SEC votes to adopt amendments to best-price rule

By: Cydney Posner

At an open meeting this morning, the SEC voted to adopt amendments to the best-price rule for issuer and third-party tender offers. The amendments make clear that the best-price rule applies only with respect to the consideration offered and paid for securities tendered in a tender offer and should not apply to consideration offered and paid under employment compensation, severance or other employee benefit arrangements entered into with security holders of the issuer or subject company. The amendments will become effective 30 days after publication in the Federal Register.

There was no dissension at the meeting, as all of the commissioners praised the amendments as a fair balance between preservation of the basic intent of the rule to ensure equal treatment of shareholders and acknowledgement of the legitimate business interests of companies in arranging compensation in connection with business combinations. (Of course, Rick and Keith ask sub rosa why then it took so many years to adopt the changes.) The amendments are designed to remove any regulatory disincentive to tender offers as a form for business combinations in light of the uncertainty created by a split among the circuits as to whether compensation should be taken into account in applying the best price rule (as discussed in more detail in the summary copied below). Commissioner Campos reiterated that the amendments should not be read to suggest that the SEC is indifferent to executive compensation packages, particularly in connection with changes in control.

The amendments were adopted substantially as proposed with a number of revisions designed to address comments received. As adopted, the amendments revise the best-price rule to state that a bidder may not make a tender offer unless the consideration paid to any security holder "for securities tendered in the tender offer" is the highest consideration paid to any other security holder for securities tendered in the tender offer. The clause "for securities tendered in the tender offer" has replaced the clauses "pursuant to the tender offer" and "during such tender offer" currently in the rule. In addition, the amendments add a specific exemption for the negotiation, execution or amendment of an employment compensation, severance or other employee benefit arrangement that satisfies certain requirements. In response to comments, the original proposal has been revised to apply to arrangements with any security holders, not just with employees and directors of the subject company. In addition, the proposal had originally addressed only third-party tender offers, but in response to comments has been revised in the final rule to apply also to issuer tender offers. Further, as proposed, the rule would have required that the amount payable under the arrangement relate solely to past or future services. In response to comments received, the italicized language has been changed to "is being paid or granted for" services. Finally, the proposed requirement that the amount not be "based" upon the number of securities the employee or director owns or tenders has been modified slightly to add "calculated" in front of "based" and to delete the ownership concept.

The amendments as adopted also include a safe harbor. As proposed, the non-exclusive safe harbor provided that an arrangement would be deemed an employment compensation, severance or other employee benefit arrangement within the rule if it was approved as meeting the requirements of the new exemption by the independent compensation committee of the target or bidder (depending upon whether the target or bidder was a party to the arrangement). Several changes have been made in response to comments regarding the safe harbor. First, the safe harbor will now apply to both third-party and issuer tender offers. Second, in all cases, the approval may be given by the directors of the target or, if the bidder is a party to the transaction, by the bidder's directors. Third, if the company does not have an independent compensation committee, the arrangement may instead be approved by an independent special committee formed for the purpose of considering the business combination. Fourth, special accommodations have been made for foreign private issuers to permit use of other committees or board members and home country standards of independence. Finally, an instruction has been added that allows a determination by the board as to the independence of the committee under applicable SRO standards to satisfy the safe harbor's independence requirements.

There were two comments that were seriously considered by the SEC, but not adopted. The first comment suggested that the exemption be expanded to include commercial arrangements. The SEC was concerned that this expansion could be too open-ended and that, if qualified, would lead again to uncertainty and court battles. However, to provide some comfort regarding this concern, an instruction has been added to indicate that legitimate commercial arrangements should not be viewed to violate the rule. The next comment suggested the addition of a de minimis exception. However, the SEC viewed that type of exception to run counter to the premise of the rule and declined to include it in the amendments as adopted.

Read more on the best-price rule proposal.