What is the Best-Price Rule?
The best-price rule refers to Securities and Exchange Commission (SEC) Rule 14d-10. This rule 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.
How Does the Best-Price Rule Work?
The best-price rule descended from the Williams Act of 1968, which outlawed so-called 'Saturday-Night Specials' and 'First-Come, First-Served' offers that gave preferential treatment to some shareholders and pressured others during tender offers.
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. Under the best-price rule, XYZ Company 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 XYZ Company to offer the shareholders the same amount for each of their shares.
Company XYZ may exclude some shareholders from the tender offer if those shareholders live in state that prohibits the tender offer. Company XYZ may also 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, XYZ may offer Company 123 shareholders the choice of either $6 in cash, one share of Company XYZ stock plus $3 of cash, or two shares of XYZ Company stock in return for each Company 123 share. Under the rule, XYZ Company must give all of the Company 123 shareholders the same choices.
The SEC has the right to waive the application of the best-price rule if it finds 'it's not necessary or appropriate in the public interest or for the protection of investors.'
Why Does the Best-Price Rule Matter?
According to the SEC, the goal of the best-price rule is to 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 are usually 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 applicaaConsumer stapleslity 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.'
The question about whether the best-price rule applies to employee compensation has notably discouraged some companies from making tender offers. Instead, they have resorted to structuring transactions as statutory mergers, which are not subject to the best-price rule.