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Gregory K. Bader serves as chairman of the firm’s Banking and Financial Services practice and is a partner in the Corporate Practice Group. He focuses his practice on mergers and acquisitions, regulatory compliance, securities offerings, and advising companies and their management as they make critical business decisions.

SEC Chair Mary Jo WhiteThe mission of the U.S. Securities and Exchange Commission (“SEC”) is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. This sounds great, but how does the SEC actually carry out its mission? The answer lies in the SEC’s oversight and regulation function of the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. A key player in how the SEC exercises this function is the SEC Chair, essentially, the SEC’s chief executive.

On April 10, 2013, the SEC announced the swearing in of Mary Jo White as the 31st Chair of the SEC. So who is Mary Jo White? White is a former federal prosecutor, specializing in complex securities and financial institution frauds and international terrorism cases from 1993-2002. After working as a prosecutor, White became a partner at Debevoise & Plimpton where she represented high-profile clients, including JPMorgan Chase & Co, former Bank of America Corp. CEO, Ken Lewis, UBS AG and accounting giant, Deloitte & Touche LLP.

So what’s not to like? The confirmation from the Senate came with little dissent: it voted unanimously in her favor, and its Banking Committee voted 21-1 in her favor. The one nagging criticism of White stems from her ability to effectively navigate conflicting interests. Essentially, some critics fear that her ties to Wall Street will cloud the SEC’s decision-making with respect to these institutions’ behavior during the 2007-09 financial crisis.

Importantly, because of White’s vast experience as both a federal prosecutor and Wall Street defense lawyer, she must, as SEC Chair, recuse herself from investigating former clients for at least a year. Notably, after defending JPMorgan Chase for its role in the financial crisis, for example, White could have to sit out an SEC investigation into the bank’s recent $6 billion trading loss.

Even without consideration of White’s association with Wall Street, she takes over at the SEC at a time of transition, and is faced with grave challenges. According to many, the SEC has been “stuck in a rut” since former SEC Chair, Mary Schapiro, resigned in December of 2012, leaving the SEC’s five-member panel divided between two Democrats and two Republicans.  But White is starting to make changes.  Recently, she appointed Keith Higgins as the new Director of Corporation Finance and appointed acting director, Lona Nallengara, as SEC chief of staff.  Also, President Obama nominated two U.S. Senate aides to replace
Continue Reading New SEC Chair: Mary Jo White

Registering shares of stock in a mergerThis is the fifth part of our Securities Law 101 series.  Because capital raising is such a critical function for middle market companies, we designed this series to introduce their management teams to some of the fundamental concepts in securities law.  We hope that this series will prevent some of the most common mistakes management teams make.  We will periodically publish posts examining different aspects of securities law. 

So your company wants to use its stock to buy another company?  As we have seen, stock consideration is coming back into vogue.  Issuing shares of stock for mergers and acquisitions, however, triggers the need to either register the new shares with the SEC (and possibly state securities regulators) or to find an exemption from the requirements found under Section 5 of the Securities Act of 1933. The presence of these rules can substantially increase the cost of the deal and could even make you consider going public before you thought possible.      

For mergers, finding an exemption from registration is not usually an easy task unless the target company is still held largely by the founder. Usually, the target company’s shareholders in the merger are often numerous, from many different states or jurisdictions, and represent a wide range of investor qualifications (accredited, sophisticated, etc.). As such, in many cases, finding a securities exemption is all but impossible. With exemptions off the table, let’s look at how to register stock in a merger. 

Stock that is registered in the context of a merger is registered on Form S-4.  This form was specifically designed for business combinations and exchange offers.  A transaction in which security holders are required to elect to receive new or different securities in exchange for their existing security (so called Rule 145 transactions) would qualify to use Form S-4.

