How long after merger agreement signed before issue proxy statement

[Last updated: 1 June 2022, unless otherwise noted]

The principal methods of acquiring 100% of a target company are tender offers (followed by a second-step "short-form" merger to squeeze out non- tendering shareholders) and "long-form" negotiated mergers that are submitted for approval by the target company's (and, in certain circumstances, the acquirer's) shareholders pursuant to a proxy solicitation in accordance with the SEC's proxy rules (Section 14 of the Exchange Act and SEC Regulations 14A and 14C). A friendly tender offer is generally carried out pursuant to a negotiated merger agreement in which the acquirer agrees: (i) to conduct a tender offer for the target company's shares at the price stipulated in the agreement in lieu of the target company seeking shareholder approval of the merger; and (ii) provided that the acquirer receives tenders of a sufficient number of target company shares (90% in most states but in Delaware an absolute majority of the outstanding voting shares unless a higher percentage of the target company's voting shares is required to approve a merger), to effect a squeeze-out merger of the target company's non-tendering shareholders.

4.1 Preliminary matters

1. No takeover code – There is no takeover code under US federal or state law. Section 14(d) of the Exchange Act and SEC Regulations 14D and 14E regulate both the information to be provided to target company shareholders in a tender offer and the procedure for conducting a tender offer. Proxy and consent solicitations in US domestic companies are governed by the SEC's proxy rules, which prescribe extensive disclosure requirements for such solicitations. State corporate laws specify various procedural matters, e.g., notice, timing and voting requirements, to be followed in acquiring a company pursuant to the state merger statute, in effecting a dissolution of a seller following an asset sale, and completing a tender offer via a statutory merger to squeeze out non- tendering shareholders. Such state corporate laws will also determine whether shareholders may seek an appraisal of their shares in lieu of accepting the merger consideration, and the procedures to follow to do so. Judicial decisions may impose additional requirements, particularly in the case of business combination transactions with controlling persons of the target.
2. No mandatory offers; no minimum pricing – Unlike the takeover rules in certain non-US jurisdictions, neither US federal securities laws nor state corporate laws require a bidder to commence a tender offer for the shares of a company as a consequence of acquiring a specified percentage of a public company's outstanding shares. However, three states (Maine, Pennsylvania and South Dakota) have "control share cash-out" requirements under which a bidder that acquires a specified percentage of voting power must notify remaining shareholders, who can then require that the bidder purchase their shares. Similarly, US federal securities laws do not impose any minimum price at which a tender offer is to be conducted or minimum amount of merger consideration that must be paid, subject to certain limited exceptions for squeeze-outs and required disclosure of the price paid in purchases made during a specified period prior to the tender offer. Some states impose "fair price requirements", e.g., highest price paid during a specified "look-back" period, on the consideration in business combinations with holders of more than a specified percentage of the target company's outstanding shares. Certain rules regulate changes to the consideration payable in a tender offer and the consideration payable in squeeze-outs. These are discussed below.

