Page 10 - M&A

S10 | MONDAY, OctOber 26, 2015 | Mergers & Acquisitions
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Going Dark
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with contract-based reporting obligations, must wait until the following fiscal year for its statutory §15(d) suspension, to become a voluntary filer post-acquisition.
Debt-Only Issuers and Voluntary Filers
Acquired companies may continue to have outstanding registered indebtedness that subjects them to Exchange Act reporting requirements. Even indentures for private, unregistered, debt securities often require companies to file SEC periodic reports (even if not then subject to reporting requirements), and to provide the trustee and noteholders with such reports by website posting or EDGAR filing.
A company with registered debt, who is a “debt-only” registrant (which would include an acquired company with pub- lic debt that remains outstanding post- acquisition) but not a “voluntary filer” (discussed below), must comply with SEC periodic reporting obligations (including filing Forms 8-K), but only a company with §12-registered equity securities must com- ply with §16 (requiring directors, officers and certain beneficial owners to file Forms 3, 4 and 5 and face possible liability for short-swing profits) or §§13D and 13G (requiring filing of beneficial ownership reports). Debt-only issuers also need not comply with the proxy rules (but must include in their annual reports certain disclosure that ordinarily would have been incorporated by reference from the proxy statement into the annual report) or
Insurance
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R&w insurance carriers as early as pos- sible in the transaction process. This will enable the buyer and seller to structure the acquisition agreement, including post- closing indemnification obligations, taking into account the policy terms. Buyers should engage an experienced broker to canvas the market to obtain price and coverage quotes from insurance carriers, which can often be obtained within only a few days after initial contact from the broker. Experienced insur- ance carriers will be prepared to quickly and efficiently negotiate and execute a non- disclosure agreement.
once the insurance carrier is selected, it will begin its due diligence process and will send the buyer a list of diligence requests. At this stage, most insurance carriers will require up-front payment of their underwriting fee, which typically ranges between $20,000 to $40,000, and is used to engage outside legal counsel to assist the insurance carrier in evaluating the transaction. Deal profession- als should be aware that the underwriting fee
exchange-mandated governance require- ments (such as majority Board indepen- dence or independent board committees).
If the acquired company has no publicly- held securities post-closing, it may qualify as a “voluntary filer” (i.e., a company with no Exchange Act-registered securities or an obligation to file periodic reports, but that files periodic reports due to a contractual or other obligation to do so). Similar to a debt-only issuer, a voluntary filer is not subject to §16, proxy or other rules listed above. It also need not comply with certain requirements set forth in rules implemented under the Sarbanes-oxley Act of 2002 (SoX),6 such as the §402 prohibition on personal loans to directors and executive officers, the §304 clawback of CEo/CFo compensation for restatements due to misconduct, or the §404(b) requirement that an auditor attest to the management’s internal control report.7 A voluntary filer must still comply with cer- tain rules such as Regulation S-K8 and the conflict mineral rules.9 It also must comply with certain SoX requirements,10 such as the SoX §§302 and 906 CEo/CFo certification requirements,11 the §404(a) management internal control report requirement12 and the requirement to disclose results of manage- ment’s evaluation of controls.13 A voluntary filer also should comply with Regulation G relating to disclosures on non-GAAP financial measures.14
Since companies with registered equity have additional obligations (for example, procuring an auditor attestation can be costly), many post-acquisition companies (particularly those in which no public equi- ty remains) would prefer to deregister their equity quickly and, if nonetheless contrac- tually required to provide periodic reports,
is in addition to, and is not credited against, the policy premium once the transaction is consummated.
Insurance carriers will not conduct their own, independent due diligence review of the target company. Instead, the insurance carrier, together with its outside legal counsel, will audit the due diligence performed by the buyer and its advisors of the target company. The insurance carrier’s due diligence review will include a review of the acquisition agreement (with an emphasis on non-standard represen- tations and warranties made by the seller or the target company), a high-level review of the materials included in the electronic data room and review of any diligence materials prepared by the buyer or its advisors in the case of a buyer-side R&w insurance policy. while not required by most insurance carri- ers, preparation of a legal due diligence sum- mary by the buyer or its advisors is often constructive to the underwriting process for a buyer-side policy. Usually within a week after the underwriting fee has been paid, the insur- ance carrier and its outside legal counsel will schedule a due diligence call with the insured and its advisors, during which the insurance carrier will ask the insured questions about
achieve voluntary filer status as soon as possible. As to the timing of filing reports, notwithstanding a change to voluntary filer status, a pre-acquisition “accelerated filer” may remain an accelerated filer (particularly if the acquisition closed during the second half of the company’s fiscal year) until its next “public float” determination in the middle of the following year. Since the accelerated filer determination is based on public float as of the end of the second fiscal quarter, this means that a company that is acquired in the second half of its fiscal year will remain an accelerated filer the following fiscal year, until it can exit as an accelerated filer based on lack of public float (as determined at year end based on the public float at the end of the second fiscal quarter). Thus, an acquired accelerated filer will need to file the auditor attestation report for that fiscal year’s Form 10-K, notwithstanding that there remains no public equity outstanding, and will need to file its next year’s periodic reports sooner after quarter-end and year-end than once it becomes both a voluntary filer and a non- accelerated filer.
