THE CORPORATE & SECURITIES LAW ADVISOR Volume 17 Number 2, February 2003

SECURITIES REGISTRATION Resales of Stock Acquired in Merger Transactions Securities registration and integration issues relating to “resales” can have unexpected consequences in merger transactions. Acquirors are advised to analyze those issues carefully before rushing into “lockingup” target stockholders or undertaking to provide resale registration rights in their next acquisition.

by Lorenzo Borgogni and James J. Moloney A recurring issue in mergers and similar transactions in which all or part of the consideration consists of stock of the acquiring company is the ability of the target company’s stockholders to freely resell those securities after the transaction is completed. In 1972, the SEC reversed its long-standing position that no “sale,” within the meaning of Section 2(3) of the Securities Act of 1933 (Securities Act), occurs when securities are issued in a business combination transaction subject to stockholder vote.1 In so doing, the SEC adopted Rule 145 under the Securities Act,

Lorenzo Borgogni is a senior corporate associate at Wachtell, Lipton, Rosen & Katz in New York, NY. James J. Moloney is a senior corporate associate at Gibson, Dunn & Crutcher in Orange County, CA, and former Special Counsel in the Office of Mergers & Acquisitions at the US Securities and Exchange Commission in Washington, DC. The views expressed in this article are the authors’ own and not necessarily those of their respective law firms.

which requires registration of securities issued in a merger or similar transaction, unless an exemption is available. Form S-4 (or F-4 for foreign private issuers) is the SEC form typically used for the registration of securities issued in business combination transactions.2 If the acquiror registers its stock in compliance with Rule 145, target stockholders generally will receive freely tradable stock in the merger and not have to worry about registering resales of such stock after the merger is completed. However, Rule 145 also provides that any party to a merger or other transaction subject to the rule (other than the acquiror issuing stock in the transaction) and any person who at the time the transaction is submitted for stockholder vote or consent is an affiliate of that party, and who publicly offers or sells securities acquired in the transaction, is deemed to be engaged in a distribution of the securities and therefore an “underwriter,”3 unless the resale limitations of the rule are satisfied. As a presumptive underwriter, a target affiliate who resells acquiror stock incurs heightened securities liability and must comply with the prospectus delivery requirements upon reselling the securities. Therefore, with respect to target affiliates, resales of stock acquired in merger transactions can give rise to significant registration issues, whether or not the acquiror’s stock is registered under the Securities Act.4 Given the current political and regulatory environment following the adoption of the SarbanesOxley Act of 2002 and implementing SEC regulations, participants in merger transactions will

have an increased need to familiarize themselves with the “resale” issues associated with those transactions. Smaller public companies now may be more inclined to consider a sale to another company, and private companies (including former public companies that have opted to go private)5 that may have contemplated an initial public offering are more likely to focus on a sale, to avoid the increasing regulatory burdens associated with being a public company.6

•

In some cases, the acquiror’s capitalization and trading volume is sufficient to permit resales by target affiliates immediately after the close of the merger with little or no restrictions imposed by Rule 145(d).12 In all other cases, target affiliates likely will seek resale registration of their stock, either as a post-closing covenant from the acquiror or as a condition to the closing of the merger. If the acquiror agrees to a post-closing covenant, it will typically enter into a registration rights agreement with the target affiliates providing for the filing on their behalf of a “shelf ” registration statement on Form S-3 pursuant to Rule 415 under the Securities Act covering all acquiror stock owned by the target affiliates. The terms of the agreement usually provide for registration within an agreed-on time or as soon as practicable after closing.

