A Guide to Takeovers in the United States

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1 A Guide to Takeovers i the Uited States

2 Clifford Chace Iteratioal law firm Clifford Chace combies the highest global stadard with local expertise. Leadig lawyers from differet backgrouds ad atioalities come together as oe firm, offerig urivalled depth of legal resources across the key markets of the Americas, Asia, Europe ad the Middle East. The firm focuses o the core areas of commercial activity: corporate ad M&A; capital markets; fiace ad bakig; real estate; tax, pesio ad employmet; ad litigatio ad dispute resolutio. Through a strog uderstadig of cliets busiesses, cultures ad objectives, Clifford Chace draws o the full breadth of its legal skill to provide results drive commercial advice. Visit our website to discover more about us.

3 U.S. M&A Practice Our U.S. M&A practice is a leader i domestic ad cross-border M&A, providig cliets with high value strategic ad structurig advice ad superior project maagemet ad coordiatio ability. Our team is part of a global practice which is a recogized market-leader for M&A ad is kow for our busiess-orieted legal approach to M&A trasactios. We provide advice across the full spectrum of M&A products ad services Strategic plaig ad structurig advice Mergers & acquisitios (public & private) Fiacial advisor represetatio Teder offers Corporate reorgaizatios Private equity Negotiated trasactios Usolicited bids PIPES Complex cross-border M&A Leveraged buyouts REITs ad real estate related M&A Joit vetures Recapitalizatios Proxy cotests Disclosure advice Advace ati-takeover preparatio Distressed ivestig...ad are supported by strog regulatory ad other specialist capabilities. We work closely with our tax, real estate, competitio/atitrust, employee beefits ad other practice areas ad idustry groups both domestically ad globally to provide cliets with the full spectrum of requisite legal advice for each trasactio. For further iformatio about this Guide or our U.S. M&A capabilities, please cotact ay of the followig parters: Joh Healy, Parter/Co-Head of Americas M&A, T: , E: joh.healy@cliffordchace.com Bria Hoffma, Parter/Co-Head of Americas M&A, T: , E: bria.hoffma@cliffordchace.com Jeff Berma, Parter, T: , E: jeff.berma@cliffordchace.com David Brito, Parter, T: , E: david.brito@cliffordchace.com Sarah Joes, Parter, T: , E: sarah.joes@cliffordchace.com Craig Medwick, Parter, T: , E: craig.medwick@cliffordchace.com Paul Meyer, Parter, T: , E: paul.meyer@cliffordchace.com Bejami Sibbett, Parter, T: , E: bejami.sibbett@cliffordchace.com Roger Siger, Parter, T: , E: roger.siger@cliffordchace.com Nicholas Williams, Parter, T: , E: ick.williams@cliffordchace.com

4 Itroductio This Guide to Takeovers i the Uited States provides a summary overview of the pricipal legal cosideratios with respect to takeovers of U.S. public compaies. It cosiders, from both a legal ad regulatory perspective, the various stages of a takeover from the iitial approach to, through to obtaiig cotrol of, the target compay. It addresses several key areas the applicable regulatory framework (Chapter Oe), prelimiary takeover activity, icludig stakebuildig, prelimiary agreemets ad seekig support from the target s shareholders (Chapter Two), primary acquisitio structures (Chapter Three), deal protectio, icludig o-shop, o-talk ad go-shop provisios as well as fiduciary outs ad break fees (Chapter Four), fiduciary duties applicable to a target compay s board of directors i the M&A cotext (Chapter Five), takeover defeses (Chapter Six), atitrust/merger clearace (Chapter Seve) ad U.S. regulatio of o-u.s. ivestmet i the Uited States (CFIUS) (Chapter Eight). This Guide does ot, however, address ay fiacial, tax or accoutig matters or the applicatio to takeovers of securities ad other laws of jurisdictios outside the Uited States. May of the legal issues discussed i this Guide are potetially applicable to takeovers of o-u.s. compaies that have shares traded or held i the Uited States. While the Guide touches briefly o some of the issues that arise i that cotext, its pricipal focus is o takeovers of U.S. public compaies. Other issues that are ot covered i this Guide must also be addressed whe the target compay is a o-u.s. compay. The Guide does ot purport to be comprehesive, but rather provides a summary overview of a series of complex topics. It is ot iteded to, ad does ot, costitute legal advice. The iformatio cotaied i this Guide is accurate as of October 2010.

