1973, March, Pg. 9. Business Combinations Under New SEC Rule 145.

• Author: by Hans von Mende

2 Colo.Law. 9

The Colorado Lawyer

1973.

1973, March, Pg. 9.

Business Combinations Under New SEC Rule 145

9Vol. 2, No. 5, Pg. 9Business Combinations Under New SEC Rule 145by Hans von MendeHans von Mende, Denver, is a member of the firm of Ireland, Stapleton, Pryor & Holmes, P.C.Effective January 1, 1973, the Securities and Exchange Commission rescinded Rule 133 and replaced it with Rule 145(fn1) with the result that most mergers, consolidations and stock-for-assets business combinations as well as certain reclassifications became subject to the registration requirements of the Securities Act of 1933 (the "1933 Act").(fn2) To facilitate registration, Form S-14 has been made available allowing the use of the proxy statement of one of the constituent companies as the required prospectus. For purposes of the following discussion of Rule 145,(fn3) the acquiring or surviving company will be referred to as the "issuer" and the acquired or disappearing company as the "target company."

Background: Rule 133Section 5 of the 1933 Act(fn4) makes it unlawful to sell or offer for sale any security unless a registration statement is in effect or an exemption for either the securities or the transaction is available. For purposes of defining the registration requirements of Section 5, Rule 133(fn5) specified that the submission to a vote of the target company's stockholders of a proposal for a statutory merger or consolidation, for reclassification of securities, or for an exchange of all the assets of the target company for securities of the issuer did not involve a "sale," "offer to sell" or "offer for sale" of the issuer's securities to be issued in the transaction was was thus not subject to the registration requirements of the 1933 Act. This "no-sale" approach was based on the rationale that these transactions were essentially corporate acts as opposed to individual acts since the transactions occurred as a matter of law following approval by the majority of the target company's shareholders and would be binding even on those individuals who had voted against the proposal, subject, of course, to dissenters' appraisal rights.(fn6)

Rule 133 further provided that affiliates---essentially control persons---of the constituent corporations were deemed to be underwriters for purposes of the 1933 Act and could not publicly resell, without registration, securities of the issuer received in a Rule 133 transaction in excess of certain limited leakage provisions. Nonaffiliates were free to resell securities received by them provided they did not hold restricted securities of the target company prior to the reorganization. Although repealed as of January 1, 1973, Rule 133

10remains applicable to transactions submitted before that date for vote or consent of security holders and will continue to govern resales of securities received in prior Rule 133 transactions.

Rule 145Rule 145 abandons the "no-sale" approach of Rule 133 and makes it clear that the submission to the vote or for consent of security holders of a corporation or other entity of a plan or agreement for certain types of reclassifications, mergers, consolidations, or transfers of assets in exchange for securities shall be deemed to involve an "offer," "offer to sell," "offer for sale" or "sale" of the securities to be issued in the transaction. In adopting Rule 145, the Commission recognized that the rationale for Rule 133 was correct only in a formalistic sense and overlooked the fact that the "corporate action" on which such great emphasis had been placed is derived from the individual decision made by each stockholder to accept or reject the offered securities. Justifying its turnabout, the Commission concluded that formalism should no longer deprive investors of the disclosure to which they are entitled.

Transactions Covered by Rule 145Rule 145 became effective January 1, 1973, and covers three types of transactions which are submitted for stockholder vote or consent after that date. First, it applies to internal reorganizations involving the substitution of one security for another of the same issuer other than stock splits, reverse stock splits or changes in par value. However, as the preliminary note to Rule 145 explains, reclassifications which would be exempt under Sections 3(a)(9) or 3(a)(10) of the 1933 Act(fn7) do not, by virtue of Rule 145, become subject to the registration requirements.

Second, the Rule applies to statutory mergers or consolidations in which the securities of the target company are exchanged for...