On November 18, 2016, the Staff of the Division of Corporation Finance issued two new C&DIs that address banker fee disclosures for tender offers on Schedule 14D-9. The new C&DIs clarify that disclosure is required of “all” material terms for compensation including the types of fees payable to the financial advisors as well as any contingencies, milestones or triggers relating to the payment of fees, which suggests that the disclosure of alternative fee arrangements would be required. The C&DIs also reinforce the requirement under state law to include disclosure of material banker conflicts and incentives.
Under Rule 14e-2 of the tender offer rules, a company is required to file its position to a tender offer within 10 business days on Schedule 14D-9. Item 5 to Schedule 14D-9 (which refers to Item 1009 of Reg M-A) requires the company to provide a summary of all material terms of employment, retainer or other arrangement for compensation regarding persons that are directly or indirectly employed, retained, or to be compensated to make solicitations or recommendations in connection with the offer.
New Question 159.01 clarifies that this information is required with respect to financial advisor fees even though the financial advisor is only providing a fairness opinion on the underlying transaction and disclaims involvement in the solicitation or recommendation of the offer. New Question 159.02 clarifies that because the tender offer rules are designed to assist security holders in evaluating the merits of the solicitation, the rules require a full summary of all material terms regarding any compensation to be paid to bankers or other advisors, and that generic disclosure (i.e. “customary reasonable fees”) is ordinarily not enough.
Typically, financial advisor fee disclosure includes a brief description of the fees paid and payable in the specific transaction at various stages of the deal (e.g. on engagement, upon delivery of the fairness opinion and upon completion of the transaction). However, a review of recent banker fee disclosure for transactions initiated by an unsolicited bid show that it is not current practice for the financial advisor fee disclosure to include a description of alternative fees payable in other contexts, such as in the context of an activist-initiated sale transaction where the target may have agreed to pay the financial advisor one fee for remaining independent and a different fee if the company is ultimately sold. The new C&DIs appear to require additional transparency in this scenario by requiring narrative disclosure of multiple fee types that would be sufficient to “provide the primary financial incentives for the financial advisors in connection with their analyses and advice.”
Specifically, New Question 159.02 provides that while quantifying the amount of compensation may not be required in all instances, disclosure of the required “summary of all material terms” of the financial advisors’ compensatory arrangements would generally include:
- the types of fees payable to the financial advisors (e.g., independence fees, sale transaction or “success” fees, periodic advisory fees, or discretionary fees);
- if multiple types of fees are payable to the financial advisors and there is no quantification of these fees, then sufficiently-detailed narrative disclosure to allow security holders to identify the fees that will provide the primary financial incentives for the financial advisors;
- any contingencies, milestones, or triggers relating to the payment of the financial advisors’ compensation (e.g., the payment of a fee upon the consummation of a transaction, including with a bidder in an unsolicited tender or exchange offer); and
- any other information about the compensatory arrangement that would be material to security holders’ assessment of the financial advisors’ analyses or conclusions, including any material incentives or conflicts that should be considered as part of this assessment.
See a copy of the new C&DIs.
 For example, in the engagement letters between CVR Energy, Inc. and its financial advisors that were signed in March 2012 after bidders affiliated with Carl C. Icahn launched an unsolicited tender offer for the company, the company agreed to pay its advisors a schedule of flat rate fees each payable upon different triggering events and dates, including a fee for essentially remaining independent, a “discretionary fee” payable at the discretion of the company, an “announcement fee” upon the announcement of a sale transaction and a “sale transaction fee” upon consummation. CVR’s Schedule 14D-9 disclosed that the company agreed to pay its financial advisors “customary compensation.” The SEC did not appear to comment on the disclosure. After Icahn successfully acquired control of the company, CVR was ordered to pay its financial advisors a sale transaction fee of $36 million, reportedly double the amount of the independence fee. Icahn later sued the company’s law firm for malpractice for failing to advise CVR that it was required to pay the sale transaction fees even if the company was acquired by the hostile bidder. The malpractice claim is currently on-going.