Best-Price Rule (Rule 14D-10): SEC Regulations & Tender Offers

Definition of Best-Price Rule (Rule 14D-10)

Best-price rule (Rule 14D-10) is a regulation by the Securities and Exchange Commission (SEC) that stipulates that consideration offered to any security holder in a tender offer must be equal to the highest consideration paid to any other security holder. The best-price rule is meant to provide equal treatment to all holders of securities in a tender offer.

Understanding Best-Price Rule (Rule 14D-10)

The Best-price rule (Rule 14D-10), as originally written, required fine-tuning, as disputes arose over how to treat certain employment compensation, severance and other employee benefit agreements in a situation of change of control that a completed tender offer created. If some high-level employees who held securities were to receive additional monies in a tender offer, would all other security holders be entitled to receive the same amount?

Amendments to Rule 14D-10

To provide clarity of the rule, the SEC made amendments that went into effect in December 2006. The rule was amended in three ways: First, the central language of the rule was changed to: "consideration paid to any security holder for securities tendered in the tender offer is the highest consideration paid to any other security holder for securities tendered in the tender offer." The focus on "securities tendered" excludes any other compensatory agreements in the amount of consideration due to security holders. Second, compensatory arrangements were exempted from the rule. Any amounts to be paid pursuant to an arrangement will have to be "paid or granted as compensation for past services performed, future services to be performed, or future services to be refrained from performing, by the security holder (and matters incidental thereto)" and may "not [be] calculated based on the number of securities tendered or to be tendered in the tender offer by the security holder." Third, a safe harbor was instituted in the rule for compensation arrangements approved by a committee of independent directors.