for your business. Because of this, you want to study and understand every aspect including your odds at success and whether or not the challenges are worth the try.
If you have finally analyzed the situation and you’re confident in buying one or more companies, the next step will be easier. You just have to bring a team of experienced advisors. A lawyer, an accountant, a business broker, and a commercial real estate agent, to help you begin searching out the right business to buy, negotiating, and managing the transition.
Take as much time as you need, do your due diligence, and make sure that you are not in a hurry when it comes to decision-making. Even if your company is qualified for growth through acquisition, acquiring one that doesn’t fit well or doesn’t offer enough positive return on investment can shatter your goals.
How to Grow Through Acquisition
They say that the key to achieving growth by acquisition is acquiring a business that has synergy with your existing business. Try and go outside the box, there is no limit and you have more options other than buying out direct competitors.
As you go through this, you will find that it is not uncommon for any company to take advantage of each other’s distribution channels by buying another company. This is done in able to expand to other markets.
There is also the option of buying or purchasing another company that is in the same industry as long as it is indifferent geography. With this, a business can now compete better regionally or even national.
If you think that acquisition is not suitable for your small company, you can employ other growth strategies like intensive growth. This involves market penetration development, product development, new products, and many more. You can also seek to diversify how you expand your company by completely unrelated products or services.
As with everything in life, there is no instant gratification to growth strategies. You have to be willing to change the course depending on the feedback you will get from your market. This is extremely important.
Conclusion
Most times, it takes at least a year for companies to develop a strategy and by the time they try to implement said strategies, they find out that the market has changed.
And besides, growth should always ensure that it will generate good returns for shareholders. Most of the time, it is possible for managers to continue to generate acceptable returns by keeping a company at a given size, but instead, choose to pursue aggressive and unmanageable growth. Don’t let this happen to your company.
Hart-Scott-Rodino Antitrust Improvements Act of 1976
It is no secret that the United States went through two decades of vigorous antitrust improvements and enforcement. Before the Hart-Scott-Rodino Antitrust Improvements Act was passed, the enforcement agencies weren’t powerful enough to require private economic data from third parties, and the competitors of the merging company, like what we discussed in Williams Act. And because of that, the enforcement agencies were forced to drop countless investigations due to the lack of hard economic data.
When the Hart-Scott-Rodino Antitrust Improvements Act was passed in 1976, the power of the Justice Department and the Federal Trade Commission, the two antitrust enforcement agencies, increased significantly. This means that the HSR law gave the Justice Department the right to issue “Civil Investigative Demands” to the merging companies. It also has them the right to require third parties to gather data prior to filing a complaint.
Additionally, thanks to the HSR, it is now possible for the government to require the postponement of proposed M&As until the authorities gave their approval of the deal. This wasn’t possible before the passage of HSR.
Moreover, the HSR law requires that the Bureau of Competition of the FTC and the Antitrust Division of the Justice Department be given the opportunity to review any proposed Mergers and Acquisitions in advance. An acquisition or a merger is not allowed to be consummated until the authorities have reviewed the transaction – this is all according to the HSR act.
It is up to the two agencies to decide which of them will investigate the particular transaction. The HSR also prevents consummation of a merger until the end of specified waiting periods. This means that failing to file in a timely manner could lead to the delay of completion of the transaction.
One of the main reasons why HSR was passed is to prevent the consummation of transactions that would ultimately be found to be anticompetitive. This way, the Justice Department will have the capability to avoid disassembling a company that had been formed in part through an anticompetitive merger or acquisition. Some might even hear others refer to this process as “unscrambling eggs”
The HSR is a big help and has given the government enough power to halt any transaction by means of granting of injunctive relief while it attempted to rule on the competitive effects of the business combination in question. During the times when injunctive relief was not possible yet, it would take many years for the mandated divestiture to take place after the original acquisition or merger.
With the HSR, these problems could be prevented before they even occur. The HSR added another layer of regulation and a waiting period for tender offers.
Size Requirements for Filing
The law established size thresholds for filing because there are times where small mergers and acquisitions are less likely to have anticompetitive effects. There are two thresholds: the size-of-transaction threshold and the size-of-person threshold. We will look into both of those thresholds in a little bit. Those who failed to file is subjected to monetary penalties of $16,000 for each day that the filing is late.
The Two Thresholds
- Size-of-Transaction Threshold – this threshold is only met if the buyer is acquiring voting securities or assets of $80.8 million or more. This is updated as of the year 2017. Any deal above that level requires a filing. Deals beneath that level require no HSR filing.
- Size-of-Person Threshold – on the other hand, there’s the size-of-person threshold where if one party to a transaction has $161.5 million or more in sales or assets, and the other has $16.2 million or more in sales and assets, the test is met. There is a contingency to this threshold, too. The contingency is that all deals that are valued at $32 million or more have to be reported regardless of the size-of-person test.
Additionally, it is also important to understand that the Justice Department and the Federal Trade Commission are still authorized to challenge any M&A on antitrust grounds. This is true even if a filing is not required under HSR thanks to the Sherman Act and the Federal Trade Commission act.
As expected, there are also deadlines for filing. As soon as a bidder announces a tender offer or any other offer, they must immediately file under the HSR Act. This response comes in the form of the target’s filing which must be within 15 days after the bidder has filed.
How does one file? There is a 15-page form which is available for download on the Federal Trade Commision website. The form requires the bidder to submit business data describing the business activities and revenues of the acquiring. Additionally, the target firms’ operations must also be provided according to the North American Industrial Classification System or NAICS codes.
Most of the time, a lot of the firms already have this information as it is also required to be submitted to the U.S. Bureau of the Census. Additionally, the acquiring firm is also required to attach any reports the firm has compiled to analyze the competitive effects of this transaction in their file.
