What is a Saturday Night Special?
Saturday night specials are illegal rules that give preferential treatment to some shareholders and pressure others during tender offers.
How Does a Saturday Night Special Work?
Let's assume Company XYZ wants to purchase the common shares of Company 123. To accomplish this, Company XYZ makes a tender offer to the common shareholders of Company 123. If Company XYZ makes the tender offer available only to a few of the shareholders, it would be offering a Saturday night special.
However, the Best-Price Rule, which refers to Securities and Exchange Commission Rule 14d-10, requires an entity making a tender offer for a certain class of shares to make the same offer to all the shareholders in that class. The rule descended from the Williams Act of 1968, which outlawed Saturday night specials.
Under the Best-Price Rule, Company XYZ must make the tender offer available to all of Company 123's common shareholders (rather than just the largest shareholders or shareholders who happen to be employees, for example). The rule also requires Company XYZ to offer the shareholders the same amount for each of their shares (in other words, Company XYZ cannot negotiate with each shareholder or pay some shareholders more than others for their shares).
Company XYZ may exclude some shareholders from the tender offer if those shareholders live in a state that prohibits the tender offer. Company XYZ also may offer more than one kind of consideration to Company 123's common shareholders, meaning that it may offer a choice of various combinations of cash or Company XYZ stock in return for the Company 123 shares. For example, Company XYZ may offer Company 123 shareholders the choice of either $5 in cash, one share of Company XYZ stock plus $3 of cash or two shares of Company XYZ stock in return for each Company 123 share. Under the rule, Company XYZ must give all of the Company 123 shareholders the same choices. Again, if some Company 123 shareholders live in a state that prohibits Company XYZ's tender offer, then Company XYZ may offer those shareholders a different form of payment.
The SEC has the right to waive the application of the Best-Price Rule if it finds it 'not necessary or appropriate in the public interest or for the protection of investors.'
Why Does a Saturday Night Special Matter?
According to the SEC, Saturday night specials are illegal because they do not ensure 'fair and equal treatment of all security holders of the class of securities that are the subject of a tender offer.'
Because tender offers usually are used to purchase a company, they frequently include proposals to reorganize or eliminate the management of the acquired company, which in turn involves severance and other employee compensation arrangements. A variety of court cases have tested the applicability of the Best-Price Rule to employee compensation, with mixed results. This is why in December 2005 the SEC proposed an amendment that makes the rule applicable only to securities in a tender offer and not to 'consideration offered and paid according to employment compensation, severance or other employee benefit arrangements entered into with employees or directors of the subject company.'
