A company experiencing financial distress or seeking to rationalize, refinance or simplify its debt capital structure may utilize various transactional approaches to restructure its existing indebtedness. Liability management transactions, typically involving a cash tender offer or exchange offer, are commonly employed in support of such restructuring efforts. Companies considering such a restructuring, however, need to keep in mind a range of legal, strategic and logistical considerations directly relevant to the conduct and execution of a cash tender offer or exchange offer.
In its simplest form, a debt tender offer is an offer, typically by the issuer, to purchase all or a portion of its outstanding debt securities for cash at a price specified by the offeror. Similarly, an exchange offer (which is also technically a tender offer) is an offer, typically by the issuer, to exchange a holder’s existing debt securities for new equity or debt securities of the offeror or other consideration (or a combination thereof). The legal rules governing, and the mechanical processes underlying, cash tender offers and exchange offers are substantially similar, with certain differences highlighted below. This article focuses only on debt tender offers, and does not discuss equity tender offers to which a different set of rules apply.
Tender Offer Defined
The securities laws do not define the term “tender offer,” and the Securities and Exchange Commission (“SEC”) and courts must look to the specific facts and circumstances to determine if one exists. The SEC has advised, and courts have adopted, the following eight factors as relevant in determining the existence of a tender offer: (i) the active and widespread solicitation of public security holders, (ii) the solicitation to purchase a substantial percentage of the securities, (iii) the offer to purchase the securities at a premium over the prevailing market price, (iv) the terms of the offer are firm rather than negotiable, (v) the offer is contingent on the tender of a fixed minimum number of securities, (vi) the offer is open for only a limited period of time, (vii) the offerees are pressured to sell and (viii) the public announcement of the purchasing program precedes or accompanies a rapid accumulation of securities.
These factors provide companies, as well as the SEC and courts, with guidelines to determine whether the rules governing tender offers should be, or should have been, followed with respect to a particular transaction or series of transactions. While no single factor is determinative, it is unclear how many factors must be present for a particular transaction (or series of transactions) to constitute a tender offer.
Complying with Securities Laws
An examination of the regulation of cash debt tenders or exchange offers begins with Section 14(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which includes the general anti-fraud provision applicable to tender and exchange offers and grants the SEC power to create rules applicable to tender offers. While most of the rules promulgated by the SEC in this area apply to equity tender offers, one rule, Rule 14e-1, provides the basic framework for conducting and completing a cash tender offer or exchange offer for debt securities, with many specific practices developed under an extensive regulatory mosaic, including formal and informal guidance issued by the SEC and its Staff, as well as commonly utilized and agreed market structures and approaches.
Securities Act Registration. The registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) are inapplicable to cash tender offers. However, to the extent that securities form any or all of the consideration offered by an issuer to outstanding holders in connection with an exchange offer, the offer of such securities must be registered under the Securities Act absent an applicable exemption. Companies commonly utilize available exemptions from Securities Act registration under Regulation D, Section 4(a)(2) and Regulation S of the Securities Act. Section 3(a)(9) of the Securities Act may also provide an exemption from registration for use in connection with an exchange offer, but is often not of practical use because it requires that no commission or fee is paid for the solicitation, a requirement that cannot be met if, as typical, a dealer manager is utilized.
Unregistered exchange offers typically can be completed more quickly and at less expense than an SEC-registered exchange offer, as they avoid SEC review and, while subject to the general anti-fraud provisions of the Exchange Act, are not subject to line item disclosure requirements. In order to qualify for an exemption, the offer typically is limited to accredited investors or institutional accredited investors, qualified institutional buyers (“QIBs”) and/or non-U.S. persons. In particular, since a company generally may not engage in any “general solicitation,” the offering document cannot simply be broadly disseminated or sent to all holders if retail investors hold the securities. Rather, the company may need to pre-qualify holders through the use of eligibility questionnaires or by having investors provide representations (including in any support agreement) that they are accredited investors, QIBs or non-U.S. persons, as applicable, prior to sending materials that could constitute an offer.
<blockquote>The company should carefully consider what types of material non-public information will be shared with investors in pre-offer negotiations since those investors will require all such information to eventually be made public.</blockquote>
Timing Considerations. Rule 14e-1 includes basic requirements regarding the length of time that a tender or exchange offer must be held open (and potentially extended) that must be factored into the execution planning for any restructuring plan. Broadly speaking, tender offers must be held open for a minimum of 20 business days to allow investors holding the tendered-for securities to consider the offer and decide whether they will participate.3 For purposes of Rule 14e-1, a tender offer is deemed to have commenced on a particular day so long as the tender offer materials are sent to holders by 11:59 p.m. and must expire no earlier than at midnight on the 20th business day.
