Key Takeaways

  • The all-holders rule (SEC Rule 14d-10) requires that tender offers be extended equally to all shareholders of the same class.
  • It prevents selective treatment by ensuring minority and majority shareholders receive the same price and opportunity.
  • The rule complements the Best-Price Rule, which mandates equal consideration for all tendering shareholders.
  • Amendments clarify that executive compensation tied to services is excluded from the rule to allow tender offers without unintended violations.
  • Violations may result in SEC enforcement, litigation, and potential invalidation of acquisition offers.
  • Courts and regulatory bodies use the rule to promote fairness, transparency, and investor confidence in U.S. capital markets.

The all-holders rule is a regulation by the Securities Exchange Commission (SEC) requiring all holders of the same class of stock in a business to receive the same offer for purchase. All shareholders must be treated equally. The specific rule is 14d-10 of the 1934 Securities Exchange Act.

Why is the All-Holders Rule Important?

One reason that the all-holders rule was established is to prohibit a company that is taking over another business from making offers to buy shares only from those who are in favor of the takeover. Every shareholder who owns a specific class of stock must be given the same opportunity to sell their shares at the same price. However, those who own different classes of stock are not included in this regulation.

A tender offer, which is an investor's proposal to buy shares, must be at the highest price. Offering certain shareholders a lower price than what is offered to others is not allowed. During an acquisition, the investor typically offers a higher price than the current value of the shares to encourage the shareholders to sell. This offer may be contingent on the ability to purchase at least 51 percent of all shares.

This rule helps to level the playing field so that smaller investors have the same chances of success as the ones holding more shares. A similar rule, which is in the same section of the SEC, is called the Best Price Rule. Any tender offer that a shareholder receives must be equal to the best, or highest, price that is offered to any other shareholder.

How the All-Holders Rule Protects Shareholders

The all-holders rule is primarily a safeguard for fairness in corporate takeovers. Without it, acquiring companies could offer favorable terms only to influential shareholders to secure control while leaving smaller investors disadvantaged. By requiring equal treatment for all holders of the same class, the rule ensures:

  • Equal Access to Offers: Every shareholder has the right to participate in a tender offer at the same price and conditions.
  • Protection of Minority Shareholders: Investors with smaller stakes are not marginalized during acquisitions.
  • Market Integrity: Consistent standards build trust in the U.S. securities market, making tender offers more transparent and credible.

Amendments to the Best-Price and All-Holders Rule

Since its adoption in 1934, there have been amendments to the best-price and all-holders rules. Various court proceedings indicated a difference of opinion on how some types of employment compensation, benefits, and severance pay were treated with regard to a tender agreement. It was possible for corporation directors and officers to forge agreements with an acquiring company that provided for extra compensation in the form of bonuses, golden parachutes, and other perks.

Courts have used different methods of determining whether or not the extra bonuses offered to certain shareholders were considered a part of the tender agreement for their shares. If they were considered part of the agreement, then the best-price rule would be violated if all shareholders were not offered the same.

Because of this, acquiring companies became less likely to use tender offers as a means of taking over another business. Instead, they used a method called a statutory merger. The SEC's amendment serves to clarify the rules, so the tender offer can once again be a viable option for corporate acquisition.

The amendments include the following provisions:

  • The tender offer strictly includes the price that is paid for shares and does not include other agreements involving bonuses or other compensation.
  • Negotiations regarding severance, benefits, and other types of compensation are specifically excluded from the best-price rule when they apply to services taking place in the past or the future.

The amendment also includes safe harbor for all arrangements that are approved by a committee of independent directors. This provides additional clarity for the process of tender offer. It includes the following:

  • The compensatory arrangements may be approved by a committee of independent directors.
  • The committee of directors must have full knowledge about the tender offer before arrangements are approved.
  • If a company does not have a compensation committee, it is able to establish one for this purpose.
  • Issuers of stock from foreign companies may use the safe harbor agreement if the arrangement is approved by a committee authorized to do so according to the laws of their home country.
  • Safe harbor applies to all tender offers, including those from the issuer and third parties.

Practical Applications in Corporate Transactions

In practice, the all-holders rule applies to both issuer tender offers and third-party tender offers under the Securities Exchange Act. Examples include:

  • Mergers and Acquisitions: When a company seeks to purchase outstanding shares, all shareholders in the target class must be included.
  • Going-Private Transactions: Public companies attempting to delist must extend offers uniformly to all investors.
  • Cross-Border Acquisitions: Foreign issuers making offers in U.S. markets must comply unless specifically exempted by the SEC.

These applications ensure corporate decision-making is not manipulated by selective buyouts or side deals with insiders.

Legal Interpretations of the All-Holders Rule

It is common for acquisition negotiations to include special payments to the executives at the company that is being acquired, such as payments in exchange for a non-compete agreement, stock options, and bonuses for those who will be staying on. As a result, there have been instances of litigation arguing that extra consideration paid to “insiders” violates the all-holders or best-price rule.

Consequences of Violating the All-Holders Rule

Failure to comply with the all-holders rule can have serious repercussions:

  • SEC Enforcement: The Commission may investigate and impose penalties or bar noncompliant transactions.
  • Litigation Risk: Shareholders who feel excluded or disadvantaged may file lawsuits, delaying or blocking the acquisition.
  • Deal Uncertainty: Violations may lead to withdrawal or restructuring of offers, raising costs for both the acquiring and target companies.

These risks highlight why legal and financial advisors carefully review tender offers to confirm compliance before proceeding.

Frequently Asked Questions

  1. What is the all-holders rule?
    It is an SEC regulation requiring that any tender offer be extended equally to all shareholders of the same class of stock.
  2. How does it differ from the Best-Price Rule?
    The all-holders rule focuses on equal access, while the Best-Price Rule ensures all tendering shareholders receive the same highest price.
  3. Does the rule apply to different classes of stock?
    No. It applies only to shareholders within the same class. Different classes may receive different terms.
  4. Can executive compensation agreements violate the rule?
    Not necessarily. Amendments clarify that compensation for services (past or future) is excluded, provided it is properly approved.
  5. What happens if a company violates the all-holders rule?
    Possible consequences include SEC enforcement actions, shareholder lawsuits, and invalidation of the tender offer.

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