5 cotets 1. Regulatory Framework 1 State Corporate Laws 2 Federal Securities Laws 2 Securities Act 2 Proxy Rules 4 Teder Offer Rules 4 Other Primary Regulatios 5 Federal Securities Laws Applicable to Stakebuildig 5 Atitrust/Merger Clearace 5 Exo-Florio/CFIUS 5 Regulated Idustries 5 2. Prelimiary Activity 6 Approachig the Target 7 Cofidetiality 7 Stakebuildig 7 Maagemet Team ad Outside Advisers 9 Due Diligece 9 Fiacig 10 Prelimiary Agreemets Betwee Acquirer ad Target 10 Cofidetiality Agreemets 10 Stadstill Agreemets 10 Exclusivity/Expese Reimbursemet Agreemets 11 Letters of Itet 11 Seekig Support From Shareholders 11

6 cotets 3. Acquisitio Structures 12 Choice of Acquisitio Structure - Two-Step or Sigle-Step 13 Two-Step Structure 13 Sigle-Step Structure 14 Summary Compariso of Structurig Alteratives 14 Provisios Commoly Icluded i the Merger Agreemet 14 Implemetatio of a Two-Step Trasactio 15 Implemetatio of a Sigle-Step Trasactio 16 Additioal Structurig Cosideratios 17 Registratio Uder the Securities Act 17 Required Board ad Shareholder Approvals 17 Appraisal Rights 17 Disclosure of Fiacial Statemets 18 Miimum Offer Period; Withdrawal Rights 18 All Holders/Best Price Rule 19 Target Compay s Obligatios 19 Arragemets Betwee the Acquirer ad Members of Target s Maagemet Team 19 Tradig Restrictios 20 Foreig Private Issuers Deal Protectio 22 No-Shop, No-Talk ad Go-Shop Provisios 23 Fiduciary Outs ad Break-Up Fees 24 Stock Optio Agreemets 24 Votig/Support Agreemets 25

7 cotets 5. Fiduciary Duties of a Target Compay s Board of Directors 26 Pricipal Compoets of Directors Fiduciary Duties 27 Fiduciary Duties i the M&A Cotext Takeover Defeses 30 Poiso Pill Shareholder Rights Plas 31 Charter ad Bylaw Provisios 31 Atitakeover Statutes Atitrust/Merger Clearace The Committee o Foreig Ivestmet i the Uited States (CFIUS) 36 Appedix A Idicative Timelie for Sigle-Step ad Two-Step Cash Acquisitios of U.S. Public Compaies 39 Appedix B Deal Structure Cosideratios i Acquirig a U.S. Public Compay - The Relative Advatages ad Disadvatages of the Sigle-Step ad Two-Step Structures 41

8 1. Regulatory Framework State Corporate Laws 2 Federal Securities Laws 2 Securities Act of Proxy Rules 4 Teder Offer Rules 4 Other Primary Regulatios 5 Federal Securities Laws Applicable to Stakebuildig 5 Atitrust/Merger Clearace 5 Exo-Florio/CFIUS 5 Regulated Idustries 5 1 A Guide to Takeovers i the Uited States, Clifford Chace US LLP

9 Sectio 1: Regulatory Framework I this chapter, we provide a brief overview of the more sigificat regulatory requiremets likely to be relevat to a acquisitio of a U.S. public compay. State Corporate Laws Most domestic U.S. publicly traded busiesses are orgaized as corporatios. With very limited exceptios, the laws uder which U.S. corporatios are orgaized are state (ot federal) laws. State corporate laws dictate what shareholder approvals are required for a particular form of trasactio. 1 State corporate laws also establish the duties of a target compay s board of directors durig the takeover process. Accordigly, state corporate laws gover the ability of a target compay s board of directors to reject or resist usolicited takeover proposals, as well as the board s resposibilities whe egotiatig the terms of a takeover or choosig from amog competig proposals. Whe we discuss corporate laws i this Guide, uless otherwise idicated, we are referrig to Delaware law. Accordig to recet studies, more tha 50% of the corporatios i the Fortue 500 are icorporated i Delaware. Federal Securities Laws The primary U.S. federal securities laws that are potetially applicable to takeover trasactios are: the registratio requiremets of the Securities Act of 1933 (the Securities Act ), which potetially apply to M&A trasactios whe the cosideratio to be received by the target s shareholders icludes securities; the provisios of the Securities Exchage act of 1934 (the Exchage Act ) ad related rules goverig proxy solicitatios i respect of shares registered uder the Exchage Act (geerally referred to as the proxy rules); ad the portios of the Exchage Act ad related rules goverig the coduct of teder offers (geerally referred to as the teder offer rules). Securities Act The registratio requiremets of the Securities Act potetially apply to share-for-share acquisitios ad other trasactios i which the target s shareholders are offered securities. The registratio requiremets of the Securities Act do ot apply to all-cash M&A trasactios. For purposes of the Securities Act, a M&A trasactio i which the cosideratio to be received by the target compay s shareholders cosists i whole or i part of securities is deemed to ivolve a offer ad sale of securities, regardless of whether the trasactio is effected pursuat to a teder offer or a shareholder vote. Uder the Securities Act, uless a exemptio is available, (i) a offer to sell securities caot be made util a registratio statemet coverig the proposed offerig has bee filed with the SEC, ad (ii) a sale (defied to iclude a bidig cotract of sale) caot be effected util the registratio 1 I oe situatio, stock exchage rules also are relevat to shareholder approval requiremets: if the acquirer i a share-for-share trasactio is listed o a U.S. exchage ad as a result of the trasactio will icrease the umber of its outstadig shares by 20% or more, the acquirer will be required uder stock exchage rules to obtai the approval of its ow shareholders. A Guide to Takeovers i the Uited States, Clifford Chace US LLP 2

