How to acquire a United States public company

Introduction

People seeking to acquire a company in the United States (US) need to understand the steps and complexities involved in the transaction. Navigating the challenges and opportunities involved are the key ingredients for a successful M&A transaction. The process involves a thorough legal understanding and nuances.

Hostile or friendly approach in acquiring the target?

There are different approaches taken by acquirers to approach the target. The transaction can either be friendly or hostile. A friendly acquisition, as the name suggests, results in a smoother, quicker and a more efficient completion of the transaction. This is attributed to the fact that an acquirer is engaged in negotiating directly with the target’s board of directors. The terms of the deal are mutually agreed upon, which helps ensure a quicker and more efficient completion. A hostile acquisition, on the other hand, happens when the target company’s management resists the acquisition. In such cases, the acquirer bypasses the target's board and makes a direct offer to the shareholders through a tender offer. Hostile acquisitions are rare but can occur in situations where the acquirer believes that the management of the target company is not acting in the shareholders' best interests. Hostile takeovers are legally challenging, involve a significant amount of resistance and often require a more aggressive approach.

Transaction structures: One step vs. two step

When acquiring a US public company, acquirers must choose between different structural approaches based on their strategic objectives, timeline and regulatory considerations. The two most common structures are the one step/statutory merger and the two-step transaction.

One step / statutory merger

A one step merger operates in a way where there one legal entity mergers into another. This process usually requires is a negotiation of a definitive merger agreement with the target. There is a multilayered approval required by first the board of directors of target and then by the holders of the target’s outstanding stock. This shareholder vote requires approval of target’s outstanding shares. It is pertinent to note that a one step or a statutory merger cannot be completed via a hostile transaction. A common illustration of a one step or a statutory merger is the reverse triangular merger. It is a type of a merger where a temporary subsidiary of an acquiring company rather than the company in itself merges with a target company. This way when the merger is effectuated, the temporary subsidiary dissolves, retaining the target entity as the new subsidiary of the acquiring company. This method is often used because it allows the target company to retain its legal identity, including contracts, licenses and permits, which can make the transition smoother and more tax-efficient. It's called “reverse” because, unlike a forward triangular merger where the target is absorbed, here the target remains intact.

Elements of a merger agreement

A typical merger agreement involves several key elements, outlined below:

• Representations and warranties: These are assurances made by the target company, including statements about capitalization, absence of material adverse changes, undisclosed liabilities, pending litigation, compliance with laws, accuracy of public filings, financial statements, material contracts, employee benefits and tax matters. These representations are generally provided by the target on the date of the agreement and are often reaffirmed on the merger's closing date.
• Conditions: The agreement specifies the conditions necessary to complete the merger. In a two-step transaction, this may cover the tender or exchange offer and the subsequent merger.
• Indemnity: In public company mergers, the target company does not typically indemnify the acquirer. Instead, if the target breaches a representation, the acquirer’s main remedy is to terminate the agreement, rather than proceeding with the merger and seeking compensation for the breach.
• Deal protection: To protect the deal, the merger agreement often includes provisions like "no-shop" clauses, which prevent the target from seeking or negotiating other offers. It may also include "fiduciary out" clauses, allowing the target’s board to consider superior proposals. Additionally, breakup fees may be negotiated, and if the target has a controlling shareholder, the acquirer may secure an agreement from that shareholder to tender their shares or vote in favor of the merger.

Filing of a preliminary proxy statement (Schedule 14A) with the SEC to disclose information about the shareholder vote

Once the merger agreement is signed, the target company must file a preliminary proxy statement (Schedule 14A) with the SEC to disclose information about the shareholder vote. If the merger involves the issuance of acquirer securities, these must be registered with the SEC. In such cases, the acquirer will file a Form S-4 registration statement, detailing the acquirer’s financial information and related projections. This combined document, known as a "proxy statement/prospectus," is filed with the SEC to comply with registration requirements.

If the acquirer needs shareholder approval, such as when the share issuance exceeds 20 percent of its outstanding shares, the proxy statement will also serve as a joint document for both companies.

Contents of a typical proxy statement

A merger proxy statement typically includes:

• Date, time and place of meeting shareholders
• Directors, officers and major shareholders: Information on the target’s executives, directors and major shareholders (those owning 5 percent or more of shares).
• Target board recommendation: The target’s board of directors’ recommendation on the merger, along with the rationale behind it.
• Voting procedures
• Revocability of proxy
• Dissenters right of appraisal
• Financial statements

Target shareholder approval

After filing of the proxy statement with the SEC, there will be SEC comments which are usually given within 10 calendar days. Then the companies need to address those comments which delays the process. After addressing SEC comments, a date for the shareholder meeting is set. The definitive proxy statement, including a proxy card for voting, is then sent to the target’s shareholders. Shareholders typically have 20 to 30 business days to review and vote, with a minimum of 20 calendar days between the mailing date and the meeting date required under Delaware law.