4.2 Making the bid public

1. Preliminary discussions – As a first step in acquiring the target company, the acquirer's CEO may contact the target company's CEO and set up a meeting between the two CEOs to discuss strategic alternatives available to the two companies. At this meeting, the acquirer's CEO may suggest an offer to purchase the target company for a specified amount per share or premium per share (or range thereof), as well as discuss other matters relevant to the acquisition proposal. If the target company agrees to proceed, then the parties can determine whether the acquisition will be structured as a tender offer or a merger and begin to negotiate a definitive acquisition agreement. In friendly transactions, the parties generally enter into a confidentiality agreement to permit the acquirer to conduct due diligence. This agreement typically restricts public announcements about the negotiations and enables the target company to provide material non-public information to the acquirer without violating SEC Regulation FD, which restricts selective disclosure of such information. Because negotiations and due diligence are conducted pursuant to an agreement that requires confidentiality and restricts public announcements, acquisitions in the US generally become public only upon the signing of a definitive agreement. This may be contrasted with the practice in other jurisdictions where such announcements are made earlier, particularly if the acquirer builds up its holdings to a level that obligates it to offer to purchase publicly held shares. If the target company is unwilling to proceed with negotiating a ‘friendly’ transaction, then the acquirer may consider whether to proceed on a ‘hostile’ basis, which generally means that the acquirer will make public its intentions regarding an acquisition of the target company. Even at this preliminary stage, a potential acquirer will need to keep a record of its contacts and discussions with the target company. If the parties reach agreement for an acquisition of the target company, the disclosure document prepared for the target company's shareholders – a definitive proxy statement for a long-form merger or an offer to purchase for a tender offer – will include a detailed discussion of past contracts, transactions or negotiations between the target company (and its affiliates) and the acquirer or their respective representatives, generally including the nature of the contact, e.g., a meeting, letter, or telephone conversation, the principal participants and the substance of the contact. This disclosure is usually presented in the target company's proxy statement or the acquirer's offer to purchase under an appropriate heading, such as "Background of the Merger." As noted above, a party filing a Schedule 13D is obligated to disclose its "plans and proposals" regarding the subject company, and to amend its Schedule 13D for "material changes" in the information in the Schedule. If a potential acquirer has a stake in the target company that has been disclosed in a Schedule 13D, execution of a confidentiality agreement and the conduct of due diligence entails a significant risk that the parties' discussions – even at this preliminary stage – must be disclosed as such a material change, particularly if the acquirer's initial filing stated simply that it acquired its stake "for investment," without any reference to seeking a possible business combination or other transaction with the target company.
2. Tender offer commencement – Under the SEC tender offer rules, a tender offer is commenced when a bidder first publishes, sends or gives the means to tender securities to the target company's security holders. On the commencement date, a bidder must file a Schedule TO with the SEC together with the required exhibits (which will include the offer to purchase, a letter of transmittal and other documents required to deliver tendered shares, and the acquirer's press release announcing commencement of the offer). The bidder must deliver a copy of Schedule TO to the target company, notify the exchange on which the target company's shares are listed of the commencement of the offer, publish an advertisement (which may be in summary form) in one or more major newspapers containing specified information regarding the offer, and disseminate the tender offer materials to target company shareholders.
   • Pre-offer announcements – Announcements prior to formal commencement, e.g., an announcement that a bidder is considering or has determined to make a tender offer, or is in discussions with the target company regarding a possible bid, are permitted. Such announcements do not constitute "commencement" of the offer if they are filed with the SEC under cover of Schedule TO on the date of first use and designated as pre-commencement communications. Such communications may not include the means to tender shares and must contain cautionary language advising target company shareholders where to obtain the tender offer statement and to read it when it is available. These requirements also apply to a joint press release issued by an acquirer and a target company announcing their execution of a merger agreement prior to commencement of the tender offer for the target company's shares pursuant to the merger agreement.
   • Pre-offer announcements – Exchange offers – In exchange offers (tender offers in which the consideration will consist in whole or in part of securities of the acquirer), such announcements constitute "offers" of such securities. Ordinarily, securities may not be offered publicly unless a registration statement relating to the offered securities has been filed under the Securities Act. However, SEC Rule 165 permits such announcements prior to the filing of a registration statement for the securities to be offered in an exchange offer, provided that the announcements are filed with the SEC and comply with informational limits limitations on such pre-offer announcements.
3. Long-form mergers – Upon executing a definitive agreement for a long-form merger, the acquirer and target company will typically issue a joint press release and file it with the SEC. The release will generally identify the parties involved and summarize the material terms of the transaction.
   • Pre-solicitation announcement - Mergers - Before the target company (and, in certain circumstances, the acquirer) begin formally soliciting proxies from shareholders, the acquirer and target company may communicate orally and in writing with shareholders and other stakeholders, e.g., employees, customers and suppliers, and the market regarding the transaction, but all such written communications before or after the proxy statement is furnished must be filed with the SEC on the day of first use. They must identify the participants in the proxy solicitation and describe their direct or direct interests in the solicitation or advise shareholders where to obtain the information. Before distribution of the definitive proxy statement for the transaction, such announcements may not include a form of proxy and, like pre-commencement tender offer announcements, they must advise shareholders on where to obtain the definitive proxy statement and to read it when it is available. As with exchange offers, where the merger consideration will consist in whole or in part of securities, such announcements constitute "offers" of such securities. Rule 165, however, permits such offers prior to the filing of a registration statement for the offering, subject to that rule's filing requirements and information limitations.

