DealLawyers.com Blog

December 14, 2005

SEC Proposes Amendments to the Best-Price Rule

Today, the SEC proposed amendments to the best-price rule, which requires that the consideration paid to any security holder in a tender offer is the highest consideration paid to any other security holder in the offer. As you may recall, these amendments were proposed due to a split among federal circuit courts as to whether the best-price rule applies to arrangements, usually compensatory in nature, entered into by a bidder in a tender offer and the employees or directors of the target company in contemplation of the acquisition.

As noted in this press release, the SEC voted to propose revisions that would reinforce the original premise of the tender offer best-price rule – ensuring that all shareholders who tender their securities in an offer are paid the same consideration. The proposed revisions also would allow bidders and target companies to proceed with a tender offer with greater certainty as to the manner in which the best-price rule will be applied to employment and severance arrangements.

The proposed amendments would revise the best-price rule as follows:

Clarify the application of the tender offer best-price rule – The issuer and third-party best-price rules would be revised to clarify that the best-price rule applies only with respect to the consideration paid for securities tendered in an issuer or third-party tender offer. The best-price rules also would be revised to make clear that there is not a time restriction on its application.

Exempt certain compensation, severance or employee benefit arrangements from the tender offer best-price rule – The third-party best-price rule would be revised to add a specific exemption from the rule for the negotiation, execution or amendment of an employment compensation, severance or other employee benefit arrangement, so long as the amount payable under the arrangement relates solely to past services performed, future services to be rendered or refrained from rendering and is not based on the number of shares the employee or director owns or tenders.

Provide a safe harbor for the exemption from the tender offer best-price rule for certain compensation, severance or employee benefit arrangements – The third-party best-price rule would be revised to include a safe harbor provision that would allow the independent compensation committee or a committee of the target’s or bidder’s board of directors – depending on whether the target or the bidder is the party to the arrangement – to approve an employment compensation, severance or other employee benefit arrangement and thereby have it deemed to be such an arrangement within the meaning of the exemption.

There is a 60-day comment period.