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| Best-Price Rule |
What It Is:
The best-price rule refers to Securities and Exchange Commission Rule 14d-10.
This rule requires an entity making a tender offer for a certain class of shares
to make the same offer to all the shareholders in that class.
The rule descended from the Williams Act of 1968, which outlawed so-called
�Saturday-Night Specials� and �First-Come, First-Served� offers that
gave preferential treatment to some shareholders and pressured others during
tender offers.
How It Works/Example:
Let�s assume XYZ Company wants to purchase the common shares of Company 123.
To accomplish this, XYZ Company makes a tender offer to the common shareholders
of Company 123. Under the best-price rule, XYZ Company must make the tender
offer available to all of Company 123�s common shareholders (rather than just
the largest shareholders or shareholders who happen to be employees, for
example). The rule also requires XYZ Company to offer the shareholders the same
amount for each of their shares.
The SEC has the right to waive the application of the best-price rule if it finds it �not necessary or appropriate in the public interest or for the protection of investors.�
Why It Matters:
According to the SEC, the goal of the best-price rule is to ensure �fair and equal treatment of all security holders of the class of securities that are the subject of a tender offer.�
Because tender offers are usually used to purchase a company, they frequently include proposals to reorganize or eliminate the management of the acquired company, which in turn involves severance and other employee compensation arrangements. A variety of court cases have tested the applicability of the best-price rule to employee compensation, with mixed results. This is why in December 2005 the SEC proposed an amendment that makes the rule applicable only to securities in a tender offer and not to �consideration offered and paid according to employment compensation, severance, or other employee benefit arrangements entered into with employees or directors of the subject company.�
The question about whether the best-price rule applies to employee compensation has notably discouraged some companies from making tender offers. Instead, they have resorted to structuring transactions as statutory mergers, which are not subject to the best-price rule.
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