4.3 Form of consideration and pricing rules

1. Form – Neither US federal securities laws nor state corporate laws prescribe the form of consideration to be paid in a tender offer or merger. Apart from a bidder's own financial resources and access to financing, factors that will influence an acquirer's choice of consideration to be offered include the following:
   • Tax deferral – If a significant part of the consideration payable to target company shareholders in a merger or other business combination consists of equity securities of the acquirer and the transaction otherwise satisfies the US tax law requirements for a "reorganization", target company shareholders will not recognize gain or loss on the exchange of target company shares for acquirer shares; rather, any tax on acquirer shares received as consideration is deferred until the target shareholders sell the acquirer shares. The transaction is immediately taxable to target company shareholders to the extent they receive "boot", i.e., non-qualifying consideration, such as cash or debt securities of the acquirer.
   • Securities Act registration; timing and availability of information – Securities to be issued as tender/exchange offer or merger consideration to shareholders of a publicly-held target company must be registered under the Securities Act. Preparation of a registration statement is a complex and time-consuming process, and the issuer and certain other parties are subject to strict liability for material misstatements in and omissions from the prospectus. For a target company that requires speedy completion of the transaction, acquirers prepared to pay cash, such as private equity funds and cash-rich strategic buyers, may have a significant advantage over an acquirer proposing to issue securities as all or part of the acquisition consideration.
   • Exchange act reporting obligations – A company that files a registration statement under the Securities Act (including a registration statement for securities to be issued as the consideration in a merger or a tender offer) that is declared effective by the SEC automatically becomes subject to the periodic reporting requirements of the Exchange Act. Acquirers wishing to avoid such reporting obligations, such as many FPIs, will necessarily offer cash consideration.
   • Acquirer shareholder approval requirements – Exchange listing rules may apply to the acquisition of a significant minority interest in a listed company from the company or to the issuance of listed company shares as acquisition consideration. Stock exchanges require that listed companies list all outstanding shares of the listed class, as well as shares of that class issuable upon conversion of convertible securities, exercise of options, warrants and other subscription rights, etc. As a condition to such listing, both the NYSE and Nasdaq require their listed companies to obtain shareholder approval before issuing common shares that represent (or before issuing securities convertible into, or exchangeable or exercisable for, common shares that, when converted, exchanged or exercised will represent) 20% or more of the voting power of the listed issuer (measured before giving effect to such issuance and subject to certain exceptions), as well as for the issuance of shares in certain acquisitions from related parties and in transactions that would result in a change of control of the issuer, regardless of whether state corporate law requires approval by an acquirer's shareholders. Such requirements are not applicable to acquisitions for cash.
   • Hostile vs. friendly bids – Extensive information regarding the target company is required to be included in a registration statement for shares of an acquirer to be issued as tender/exchange offer or merger consideration. Depending on the materiality of the target company to the acquirer, that information could include the target company's historical financial statements and pro forma combined financial statements that give effect to the business combination. Such information is likely to be impractical or even impossible to obtain in a hostile acquisition, making the issuance of shares in a registered offering impracticable. As noted above, an acquirer in an all-cash transaction will have a timing advantage over a rival bidder offering its securities. This can be especially important when the board of the target of a hostile bid determines that an all-cash acquisition of the target by a "white knight" is preferable to the hostile bidder (subject to compliance with the directors' fiduciary duties (see "4.7 Fiduciary Duties of Directors," below).
   • Acquirer financial statements – Under certain conditions, an acquirer is required to include its financial statements in a tender offer document furnished to target company shareholders. However, financial statements are not required to be disclosed if the consideration is cash, the tender offer is not subject to a financing condition, and either the acquirer is an Exchange Act reporting company or the offer is for all the outstanding securities of the target company. The proxy rules provide comparable accommodations for all cash transactions. See "4.5 Financing requirements," below. An acquirer having sufficient cash and/or committed financing and wishing to maintain the confidentiality of its financial statements would offer cash consideration for this reason
   • Availability of appraisal rights – Shareholders of a target company in all-cash mergers (including second-step squeeze-out mergers following a tender offer) generally have statutory appraisal rights. See "4.8 Appraisal Rights of Minority Shareholders," below. Under Delaware law and many other state corporate laws, appraisal rights are not available in a merger in which the consideration consists of public company shares.
   • CVRs - Contingent consideration, or the right to receive an additional payment or payments such as earn-outs or milestone payments upon satisfaction of specified conditions set forth in the governing instrument for the payment (often referred to as a contingent value right, or "CVR"), is unusual in public company acquisitions for various reasons, including the difficulty of valuing the contingent payment for purposes of assessing the fairness of the consideration offered to target shareholders, and comparing the value of the CVR to the consideration in an all-cash or all-stock transaction. A fully transferable CVR will generally be considered a security requiring Securities Act registration and, if structured as a debt instrument (as many CVRs are), qualification of an indenture under the US Trust Indenture Act of 1939, as amended. In some cases, such registration and a limited period of required Exchange Act reporting by the entity issuing the CVRs (generally lasting until redemption or payout of the CVRs) are an acceptable trade-off for the ability to include contingent consideration in the transaction. However, in most cases, restrictions on transferability and other limitations may obviate the need for Securities Act registration.
2. Pricing – Neither US federal securities laws nor state corporate laws prescribe the amount of the consideration to be paid in a tender offer or merger (other than in second-step squeeze-out mergers after a tender offer, in which both exemption from the SEC's going private rule and the Delaware law provision permitting a squeeze-out with less than 90% ownership of the target company require that the consideration in the squeeze-out be at least equal to the highest consideration paid in the tender offer). Factors affecting pricing will include the following:
   • SEC best price rule – SEC Rule 14d-10 requires that the consideration paid to any target company shareholder for tendered shares equals the highest consideration paid to any other security holder for such shares.
   • Price changes – SEC Rule 14e-1 requires that upon any increase or decrease in the tender offer consideration, the tender offer must remain open for a minimum of 10 business days following dissemination of notice of the change in consideration.
   • Disclosure and fairness considerations – In all tender offers and mergers, the acquirer is required to provide information regarding purchases of the target company's securities during the preceding 60 days by the acquirer and certain related parties. In addition, in going private transactions, the acquirer-affiliate is obligated to provide extensive additional disclosure regarding the proponent's belief as to the fairness of the transaction to unaffiliated shareholders of the target company and the basis for that belief.

