I assure you merger proxies are always published for take privates because for legal and tax purposes, the target actually merges with a private acquisition company (The LBO Fund), and therefore a merger vote is required by the selling SH’s, thus the merger proxy. Look up DEFM14A’s for Alltel/TPG or KKR/First Data, if they haven’t already been delisted.
I agree - But if a LBO is done via a tender offer (which is rare but will become more frequent given the amendment to the best price rule), a schedule TO could potentially be filed before a DEFA14A. Shareholders vote by tendering, not by a shareholder vote - until the squeeze out occurs (long form merger if don’t achieve 90+ then shareholder meeting required, short form if achieve 90+ and no shareholder meeting) A DEFA14A will typically be filed even if it is a tender offer (unless it is hostile tender). So as I said, being nit picky - but in terms of timing, there may be situations where you should hunt for a Schedule TO versus a merger proxy, as the merger proxy may not be available yet. And you can always look up historical SEC filings, regardless of whether the targets have been delisted (Alltel has not closed yet, FDC has)
What’s the best price rule? What amendments are you talking about? Are you referring to Revlon Duties by the board in finding the highest bid during a proposed change of control? …And what’s a Schedule TO? …this guy must be a trader or something… Isn’t the actual tender and other stock tender issues handled by a dealer agent? Does the PE firm actually have to worry about this? Thanks for sharing your knowledge by the way… 
I’ve never seen a successful LBO tender offer to acquire a 90% stake. But I should add that pension fund LP’s forbid the PE funds from participating in hostile tenders.
Best price rule -Used to be that tender offers in a LBO context were never done b/c of best price rule. basically required all shareholders to get same consideration as mgt shareholders(including severance, benefits etc.) in a tender. Seeing as LBOs are often structured with considerable management incentives, no sane sponsor would do a tender b/c they might end up of having to pay the same amount out to each shareholder, so deals were always done as mergers. In November last year, this was amended. http://www.skadden.com/content/Publications/Publications1205_0.pdf This has nothing to do with Revlon Duties - which are triggered when board decides to run a sale process, that the board must undertake reasonable efforts, supported by a logically sound process, to secure the highest price realistically achievable given the market for the company. A Schedule TO-T (formerly a 14D-1) is required to be filed with the SEC at the time an offer is made to shareholders, if acceptance of such an offer would result in ownership of over 5% of shares outstanding. It covers similar ground as a merger proxy (history, sources and uses, plan of tender, etc). The PE firm is not actually involved in the tender process, (the dealer agent/banker does as you noted), but they still have to choose the appropriate structure and provide guidance to the lawyers and bankers throughout the process. Some pension fund LP’s forbid sponsors from participating in hostile takeovers - not all. Check out Sun Capital’s recent actions http://www.reuters.com/article/businessNews/idUSN1352893020071113 And I can assure you - I am certainly not a trader.
^ While I’m certainly not a lawyer, I must add that most corporate charters already have something called a fair price provision in their charters that achieves the same result as the SEC rule you mentioned above. The fair price provision in the charter mandates that all selling SH’s receive the same consideration from a buyer. So even if your “best price rule” has been amended to allow discriminatory compensation for mgt, they’ll probably be in violation of the standard corporate charter, unless they amend it of course, which still requires a SH vote. In the past, charters were amended to include this fair price provision- in response to hostile two-tier tender offers, greenmailers, and other discriminatory payouts. Regarding pension LPs funding hostile bids…I’m not convinced. Who’s behind Sun Capital? I doubt Calpers or Texas, or even NY are invested in the specific fund pursuing that hostile bid (it could be a side fund raised separately, not pension LPs)…same applies to terrorist/communist entities…The big pensions…just don’t get involved…but things might have changed…I’m just iffy…
Totally different. Fair price provision is to protect from two tiered tender offers (ie buy now and you get $45 a share, wait and we will squeeze you out at $40 per share). Two tiered tender offers are virtually impossible to achieve anyway after 1991 in USX v Marathon. The combination of virtually zero tolerance in DGCL and the fact that many corporations have fair price provisions in their charters means that we will probably never see a two tiered tender offer again. Now pre-Nov 2006, the old best price rule stated “consideration paid to any security holder pursuant to the tender offer must be the highest consideration paid to any other security holder during such tender offer”. However, as I explained above, in acquisitions, bidders will typically enter into arrangements (options cash out, severance, retention bonuses, and other service compensation agreements) with individuals (ie mgt) who also happen to be shareholders. As a result of litigation, the risk of being tripped up as a result of the best price rule was too high to justify use of the tender offer structure for friendly deals. Now this has changed. And it is not in violation anything. And the information in corporate charters doesn’t pertain to this. It is not that management is getting $40 a share and the public is getting $35, it is both management and public are receiving $35, but management has also signed up a deal to get $2mill for staying on for a year. There is nothing in corporate charters that says shareholders will also be entitled to $2m each. Re: hostile. It happens very infrequently for the reasons you cited, plus the fact not many PE firms want the reputation associated with hostile takeovers, and usually you are trying to work with management to improve the business. However, Sun is considering it (not sure who their LPs are), and I seem to remember Affinity Equity Partners did it a year ago. But as you mentioned, their LPs are certainly not Calpers.