Disclosure under Form S-4 can be quite complex. Generally, Form S-4 requires full disclosure regarding both the acquiring and target companies and, if the post-merger entity will differ materially from the acquiring entity, then full disclosure with respect to the post-merger entity is also required. Form S-4s also include the proxy statement for the shareholder meeting to approve the transaction and, typically, combine this proxy with the prospectus. Form S-4 mandates extensive disclosure of the transaction in the prospectus/proxy statement, including any fairness opinions and a comparison of the rights of the shareholders of the parties to the transaction.  Essentially, the disclosures are tailored to the specific transaction and nuances in the deal can create the need for a lot of disclosure.  Notably, for some companies, (e.g., 1st United Bancorp, Inc.)
Continue Reading Securities Law 101 (Part V): Issuing shares of stock for mergers and acquisitions

Dell going private transaction shines light on risksSo you are set on taking your company private.  Well, before you put your plans in motion, there are a lot of risks and potential consequences to consider along with the benefits.  At the moment, no one knows this better than Michael Dell, CEO of Dell Inc.  

Back in February 2013, Mr. Dell and his financial partner, Silver Lake Management LLC, entered into a merger agreement with Dell that would make Dell a private company.  The merger was valued at $13.65 per share, with a deal value of $24.4 billion.  The deal would keep CEO Michael Dell and others in his investment group in charge of the company. 

The driving force behind the deal is the perceived need to restructure Dell due to fundamental changes in the computer industry.  Consumers are focusing more on tablets and smartphones, which is hurting Dell’s core computer business.  The thought is that the company needs a couple years to restructure and that being a private company would allow the restructuring to occur without so directly impacting the price of the stock.  Since most investors these days have shorter time horizons and less patience for restructuring, this looked like a smart move. 

As negotiations progressed and the deal was announced, however, the door was opened for other offers because Dell was in play.  This is one of the uncertainties involved with a going private transaction and makes this type of deal more risky.  In particular, there is the risk that the initial group loses control of the bidding process and gets out bid. 

Here, despite initial thoughts that no other parties would top the Silver Lake bid, two additional bids that are arguably superior have surfaced and make the outcome uncertain.  One of these bids is lead by investor Carl Icahn and the other is lead by Blackstone.  Both bids were deemed by Dell’s special committee to be potentially
Continue Reading Dell shines a light on the risks of going private

Independent ChairmanAre the CEO and the Chairman of the Board the same executive at your company?  While there can be very good reasons to have these positions held by the same person, the separation of these posts continues to be a hotly debated topic.  Since the early 1980s, much attention has been paid to corporate boards of directors and how their structures improve (or undermine) organizational performance. In the wake of the recent financial crisis, public corporations have come under scrutiny from activist shareholders, institutional investors, advisory firms and regulators alike.  So naturally, this is the source of the debate over the separation of the CEO and Chairman positions. 

According to the ISS Governance Exchange, in 2012, investors filed 49 independent chair proposals, with more than three-quarters coming to a vote, including three that received majority support.  As of February 1, 2013, this year’s volume of filings now exceeds last year’s total with 53 firms targeted by shareholders seeking a split of the top posts, with additional filings likely at companies meeting later in the year.  Notably, the record for such proposals was set in 2010, with a total of 66. 

Proponents of CEO and Chair independence base their view on the inherent system of checks and balances that the Board, and particularly the Board’s Chairman, is supposed to impose on management.  Essentially, a firm’s Board and Chairman of the Board serves to hire, fire, evaluate and compensate management (including the CEO) based on performance.  Clearly then, these proponents argue, a single CEO and Chairman cannot perform these tasks apart from his or her personal interests, making it more difficult for the Board to perform its critical functions, if and when the CEO is its Chairman.  Accordingly, separation of the Chairman and CEO roles, can lead to better management and oversight because an independent Chairman is able to ensure that the board is fully engaged with strategy and to evaluate how well that strategy is being implemented by management. Importantly, appointment of an independent Chairman can also signal to all stakeholders that the CEO is accountable to a unified Board with a visible leader. 