4.4 Conditional and unconditional offers

US tender offer law and practice does not provide that tender offers become "unconditional" after the passage of a specified interval after commencement or another event. In a non-hostile transaction, the conditions to an acquirer's obligation to accept and pay for tendered shares are generally negotiated between the acquirer and the target company. In a hostile bid, such conditions are determined by the acquirer. Conditions may be waived by the party whose obligations are subject to satisfaction of the condition. Typical conditions to an acquirer's obligation are:

• Number of shares tendered – Receipt of tenders of a number shares which, when added to any shares owned by the acquirer, will constitute at least a majority of the target company's outstanding shares (or, in some cases, the number of shares required for the acquirer to effect a short-form merger).
• Availability or completion of financing – Receipt of financing to complete the purchase and payment for the target company's shares. (Obviously, an acquirer that includes this condition in its offer can be at a serious disadvantage if a competing bid is commenced by an acquirer with available or committed financing.)
• Receipt of governmental consents – Receipt of pre-merger clearance (or early termination of the waiting period) under the HSR Act, and receipt of other required governmental consents, permits or approvals, such as CFIUS clearance.
• Absence of legislative or judicial impediments – No enactment of any legislation that would prevent or interfere with the transactions or commencement of any judicial or administrative proceedings seeking to prevent consummation of the transaction.
• Compliance with debt instruments and other contracts – Satisfaction or waiver of any conditions to or limitations on mergers or changes of control of the target company under its debt instruments, modification or removal of financial covenants in the target company's debt instruments to enable the merger to proceed, and receipt of any consents under "change of control" or similar clauses in the target company's material contracts.
• Equity rollover - In a "public-to-private" acquisition by a private equity firm, the rollover of the equity held by specified shareholders, such as founders and key management members, into the new equity structure of the acquired company.(A cautionary note - if the rollover negotiations take place too early in the sale process, e.g., before agreement has been reached on price, management may be subjected to claims that they selected the bidder that offered the best terms to management, rather than the best value to all shareholders.)
• No material adverse changes – Absence of material adverse changes in the business, financial condition or results of operations of the target company.
• Effectiveness of registration statement – Where the consideration consists of or includes shares, effectiveness of a registration statement filed with the SEC to register such shares, and the absence of any stop order suspending the effectiveness of the registration statement.
• Elimination of takeover defenses – Approval of the acquisition by the target company's board under any applicable "interested shareholder" statutes and waiver or amendment of any "poison pill" to enable the transaction to proceed. The target company's agreement on these points will be necessary conditions to any hostile bid. In a friendly acquisition, they will generally be provided for in the merger agreement and described to shareholders in the offer to purchase or the definitive proxy statement.