10 Sectio 1: Regulatory Framework statemet has become effective (which, geerally, meas cleared by the SEC). For most share-for-share acquisitios of U.S. public compaies, o exemptio from registratio will be available ad, as a result, a share-for-share acquisitio of a U.S. public compay almost certaily will have to be registered uder the Securities Act. If the target compay i a share-for-share trasactio qualifies as a foreig private issuer uder the SEC s rules 2 or is closely held, exemptios from registratio uder the Securities Act may be available. The SEC s rules prescribe various forms of registratio statemets for use i registerig differet kids of trasactios uder the Securities Act. For a share-for-share trasactio, the required form of registratio statemet is Form S-4 or, if the acquirer qualifies as a foreig private issuer, Form F-4. For ay share-forshare acquisitio of a U.S. public compay, i additio to the registratio requiremets of the Securities Act, the trasactio also will be subject to either the proxy rules or the teder offer rules because the trasactio will be effected either pursuat to a sigle-step merger that requires a vote of the target s shareholders, or pursuat to a exchage offer. 3 Accordigly, the disclosure documet required to be icluded i the registratio statemet must satisfy both of the applicable sets of rules (the Securities Act rules ad either the proxy rules or the teder offer rules). The disclosure documet to be set to the target compay s shareholders 4 must cotai detailed disclosure regardig, amog other thigs, the terms of the trasactio, the egotiatios betwee the parties, the target board of directors deliberatios, fairess opiios of fiacial advisors, historical fiacial iformatio with respect to the target ad acquirer ad, depedig o the size of the target relative to the acquirer, pro forma fiacial iformatio givig effect to the trasactio. The SEC s legal ad accoutig staff ormally will review ad commet o a registratio statemet prior to the SEC declarig the registratio statemet effective uder the Securities Act. The process of preparig the registratio statemet ad dealig with the SEC staff s commets typically would be expected to take ot less tha six weeks, ad sometimes much loger, especially for a first-time registrat (a compay that has ever filed a registratio statemet with the SEC). Particularly for a o- U.S. acquirer whose shares are ot already listed o a U.S. exchage, complyig with these Securities Act registratio requiremets ca be time-cosumig ad expesive. For a acquirer that is ot already subject to the ogoig reportig requiremets of the Exchage Act, the use of a Securities Act registratio statemet to effect a M&A trasactio will trigger a requiremet to comply with those ogoig reportig requiremets from the time the registratio statemet is declared 2 The SEC s defiitio of a foreig private issuer is set out o page Some states expressly permit compulsory share exchages that elimiate the eed for a merger. See footote 8 o page 19 for a more detailed explaatio of this structurig alterative. 4 I U.S. practice the disclosure documet used i a trasactio subject to registratio uder the Securities Act is called a prospectus; the disclosure documet used to solicit proxies is called a proxy statemet; ad the disclosure documet used i a teder offer is called a offer to purchase. Hybrid disclosure documets have hybrid ames for example, a disclosure documet used i a share-for-share trasactio to be voted o by the target compay s shareholders is called a proxy statemet/prospectus. 3 A Guide to Takeovers i the Uited States, Clifford Chace US LLP

