"Burger King" May Not Allow You to Have it Your Way. . . Is the Two-Tier M&A Deal Ending?

Posted by Ernest E. Badway on March 01, 2013

A popular two-tier merger and acquisition structure may trigger certain prohibitions under the Securities Exchange Act of 1934.  In particular, this problem relates to the so-called "Burger King" structure, arising from the private equity fund acquisition of the fast-food chain by a private equity fund, and its simultaneous pursuit of a tender offer and a traditional one-step merger. 

The Burger King deal required that the PE firms agree that, if they could not reach a share majority in the tender offer of generally 90 percent, the PE firms could swith to the one-step merger in the middle of the transaction.  Such a practice would allow the PE firms to save time as well as move faster on the ultimate acquisition.  This practice has been adapted in several other transactions.

Nonetheless, there are always issues.  This dual structure may violate Exchange Act Rule 14e-5.  This Rule prohibits buying or offering to buy the target company's securities outside of the tender offer.  This happens in the Burger King process although a preliminary proxy statement is actually filed with the SEC, triggering this problem.

Subsequently, the SEC has warned of this potential predicament.  However, the SEC has not offered any clarity on this point or if there will be a Staff statement on this potential problem.  That leaves those who wish to pursue this method in a bind.  If they seek no-action relief from the SEC Staff, they will have to address the Staff's concerns or outright refusal to go along with the transaction.  In any event, those working on these transactions should be careful with the timing of the filing of these proxys with the SEC, and consider contacting the SEC prior to any filing in the hope the Staff may offer some "pre-clearance."

Well, as Chaucer said, "all good things must come to an end," however, we still have the Whopper.

You May Get Lucky By Not Discussing Merger Talks

Posted by Ernest E. Badway on February 18, 2013

Corporate officials, who did not disclose merger talks with a competitor, did not commit securities fraud.  See Filing v. Phipps, 6th Cir., No. 11-4157, 10/23/12, http://federal-circuits.vlex.com/vid/mark-filing-v-william-phipps-403576058. 

The court determined that the discussions were at the time not material, thus, not requiring disclosure.  This transaction involved tortured negotiations that did not culminate until 16 months later and well after the investor sold shares.  Consequently, the court refused to hold that these initial merger talks were material.

These corporate executives were able to escape liability because the deal was essentially not "ripe" at the time the investor sold shares.