In light of current market conditions, many debt securities are trading significantly below their face values, creating an attractive opportunity for issuers to repurchase their debt at discounts. When an issuer embarks on a systematic program of repurchasing debt securities, it may be treading into the territory of tender offers and may subject itself to disclosure and filing obligations pursuant to the Securities and Exchange Commission (SEC)’s tender offer rules.
Identifying a Tender Offer
What distinguishes purchases of debt securities on the open market or in privately negotiated transactions from a tender offer for debt securities? Neither the Exchange Act nor the regulations promulgated under it define “tender offer,” but case law has identified several factors — the Wellman factors, named after the case that articulated them (Wellman v. Dickinson, 475 F. Supp. 783 (S.D.N.Y. 1979) — that suggest that an issuer’s activities constitute a tender offer when, among other things, the offering price represents a premium above market value, the offerees do not have a “meaningful” opportunity to negotiate the terms of the offer, the offer is contingent upon a certain minimum number of securities being sold, and the offerees are under time pressure to accept the offer.
Subsequent case law has refined the analysis outlined in Wellman: Courts have found that certain repurchase programs do not constitute tender offers, citing the absence of pressure to participate in the offering, the small number of offerees and the sophistication of offerees as reasons for their finding. See, for example, Hanson Trust PLC v. SMC Corp., 774 F.2d 47 (2d Cir. 1985). This jurisprudential trend in the tender offer arena echoes distinctions that have emerged between public offerings requiring registration with the SEC, on the one hand, and private, unregistered placements with small numbers of sophisticated investors on the other. The latter have become a popular capital-raising tool for public and private companies; the smaller the group of investors and the greater their sophistication, the less likely that debt repurchases will be treated as debt tender offers subject to SEC regulations.
An issuer must consider the factors above in evaluating whether its proposed activities would constitute a tender offer. If not a tender offer, the issuer still may be required to disclose the repurchases in its periodic reports, to the extent the repurchases relate to convertible debt securities.
Straight Debt, or Debt with an (Equity) Twist?
Issuers that embark on a tender offer may face substantially different filing obligations depending on the type of security involved in the tender offer. If the security is a debt security with no convertible features, the issuer will be required to comply only with the anti-fraud provisions of the tender offer rules. On the other hand, a tender offer for convertible debt securities, which are included in the broad definition of “equity securities,” obligates the issuer to comply not only with the anti-fraud provisions, but also requires the filing of a tender offer disclosure statement with the SEC.
Tender offers for “straight” debt (i.e., debt with no convertible features) must comply only with the anti-fraud provisions, which require, among other things, that:
- a tender offer must be held open for at least 20 business days
- the percentage of the class of securities being sought or the price being offered may not be changed until at least 10 business days following the commencement of the tender offer
- the issuer pay the consideration offered, or return the securities tendered, upon termination or withdrawal of the tender offer, and
- a public notice be issued in connection with the extension of a tender offer containing disclosure of the number of securities already tendered.
Notably, the SEC has declined to enforce the 20-business-day offering period requirement, subject to certain conditions. In a string of no-action letters issued between 1986 and 1993, the SEC repeatedly noted that issuer cash tender offers for any or all of a particular class of straight debt securities implicate different considerations than similar tender offers for convertible debt securities. Based on this distinction, the SEC confirmed that it would not pursue enforcement action against issuers conducting cash tender offers for straight debt securities with offering periods of less than 20 business days, provided that such offers still allow each debt holder a “reasonable opportunity to participate [in the tender offer],” and provided further that the offering letter is disseminated to debt holders on an “expedited” basis when the offering period is less than 10 calendar days. Notwithstanding that the SEC’s no-action positions have never been formally codified into exceptions to the tender offer rules, issuers continue to conduct cash debt tender offers with offering periods of seven calendar days in reliance upon this SEC position.
The SEC also has issued no-action letters indicating that it will not pursue enforcement action against issuers that did not comply with the rule that requires an issuer to extend the tender offer period in the event that it changes the price of the subject security. Several issuers requested relief from compliance with this rule in connection with cash tender offers structured to tie the price of the subject security to a fixed spread over the cost of a specified Treasury Benchmark Security, determinable on each day of the tender offer period. The SEC confirmed that it would not recommend enforcement action against issuers that engaged in such tender offers, even though they did not extend the tender offer period for 10 days each time the price of the securities fluctuated.
Form 8-K Disclosure of Straight Debt Tender Offers
Form 8-K, the form designated for filing with the SEC to disclose certain material information, does not contain any item specifically addressing disclosure of a tender offer. However, most issuers choose to file a voluntary current report on Form 8-K to report the commencement and/or termination of a cash tender offer for a particular class of debt security. Issuers customarily disclose the offering period, price, and, in the event of a Form 8-K filing announcing the conclusion of a tender offer, the number of securities tendered.
When a class of debt securities is convertible into equity securities, the convertible debt securities are considered to be equity securities for purposes of the tender offer rules. In addition to compliance with the anti-fraud provisions of the tender offer rules described above, an issuer making a tender offer for equity securities (including convertible debt securities) may not repurchase securities covered by the tender offer outside the tender offer itself, subject to certain exceptions including odd-lot offers and the conversion of securities into covered securities.
In the case of an issuer cash tender offer for convertible debt securities, a tender offer disclosure statement must be filed with the SEC on the date of commencement of the tender offer, including disclosure of background information on the issuer, the terms of the tender offer (including its purpose and the proposed use of proceeds), and financial statements of the issuer. Compliance with the requirements of the rules governing self-tender offers requires considerably more attention and entails higher costs than are associated with issuer cash tender offers for straight debt securities.
Issuers considering whether and how to approach restructuring their debt should consider how tender offer rules might apply to such restructuring plans. For a discussion of additional legal implications of an issuer debt repurchase program, see our recent article titled “Buy Back Debt Today, Pay Tax Later.”
Shirley R. Kuhlmann