There is nothing in corporate charters that says shareholders will also be entitled to $2m each. … -But there is something called a golden parachute engraved in mgts employment contract that calls for accelerated vesting and payouts if there’s a change of control, or inadvertent termination of the mgt employee…I assume this is what you are referring to… Again, I’m no lawyer, but why not just give mgt a new incentive structured payment after closing tied to performance…similar to a vesting stock plan, or like an earn-out? That way you don’t worry about discriminatory payments and these SEC rules that’ll probably be challenged in court? Thanks again…for sharing your thoughts… Last question … Have you seen the reverse subsidiary cash merger structure used with the section 338 election for a go-private transaction? I don’t have time to research the private letter rulings…but what kind of tax structure are safest/or least likely to be challenged by the IRS in these take privates…? …Hey nobody wants the IRS refusing a section 338 right…any thoughts…?
sure - but what if mgt is leaving and is getting paid severance (golden parachute 280g). in the old tender offer regs, this could be considered as consideration, entitling all shareholders to the same payment. with best price amendment that is no longer the case. you cant do a 338h10 with a public company. only can do it with a private company that is a s-corp or division of a larger company. P2Ps can only be done as acquisitions of stock (rather than assets or 338h10s which are stock deals treated as asset deals for tax purposes)
I agree…I was actually referring to section 338 involving LBO of a stand-alone public company, not a LBO of a division from a parent, or stand-alone S-Corp, which is handled by 338h10 as you correctly stated. But a public company (strategic buyer) should be able to make a section 338 election if acquiring all the stock of another public company. In turn, the strategic buyer, by way of 338, receives higher tax-deductible d&a write-offs, via basis step ups, and tax deductible goodwill if created. But the set back in 338 elections are that the acquirer usually pays the cap gains tax on the deemed asset sale, usually reflected as an adjustment to the purchase price, thus a higher purchase price. {On the otherhand, I believe in 338h10, the parent of the subsidiary actually foots this cap gains tax on asset sale, so it helps if the parent has NOL’s or tax credits to offset this gain. Either way, the parent receives its consideration as the divested unit is liquidated tax free under sec. 332} So I believe it is safe to conclude that: LBOs of stand-alone public companies, AKA P2P, can be done with Section 338 elections, or as simple taxable stock purchases. AND LBOs of subsidiaries (business units) from public parents are typically done via 338h10.
very impressive discussion here, bankingbaby and wessun…i’m definitely learning a lot from your posts. keep it up
sorry - perhaps you misread my post. A publicly traded company cannot be acquired via a section 338h10 election. In order to qualify for a 3338h10 election the following criteria must exist -acquiror must be a US corp (but can be a US acquisition stub of foreign parent) -target must be at least 80% owned corporate subsidiary of a US corp or, -target must b a S-corp The second point, the fact that the target must be 80% owned subsidiary, effectively prevents public companies from being eligible. (unless the public owns less than 20%) Your points on the step up in basis, increased tax deductible D&A, and tax deductible goodwill amortization are all correct. And your points on NOLs are also true. (As NOLs cannot be acquired by buyer in asset deal or 338h10) However, LBOs of public companies or acquisitions of public companies by other public companies cannot be done via a 338h10 election. You are correct in noting that LBOs of business units of public parents can be done via a 338h10, as can LBOs of privately held companies.
Just to clarify… Sec. 338 and Sec. 338(h)(10) elections are VERY DIFFERENT, even though they attempt to arrive at the same result- treating the stock sale as a deemed asset sale for tax purposes, thus the basis step up and other benefits to the buyer, etc… Sec 338 is applicable to the the the sale of a stand alone parent (public or private is irrelevant to the IRS). Stock is stock, asset is asset…all that matters to Uncle Sam is the basis and the holding period in calculating their cap gains. Sec 338(h)(10) pertains to the sale or divestment of a subsidiary from a parent.
