CHAPTER 5 SELECTED DISCLOSURE ISSUES IN RESOURCE COMPANY MERGERS AND ACQUISITIONS
| Jurisdiction | United States |
(Nov 1994)
SELECTED DISCLOSURE ISSUES IN RESOURCE COMPANY MERGERS AND ACQUISITIONS
Ronald K. Edquist
Laura Battle 1
Davis, Graham & Stubbs, L.L.C.
Denver, Colorado
I. M&A Regulatory Framework
A. 1933 Act
1. Section 5 of the Securities Act of 1933, as amended (the "1933 Act"), makes it is unlawful (i) to make an offer to sell or an offer to buy a security unless a registration statement has been filed with the Securities and Exchange Commission (the "Commission") or (ii) to sell a security unless a registration statement has been declared effective by the Commission. For the registration requirement of Section 5 to be operative, there must be a non-exempt "sale" or "offer." There are several exemptions from Section 5 provided by the 1933 Act, such as private placements. Section 2(3) of the 1933 Act defines a sale as every contract of sale or disposition of a security for value but excludes preliminary negotiations between issuers and underwriters.
2. Business combinations in which the acquiring company uses its own securities as consideration are generally effected in three ways: (1) a voluntary exchange of securities, (2) a statutory merger or consolidation, and (3) a sale of the assets of the acquired company in exchange for securities of the acquiring company. An exchange of securities involves a disposition for value and a "sale" under Section 2(3). Therefore, a stock-for-stock exchange is subject to the registration requirements of the 1933 Act.
3. Prior to 1973, a business combination effected by a statutory merger or a sale of assets was not subject to the registration requirements of Section 5 because of Rule 133, a longstanding exemptive rule of the Commission. Rule 133, adopted in August 1951, stated the Commission's position that mergers, consolidations and similar transactions would not be deemed a "sale" or "offer to sell" for purposes of Section 5 of the 1933 Act.
a. Rule 133 was predicated on the belief that in a merger or sale of assets transaction, the exchange or alteration of the
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shareholder's interest occurs without individual shareholder consent (i.e., an investment decision) by an authorized act of the corporation.
b. The Commission in 1972 realized that in voting on a proposal to merge or consolidate a business, the consenting shareholder is "expressing his voluntary and individual acceptance of the new security." 2 In addition, transactions that were not deemed to be "sales" for purposes of Section 5 were nonetheless still deemed "purchases" for purposes of Section 16 under the Securities Exchange Act of 1934, as amended (the "1934 Act") and "sales" for purposes of the anti-fraud provisions of the 1933 Act. The Commission was also aware of abuses of the rule. The Commission was concerned that large quantities of securities that had not been registered were being distributed to the investing public by companies which were utilizing Rule 133 to avoid or evade the registration requirements of Section 5.
c. In October 1972, the Commission rescinded Rule 133 and adopted Rule 145, effectively subjecting transactions involving business combinations to the registration requirements of the 1933 Act. 3 Rule 145 requires that securities to be issued in mergers or transfers of asset transactions be registered under the 1933 Act, unless exempt.
d. Registration exemptions for the buyer
i. While the issuance of securities still will be subject to the antifraud provisions of the federal securities laws, many registration exemptions under the 1933 Act for securities issued by the buyer in an acquisition may be available, depending on the investment experience of the parties and the circumstances of the transaction.
ii. Among the more significant exemptions are: (i) Section 4(2), commonly known as the "private placement" exemption, which exempts transactions not involving any public offering, (ii) Regulation D, a safe harbor adopted under Section 4(2) for certain limited, non-public offerings and issuances of securities, (iii)
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Section 4(6), which exempts transactions involving offerings or sales by an issuer solely to accredited investors, (iv) Section 3(a)(10), which exempts certain issuances made pursuant to a governmentally approved exchange of securities, and (v) Section 3(a)(11), commonly known as the "intrastate offering exemption," which exempts issuances offered and sold only to persons within a single State or Territory.
