1. Why is the All-Holders Rule Important?
2. Amendments to the Best-Price and All-Holders Rule
3. Legal Interpretations of the All-Holders Rule

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.

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.

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.

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