Registration of Resales and Rule 145 Almost invariably, target company stockholders receiving acquiror stock in a merger transaction will be concerned with their ability to liquidate their investment in the acquiror, either immediately or at some future date after the transaction is completed. If a merger is completed privately in reliance on an exemption from registration,7 all target stockholders will face potential registration issues because the stock received in the transaction is typically restricted.8 As noted, when the acquiror stock issued in the merger is registered under the Securities Act, those stockholders who are affiliated with the target company will face potential resale restrictions under Rule 145, while most other stockholders will be able to resell their stock without registration concerns, immediately after completion of the merger.9

If available, a shelf registration statement on Form S-313 will afford target affiliates maximum flexibility by allowing them to sell their acquiror stock in one or more offerings, at any time or from time to time, for so long as the acquiror has an obligation to keep the shelf registration statement effective (which may be until all registered stock has been sold pursuant to the registration statement or may be resold freely without restrictions under the Securities Act).14 In any event, whether during the effectiveness of the resale registration statement or thereafter, target affiliates may also sell in compliance with the resale restrictions of Rule 145(d) (namely, Rules 144(c), 144(e), 144(f) and 144(g)).15 A Form S-3 filing should not be overly burdensome for the acquiror because the form allows for automatic updating of prospectus information through incorporation by reference of the acquiror’s periodic and current reports.16

In order to avoid the issues associated with underwriter status under Rule 145 described previously, target affiliates should either have their resales registered under the Securities Act or comply with the Rule 145(d) safe harbor.10 Under Rule 145(d), a target affiliate will not be deemed an underwriter, and therefore may resell acquiror stock without need for registration under the Securities Act, so long as: •

•

The amount limitations, public information, and manner of sale requirements of Rule 144 are met;11 The person is not an affiliate of the acquiror, a period of at least one year has passed since the securities were acquired in the merger and the acquiror satisfies the public information requirements of Rule 144 (i.e., generally, has been subject to the reporting requirements of the Securities Exchange Act of 1934 for at least 90 days immediately prior to the sale of the securities and

INSIGHTS, Volume 17, Number 2, February 2003

has filed all the reports required to befiled under such Act during the 12 months preceding the sale or for such shorter period that the acquiror was required to file such reports); or The person is not, and has not been for at least three months, an affiliate of the acquiror and two years have passed since the securities were acquired in the merger.

In many cases, the target affiliates will want the acquiror stock to be registered upfront as opposed

2

The SEC staff initially took the view that an acquiror could not register securities on Form S-4 if those same securities previously had been offered to target stockholders pursuant to lock-up arrangements. The acquiror could, however, register resales of its securities by the locked-up stockholders. Subsequently, the SEC staff reversed its position, allowing target affiliates to receive stock registered on the acquiror’s S-4, despite the existence of lockup agreements between those affiliates and the acquiror.23 This informal staff position was reaffirmed and expanded in connection with the Aircraft Carrier Release,24 which included a proposal to codify the staff’s position on lock-up arrangements in new Rule 159 under the Securities Act. As proposed, Rule 159 expressly permits an acquiror to register the offer and sale of stock subject to a lockup agreement after the fact so long as:

to after closing. This demand may arise, for example, when the target stockholders ask for cash in exchange for their target stock but the acquiror is only able or willing to do a stock deal. If the acquiror is willing to give registration rights as a closing condition, resales by target stockholders may be registered either on the same S-4 registration statement used to register the issuance of stock in the merger17 or in a separately filed shelf registration statement (on Form S-3 or other available SEC form). If a “universal” shelf on Form S-3 is used to register resales, the selling stockholders must be identified at the time of filing in a separate section of the prospectus, together with the amount of securities to be offered by each seller.18 Whether the same Form S-4 or a separate Form S-3 is used, the registration statement must be declared effective by the SEC prior to or concurrently with the closing of the merger.19 If the acquiror has an existing “acquisition shelf ” registration statement on Form S-4 on file which is effective,20 resales may be included on such registration statement, but the names of the selling stockholders will have to be added by means of a post-effective amendment to the Form S-4, which would cause the primary advantage of using an acquisition shelf (i.e., avoiding SEC review) to be lost.21

1. The lock-up involved only executive officers, directors, affiliates, founders and their family members, and holders of 5 percent or more of the voting equity securities of the target; 2. The persons signing the lock-up owned less than 100 percent of the voting equity securities of the target; and 3. Votes were solicited from target stockholders who did not sign the lock-up and would not have been eligible to purchase the securities in a private offering under Section 4(2) of the Securities Act (or Section 4(6) of, or Rule 506 of Regulation D under, the Securities Act).

