Mergers and Acquisitions: Securities Regulation

1. Mergers and Acquisitions: Securities Regulation Professor Jack Williams

2. 2 Securities Regulation Using securities as consideration Stock Notes Bonds Debentures

3. 3 Securities Act of 1933 Protect purchasers of securities in public offerings Public is generally defined as over 35 people Firm must register the sale under 1933 Act Trigger: Target s/hs receive securities instead of cash and the s/h class is large. SEC Rule 145

4. 4 1933 Act Requires full disclosure through a document called the prospectus Goal is to provide adequate information Plain English rule � is the information reasonably accessible to the general public Where do investors get information� Business Press Motley Fool Radio and TV Firm must comply with 1933 Act or find an exemption

5. 5 Effect of �33 Act on Stock Swap Mergers and Stock for Asset Acquisitions If corp. using its own stock and target is a public-traded corp., the SEC adds the disclosure requirements of the 1933 Act to the proxy solicitation rules of the 1934 Act. Why need the1933 Act registration statement if Target s/h already protected by the proxy solicitation rules of the 1934 Act? Make underwriters of the Target firm and its controlling officers and s/h liable for disclosure violations under the 1933 Act. To restrict the resale of securities obtained by Target s/h who control the Target. (controlling Target s/h who are unwilling to hold securities in the acquired firm and want to cash out immediately after the acquisition will not agree to a swap). Target s/h have to register their securities before resale.

6. 6 Movement of Securities Issuer ---- Underwriter ---- Dealer ----Public Issuer � Corp Underwriter � Broker Dealer � Seller Public � Offering to large number of investors INHERENT CONFLICTS

7. 7 Key Dates Prefiling /// (2) Waiting /// Post-Effective Prefiling: No offers or sales Waiting: Offers generally fine; sales not Post-effective: Offers and sales OK

8. 8 Procedures Upon Filing of Registration Statement SEC response to registration statement Refusal order Stop order Reviews Full Cursory Delaying amendment Each amendment triggers new 20-day period SEC may expedite last registration statement

9. 9 What Required by the Issurer to be Filed with the SEC The issuer ultimately seeks that the registration has gone effective � ticket to the offer and sell process. Prospectus Information not required in the Prospectus Need not send this information to prospective purchasers. Registration statements themselves plus reports can be found on Edgar at the SEC's website.

10. 10 Pure Cash-Out Merger Does not implicate securities regulation. Has tax consequences for shareholders of Target. Notes may constitute a security and could trigger securities registration requirements. A series of notes says pay to the order of Target can be dividended up � note doesn't look like a security but SEC says security extends beyond garden variety

11. 11 Section 13(a) of 1934 Exchange Act 1934 Exchange Act requires public co.s to file reports with the SEC. Reports contain certain information about the co. Duty to Disclose Acquisition negotiation anti-half truth rule: firm must disclose whatever is necessary so the required disclosures are not misleading. � 13(a) 1934 Exchange Act requires each reporting co. to file with the SEC those documents necessary for the protection of the investors and to ensure fair dealing in that co's securities.

12. 12 Annual Reports Certified By Independent Certified Public Accountant 10-K Sarbanes Oxley modification. Cornerstone is the Form 10-K: Annual report. Not necessarily in Plain English. Must include public co's analysis of business property legal proceedings (brought by or against it) set forth financial highlights of the year complete audited financial sheets (balance sheet, profit/loss, cash flow, changes in equity).

13. 13 Annual Report cont�d Mgmt discussion and Analysis � MD&A. Report of Audit committee and committee members � how came about picking auditors. Sarbanes-Oxley. Who is audit committee. Particular expertise Interaction with them. Sarbanes Oxley � must have some idea of what an audit is all about. Prior to this the audit committee was the committee that hired the auditors and did nothing else. Interface but clearly didn't question any position � simply deferred on everything. Paid quite well � people who get sued are the audit committee members directly. Background about mgmt, directors, exec. compensation. Quantitative and qualitative analysis about market risks.