Under the HSR Act, there is a 30-day waiting period unless the deal is a cash tender offer or a bankruptcy sale. In those cases, the waiting period is only 15 days. Now, if either the Justice Department or the Federal Trade Commission concludes that a closer inquiry is necessary, they may push for a second request for information.
This second request adds another 30 days to the waiting period, or 10 days in case of cash tender offers or bankruptcy sales.
The filing companies may also request for early termination of the waiting period. This is on the grounds that it is clear there are no anticompetitive effects. In most cases, these requests are granted. However, as expected, there are also some investigations that can be lengthy.
The HSR filing is also considered as a confidential filing with the government. This means that it is not meant for public disclosure. However, the target is also made aware of the bidder’s intentions because the target company receives a notice and is required to respond to the government.
There are also certain exemptions to the HSR Act. This includes certain acquisitions that are supervised by governmental agencies as well as certain foreign acquisitions. This exception allows an individual to acquire up to 10% of an issuer’s voting securities for as long as the acquisition is solely for the purposes of investment.
Friendly Mergers vs. Hostile Deals
We have discussed everything there is to know about mergers and acquisitions in several articles prior to friendly mergers vs hostile deals. In those articles, we have also established the different kinds of mergers and how these affect a company. Some mergers lead a company to the right path to success, while some are simply a means to an end.
With that said, there is more to cover about mergers and acquisitions. In this article, we will discuss the different types of friendly mergers and how they can help a corporation. We will also dive deeper into the different types of hostile deals, what they are, and how they affect a corporation.
Additionally, we will learn the difference between friendly mergers and hostile deals. Hopefully, by the end of this article, a lot of you will understand the differences and similarities between the two.
The legal regulations governing mergers and acquisitions will also be discussed. Depending on whether a transaction is a friendly merger or a hostile deal, the legal requirements governing mergers and acquisitions differ in the different states within the United States. It is also important to mention that within friendly mergers and hostile deals, the rules vary depending on two factors. These factors are whether the transactions are financed by cash or financed by stocks.
Check out the regulatory framework of each of these alternatives below:
Friendly Mergers
Cash financed
In a cash financed friendly merger, the bidder is required to file a proxy statement with the Securities and Exchange Commission (SEC). This describes the deal. To make the deal happen, it is only usual for the bidder to file a preliminary statement first.
There will also be instances where the preliminary statement is changed before it is finalized. This usually happens if the Securities and Exchange Commission makes a comment or request some changes.
Once the proxy statement is finalized, it will then be mailed to shareholders along with a proxy card. The shareholders will fill out and return the said proxy cards. After this, the shareholders will hold a meeting and approve the deal. This is also where the deals are closed.
Stock financed
The friendly mergers that are financed by stock have a similar process to those friendly mergers financed by cash. The difference is that the securities used to purchase target shares have to be registered.
The process usually starts when the bidders file a registration statement. Once the registration statement is approved, the combined registration and proxy statement can be sent to shareholders.
Additionally, this can also have deals where a combination of stock, cash and even other securities are used.
Hostile deals
Friendly mergers are focused on cash and stock financed. What happens now with hostile deals?
Cash tender offer
In hostile deals where cash tender offers are used, the bidder is the first one to initiate a tender offer. The bidder does so by disseminating tender offer materials to his or her target shareholders.
Offers like these have to be made pursuant to the requirements of the Williams Act. The Williams Act was passed in the year 1968. It is one of the most important pieces of securities legislation when it comes to the field of M&A.
Since it was passed, this bill had a pronounced impact on merger activity, especially in between the 1970s and 1980s. Before the Williams Act was passed, tender offers were largely unregulated. However, in the 60s, these types of offers became a more popular means of taking control of corporations and ousting entrenched management.
There are four major objectives under the Williams Act. These are as follows:
- To regulate tender offers – as previously mentioned, before the Williams Act was passed, the world of mergers and acquisitions was very different. Back then, stockholders of target companies often were stampeded into tendering their shares quickly to avoid receiving less advantageous terms.
- To provide procedures and disclosure requirements for acquisitions. Through the Williams Act, there are now better disclosures. This means that stockholders can now make more enlightened decisions with regard to the value of a takeover offer.
- To provide the shareholders with time so they can make informed decisions regarding tender offers. Everyone needs ample time to analyze the data given to them. With the help of the Williams Act, shareholders are now equipped with enough time to review the data and make more informed decisions.
- To increase the confidence in securities markets. If investors are confident in the securities market, the market can attract more capital. It’s a win-win situation where the investors will be less worried about being placed in a position. Where incurring losses happen when they make decisions based on limited information.
However, unlike the friendly transactions we discussed, the Securities and Exchange Commission or SEC does not have an opportunity or the right to comment. The materials that are sent to the shareholders prior to their dissemination. However, the SEC does have the right to do so during the minimum offer period and only in that minimum offer period.
Stock tender offers
Now we have the final type of hostile deal, the stock tender offers a hostile deal. In deals like these, the bidder is required to submit a registration statement first and wait until it is effective prior to submit the tender offer materials to the shareholders.
In cases like these, the SEC may have comments on the preliminary registration statement. It has to be resolved before the statement can be considered effective. Once all of these requirements are done, the process of a hostile deal stock tender offer proceeds similarly to a cash tender offer.
Now that we have all of the friendly mergers and hostile deals covered, you now have a basic understanding of the difference between the two. We hope that this article has helped you gain some more insight into these types of mergers and deals, and use this knowledge to your full advantage.
If you have more questions and additional information regarding friendly mergers and hostile deals, be sure to let us know, we’d be more than happy to help!