Finalizing the merger

Assuming all conditions (regulatory and otherwise) are met and shareholders approve the merger, the acquirer usually completes the merger immediately following the shareholder vote. The process from signing the merger agreement to closing typically spans 10 to 12 weeks.

Appraisal rights

In mergers where cash or unlisted shares are involved, shareholders who vote against the merger or abstain from voting are often entitled to appraisal rights. These rights allow shareholders to request a court to determine the "fair value" of their shares, which may be higher or lower than the merger consideration. Shareholders who vote in favor of the merger typically cannot exercise appraisal rights.

The appraisal process can take more than a year but may be settled earlier. If shareholders tender their shares in a tender offer, they forfeit appraisal rights, although non-tendering shareholders can exercise them in any subsequent "squeeze out" merger.

Two-step transaction

The two-step transaction entails a an either an exchange offer or a tender offer in tandem with a back end merger. Tender offers are usually which require cash offers for the target shares whereas exchange offers encompasses securities or a mix of both cash and securities. The steps involved in a two-step transaction are the following: the acquirer makes the initial offer to the target shareholders for the target shares. Next each of the target shareholders make an independent decision to whether sell or tender their shares in exchange for cash or securities offered by the acquirer. Once the exchange/tender offer step has has been concluded, the target goes on to complete the statutory merger with the acquirer.

The exchange / tender offer process

To kickstart the offer process, a Schedule TO is required to be filed with the SEC in which an “Offer to Purchase” is attached for a tender offer or an “Exchange Offer” for an exchange offer. It needs to be distributed to the target shareholders as well. Additionally, if there is offering of securities alongside, such securities are required to be registered by filing a registration statement (S-4) with the SEC. Within 10 days of beginning the offer process, the target’s board of directors must file a recommendation statement (Schedule 14D-9) detailing their view on the alleged offer with the SEC. If the requisite shares are tendered (usually 50 percent of the targets shares), then it’s time for the acquiror to purchase those shares. This is usually a minimum condition requirement to activate an acquirers obligation to pay and accept the tendered shares along with other conditions imposed, normally outlined by the acquirer in his initial offer. The timing for the offer to remain open also is crucial. In this period, the shareholders can either tender the offer or withdraw from it before the offer expires. In cases of starting a tender offer, it is open initially for 20 business days but can be extended to 10 additional business days if SEC passes substantial comments on the Schedule TO. The exchange offer cannot be said to be effective until SEC declares it effective, such as the acquirer’s registration statement, related to the shares being offered as consideration, effective. Last process would be when the offer period has expired, finally the acquirer buys the tender shares and then the acquirer and target proceed to effectuate a back end merger. then will be able to complete the back end merger. This back end merger can usually take place immediately after the acquirer’s purchase of shares if the acquirer owns enough shares to carry out a short-form merger. In Delaware, for instance, the acquirer must own at least 90 percent of the target’s outstanding voting shares after the offer closes (including any shares the acquirer already owned prior to the offer and shares bought in the offer). In cases where the acquirer owns enough shares to approve a long-form merger and the Delaware General Corporation Law Section 251(h) applies, the merger process can proceed under simplified rules for completing the transaction.

One step or two step? Deciding which structure to use

The decision to use a one step or two step structure depends on various factors, including the type of consideration offered, regulatory concerns and the acquirer’s timeline and control over the process.

Cash consideration: Two step structure generally preferred

In such a transaction, two-step transaction takes precedence over a one step merger due to variety of reasons such as speed and control. In terms of speed, the transaction will be executed on an expedited basis such as will be completed in as little as 20 business days. In terms of control, the acquirer can have control over the target even before the back end merger is completed and can secure board control as well, if the acquirer is able to purchase more than 50 percent of target’s outstanding shares. Lastly, there will be also be faster payout for target shareholders.

Stock consideration: One step structure preferred

When stock is used (either fully or partially) as consideration in the transaction, a one step merger is generally preferred over an exchange offer. This is due to the requirement that the acquirer’s stock must be registered with the SEC before it can be issued to target shareholders. This process requires SEC review, which often negates the timing advantage of the two step process. Even though the SEC has made efforts to expedite the review of exchange offer registration documentation, most public company acquisitions involving stock consideration prefer a one step merger due to the complexities associated with registering and issuing the acquirer’s shares.

