Thursday, May 18, 2017

Staff grants no-action relief for Yahoo’s pricing formula in Dutch auction tender offer

By Jacquelyn Lumb

The SEC’s Division of Corporation Finance has granted no-action relief requested by Yahoo! Inc. that will permit it to rely on a particular formula to determine the purchase price of its common shares and the number of shares accepted in a planned issuer tender offer. Yahoo plans to offer up to $3 billion for its shares in the self-tender offer which will occur in advance of its sale to Verizon Communications Inc.

Verizon agreement. Yahoo and Verizon entered into a share purchase agreement last year in which Verizon agreed to purchase Yahoo’s operating business for an aggregate purchase price of $4,475,800 in cash, subject to certain adjustments. Prior to the completion of the sale, Yahoo will transfer the assets and liabilities of its operating business to a wholly-owned subsidiary and sell Verizon all of the outstanding shares of the subsidiary. Prior to the sale of the subsidiary, Yahoo will cause the subsidiary to sell to a foreign subsidiary of Verizon all of the equity interests in a newly formed foreign subsidiary of Yahoo that will hold certain foreign subsidiaries relating to the operating business.

Yahoo becomes investment company. Upon the completion of the sale transaction, Yahoo’s remaining assets will consist of assets and liabilities that were excluded in the transfer, which include cash and marketable debt securities, shares in Alibaba Group Holding Limited, shares in Yahoo Japan Corporation, certain other minority equity investments, and Excaliber IP, LLC, which is a subsidiary that owns a portfolio of non-core patent assets. Yahoo will continue to be a Delaware corporation publicly traded on the NASDAQ Global Select Market but will be renamed Altaba Inc. Since its assets will consist primarily of its equity investments, short-term debt investments, and cash, it will be required to register as an investment company.

Self-tender offer. After the completion of the sale, Yahoo intends to return substantially all of its cash to its shareholders but will retain sufficient cash to satisfy its obligations to creditors and for working capital. The transaction is subject to shareholder approval at a special meeting scheduled for June 8, 2017, followed by a closing of the sale in mid-June 2017. The sale transaction is not conditioned upon the commencement or the consummation of the offer.

Yahoo will offer to acquire a portion of its outstanding shares in order to provide liquidity to a potentially significant number of its shareholders that will be forced to sell their shares at or prior to the sale transaction. Some of the shareholders will be subject to restrictions on holding Yahoo shares once it becomes a registered investment company and other shareholders, including index funds, will be required to sell the shares once they are removed from the Standard & Poor’s 500 Composite Index and other indices.

Pricing formula. The offer will be structured as a modified Dutch auction tender offer in which shareholders who tender shares will select a multiple that will be fixed throughout the duration of the offer. Yahoo will determine a final multiple that will clear the aggregate consideration of $3 billion or, if less, the top of the multiple range. Yahoo will apply the final multiple to the per share daily volume-weighted average pricing for an American Depositary Share of Alibaba. According to Yahoo, the pricing formula is intended to reflect the current correlation between the trading prices of its common shares and Alibaba’s ADSs.

Yahoo explained that its investment in Alibaba is its most important asset and its common shares are highly sensitive to movements in the price of the ADSs, so in determining the pricing formula, it wanted to ensure that the price paid for the common shares tendered in the offer reflect current market values. Yahoo added that the use of the value of the ADSs as part of the formula is particularly important because it lacks access to nonpublic information about Alibaba’s management or operations.

No-action relief. The no-action relief is strictly limited to the application of the regulatory provisions of the offer, according to the staff. Yahoo should discontinue the offer pending further consultation with the staff if any of the facts or representations in its request for no-action relief change.