Interesting. I will admit I have never heard of a plain Section 338 election although I have done several 338h10 elections. I would be surprised if you could do a 338 election with a public corporation and haven’t heard of one before (if you could provide that would be helpful). The reason is, if I am thinking about this correctly, in a 338 or 338h the acquiror gets the new stepped up basis, and the target must pay tax on gain from the step up. How would you collect/allocate the tax across all of the shareholders of a public company? This seems messy to me, although perhaps plausible. If you have any examples, I would love to see. Every single public M&A deal I’ve done has been as a taxable transaction, a purchase of equity in the target. But I’m not a lawyer so happy to hear insight.
if I am thinking about this correctly, in a 338 or 338h the acquiror gets the new stepped up basis, and the target must pay tax on gain from the step up. How would you collect/allocate the tax across all of the shareholders of a public company? ^ …That’s entirely correct, but just to summarize without delving into the details…In a section 338 & 338 (h)(10): Sell-side: Target SH: They get taxed on their cap gains at the long or short term cap gains rate, 15%, 35%, when they sell their stock…This is the “deemed stock sale”. IRS gets paid. The Investment Bank prices the deal…and their role ends here… Target Corp: By way of the section 338, or 338h10 election, the target is taxed on corp level as if it actually completed a taxable asset sale, but in reality this never happens…in legal lingo this is what’s called a …“deemed asset sale”, but remember in reality this never happens thus the deemed asset sale. It’s just for tax purposes… Buy-side Who pays the cap gains tax bill on the deemed asset sale? …Well traditionally for 338s the cap gains tax bill on “deemed asset sale” is paid by the acquirer and the acquirer just tags this along with the final purchase price (so the seller can pay before liquidation), so this additional tax doesn’t really benefit the acquirer, that’s why the 338s aren’t too common, but they do happen, especially in real estate where it is paramount that you get a basis step up for your acquired buildings. The bill can be negotiated… In 338(h)(10) the tax bill is usually paid by the parent co’ of the divested unit, although it can be negotiated b/w buyer and seller, but we shall assume its paid by parent co, to keep things simple. Following the election in 338h10, the target corp then liquidates and passes the liquidtion proceeds (payment received for business unit by acquirer) tax free to the corporate parent under sec. 332, that way the parent dodges a tax here… otherwise we’ll have triple taxation by the time we are all said and done. The parent is not taxed for liquidation distributions under 332, but if it decides to distribute a one-time dividend to its own SH’s that’s okay …as the parent’s actual SHs will then be taxed as they receive dividends at their various personal income tax rates. Plus if the Parent of subco has a huge NOL account, or tax credits, those can be used to offset the capital gain on the deemed asset sale…so if they have a huge NOL account they may not have to pay cap gains tax at all… on the deemed asset sale. The buyer involved in 338h10: 1. Usually doesn’t pay a capital gains tax on deemed asset purchase. 2. Unlike 338 the buyer gets a basis step in the targets asset, thus reaping D&A shields= higher cash flows for financial sponsors to pay down debt. This is why 338h10s are popular especially to the buyside. The purchase price allocation {Acquired target} For tax purposes, since the IRS sees both the 338 and 338h10 as taxable asset purchases, the buyer gets a basis step up, (in tax-free 368, its a carry over basis…leave this for another day), and recognizes tax goodwill, which is just excess of the total payment including liabilities assumed above the stepped up FMV of aggregate acquired assets. Like you stated this goodwill is tax deductible on the tax side (not GAAP) over 15 years. So its like having two transactions at the same time…The deemed stock sale actually happens in reality, but the deemed asset sale never happens…its just performed to grant the buyer a basis step up, so he gets his D&A benefits, in turn somebody has to pay the cap gains tax on deemed asset sale, in 338, its usually the buyer, so 338 are rare, but in 338h10, its usually bore by the parent co’ involved in the divestment…(but the buyer can pass the tax in for of higher purchase price).
^ I mistyped in the line(s) above… The buyer involved in 338h10: 1. Usually doesn’t pay a capital gains tax on deemed asset purchase, as opposed to 338. 2. The buyer gets a basis step in the targets assets, thus reaping D&A shields= higher cash flows for financial sponsors to pay down debt. This is why 338h10s are popular especially to the buyside.
still would love to see a real world example where a transaction with public target was done as a 338 election
bm_chicago…how’d the interview go?
Jeff_s, it went well, i gave some details of it in this thread. i am waiting eagerly for final call backs in december. 
Jeff, are you a level 3 candidate? i havent registered yet, but hope to appear for it in June 08.
finished level 3 this summer, actually. very happy its over. good luck in june…don’t underestimate it! i found it to be more work than level II.