On October 18, 2006, the U.S. Securities and Exchange Commission approved amendments to U.S. tender offer best price rule (Rule 14d-10 under the U.S. Securities Exchange Act of 1934), which currently provides that no one may make a tender offer unless the consideration paid to any security holder during the tender offer is the highest consideration paid to any other security holder. These amendments to Rule 14d-10 are intended to clarify that the rule applies only to the consideration paid for securities tendered in a tender offer, and also that employment compensation, severance or other employee benefits should not be considered part of the price being paid in a tender offer.  The final text of these amendments is not yet available. The following summary is based upon public statements by the Chairman of the Commission and certain members of the Commission's Staff.

Case law over the last several years has raised significant issues as to whether the payment or grant of executive compensation by a target company in connection with a tender offer (even if agreed to and made outside the tender offer period) constitutes disparate treatment of shareholders in violation of Rule 14d-10.  As a result of certain courts' expansion of Rule 14d-10, business combinations over the last several years have been primarily structured as one-step mergers if the grant of additional compensation to the subject company's executives is necessary or desirable.  One of the Commission's goals in adopting the amendments is to reduce any regulatory disincentive to structuring an acquisition of securities as a tender offer.

The amendments to Rule 14d-10, which apply to both issuer and third-party tender offers,  clarify that the rule applies only with respect to the consideration offered and paid for securities tendered in a tender offer, rather than consideration paid to any security holder pursuant to and during the tender offer.  The exemption in connection with employment compensation, severance or other employee benefits is not limited to directors or employees of the target company, but includes all security holders of the target company.  An arrangement will satisfy the exemption if it "is not calculated based on the number of securities tendered or to be tendered" and the arrangement "is being paid or granted as compensation for" services rendered or to be rendered.

The amendments also provide for a safe harbor that would allow an independent compensation committee of the subject company (and the directors of the bidder if the bidder is a party to the transaction) to approve an employment compensation, severance or other employee benefit arrangement and, in doing so, satisfy the requirements of the exemption to the best price rule. The safe harbor includes arrangements approved by a special committee of the directors comprised solely of independent members and formed to approve such arrangements if the company does not have a compensation or similar committee,  or if the company has such a committee but its members are not independent.  Foreign private issuers are accommodated in the amendment if the compensation arrangements are approved by directors or any committee of the board that is duly authorized to approve such arrangements under the laws or regulations of their home countries.

As noted above, the final text of the amendments is not yet available. We expect the final rule text and the Commission's adopting release to provide more details and clarifications regarding the amendments.  The amendments will become effective 30 days after the full text of the amendments is published.

If you have questions concerning this memorandum, or United States tender offers or securities laws generally, please do not hesitate to contact Gerald Shepherd at (212) 588-5540, Bonnie Roe at (212) 588-5543, Scott Tayne at (212) 588-5520 or Darren Novak at (212) 588-5579.

Davies Ward Phillips & Vineberg LLP, with over 235 lawyers, practises nationally and internationally from offices in New York, Toronto, Montréal and an affiliate in Paris and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and overseas clients.

The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.