When the private equity firm 3G Capital took Burger King private in 2010, it used an innovative “dual-track” acquisition structure to minimize the amount of time to consummate the acquisition. This involved 3G simultaneously pursuing both a friendly tender offer to Burger King shareholders as well as a traditional merger that would need to be approved by shareholders at a special meeting. Since the Burger King deal, nearly 20 other companies have used this structure.
In basic terms, a tender offer allows the acquirer to make a direct offer to shareholders to purchase shares of the target company at a specified price. Consummation of the tender offer is usually contingent upon the target shareholders tendering a minimum number of shares so that the acquirer can take advantage of a subsequent short-form merger to squeeze out any non-tendering shareholders thereby resulting in the acquirer being the 100% shareholder of the target company. On the other hand, a traditional merger involves the solicitation of shareholder votes to approve the acquisition by proxy or in person at a special shareholder meeting.
From a timing perspective, acquirers typically prefer to use tender offers to accomplish acquisitions because it normal takes less time to complete because, among other things, it does not require a special meeting of the shareholders to approve the transaction. Where a traditional merger can take upwards of three to six months to complete (depending on the circumstances), a tender offer can be completed in as few as 20 business days following the date the tender offer is initiated (the minimum period that a tender offer must remain open). However, if shareholders of a target company do not tender the minimum number of shares necessary to consummate the acquisition, the acquirer would be forced to abandon the tender offer and switch over to a traditional merger structure.
In the Burger King deal, rather than waiting to see whether the tender offer was successful, 3G simultaneously prepared documents and made filings to proceed with a traditional merger concurrently with the tender offer. By doing this, 3G would have a head start on the traditional merger transaction if the tender offer ultimately failed, thereby saving significant time. However, public companies considering this type of approach should be aware that the timing of certain key events when undertaking a dual-track approach could result in an inadvertent violation of the Exchange Act rules.
Specifically, Rule 14e-5 issued under the Exchange Act prohibits an acquirer from purchasing or arranging to purchase securities subject to the tender offer outside of the tender offer. This prohibition applies from the date the tender offer is announced until the date it expires. As a result, this rule can become problematic in a dual-track acquisition structure because if the acquirer files a proxy statement related to the traditional merger before the tender offer period expires, that filing could potentially be viewed as an arrangement to purchase securities outside of the tender offer in violation of Rule 14e-5. Thus, the timing of the proxy statement filing is a critical element in avoiding a violation of the Exchange Act rules.
In the Burger King acquisition, 3G filed a preliminary proxy statement for review by the SEC while the tender offer was still open and also contacted the SEC prior to filing to indicate that the definitive proxy statement would not be filed or mailed to shareholders until after the tender offer period expired. 3G ended up never having to file a definitive proxy statement because enough shares were tendered in the tender offer to complete the acquisition. The timing of the preliminary proxy statement filing apparently was a non-issue based on the fact the SEC did not object to the plan as proposed by 3G. However, in light of recent remarks by special counsel to the Office of Mergers and Acquisitions at the SEC’s Division of Corporate Finance, if an acquirer files a definitive proxy statement during the tender offer period (as opposed to merely the preliminary proxy statement) that may constitute a violation of Rule 14e-5.
Thus, the timing of the proxy statement filings is a critical element in avoiding a violation of Rule 14e-5 when using a dual-track approach. Although it may delay the consummation of the acquisition in the event of a failed tender offer, the conservative approach would be for the acquirer to wait until after the tender period expires before filing its preliminary proxy statement (of course, this would not be necessary if the tender offer was successful). Alternatively, an acquirer could take the 3G approach by filing its preliminary proxy statement during the tender offer period. If an acquirer elects to use the second option, it should first contact the SEC prior to making the filing to see if they have any objections. This option could be more favorable to acquirers since the clock on the 10-day waiting period that is required before the definitive proxy statement can be filed would run concurrently with the pending tender offer.
The takeaway here is that the dual-track approach can be a good option for companies looking to quickly complete acquisitions while potentially minimizing the delays from an unsuccessful tender offer. Acquirers can try to take advantage of the speed of the tender offer structure but can also be assured that they will be able to quickly move to a traditional merger structure if the target shareholders do not tender the minimum number of shares during the tender offer period. However, in using this parallel structure, an acquirer must carefully time the filing of its proxy statement so as not to violate Exchange Act rules. While it may be alright to file a preliminary proxy statement during a pending tender offer, the acquirer should wait until the tender offer has expired before it files and mails the definitive proxy statement.