December 8, 2004
Formula Pricing Update
For those of you who may have been busy over the past year with the many SOX-related developments coming out of the SEC and SROs, you may have missed two recent no-action letters issued by the Office of Mergers & Acquisitions on the subject of “formula pricing”. By way of background, M&A practitioners are likely familiar with the landmark no-action letter issued to Lazard Freres & Co. (August 11, 1995) which allowed a third-party bidder in an exchange offer to determine the final offer price based upon a pre-disclosed formula, hence the term “formula pricing”.
In Lazard, the staff provided relief from Rule 14e-1(b) and allowed the bidder’s final offer price or ratio to be “fixed” as late as two business days prior to the expiration of the offer. Two years later the staff issued a no-action letter to AB Volvo (May 16, 1997) which expanded the relief for formula pricing mechanisms to include offers where one of the subject securities sought in the offer was only listed on the Stockholm Stock Exchange and not a national securities exchange or Nasdaq in the U.S.
This past year the staff issued letters to Epicor Software Corporation (May 13, 2004) and TXU Corporation (Sept. 13, 2004) which further expanded and clarified the staff’s relief in the context of: (i) a third party exchange offer where the trading prices for the subject securities were publicly available only on the Euronext and Euronext Amsterdam in the Netherlands (Epicor) and (ii) an issuer tender offer where the formula pricing was based on the subject company’s common stock price instead of the trading price of the securities actually sought in the offers (i.e., convertible debt and similar derivative securities) (TXU).
In both cases, the final price was determined using a fixed formula that was disclosed in the offering materials and the final price was announced by means of a press release issued before the opening of the market on the second business day preceding the expiration date (i.e., before the opening of the market on the 19th day in a 20-day offer).