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Let's say that after running over the Wellman factors, the proposed cash purchase offer by the issuer for its non-convertible debt securities is a "tender offer." Now, we are off to the races!
Section 14(e) of the Exchange Act is an anti-fraud provision that is the "starting line" for the regulation of all cash tender offers as well as exchange offers that are subject to the tender offer requirements.
Section 14(e) prohibits the following in connection with any tender offer:
In order to give effect to the commandments of Section 14(e) and as a means reasonably designed to prevent fraudulent, deceptive and manipulative practices, the SEC adopted Regulation 14E under the Exchange Act. Regulation 14E applies to all cash tender offers, as well as exchange offers subject to the tender offer requirements.
This is where the rubber meets the road.
Rule 14e-1(a) of the Exchange Act (Unlawful tender offer practices) requires, among other things, that all tender offers must be kept open for at least 20 business days from the date that the tender offer commences, which is the date on which the tender offer is first published or sent to holders of the subject securities. This requirement is intended to give holders of the subject securities sufficient time to ponder whether or not they should go along for the ride and tender their securities.
Rule 14e-1(b) of the Exchange Act requires that in case of any increase or decrease in the consideration offered ("any" means there is no de minimis exception) all tender offers must remain open for at least 10 business days from the date that notice of such increase or decrease is first published or sent or given to security holders. This 10 business day extension is also required in case of any increase or decrease in (1) the percentage of securities to be acquired pursuant to the tender offer (if the change exceeds two percent of the original amount), or (2) any dealer manager’s solicitation fee, if any.
For the purpose of the above rules, the term "Business Day" is defined in Rule 14d-1(g)(3) of the Exchange Act as follows: "The term business day means any day, other than Saturday, Sunday or a federal holiday, and shall consist of the time period from 12:01 a.m. through 12:00 midnight Eastern time. In computing any time period under . . . Regulation 14E, the date of the event which begins the running of such time period shall be included except that if such event occurs on other than a business day such period shall begin to run on and shall include the first business day thereafter."
Holy Brake Lights!
20 Business Days is a month and then some, especially with a few holidays thrown in!
The additional 10 Business Day requirement for changes in consideration or amount of securities sought hardly speeds things along!
Consider this:
It is not unusual for investment-grade and high-yield issuers to seek to refinance hundreds of millions of outstanding debt securities (that's a lot of gasolina, amigo!) during h̶e̶r̶e̶ ̶t̶o̶d̶a̶y̶ ̶g̶o̶n̶e̶ ̶t̶o̶m̶o̶r̶r̶o̶w̶ temporary windows of favorable market conditions. In the course of these refinancings, some issuers seek to replace existing debt securities with impending maturity dates with new debt securities that have longer maturities.
Most issuers seek to replace existing debt securities with a high rate of interest with new debt securities at a lower interest rate. The funny thing about interest rates is they can fluctuate (hard to believe, we know, but it has happened and may happen again) and therefore a longer tender period breeds uncertainty for the success of the tender offer. If interest rates fall during the tender period, then participation in the tender offer will likely decline because holding on to the outstanding higher rate debt securities becomes attractive. If interest rates rise, then it will become more expensive for the issuer to retire the old debt securities. Either way, not good!
The pressure to put the pedal to the metal is exacerbated when the issuer has incurred the cheaper refinancing debt while the old expensive debt is still outstanding. This subjects the issuer to a̶ ̶d̶o̶u̶b̶l̶e̶ ̶w̶h̶a̶m̶m̶y̶ "negative carry" as it is required to pay interest on both the new and old debt securities pending completion of the tender offer for the old debt securities and their eventual s̶c̶r̶a̶p̶p̶i̶n̶g̶ retirement.
Holders of outstanding debt securities have reason to rally for shortened cash purchase tender offer periods too.
"Fast Cash" received from the issuer is great for holders of old securities who want to roll over those $$$ to buy the new debt securities from the same issuer.
These vexing issues have received sympathetic treatment from the SEC Staff who have taken helpful action in the past by . . . err . . . agreeing not to recommend any enforcement action in the case of cash tender offers for any and all non-convertible investment-grade debt securities. Read on for the No-Action Packed details!
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