The 'All-Holder - Best Price

Masthead Logo DePaul Business and Commercial Law Journal Volume 1 Issue 2 Winter 2003 Article 6 The 'All-Holder - Best Price' Rule: Executive Compensation Agreements and Their Place in Tender Offers John Mueller Follow this and additional works at: https://via.library.depaul.edu/bclj Recommended Citation John Mueller, The 'All-Holder - Best Price' Rule: Executive Compensation Agreements and Their Place in Tender Offers, 1 DePaul Bus. & Com. L.J. 287 (2003) Available at: https://via.library.depaul.edu/bclj/vol1/iss2/6 This Comment is brought to you for free and open access by the College of Law at Via Sapientiae. It has been accepted for inclusion in DePaul Business and Commercial Law Journal by an authorized editor of Via Sapientiae. For more information, please contact , . The 'All-Holder-Best Price' Rule: Executive Compensation Agreements and Their Place in Tender Offers John Mueller' I. INTRODUCTION Should one's position, or lack thereof, within a target company affect the level of compensation received in the event of a tender offer? This question has spawned countless arguments within the legal and business communities. Both the courts and legislature of the United States have undertaken efforts to provide a solution. 2 However, it is the inconsistent application of these regulations through a myriad of judicial tests that requires examination. Included in the 1968 amendments to the Securities Exchange Act of 1934 (the "Exchange Act"), 3 the "all-holder-best price rule" (the "AHBPR") 4 and its application in business, litigation have created ex1. J.D. from DePaul University College of Law expected May 2003; Vanderbilt University, B.A., 2000. 2. See generally Michael A. Lawson & Daryl W. Hall, Measuring the Feasibility of a Tender Offer, 8/27/01 L.A. Bus. J. 49 (2001) (analyzing the effect of the decision in Katt v. Titan Acquisitions, Ltd. with respect to prior cases and statutory regulations). 3. Pub. L. No. 90-439, 82 Stat. 454 (1968) (codified as amended at 15 U.S.C. §§ 78a-7811 (1988). 4. The AHBPR is regarded as one rule, but actually combines the requirements of both § 14(d)(7) and § 14(d)(10) of the Exchange Act: Under Rule 14d-10, 17 C.F.R. § 240.14d-10, also known as the 'all-holder-best price' rule: (a) No bidder shall make a tender offer unless: (1) The tender offer is open to all security holders of the class of securities subject to the tender offer; and (2) The consideration paid to any security holder pursuant to the tender offer is the highest consideration paid to any other security holder during such tender offer. McMichael v. United States Filter Corp., 2001 WL 418981, at *4 (C.D. Cal. Feb. 23, 2001) (quoting 17 C.F.R. § 240.14d-10). Section 14(d)(7) prohibits a tender offeror from offering different consideration to different shareholders for the same shares and provides, in pertinent part, as follows: Where any person varies the terms of a tender offer or request or invitation fro tenders before the expiration thereof by increasing the consideration offered to holders of such securities, such person shall pay the increased consideration to each security holder whose securities are taken up and paid for pursuant to the tender offer or request or invitation for tenders whether or not such securities have been taken up by such person before the variation of the tender offer or request or invitation. Katt, 133 F. Supp. 2d at 638 (quoting 17 C.F.R. § 240.14d-7). 288 DEPAUL BUSINESS & COMMERCIAL LAW JOURNAL [Vol. 1:287 tensive controversy and variance within the courts. 5 Originally adopted as a mechanism to insure equal treatment of all shareholders in the event of a tender offer, courts have interpreted the AHBPR's current purpose and application in vastly different manners. 6 The courts have used essentially three distinct tests in their analysis of actions brought under the AHBPR; each test interprets the AHBPR to 7 have a particular reach in its control of tender offers. The recent decision in Katt v. Titan Acquisitions8 marks a unique development in the AHBPR's interpretation. 9 Rather than following one of the already developed tests, the Katt court chose to adopt a test that combined aspects of the other tests.' 0 The decision has caused a great amount of uncertainty within the business community and, in particular, with those companies who engage, or wish to engage, in any form of merger or acquisition within which a tender offer may be involved. 1 This paper will analyze the conflicting interpretations of the AHBPR within the context of tender offers and propose a solution that will ensure identical application of the rules throughout the country and at every level of the judicial system. Part II provides a thorough statutory and judicial history of the AHBPR's application in several landmark cases, including Katt.'2 Part III examines the varying effects of the different tests and the manner in which they control court rulings. 13 Part IV proposes a new approach for the courts, namely adoption of the Bright Line Test, and discusses the reasons for its adoption-consistency and certainty in business decisions, without 14 having to worry about which district one is in. 5. See Charles M. Nathan, Jeffrey L. Rothschild, Melissa Rubin, & Greg Nowak, Providing Certainty in the Uncertain World of Telecom Deal Making, 1263 PLI/Corp 173, 184-185 (2001). 6. See generally Katt v. Titan Acquisitions, 133 F. Supp. 2d 632, 638-644 (M.D. Tenn. 2000) (examining prior decisions involving the AHBPR and the judicial tests implemented by the respective Circuits). 7. See infra Parts II.B, lI.C, II.D. 8. 133 F. Supp. 2d 632 (M.D. Tenn. 2000). 9. Michael Lawson, Employee Benefit Plans in an Acquisition Context, 510 PLI/Tax 571, 581 (2001). See discussion infra Part II.E. 10. The Court in Katt chose to adopt both the 'integral part of the tender offer' and 'functional' tests of the Second and Ninth Circuits. Katt, 133 F. Supp. 2d at 644. 11. "Executive compensation arrangements negotiated in contemplation of a corporate transaction are a common occurrence in the mergers and acquisitions arena. But a recent federal case out of the middle district of Tennessee (Katt) has the potential to scare away many of those who would otherwise test these waters." 8/27/02 L.A. Bus. J. at 49. 12. See infra Part II. Katt, 133 F. Supp. 2d 632. 13. See infra Part III. 14. See infra Part IV. 2003] ALL-HOLDER-BEST PRICE RULE II. 289 BACKGROUND In order to best understand the importance of the AHBPR, it is essential that one be knowledgeable of its history and its treatment within the American judicial system. Part A discusses the AHBPR's origin, statutory development, and eventual adoption by the SEC. 15 Part B examines the Second Circuit's decision in Field v. Trump 16 and introduces the Functional Test. 17 Part C examines the Ninth Circuit's decision in Epstein v. MCA 8 and introduces the Integral Part Test. 19 Part D examines the Seventh Circuit's decision in (...truncated)