But while largely helpful from a corporate governance standpoint, one must note that the separation of CEO and Chair positions can impose several costs on a firm.  First, while appointing an outside Chairman can reduce the agency costs of controlling a CEO’s behavior, such an appointment introduces
Continue Reading Separating the positions of CEO and Chairman: The debate rages on

Regulation FD EnforcementThis is the third part of our Securities Law 101 series.  Because capital raising is such a critical function for middle market companies, we designed this series to introduce their management teams to some of the fundamental concepts in securities law.  We hope that this series will prevent some of the most common mistakes management teams make.  We will periodically publish posts examining different aspects of securities law. 

In the wake of the SEC recommending an enforcement action against Netflix, Inc. and its CEO for social media postings that potentially violate Regulation FD, public companies must increasingly ensure that they understand, and comply with, their obligations under Regulation FD.

So what is Regulation FD?  Adopted by the SEC in 2000, Regulation FD (a/k/a Regulation Fair Disclosure) prohibits companies from selectively disclosing material nonpublic information to analysts, institutional investors, and others. Citing instances of selective disclosure to certain institutional investors and/or securities analysts and the resulting profits or avoidance of loss that come at the expense of those without knowledge of the disclosure, the SEC intended to promote full and fair disclosure of information by issuers.  

Under Regulation FD, when an issuer, or person acting on its behalf, discloses material nonpublic information to certain people (in general, securities market professionals and holders of the issuer’s securities who may well trade on the basis of the information), the issuer must publicly disclose that information.  Importantly, where a disclosure is intentional, the issuer must simultaneously make public disclosure of the nonpublic material information. However, where the disclosure is non-intentional, the issuer must “promptly” make public disclosure.  The required public disclosure may be made by filing or furnishing a Form 8-K, or by another method or combination of methods that is reasonably designed to effect broad, non-exclusionary distribution of the information to the public such as press releases disseminated by a wire service. 

Regulation FD does not define what is considered “material,” but
Continue Reading Securities Law 101 (Part III): Watch your mouth! Regulation FD’s impact on (selective) disclosure

Business CombinationsCash may be king, but the use of stock to buy a target company can be very advantageous.  The practice of using stock to purchase a target company never really went away, but it did become less desirable to target company shareholders during the recent economic downturn.  With stock values dropping and access to credit diminishing, mergers and acquisitions that did close were often done in cash.  However, as markets have become more stable and many stocks have risen to higher valuations, purchasers are looking more and more to again use their stock to buy companies.

In a typical merger, the question of whether to use cash, stock, a combination of the two or some other form of consideration is a business decision to be negotiated by the purchaser and target companies, with the consultation of professionals. Despite the recent economic downturn and its effect on market volatility, reduced market volatility over the last three years, combined with a legislative push to assist small businesses in raising capital, has made stock a more attractive form of consideration for buyers and sellers alike.

There are many benefits to using stock in a deal.  Perhaps the most important benefit stems from qualifying the transaction as a tax-free “reorganization,” provided that the transaction is structured properly. As a tax-free reorganization, the target shareholders would generally not have to realize gains on the exchange of their stock for the purchasers stock.  In contrast, target shareholders would normally have to realize gains to the extent they receive cash for their shares in a merger.  So the use of stock in a deal can be very advantageous to seller shareholders for tax reasons.

The use of stock consideration can also assist in addressing possible absolute and relative valuation issues by allowing the parties to negotiate with an eye toward the market. Further, stock consideration can help to minimize deal risks that arise in transactions where
Continue Reading Has stock returned as the currency of choice in mergers and acquisitions?