4.5 Financing requirements

Neither US federal securities laws nor state corporate laws expressly require that an acquirer have financing available or committed at the commencement of a tender offer. However, under SEC Rule 14e-8, it is fraudulent for a person to announce its intention to conduct a tender offer if the person does not have a reasonable belief that it will have the means available to purchase securities to complete the tender offer. Schedule TO requires that an acquirer provide information regarding the source and amount of funds it will use to acquire the target company. The offer to purchase (or a definitive proxy statement for a long-form merger) will include a description of the acquirer's financing arrangements, including the terms of the financing documents. The financing agreements will typically be filed as exhibits to the acquirer's Schedule TO. As indicated above, receipt of financing for the acquisition can be a condition to an acquirer's obligation to accept and pay for tendered shares (or, in a long-form merger, to complete the merger). However, the existence of a financing condition will be significant factor considered by the board of a target company that receives multiple offers, since "deal certainty" is a factor that a board may consider in its evaluation of competing offers. In addition, the SEC rules dispense with the need to provide financial information for the acquirer in an all-cash tender offer for all of the outstanding shares of the target company if the offer is not subject to a financing condition. The proxy rules afford similar relief. They provide that in an all cash acquisition, specified information for the acquiring company, including its financial statements, need not be provided unless the information is material to an informed voting decision, e.g., the security holders of the target company are voting and financing is not assured. These provisions can be attractive to an acquirer that has not previously published its financial statements and wishes to continue to avoid doing so.

4.6 Recommended and hostile offers

In all tender offers, the target company must take a formal position (which may include a statement that it makes no recommendation) with respect to the tender offer within 10 business days after the tender offer commences. It does so by including its position in a Schedule 14D-9 disclosure statement filed with the SEC. Prior to the filing of Schedule 14D-9, the target company may issue statements regarding the offer as long as it files any written communications with the SEC on the date they are issued and includes a clear legend advising its shareholders to read the target company's formal recommendation statement when it is available. In a friendly transaction, the content of the target company's position is usually negotiated in advance and the offer to purchase or target company's proxy statement will include information regarding the board's consideration and approval of the transaction, its recommendation that target company shareholders accept the offer and tender their share or vote in favor of the merger, as the case may be, and the reasons for the board's recommendation. In a friendly tender offer, the target company's Schedule 14D-9 will be prepared in coordination with the acquirer and filed and disseminated at the time the offer commences.

4.7 Fiduciary duties of directors

1. Duties of directors; standard of conduct Directors must act in the best interests of the corporation and its shareholders. They must exercise the degree of care that a reasonable person would employ in similar circumstances and place the interests of the corporation and its shareholders ahead of any self-interest. In the context of a "change of control transaction", the board is required to act reasonably to seek the transaction that offers the best value reasonably available for the company's shareholders. In Delaware, courts have stressed the importance of the board being adequately informed when negotiating the sale of control of the company. This generally requires that the target company's board:
   • analyze the entire situation and evaluate the consideration being offered for control of the corporation in a disciplined and well documented manner;
   • receive financial and legal advice, negotiate diligently and ensure that it possesses all relevant material information; and
   • use methods or procedures that will enable the board to determine whether the consideration being provided to target company shareholders represents the best value reasonably available to the shareholders.

Some of the suggested methods for the target company's board to accomplish these ends include conducting an auction, conducting an "active" market check of other potential buyers before entering into an agreement, negotiating for inclusion of a "go-shop" clause allowing the target company to solicit interest from potential buyers for a limited period of time after signing a definitive agreement with an initial buyer or, if that is not acceptable to the acquirer, including in the definitive agreement an exception to a "no-shop" clause (a prohibition on the target company's soliciting a purchase proposal from any other party) permitting the target company to terminate the agreement with the acquirer to accept a superior, unsolicited competing offer made by a third party (the so-called "fiduciary out"), the exercise of which generally requires payment of a break-up fee by the target company to the acquirer. Usually, the target company's board will seek a "fairness opinion" from its investment bankers before approving a change of control transaction. For significant acquisitions, an acquirer may consider retaining its own investment banker to provide a similar opinion.

4.8 Appraisal rights of minority shareholders

Under virtually all US state corporate laws, once a merger is approved by target company shareholders and completed, the merger is binding on all target company shareholders, regardless of whether they voted in favor of the merger (or had no vote because the merger was effected as a short form merger without shareholder approval). However, under most state corporate laws, target company shareholders in an all cash merger who properly exercise any dissenters' rights available to them under applicable state law (which generally requires that such shareholders vote against or refrain from voting on the merger) or the target company's organizational documents will generally have the right to seek appraisal, i.e., a court determination of the fair value of their shares, and to receive the appraised value of their shares, rather than the merger consideration.