4. Form S-4 and Form F-4
a. Form S-4 of the 1933 Act is used by issuers for registration of securities to be issued in business combination transactions. The prospectus requirements for Form S-4 are divided into four parts.
i. Section A requires information about the transaction and is designed to make complex transactions more easily understood by investors.
ii. Section B requires information about the acquiring company (the "registrant" or "issuer") and Section C requires information about the company being acquired. Both Section B and Section C prescribe different levels of prospectus presentation and incorporation by reference depending on which form under the 1933 Act (i.e., Form S-1, S-2 or S-3) the company could use in a primary offering of its securities in a transaction not involving a business combination.
iii. Section D requires certain voting and management information for each company whose shareholders have the right to vote on the transaction and like the presentation of the company information in Sections B and C, the presentation of management information in Section D depends on which form the company is eligible to use in a primary offering not involving a business combination (that is, to what extent may the information be incorporated by reference from prior 1934 Act filings). See the discussion of the integrated disclosure system, below.
iv. Certain information, including risk factors, ratio of earnings to fixed charges and per share data, must be presented regardless of the form available to the company.
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v. Where information is incorporated by reference, Form S-4 also requires that the prospectus be sent at least twenty business days in advance of the date of the meeting of shareholders or the date of the final investment decision. Registrants may proceed faster than the twenty business day period if they furnish the comprehensive information required by Form S-1, with their ability to hold a meeting or effect the action limited only by state corporate law requirements.
b. The Commission adopted Form F-4 as a counterpart to Form S-4 to be used by foreign private issuers (as defined in Rule 405 under the 1933 Act), and its modified disclosure requirements may be used to describe a foreign private issuer in a Form S-4 filed by a U.S. issuer in connection with the acquisition of the foreign private issuer.
i. Form F-4 disclosure requirements are somewhat less stringent than those of Form S-4, particularly with respect to financial statement presentation, as the foreign private issuer is not required to restate its financials according to United States Generally Accepted Accounting Principles.
ii. Rule 405 defines a foreign private issuer to mean any foreign issuer ( i.e., a foreign person or corporation organized under a foreign jurisdiction) other than a foreign government, except an issuer meeting the following conditions: (1) more than 50 percent of the outstanding voting securities of such issuer are held of record either directly or through voting trust certificates or depositary receipts by residents of the United States; and (2) any of the following: (i) the majority of the executive officers or directors are United States citizens or residents, (ii) more than 50 percent of the assets of the issuer are located in the United States, or (iii) the business of the issuer is administered principally in the United States.
5. In 1977 the Commission adopted Regulation S-K as the linchpin of the "integrated disclosure system," which seeks to create uniform disclosure in 1933 Act and 1934 Act disclosure documents with respect to various subject matter areas (e.g. description of business and properties, legal proceedings, management, executive compensation, selected and summary financial information and the management's discussion and analysis of financial condition and results of operation).
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The integrated disclosure system permits seasoned issuers to incorporate their annual, periodic and other reports under the 1934 Act by reference into their 1933 Act registration statements.4
B. 1934 Act
1. The 1934 Act is designed to require standardized disclosure of information regarding classes of securities held by the public, and to regulate the trading markets in which such securities are traded. 1934 Act reporting companies are required to file annual, quarterly and periodic reports. Significant occurrences such as changes in control of the registrant, adverse changes with material or potentially material financial consequences, or the acquisition or disposition of a significant amount of assets other than in the ordinary course of business require the filing of an interim report on Form 8-K with the Commission.
a. A Form 8-K must be filed within between 5 and 15 days of the event reported, depending on the type of event.
b. For any business acquisition required to be described on a Form 8-K, financial statements of the business acquired must be filed for certain periods.
c. If the consummation of a business combination accounted for as a purchase has occurred or is probable, or the consummation of a business combination to be accounted for as a pooling of interest is probable, financial statements are required.
...i. If securities are being registered to be offered to the shareholders of the business to be acquired,
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