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consideration. Over-subscriptions can either be handled through a random selection (or
lottery) process, where every shareholder in the over-subscribed pool has a random
chance of being required to receive the under-subscribed form of consideration (e.g.,
Region’s 2001 acquisition of Morgan Keegan), or through a pro rata cutback, where each
shareholder selecting the scarce form of consideration has the same proportion, but less
than 100 percent, of their shares converted into their desired form of consideration (e.g.,
Capital One/Hibernia, Citizens/Republic, Capital One/North Fork and Citigroup/Golden
State). Non-electing shares (or shares for which a proper, timely election has not been
made) are typically converted first into the under-subscribed form of consideration to
minimize the cutback for shares expressing a preference for the oversubscribed
consideration.
Election mechanisms (and the disclosures that accompany such mechanisms)
deserve careful attention, especially where there is no mechanism to equalize the value
of the cash and stock components at the election deadline. In a number of transactions
there has been a significant spread in value between the cash and the stock packages
offered to shareholders at the time of the election and there is the potential for significant
shareholder confusion, and accompanying shareholder complaints, relating to the
handling of the election process.
Equalization of the Cash and Stock Components: In light of the concerns raised
above for treating all shareholders roughly equally in a cash-election context, a number
of companies have used a somewhat complex mechanism for equalizing the value of the
cash and stock consideration packages at the time of the cash-election process. This is
the approach used in Capital One’s acquisition of North Fork and Hibernia, PNC’s
acquisition of Yardville, United National and Riggs and in Citigroup’s acquisition of Golden
State. For example, in the context of a 50 percent stock, 50 percent cash transaction,
where the stock component is expressed as a fixed exchange ratio and the cash
component is expressed as a fixed value, the parties may agree to value the total package
of consideration as of a date close to the closing date and then permit shareholders to
elect between cash and/or stock packages of equal value. Assume a deal with a fixed
exchange ratio of0.5 shares of acquiror stock for 50 percent of the target’s shares, and a
$10 per share price in cash for the remaining 50 percent. Also assume that the acquiror’s
stock was trading at $20 per share on the date the transaction was announced (thus, the
0.5 exchange ratio represents $10 in value per target share). If, as of a measurement date
close to the closing, the acquiror’s shares were trading at only $18 per share (value of $9
per target share based on the 0.5 exchange ratio), the average per share consideration
for the target company’s shares would be $9.50 per share (i.e., the average of $9 value in
acquiror stock per share for 50 percent of the total and $10 per share in cash for the
remaining 50 percent).
358
lottery) process, where every shareholder in the over-subscribed pool has a random
chance of being required to receive the under-subscribed form of consideration (e.g.,
Region’s 2001 acquisition of Morgan Keegan), or through a pro rata cutback, where each
shareholder selecting the scarce form of consideration has the same proportion, but less
than 100 percent, of their shares converted into their desired form of consideration (e.g.,
Capital One/Hibernia, Citizens/Republic, Capital One/North Fork and Citigroup/Golden
State). Non-electing shares (or shares for which a proper, timely election has not been
made) are typically converted first into the under-subscribed form of consideration to
minimize the cutback for shares expressing a preference for the oversubscribed
consideration.
Election mechanisms (and the disclosures that accompany such mechanisms)
deserve careful attention, especially where there is no mechanism to equalize the value
of the cash and stock components at the election deadline. In a number of transactions
there has been a significant spread in value between the cash and the stock packages
offered to shareholders at the time of the election and there is the potential for significant
shareholder confusion, and accompanying shareholder complaints, relating to the
handling of the election process.
Equalization of the Cash and Stock Components: In light of the concerns raised
above for treating all shareholders roughly equally in a cash-election context, a number
of companies have used a somewhat complex mechanism for equalizing the value of the
cash and stock consideration packages at the time of the cash-election process. This is
the approach used in Capital One’s acquisition of North Fork and Hibernia, PNC’s
acquisition of Yardville, United National and Riggs and in Citigroup’s acquisition of Golden
State. For example, in the context of a 50 percent stock, 50 percent cash transaction,
where the stock component is expressed as a fixed exchange ratio and the cash
component is expressed as a fixed value, the parties may agree to value the total package
of consideration as of a date close to the closing date and then permit shareholders to
elect between cash and/or stock packages of equal value. Assume a deal with a fixed
exchange ratio of0.5 shares of acquiror stock for 50 percent of the target’s shares, and a
$10 per share price in cash for the remaining 50 percent. Also assume that the acquiror’s
stock was trading at $20 per share on the date the transaction was announced (thus, the
0.5 exchange ratio represents $10 in value per target share). If, as of a measurement date
close to the closing, the acquiror’s shares were trading at only $18 per share (value of $9
per target share based on the 0.5 exchange ratio), the average per share consideration
for the target company’s shares would be $9.50 per share (i.e., the average of $9 value in
acquiror stock per share for 50 percent of the total and $10 per share in cash for the
remaining 50 percent).
358
