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Securities Issues with M&A Deals


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There are complex securities laws that can be triggered in the business acquisition context. Because the penalties for securities violations are severe, it is always worth the time to have securities counsel review the transaction and confirm compliance with the securities laws.

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Securities Issues with M&A Deals

  1. 1. Securities Issues with M&A Deals | BizTaxBuzz by Issues with M&A DealsPosted by Trevor CrowIn general, M&A transactions are structured in one of three broadcategories: (1) asset sales, (2) stock sales, and (3) mergers. Of course there are many nuances andcombinations of these broad categories that may be implemented when structuring a particular deal. Dealattorneys and the business people involved in these transactions typically center their attention on draf ting themain deal document whether it is an asset purchase agreement, stock purchase agreement, or mergeragreement. Securities law issues are of ten overlooked. Securities law implications may af f ect even seeminglystraightf orward deals, which if not handled appropriately can cause an inquiry f rom the SEC or state lawregulators.Securities OverviewThe securities laws are triggered when there is a sale of a “security.” This includes the transf er of stock (ormembership interests) in connection with the sale of a business. For example, in the case of a merger, acompany’s issuance of new stock (or membership interests) to the shareholders of another company inexchange f or their shares of stock is a securities of f ering under the securities laws.The securities laws require that when securities are being sold they must be registered under the Securities Actor the transaction must be exempt f rom registration. Registration is an expensive and time-consuming taskwith large f ees f or accountants and lawyers who prepare the registration statement. For these reasons,issuers try to avoid registration by issuing the securities pursuant to an exemption.Mistakes during the registration process or in qualif ying f or an exemption can lead to serious consequences.Under Section 11 of the Securities Act, issuers are liable if a registration statement “contain[s] an untruestatement of a material f act or omit[s] to state a material f act required to be stated therein or necessary tomake the statements therein not misleading.” Further, Section 12 of the Securities Act establishes liability f orsales of non-exempt unregistered securities and creates remedies including a right of rescission f orpurchasers and liability f or f raud. Many penalties under the securities laws apply to the of f icers and directorsof the company as well as the company itself .ExemptionsWhenever attempting to conduct an unregistered of f ering of securities, the f irst two legal issues that must beaddressed are: (a) which exemption f rom the registration applies, and (b) what type of disclosure is required.
  2. 2. The most common exemption used f or stock issued as consideration in a merger or acquisition is the privateplacement exemption pursuant to Section 4(a)(2) of the Securities Act, and corresponding saf e harborcontained in Regulation D. Generally, there can be no public solicitation or advertising (although the JOBS Actwill change this) and the issuer must make (or make available, depending on the specif ic exemption and thenature of the purchasers) certain disclosure.There are some consequences to using an exemption to sell securities. The securities sold in reliance on anexemption f rom registration are generally considered “restricted securities” under the securities laws, andtheref ore are subject to resale limitations. Further, when an company sells securities in an unregisteredof f ering, it can sell to an unlimited number of “accredited investors,” but it may only sell to a limited number of“non‐accredited investors.”State LawWhen making an unregistered of f ering, the company must f ind an exemption at both the f ederal level and thestate level. Thus, a caref ul analysis of the residency of each potential buyer and of the securities laws ofthese states’ should be conducted bef ore of f ering securities f or sale in a particular state. Many states requirea notice f iling even when a f ederal exemption applies.Read about Legal Steps Required to Sell a ColoradoCorporationAnti-Fraud ComplianceThe anti-f raud provisions of the securities laws apply to all sales of securities whether the sale qualif ies f oran exemption or they are sold under a registration statement. In general, the anti-f raud provisions requiredisclosure of (or access to, depending on the applicable exemption) all available material inf ormation about thecompany’s business and the securities being of f ered. In the context of an M&A transaction f or example,assume that the shareholders of the target company will receive shares of the acquiring company in exchangef or their shares of the target company. In this transaction, under state law the target shareholders will likelyhave to vote to approve the transaction. To comply with the securities anti-f raud provisions, the acquiringcompany must provide disclosure of all material inf ormation (or make it available, depending on the applicableexemption) to the target shareholders. Typically, this disclosure is disseminated through combinedprospectus/proxy statement that is delivered to each shareholder entitled to vote. Draf ting the combinedprospectus/proxy statement requires input f rom both the target company and the acquiring company.ResalesWhen shares are issued under an exemption f rom registration, the securities laws place resale restrictions onthese shares and these shares are called “restricted securities.” The shareholders who purchased therestricted securities must register the shares or comply with SEC Rule 144 bef ore selling. While not addressedhere, I am planning a f uture post that discusses the specif ic requirements of Rule 144. Further, in the M&Acontext, of ten the recipients of the acquiring company’s shares become executive of f icers and directors of the
  3. 3. acquiring company. Thus, these of f icers and directors must be aware of the insider trading laws, which restrictsales when such insiders are in possession of material nonpublic inf ormation. The parties to an M&Atransaction should be advised of these resale restrictions early in the negotiation process.Bottom Line. There are complex securities laws that can be triggered in the business acquisition context.Because the penalties f or securities violations are severe, it is always worth the time to have securitiescounsel review the transaction and conf irm compliance with the securities laws.