Maze of regulatory compliance

Buyers acquiring a US public company have to maneuver through a complex web of regulatory requirements at both federal and state levels, especially for non-US. acquirers it is extremely crucial to understand these regulations in order to avoid delays or legal complications.

For a foreign buyer to acquire a US company, it is necessary to navigate multiple regulatory approvals, in order to guarantee compliance with US laws and national security challenges. Obtaining antitrust approval under Hart-Scott Rodino Antitrust Improvements Act of 1976 (HSR Act) is one of those crucial steps. This Act requires that certain acquisitions and mergers must be disclosed to the US Federal Trade Commission (FTC) and the Department of Justice (DOJ) to examine any probable anti-competitive effects. If the non-corporate interests, value of the voting securities and/or holdings held as a consequence of the transaction is above the threshold and it meets the “size of person” test, a transaction may be reportable. If either the acquired or acquiring party has annual net sales or total assets of minimum US$252.9 million, and the party has total assets or net sales of at least US$25.3 million, generally the “size of person” test will be met. However, there is one exception that if the annual net sales are less than US$22.9 million, the acquired party not involved in manufacturing must satisfy the test on the premises of the value of its assets. The criteria previously was US$239 million and US$23.9 million, respectively. If the transaction is valued above US$505.8 million (previously US$478 million) however, fulfilling the “size of person” test will not be needed. As long as no exemption applies, such transactions are reportable. Beside these thresholds, the size of the parties participating also impacts the filing requirements, with particular tests for the “size of person” involved. If additional information is required by FTC or DOJ, they may issue a “second request,” extending the review period by a further 30 days. 

The filing requirements are determines by the size of the transaction, with particular thresholds for transaction value and the size of the parties engaged, Both the buyer and seller are required to file separate notifications if the transaction satisfies these thresholds, and the proposed transaction won’t be able to proceed for at least 30 days while the agencies review the deal. Since 2025, the revised thresholds for reporting are as follows: a filing fee of US$30,000 is required if the transaction is valued at more than US$126.4 million but less than US$179.4 million; a filing fee of US$105,000 is applicable if the transaction is valued between US$179.4 million and US$555.5 million; a filing fee of US$265,000 for transactions over US$555.5 million but under US$1.111 billion; a filing fee of US$850,000 is applicable if the transaction between US$1.111 billion and US$2.222 billion and a US$2.39 million filing fee for transactions above US$5.55 billion. Moreover, an increase of the threshold from US$119.5 million to US$126.4 million for the “size of transaction” test.

Along with the antitrust clearance, it is necessary for foreign buyers to take into account approval from the Committee on Foreign Investment in the US (CFIUS) under the Foreign Investment and National Security Act of 2007 (FINSA). For transactions that could result in foreign governance of a US business, this review is of utmost importance, especially in sectors with national security implications, such as defense or crucial infrastructure. If the deal presents a national security risk, CFIUS has the authority to suggest transaction modifications, impose mitigation measures, or even block the deal. Moreover, the President of the United States also has the authority to block transactions that threaten national security. Foreign buyers from specific counties or those planning on acquiring companies immersed in critical technologies or infrastructure could encounter addition scrutiny. In addition to this, the parties must submit notifications to the Directorate of Defense Trade Controls (DDTC) if the acquisition includes a company subject to the International Traffic in Arms Regulations (ITAR). This involves submitting an initial notification before the transaction and a final notification post-closing. ITAR was formed to govern the export of defense specific technologies, and compliance is vital to prevent unauthorized transfer of sensitive information. Thorough due diligence is required from buyers to comprehend the ITAR requirements, and the potential risks associated with previous violations by the target company. Finally, acquires must comply with US federal securities rules, which demand the disclosure of certain information to shareholder and the Securities and Exchange Commission (SEC), which involves making a public filing with the SEC and providing thorough financial disclosures.

Conclusion

Acquiring a US public company is a major and intricate procedure. Navigating through a series of legal, financial and regulatory challenges make it more complicated for non-US buyers. From maneuvering through tax matters and recognizing the company’s governance to determining how to structure the deal and tackling antitrust rules, every acquisition demands a tailored approach. In order to successfully finalize these transactions and obtain the opportunities the US market offers, non-US acquirers need proper planning and an exceptional legal understanding of the US M&A landscape. every acquisition is unique and requires to be looked at independently.

Special thanks to law clerk Mariam Syed for assisting in the preparation of this article.

This alert does not constitute legal or business advise but it is purely for informational purposes. The views expressed in this alert are solely of the author of this alert.

For more information or any questions, please contact the author.