Conclusion
what is the takeaway here? Companies in the acquisition process will do well to map out in advance their plans to deregister unsold securities and terminate their reg- istration statements as soon as possible so as to avoid unintentionally extending their reporting obligations. Acquired companies with both public debt and equity should be aware of potential pitfalls of having public debt in the going-dark context. And acceler- ated filers should be aware that the mid-year public float determination could extend cer-
the diligence process, the negotiation of the acquisition agreement and any risks to the business that the buyer has identified. Deal professionals should be aware that insurance carriers may exclude from coverage areas of diligence that have not been sufficiently pur- sued by the buyer. For example, if, during the diligence call, the buyer responds that neither it nor its advisors have performed any tax dili- gence, the insurance carrier may exclude the tax representations from coverage under the R&w insurance policy.
Policy and Structural Considerations
Shortly after the due diligence call, the insurance carrier will provide a draft of the insurance binder and policy. The form of policy is subject to negotiation with the insurance carrier, and can be customized to deal with the specific concerns and consid- erations unique to each transaction. Deal professionals should focus on maintaining symmetry between the terms of the acquisi- tion agreement and the R&w insurance policy (for example, when negotiating the definition of “losses”). Deal professionals should also consider the interplay between the R&w
tain of their obligations for an additional year post-acquisition. •
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1. In an acquisition, the relevant provision is usually Rule 12d2-2(a)(3), when the entire class of securities has come to represent the right to receive cash payment therefor (other than for dissenting shares).
2. SEC Compliance and Disclosure Interpretations (C&DI) No. 153.01. In addition, Exchange Act Rule 15d-6 provides that if an issuer’s duty to file reports pursuant to §15(d) as to any fiscal year is suspended as provided in §15(d), such issuer shall (within 30 days after open of the first fiscal year) file a Form 15 informing the SEC of such suspension unless a Form 15 has already been filed pursuant to Rule 12h-3.
3. Another option is to have fewer than 500 record holders and assets not having exceeded $10 million on the last day of each of the three most recent fiscal years.
4. See Rule 12h-3(c).
5. See https://www.sec.gov/interps/legal/cfslb18.htm. 6. The year that it files an exchange offer registra-
tion statement as to the debt securities (and the year that registration statement goes effective, i.e., prior to completion of the distribution) are exceptions, when a debt-only issuer becomes an “issuer” by having an out- standing registration statement for SoX purposes.
7. Notably, the Dodd-Frank wall Street Reform and Con- sumer Protection Act of 2010 added §404(c) to SoX, which exempts non-accelerated filers from SoX §404(b). Since the determination as to accelerated filer status is triggered based on public equity, this means that neither a debt-only issuer nor a voluntary filer could be an accelerated filer that would need to file an auditor attestation report.
8. See C&DI 107.01, dated Jan. 11, 2010, at http://www. sec.gov/divisions/corpfin/guidance/nongaapinterp.htm. 9. Question 1, Dodd-Frank Frequently Asked Questions
(FAQs) issued May 30, 2013, at https://www.sec.gov/divi- sions/corpfin/guidance/conflictminerals-faq.htm.
10. See SoX FAQs at https://www.sec.gov/divisions/ corpfin/faqs/soxact2002.htm and SEC Exchange Act Rules CD&Is 181.01 and 182.01, dated September 30, 2008, at http://www.sec.gov/divisions/corpfin/guidance/ exchangeactrules-interps.htm.
11. Embodied in Rule 15d-14.
12. Embodied in Rule 15d-15.
13. Embodied in Regulation S-K Items 307 and 308. 14. voluntary filers are also ineligible to use certain
securities forms (e.g., Form S-8 for grants of employee equity (Securities Act Forms C&DI 126.01, dated Feb. 27, 2009, at http://www.sec.gov/divisions/corpfin/guidance/ safinterp.htm) or Form 8-A for equity registration under the Exchange Act (Exchange Act Forms C&DI 102.03, dated Sept. 30, 2008, at https://www.sec.gov/divisions/ corpfin/guidance/exchangeactforms-interps.htm).
insurance policy and the indemnification paradigm in the acquisition agreement and the related complexities that may arise. For example, if the buyer and seller agree as a business matter that the R&w insurance pol- icy should serve as the exclusive remedy for “non-fundamental” representation breaches and the R&w insurance policy is eroded by the breach of a “fundamental” representation, the buyer may not be able to recover losses under the policy arising out of a subsequent breach of a “non-fundamental” representa- tion. As a general principle, differences in the timing and sequencing of claims should not result in different coverage outcomes. Timing and similar issues relating to the use of the R&w insurance policy should be considered and addressed in the acquisition agreement.
R&w insurance has become a prominent part of middle-market M&A transactions. M&A deal professionals have become comfortable with R&w insurance and have recognized the power and leverage that can be brought to bear on a transaction using the product. As the acquisition market continues to remain active, R&w insurance will continue to be an important tool for deal professionals structur- ing and negotiating M&A transactions.
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