14. 14 Annual Report cont�d Disclose any disagreements with accts and changes in acct methods. Any material change disclosure is required. Disclose conclusion of co's principle executive regarding effectiveness of disclosure: CEO and CFO directly responsible for the adequacy and liability and veracity of what is in the 10-K.

15. 15 Quarterly Reports 10-Q Can be unaudited and must be file for the first 3 quarters. 4th quarter the 10-Q is rolled into the 10K. Required to give the quarter's financial statement and the quarter from the year before for comparison.

16. 16 Current Reports 8-K Provides market w/ timely infor. about important events that have occurred between quarters. Requires reporting of extraordinary events. Disclosable events that trigger 8-K: Exchange and control of the co. Acquisition or disposition of a significant amount of assets bankruptcy or state court receivership Any time change cert. accountants. Resignation of one or more directors. Change of fiscal year. Any info that co. may elect to disclose under Reg FD Any amendment to code of ethics Waiver by co. of any section of code of ethics Any other event the co. wishes to disclose. Movements of stock by 5 or 10 % s/h may also be reflected.

17. 17 Section 16(a) of 1934 Exchange Act Controlling s/h (over 10% of equity securities) and directors and officers, file a statement with SEC of amount of all equity securities of which they are the beneficial owner. Whether directly or indirectly (i.e. trust beneficiary). People are called the reporting persons, co. is called the reporting co.

18. 18 SEC Rule 145 Must register securities if used as consideration for merger agreement or acquisition SEC Rule: have a merger or a sale but the essence of the consideration is an investment security and purchasing that contractual agreement with an investment security and you are the closest source of that information so have to disclose with a registration statement (prospectus, that information not required in a prospectus).

19. 19 Proxy Statements Proxy Statement Rules apply to all matters subject to a shareholder vote Allows an individual or the company to acquire the power to exercise a vote in regards to a particular stock issue. Primary Purpose: To ensure that you have a quorum and the votes necessary to approve or block a pending action or transaction. DE � have to have majority (unless charter requires more) vote of the outstanding shares. Solicit proxies: Requires certain disclosures made through a proxy statement. Must also file a registration statement � generally proxy and registration statements rolled into one statement.

20. 20 Federal Exemptions To Registration Why interested in exemptions? If required to register and do not and use security as consideration the transaction can be rescinded. Guess wrong then rescission is the remedy. With this in the background why wouldn't one just comply with the 1933 Act � Time & Money � attorneys to comply with 1933 Act (underwriter and negotiate rel'ships with dealers), accountants, time.

21. 21 Exemption: Private Placements Private Placements � transaction with less than 35 people. Rule of thumb (both correct and incorrect). More factors that need to be considered: Look to a limited group and #. Sophistication of the investors. 1933 Act meant to protect investors. If sophisticated would have access to financial info. that would not be available to a s/h. (not caveat emptor � changed by the 1933 Act). In this potential contractual rel'ship there's either unequal bargaining position or unequal access to make a meaningful decision. Change caveat emptor to protect purchasers of securities b/c don't have meaningful access to info. to make an informed decision. Private placement carves out an exemption to 1933 Act � by position able to gain meaningful info. from the prospective buyer. Used successfully in/factors considered: Dealing with a bulk of offerings where looking at one or two private placements of security investments (inst. investors and typically notes and debentures � generally not a stock). Not going to have to comply with registration requirements under 1933 Act. Offering to key EEs (not EEs across the board) of the issuing co. Change offering to acquire the stock of a closely held corp. Ralston Purina - EE's were not key but rather general.

22. 22 Exemptions: Regulation D 504 � almost always not recognized by states. Limit max. offering to $1 million. 505 � up to 5 million in securities. <= 35 non-accredited investors. Must effectuate disclosure 506 � sell unlimited amount of securities to accredited investors (smaller sales either in # of purchasers or dollar amount). Institutional investor Wealthy individual > $1million assets / $200K annual income. Corporate insiders. If non-accredited need sophistication. <= 35 non-accredited investors. Must effectuate disclosure.

23. 23 Conclusion