Gun Jumping Issues in Connection with Lock-up Arrangements Regardless of the form used or approach taken to register resales by target affiliates, “gun jumping” issues may arise if the acquiror enters into voting agreements or other “lock-up” arrangements with target stockholders before a registration statement for the merger is filed.22 An acquiror with an effective acquisition shelf on file would be able to avoid the gun-jumping issues associated with lock-ups. It is fairly common for acquirors to enter into lock-up arrangements at or near the time the merger agreement is executed to ensure that a sufficient number of target stockholders will vote to approve the proposed transaction. When the acquiror solicits and obtains irrevocable proxies from target stockholders it is viewed as having “offered” its securities privately to those target stockholders. Because stockholders are making an investment decision before any registration statement is filed, the offer must be based on a valid exemption from registration.

The first condition was intended to ensure that only true insiders, who arguably do not need the protections afforded by the registration and prospectus disclosure requirements, would be locked up in these arrangements. The last two conditions limited the safe harbor to situations in which registration under the Securities Act is necessary to accomplish the transaction. Specifically, if all of the target company’s stock is locked up or a vote is not otherwise required, no investment decision need be made by nonaffiliated stockholders and the offer is deemed completed as a private offering before a registration statement is filed. In that event, the private transaction could not be registered after the fact. Similarly, there must be some nonaffiliated stockholders who are incapable of receiving stock from the acquiror

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the Securities Act. A failure to register the initial private offering under those circumstances could result in a violation of Section 5 of the Securities Act, which would give the target stockholders rescission rights with respect to the stock acquired in the merger under Section 12(a)(1) of the Securities Act.

pursuant to an exemption. If all target stockholders are eligible to receive stock in a private placement, the SEC staff may take the position that the entire transaction should be completed as a private placement and the registration statement should cover only resales. More recently, the SEC staff has reiterated that, in the context of “traditional” lock-up arrangements (i.e., those involving public companies or obligating only key executives or “blocking” stockholders of the target), an acquiror may register the locked-up shares on its Form S-4. In contrast, arrangements in which 100 percent of the target shares are locked up or the “lock-up” group is expanded to include nontraditional members, such as middle management, the acquiror may not subsequently register those shares (or the locked-up shares, if less than all) on its Form S-4.25

Under Rule 152 under the Securities Act, a bona fide private placement of acquiror stock should not be tainted by a subsequent public offering of, or the subsequent filing of a registration statement relating to, the same stock. The SEC No-Action Letters interpreting Rule 152 provide that public and private offerings will not be integrated, even if the issuer contemplated the subsequent registered offering (i.e., the resale) at the time of the private offering (i.e., the merger), so long as the private offering is “completed” prior to the registered offering.28 For an offer to be considered “completed,” investors in the private offering must be obligated to purchase the securities (whether or not issued and outstanding), subject only to the satisfaction of conditions outside the investors’ control. Put differently, investors must be at “market risk” with respect to the securities placed privately if an offering is to be deemed completed.29 In the Aircraft Carrier Release, the SEC reiterated this approach when it proposed to amend Rule 152 to provide that a private offering would be deemed completed if:

Integration Issues in Private Merger Transactions Completed Offerings and Rule 152 Registering an offering of stock can be a time consuming and burdensome process involving the preparation of extensive disclosure documents and SEC review, particularly if financial information, including pro forma and comparative per share information for the target is required to be included in the registration statement.26 Therefore, an acquiror will typically seek to offer stock to target stockholders privately whenever the target’s stock is held by a limited number of sophisticated or accredited investors.27 In that case, a public acquiror will most likely receive demands from target stockholders for resale registration rights. Whether these rights are granted in the form of a covenant to file a registration statement covering such resales at some future date after completion of the merger or by conditioning the merger on the effectiveness of a resale registration statement, if the resale registration statement is to be filed at or near the time of the private offering (i.e., the closing of the merger), counsel should carefully examine the possibility that the two offerings will be viewed by the SEC staff as one “integrated” offering that should have been registered under

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All purchasers fully paid the purchase price for the offered securities; or All purchasers were unconditionally obligated to pay for those securities, subject only to conditions outside their direct or indirect control, and the purchase price was “fixed” (i.e., not subject to change based on the market price of the securities at or near the time of the subsequent registered offering).