Regulation A+, one of the most overlooked provisions of the JOBS Act, promises to be the best new way for private companies to raise money without the headaches of going public or the restrictions of private offerings.  As part of the JOBS Act, the SEC was tasked with creating a new offering exemption that has been dubbed “Regulation A+” due to its improvement upon the current Regulation A exemption.  The upgrades should take little-used Regulation A and transform it into the primary way for private companies to raise capital in the U.S.  In fact, I believe that Regulation A+ will end up having the opposite effect of the stated intent of the JOBS Act, which is to have more companies go public.  In contrast, Regulation A+ will allow smaller and mid-cap public companies to more easily raise capital without having to going public.  As noted in the recent GAO review of current Regulation A, investment banks that had stayed away from Regulation A offerings in the past because of the small offering maximum will now be attracted to the new exemption.

In the past, Regulation A has suffered from some serious limitations.  Particularly, the exemption only allows for $5 million to be raised in any 12-month period.  This amount is too small for many companies, given the offering costs.  In addition, the securities in Regulation A offerings do not qualify as “covered securities” under the National Securities Markets Improvement Act of 1996, which would have exempted them from state securities laws.  Thus, a Regulation A offering still has to comply with time consuming and expensive state “Blue Sky” law requirements.  Regulation A also requires SEC review of an issuer’s offering materials (generally, a scaled-down version of a full registration statement).  This offering statement, which includes a notification and a fairly extensive offering circular and exhibits, still requires a substantial outlay, despite being less expensive than a full registration statement.

So companies ultimately turn to other exemptions to raise capital.  The main exemption used is SEC Rule 506, which allows an unlimited amount to be raised, but places limits on solicitation, sales to non-accredited investors and resale (elimination of these solicitation limits are subject to current proposed rules).  With the creation of new Regulation A+, however, we should see the SEC throwing out the bad, and keeping the good, parts of Regulation A.  As a result, I believe Regulation A+ will overtake Rule 506
Continue Reading Regulation A+: Raise the capital you need without the hassle or expense

seed moneyThis is the second part of our Securities Law 101 series.  Because capital raising is such a critical function for emerging start-up companies, we designed this series to introduce their management teams to some of the fundamental concepts in securities law.  We hope that this series will prevent some of the most common mistakes management teams of start-up companies make.  We will periodically publish posts examining different aspects of securities law. 

So your company would like to raise money?  These days it seems like every company is in need of more capital, even banks that are in the business of lending their funds out to others.  Whether your business needs new funding for growth, or more funding to meet regulatory capital requirements, or your company has not been able to secure that loan the business needs, there are a lot of reasons to consider a private placement.  Here, we will explore the use of the private placement to raise funds and the recent changes in securities laws that make this a better alternative than it was before.

We all know that there are many ways to raise money out there (and sales of stock through crowdfunding isn’t one of them yet), but one typical way would be to sell equity in your company to private investors.  All securities offerings must be registered unless an exemption exists.  Therefore, these deals are generally set up as private placements exempt from registration under SEC Rule 506, which allows an unlimited amount of money to be raised from an unlimited number of accredited investors (and up to 35 non-accredited investors).  Accredited investors are those individuals whose joint net worth with their spouse is at least $1 million, excluding the value of any equity in personal residences but including any mortgage debt to the extent it exceeds the fair market value of the residences.  The term also includes individuals with income exceeding $200,000 in each of the two most recent years, or joint income with their spouse exceeding $300,000 in each of those years, plus a reasonable expectation of reaching these income levels in the current year.  There are also other types of accredited investors such as companies with total assets in excess of $5 million.  Consequently, there are several categories of accredited investors out there that can potentially help with funding.

We recommend limiting the offer of securities in a private offering to only accredited investors.  The reason for this is that
Continue Reading Securities Law 101 (Part II): Avoiding the pitfalls in a private placement

Bowing to industry pressure, FINRA has adopted vastly scaled back private placement requirements under FINRA Rule 5123.  Originally proposed in October 2011, the proposed rule was highly controversial because it significantly infringed on the capital raising process.  In particular, the originally proposed rules would require each offering to have an offering document, which must include