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Two popular debt refinancing / restructuring methods used, singly or in combination, by investment-grade issuers and high-yield issuers are:
(1) offering to purchase all or a portion of outstanding debt securities for cash by means an issuer cash debt tender offer, and
(2) offering to exchange all or a portion of outstanding debt securities for newly issued debt securities of the issuer or a guarantor by means of a debt exchange offer.
This Raises ONE Intriguing Question . . .
Good luck getting directions to that question or finding a definition of "tender offer" in the U.S. securities laws, including the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and the regulations thereunder.
The U.S. Congress and the U.S. Securities and Exchange Commission (the "SEC") have deliberately chosen not to define "tender offer" in order to: (1) give the SEC and the courts flexibility in applying the tender offer rules to a very broad range of transactions to prevent fraudulent, deceptive and manipulative practices and (2) prevent f̶r̶a̶u̶d̶u̶l̶e̶n̶t̶,̶ ̶d̶e̶c̶e̶p̶t̶i̶v̶e̶ ̶a̶n̶d̶ ̶m̶a̶n̶i̶p̶u̶l̶a̶t̶i̶v̶e̶ "creative" detours around a fixed definition that would evade the protections sought to be provided to investors by the tender offer rules.
So without a nifty definition to plug into that shiny GPS, it is time to take a quick pit stop and ask: Do all offers to purchase outstanding securities for cash constitute "tender offers?" Well(man), depends.
Open market and/or privately negotiated purchases for cash of equity or debt securities can avoid being characterized, and regulated under the Exchange Act, as "tender offers" if they veer away from certain factors that signal the presence of a tender offer.
Helpfully, U.S. courts have provided a roadmap by identifying eight factors that should be used to look under the hood of a cash purchase offer to diagnose whether such transaction is a "tender offer" or another type of solicitation.
These are known as the "Wellman Factors," named after the case that established them (Wellman v. Dickinson, 475 F. Supp. 783 (S.D.N.Y. 1979)). Although the Wellman case involved equity securities, the Wellman Factors apply equally to debt tender offers and are the classic starting point for any inquiry of whether a transaction should be deemed a tender offer.
The Wellman Factors, that characterize the presence of a tender offer, are listed in the "left lane" below. The "right lane" gives directions that, if followed in letter and sprit, will greatly increase the likelihood that a cash purchase offer will be NOT be characterized as a tender offer.
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Active and widespread solicitation of holders.
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Solicitation made for a substantial percentage of the outstanding debt.
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Offer to purchase is made at a premium over the prevailing market price.
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Terms of the offer are firm rather than negotiable.
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Offer is contingent on the tender of a fixed minimum number of securities and is often subject to a fixed maximum as well.
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Offer is open for only a limited period of time.
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Offeree is subject to pressure to sell his or her securities.
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Public announcement of a purchasing program precedes or accompanies rapid accumulation of the target’s securities.
It is not necessary for all eight factors to be present to constitute a tender offer and the weight accorded to any one or more factor(s) might vary depending on facts and circumstances of each case. Interestingly, U.S. courts and the SEC view potential tender offer transactions through somewhat different prisms. U.S. courts have applied a “totality of the circumstances” test and have focused on whether the transaction at hand lacks the disclosure and procedures required by the tender offer rules, thereby creating a substantial risk that an “ill-informed solicitee” will lack the information needed to make an investment decision with respect to the offer. On the other hand, the SEC Staff have focused on whether the proposed purchase transaction by an issuer involves an “investment decision” on the part of the offeree, thereby raising the need for protections provided by the tender offer rules.
Even if the proposed open market or privately negotiated cash purchases are structured to avoid characterization as a "tender offer,'" there are important disclosure tires to kick. Before turning on the ignition key, experienced counsel should be consulted to:
(1) avoid a̶ ̶w̶r̶e̶c̶k̶ liability under the antifraud provisions of U.S. federal securities law, particularly Rule 10b-5, which generally prohibits the use of materially misleading statements or omissions in connection with the purchase or sale of a security and otherwise prohibits the use of manipulative or deceptive devices to purchase or sell a security;
(2) carefully vet appropriate public or private disclosure of any material information, including any Regulation FD concerns and advisability of entering into confidentiality agreements between the issuer and the holders to cover private disclosure of material information in the case of privately negotiated purchases of outstanding debt securities; and
(3) comply with any disclosure or public announcement requirements under the rules of any stock exchange where the company’s equity or subject debt securities may be listed.
All tender offers - for equity and debt securities - are subject to regulation by the U.S. Securities and Exchange Commission (the "SEC") and must comply with the applicable requirements of the Exchange Act. How complex the engineering of the tender offer needs to be depends on the make and model of the securities sought to be purchased in the tender offer. Equity tender offers are subject to the most extensive and stringent requirements. Debt tender offers not nearly as much.
While it tempting to embark on the scenic route of equity tender offer regulation, that is not our destination today so let's motor on to the laws and rules that apply to tender offers for non-convertible debt securities.
Convertible debt securities that can lower their leveraged top and be converted into equity securities are treated as equity securities under Section 3(a)(11) of the Exchange Act. A tender offer for convertible debt securities must comply with the same stringent requirements that are applicable to tender offers for straight equity securities under the Exchange Act.
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