|February 16, 2012|
Previously published on February 15, 2012
You are the general counsel of a public company, and your board and your CEO are considering the company’s strategic acquisition options. Your input is needed on the different forms that such a strategic transaction can take. It would probably be too late to do the research on which structure would be best after the CEO and directors ask you for legal advice, so having a general understanding of the following five acquisition structures will take you a long way: (1) tender offer, (2) merger, (3) asset sale, (4) leveraged buyout, and (5) management buyout.
A tender offer is a broad solicitation to purchase a set percentage of the company’s equity shares. The tender offer may be made by a third party seeking control of the company or it could be a self-tender by the company for its own shares in order to reduce the company’s public market float. The offer is usually at a premium over the current market share price and is typically contingent on a certain minimum percentage (usually at least a majority) of shares being tendered. This method of acquiring shares is typically used when a buyer is interested in taking over a company by purchasing enough shares of stock to become a majority stockholder and then acquiring the rest of the shares through a merger. Tender offers may be friendly (as part of a two-step merger) or unfriendly (as part of a hostile takeover). The directors of the target company may or may not agree with or support the tender offer (or may take a neutral position), but purchasers do not need the board’s approval to make a tender offer. They are required to comply with the securities laws in making the offer, including filing a Schedule TO and leaving the tender offer open for at least 20 business days.
A merger is an acquisition in which two companies combine into one surviving entity. Generally, the surviving entity assumes all assets, rights, and liabilities of the extinguished entity (or entities). Because unanimous stockholder approval is not required to approve a merger, acquisitions of public companies nearly always involve a merger as opposed to a direct stock purchase. Mergers involving public companies can take many forms, including a direct horizontal merger with stockholders of both companies becoming stockholders of the surviving company, or a triangular (or reverse triangular) merger with the acquiring company using a subsidiary to merge with the target company. In a triangular merger the target company’s shares are converted into cash or stock of the acquiring parent company, not the subsidiary. Typically, holders of a majority of the outstanding shares of the target corporation, and the acquiring corporation (depending upon the form of the transaction, state corporate law and its charter documents), must approve a merger.
An asset transaction typically involves the purchase of all, or substantially all, of the target’s assets. The buyer acquires specific assets and specific liabilities of the target company as listed in the asset purchase agreement. After the deal closes the buyer and seller maintain their separate corporate structures, and the seller receives the purchase consideration directly. Unless the target company takes further steps to distribute the consideration, target stockholders will not be directly affected by the asset sale. Often the buyer will assume only specified liabilities of the target corporation, while excluding other liabilities, which together with any excluded assets remain with the target. This ability to “pick and choose” liabilities is an important reason for choosing the asset transaction structure when the target’s liabilities are large, highly uncertain, or closely connected with other areas of its business. However, based upon the facts and circumstances, a court in some instances may treat an asset sale as a de facto stock transaction eliminating the purchaser’s ability to pick and choose assumed liabilities. Asset transactions must be approved by the boards of directors of both companies and, if it is all or substantially all of the target’s assets, typically by holders of a majority of the outstanding stock of the target company.
A leveraged buyout (“LBO”) is the purchase of another company using a significant amount of borrowed money to finance the acquisition. The assets of the company being acquired and the acquiring company are used as collateral for the financing. The purpose of a LBO is to allow companies to make large acquisitions without having to commit a significant amount of capital. The process ends with the acquired company becoming private with a much more highly leveraged capital structure that may significantly impact how the company operates going forward. An LBO may also be referred to as a “highly-leveraged transaction” or a “bootstrap transaction.” An LBO is often structured as a merger, but because of its unique characteristics, it is usually considered as a separate acquisition structure.
Another important buyout structure is the management buyout, in which the target’s management team agrees to purchase (or to join with a financial sponsor to purchase) the company from the existing stockholders. In a typical management buyout, a relatively small number of executives lead the team (together with representatives of any financial sponsor), establish the terms of the proposed transaction from the buyer’s side, and negotiate the financing and transaction terms with the target. If the target is a public company, a management buyout is usually deemed to be a “going private” transaction under the securities laws and is subject to heightened scrutiny and disclosure. Because of the inherent conflicts existing in such a transaction, the company’s board normally must take certain precautionary steps to ensure it is satisfying its fiduciary duties, which may rise to the level of establishing a special committee of independent directors to represent and negotiate on behalf of the company. Because this structure requires a considerable amount of capital, the management team usually seeks the assistance of a financial sponsor (such as a private equity or venture capital firm) to finance the project, which financial sponsor would require some degree of influence in negotiating the transaction. As with an LBO, a management buyout will often be structured as a merger, but it has its own unique structural considerations.
Although there are other acquisition structures available, having a general understanding of these five structures—tender offer, merger, asset transaction, leveraged buyout, and management buyout—will get you through your initial crunch time meeting with your CEO or call from a director. Ultimately, electing the right transaction structure is critical to the success of any deal, so your CEO and board will appreciate your understanding of these options in making their decision.