Once the offer period commences, however, any changes to the terms of the offer may result in an extension of the 20-business-day period. For example, if there is an increase or decrease in the amount of securities being sought (in the case of an increase, if the additional amount of securities sought exceeds 2% of the subject securities outstanding) or in the consideration offered, the tender offer must remain open for at least 10 business days following the change.5 Other material changes may require that the offer remain open for at least five business days from the date of the change.6 Note that any time remaining in the original offer period counts toward these duration requirements. For example, a change in price made on Day 9 would not require an extension of the original expiration date because, for a tender offer not being conducted as an abbreviated 5-Day Tender Offer (as defined below), the expiration of such tender offer will occur at least 11 business days later under the terms of the offer satisfying the rule.
A narrow exception to Rule 14e-1’s 20-business-day timing requirement was created by a 2015 SEC no-action letter.7 The letter set the minimum offer period for a tender offer in respect of certain non-convertible debt securities, regardless of rating, at five business days. This exception to the basic 20-business-day rule, however, is subject to a number of limitations that may be challenging for a financially distressed company to meet, including that the offer may not be made: (i) in connection with a consent solicitation, (ii) if a default or event of default exists under the indenture or (iii) if the company’s directors have authorized discussions with creditors regarding a consensual restructuring. Unlike an equity tender offer, withdrawal rights in a debt tender or exchange offer are not required by Rule 14e-1, although the SEC noted that in a 5-Day Tender Offer withdrawal rights are required for a specified period.
Additional timing complexity may be present to the extent that the company plans to conduct an exchange offer and the company’s financial statements will go stale during the pendency of the offer. Even if such an exchange offer is conducted as a private placement, a dealer manager may require delivery of a “comfort letter” by the company’s auditors and/or delivery of a negative assurance letter by outside counsel and delivery of such letters will be inhibited to the extent that the company’s financial statements go stale prior to the expiration of the offer. Further, even in the absence of such delivery requirements, basic disclosure liability principles may necessitate that the stale financial statements be updated prior to the expiry of the offer.
Liability and Duties. Section 14(e) of the Exchange Act and the rules promulgated thereunder also establish liability for fraud or manipulative acts in connection with an offer.8 Tender offers are also subject to the general anti-fraud provisions of the Securities Act, including Section 10(b) and Rule 10b-5 promulgated thereunder, which prohibit the use of materially misleading statements or omissions in connection with the purchase or sale of a security.9 In addition, if the debt securities that are subject to the tender offer were registered with the SEC, the Trust Indenture Act of 1939, as amended, also provides important protections for the holders of such debt – namely against the impairment of rights to the principal of, and interest on, the debt.
The Offer – Mechanics
There are also numerous mechanical aspects to consummating a tender or exchange offer. It is generally recommended to retain a dealer manager to manage the exchange, including the pre-screening and solicitation of holders. In an exchange offer, dealer managers, who play a role similar to underwriters in a registered transaction, commonly undertake due diligence and require delivery of comfort letters and negative assurance letters. In certain circumstances, such as when the securities are held in physical form, when the securities are sufficiently concentrated among a known group or the exchange will be privately negotiated with, and only open to, a limited subset of holders, it may be possible to proceed without a dealer manager. In these situations, the company and their counsel (often with the assistance of a financial advisor) may prefer to manage the exchange themselves, including the mechanics required by the trustee. If the
existing securities, the new securities, or both are or will be DTC eligible, however, engaging a dealer manager to assist in coordinating the DTC process can be beneficial. In fact, it is likely necessary to use a DTC participant to qualify the new securities to trade through DTC.
It is also customary to retain an information and exchange agent who will provide information to noteholders, answer questions and assist noteholders with tendering securities. If existing securities are certificated, holders will be required to tender the physical certificates. More typically, securities will be held through DTC, in which case tenders may be completed electronically via DTC’s Automated Tender Offer Program (“ATOP”). In each case, a dealer manager and information agent will provide assistance to an investor’s personnel tasked with completing the mechanics necessary to consummate a tender or exchange. In our experience, engaging experts to facilitate this process can be more efficient than leaving it to the company or counsel to manage.
In handling execution mechanics, companies need to take into account the tendency of holders to wait to tender securities until the final days of the offer period. This occurs for a number of reasons, not least of which is administrative, as the individuals responsible for completing the tender mechanics at the holder are most likely different from the people who made the original investment or with whom the company negotiated the transaction. Where ATOP is used, DTC creates a “contra-CUSIP” for each option an investor may choose when responding to the offer. Once tendered, securities are shifted into the appropriate contra-CUSIP, temporarily suspending the transferability of the securities. Due to the length of time an offer must be held open, holders are unlikely to accept the market risk inherent in tendering their securities, and limiting their transferability, until the last possible moment.
Liability management is an essential part of a company’s financial toolbox and many restructuring and refinancing options exist. Anticipating liquidity shortfalls or other financial distress and actively managing the capital structure can provide a company with sufficient time to avoid a bankruptcy and restructure their capital structure through a consensual transaction.
The Private Equity Report Fall, 2019, Vol 19, No 2