Equal Treatment: Best-Price and All-Holders

The equal-treatment rules are what stop a bidder from buying off the biggest holders with side deals. They make sure everyone in the class gets the same offer on the same terms. The best-price compensation carve-out is testable because it carves compensation arrangements OUT of the rule, not because it eliminates the rule.

The All-Holders Rule

The all-holders rule lives in the equal-treatment rule (under the third-party tender offer rules for third-party offers).

• The tender offer must be open to all security holders of the class of securities subject to the offer
• The bidder may NOT discriminate among holders of the same class

Discrimination examples that violate the rule:

• Excluding holders below a certain block size
• Excluding holders in certain states without a state-securities-law exemption
• Excluding short-form holders (people who hold in street name or through a nominee)

The rule applies per class. A bidder can run a tender for the common stock and not for the preferred. Those are different classes. Within a single class, however, every holder must be eligible to tender on the same terms.

Exam Tip: Gotchas

• The all-holders rule applies PER CLASS. A bidder can tender for the common only and not for the preferred. That is not a violation because they are different classes. Within the common class, however, every holder must be eligible to tender on the same terms.
• Discrimination based on block size, state, or holder type violates the rule. A tender that excludes holders below 100 shares to avoid odd-lot proration mechanics is not allowed.

The Best-Price Rule

The best-price rule sits in the same equal-treatment provision under the third-party tender offer rules.

• The consideration paid to any security holder for securities tendered must be the highest consideration paid to any other security holder for securities tendered in the offer
• A bidder cannot privately sweeten the deal for a large holder mid-offer; the upgrade must flow to every tendering shareholder

If the bidder raises the price during the offer, the new price applies to all tendering shareholders, including those who tendered before the increase. The bidder cannot give a backdoor premium to one big holder to lock up their tender while keeping the public price unchanged.

The Compensation Carve-Out to the Best-Price Rule

The best-price rule's compensation carve-out narrowed the rule's scope. It is testable because it did NOT abolish the rule; it carved out compensation arrangements.

What the carve-out clarified:

• The best-price rule applies only to consideration offered and paid for securities tendered in the tender offer
• Employment compensation, severance, or other employee benefit arrangements with employees or directors of the subject company are OUTSIDE the rule's reach

This was a response to litigation in which plaintiffs argued that a CEO's golden parachute or retention bonus paid by the acquirer counted as "consideration" the CEO got that other holders did not, violating the best-price rule. The rule was clarified to say no, that's a compensation arrangement, not tender consideration.

The Independent-Committee Safe Harbor

The compensation carve-out includes a safe harbor. A compensation arrangement is presumptively NOT tender-offer consideration if it is approved by a committee of independent directors of either:

• The bidder's board (compensation committee or equivalent), OR
• The target's board (compensation committee or equivalent)

The safe harbor is a process check. If the compensation arrangement went through an independent committee, the presumption is that it is real compensation for services rather than disguised tender consideration.

Think of it this way: A CEO who is getting a $20 million severance payout from the acquirer at the same time the acquirer is tendering for the stock could be receiving "real" severance OR a disguised tender premium. The carve-out and the safe harbor put a process check around the question: if the comp arrangement was approved by independent compensation committee members, it is presumptively comp, not tender consideration.

Exam Tip: Gotchas

• The compensation carve-out did NOT abolish the best-price rule. It carved out compensation arrangements approved by an independent compensation committee. Side payments to a CEO that look like an executive comp package can still run afoul of the rule if the independence and process boxes are not checked.
• The safe harbor works through either the BIDDER's or the TARGET's compensation committee. It does not require both. Either an acquirer-side independent committee or a target-side independent committee can satisfy the safe harbor.

Parallel Rule for Issuer Self-Tenders

The issuer tender offer rule imposes the same all-holders and best-price requirements on issuer self-tenders. An issuer running a self-tender cannot give a side deal to its founder or to a strategic shareholder; the same consideration must flow to every tendering holder.

The mechanics work the same way: open to all holders of the class, single price (the highest paid to any holder) flows to everyone, and the compensation carve-out applies.

All-Holders / Best-Price Side-by-Side