11 Sectio 1: Regulatory Framework effective by the SEC. The ogoig reportig requiremets iclude, i the case of a U.S. domestic issuer, the requiremet to file aual reports o Form 10-K, quarterly reports o Form 10-Q ad iterim reports o Form 8-K, ad i the case of a foreig private issuer, the requiremet to file aual reports o Form 20-F ad iterim reports o Form 6-K. If the acquirer s shares are ot subsequetly listed o a U.S. exchage, it may be possible at a later date to deregister the shares ad thereby ed the obligatio to comply with the SEC s periodic reportig requiremets. 5 Proxy Rules Some public compay acquisitio structures require a vote by either or both of the target s or the acquirer s shareholders. If the class of shares to be voted is registered uder Sectio 12 of the Exchage Act (which will always be the case if the shares to be voted are listed o a U.S. exchage), the process of solicitig those votes will be subject to the SEC s proxy rules uless the issuer of the shares qualifies as a foreig private issuer uder the SEC s rules. 6 The proxy rules set forth detailed disclosure requiremets that are similar i may respects to the Securities Act disclosure requiremets described above. A proxy statemet caot be set to shareholders i defiitive form util it has bee o file with the SEC for at least 10 days. If the SEC staff provides commets o the proxy statemet, there may be a loger delay before it ca be set to shareholders i defiitive form. Teder Offer Rules If the proposed takeover is structured to ivolve a offer to purchase shares directly from the shareholders of the target, the teder offer rules will be applicable. A offer for shares that are ot registered uder Sectio 12 of the Exchage Act is subject oly to the (relatively limited) requiremets imposed by Sectio 14(e) of, ad Regulatio 14E uder, the Exchage Act. By cotrast, a offer for shares that are registered uder Sectio 12 of the Exchage Act also is subject to the more extesive requiremets imposed by Sectio 14(d) of, ad Regulatio 14D uder, the Exchage Act. Shares that are listed o the NYSE, Nasdaq or aother U.S. exchage must be registered uder Sectio 12 of the Exchage Act. For teder offers subject to Regulatio 14D, detailed disclosure requiremets apply. A offer for shares of a foreig private issuer will be exempt from most of the requiremets imposed by Regulatios 14D ad 14E if the percetage of the class of the target s shares beig sought i the offer that is held by U.S. holders is ot more tha 10%, pursuat to the Tier I exemptio. If the U.S. owership level is over 10% but is ot more tha 40%, a more limited set of exemptios, the Tier II exemptios, may be available. The calculatio of the 10% ad 40% thresholds are ot straightforward exercises ad must be doe i accordace with SEC-prescribed rules. All-cash acquisitios of U.S. public compaies commoly are structured as two-step trasactios a teder offer 5 This ca preset a difficult choice. A decisio by a acquirer ot to list its shares o a U.S. exchage i order to facilitate subsequet deregistratio may make its acquisitio proposal less attractive to the target compay ad its shareholders, or could lead to flowback that puts pressure o the acquirer s share price. 6 Solicitatios i respect of shares of foreig private issuers are exempt from the proxy rules uder Exchage Act Rule 3a12-3(b). A Guide to Takeovers i the Uited States, Clifford Chace US LLP 4

12 Sectio 1: Regulatory Framework followed by a merger that squeezes out ay utedered shares, typically by covertig them ito the right to receive the same cash price per share offered i the teder offer. The two-step approach usually has timig advatages over the alterative sigle-step trasactio structure. These alterative acquisitio structures are discussed i more detail i Chapter 3 of this Guide. Other Primary Regulatios Federal Securities Laws Applicable to Stakebuildig Would-be acquirers seekig to acquire stakes i target compaies must take ito accout the restrictios o isider tradig imposed pursuat to Rule 10b-5 uder the Exchage Act; the potetial requiremet to report beeficial owership of shares i excess of 5% o Schedule 13D; ad the short-swig profits rules imposed uder Sectio 16(b) of the Exchage Act (which potetially ca require disgorgemet of profits from tradig after the acquirer s positio i the target s shares exceeds 10%). 7 Stakebuildig ad related matters are discussed i Chapter 2 of this Guide. Atitrust/Merger Clearace May U.S. M&A trasactios are subject to the clearace process imposed uder the U.S. Hart-Scott-Rodio Atitrust Improvemets Act (commoly referred to as the HSR Act ). The HSR clearace process ad other atitrust matters are discussed i Chapter 7 of this Guide. Exo-Florio/CFIUS The Exo-Florio provisio of the Defese Productio Act grats the Presidet of the Uited States the authority to susped or prohibit acquisitios of U.S. busiesses by o-u.s. ivestors that threate to impair the atioal security. The authority to admiister the Exo Florio provisio has bee delegated to the Committee o Foreig Ivestmet i the Uited States ( CFUIS ). The Exo-Florio provisio cotemplates that parties to a trasactio ca volutarily submit to a review of their proposed trasactio by CFIUS. Despite the volutary ature of the otificatio, acquirers that believe their trasactio could possibly give rise to atioal security cocers typically choose to follow the otificatio process because acquisitios by o-u.s. ivestors that fall withi the Exo-Florio provisio but are ot cleared by CFIUS remai idefiitely subject to the impositio of divestmet or other requiremets by the Presidet. The Exo-Florio provisio ad CFIUS are discussed i Chapter 8 of this Guide. Regulated Idustries Various federal ad state regulatory requiremets may apply to trasactios of targets operatig i particular idustries, icludig: Registered Ivestmet Fuds/Advisers Bakig/Fiacial Istitutios Eergy Natural Resources Public Utilities Telecommuicatios Gamig Defese Isurace 7 Uder Exchage Rule 3a12-3(b), Sectio 16 does ot apply to acquisitios of shares of foreig private issuers. 5 A Guide to Takeovers i the Uited States, Clifford Chace US LLP

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