In the proposal, the SEC stated that the same analysis would apply to the registration of resales of privately placed securities, even if; payment for the securities had not been made, or the securities had not been issued, at the time of filing of the resale registration statement; and the payment obligation was conditioned on the effectiveness of the registration

4

statement, provided the purchasers of the securities had no control over that condition.30

The SEC staff, however, has long permitted companies to file registration statements covering the resale of privately placed securities in the capitalraising context, before the securities are actually issued and outstanding, in what is commonly referred to as a PIPE transaction (private-investment, publicequity).34 PIPE transactions are generally permitted under the following circumstances:

Based on the SEC No-Action Letters and staff interpretations relating to Rule 152, integration issues generally should not arise when the resale registration statement is filed after completion of the merger. If, however, effectiveness of the resale registration statement is a condition to the closing of the merger, care should be taken to ensure that the private offering of acquiror stock in the merger is “completed” at or before the time the resale registration statement is filed with the SEC, so that any possible integration issues are avoided. Practitioners should also be mindful that the SEC staff has been known to recharacterize transactions coupled with immediate registration rights, claiming that the issuer is in effect attempting to register an “indirect primary” offering of its stock and that the selling stockholders are effectively acting as underwriters for such stock.31 In so doing, the staff will consider whether the transaction structure and economics otherwise evidence a primary issuance and whether the stockholders purchased the securities with a view toward distribution and not with an investment intent.

1. The purchaser in the private placement must be irrevocably bound to purchase securities at the time the resale registration statement is filed, subject only to the filing or effectiveness of the registration statement or other conditions outside the purchaser’s control; 2. The obligation to purchase must be for a set number of securities at a set purchase price that is established at the time of the private placement, as opposed to being based on market prices or a fluctuating ratio at any subsequent date (such as the date of effectiveness of the registration statement); and 3. The closing of the private placement must occur within a short time after the effectiveness of the resale registration statement.35

Whether a selling stockholder is acting as an “underwriter” with respect to any particular offering (i.e., by purchasing issuer stock under Section 2(11) of the Securities Act with a “view to distribution”) is a question of fact.32 An investor’s “investment intent” is typically evidenced by direct or indirect agreements or understandings between the selling stockholders and third parties that are in place at the time the stockholders purchase the securities, relating to resale by the stockholders of such securities. The question of whether an offering styled as a secondary offering is in fact a primary offering made on behalf of the issuer also requires a factual analysis. Factors to be considered include not only who receives the proceeds from the offering, but also how long the selling stockholders have held the securities, the circumstances under which they received the securities, their relationship to the issuer, the amount of securities involved, whether the selling stockholders are in the business of underwriting securities, and whether, in light of all the circumstances, it appears that the selling stockholders are acting as a “conduit” for the issuer.33

If these conditions are satisfied, the SEC staff will generally dismiss the requirement in Form S-3 that the stock be issued and outstanding at the time of filing.36 In the private merger context, participants should be able to rely on the general PIPE analysis when filing a resale registration statement before the merger is completed. Therefore, if the target stockholders are irrevocably bound to receive a set number of shares of acquiror stock in the merger when the resale registration statement is filed, and the closing of the merger occurs within a short time after the effectiveness of that registration statement, the acquiror should be permitted to file a Form S-3 covering resales by target stockholders prior to the closing of the merger. In addition, the SEC staff has taken the position that acquirors may register for resale securities that are not yet outstanding.37 Depending on the circumstances, the right of target stockholders to vote on the merger may be viewed as a condition to closing that is within their

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the same extent as lock-up arrangements and thus not give rise to integration issues.

control. In those cases, however, the acquiror typically will enter into lock-up arrangements with key stockholders, thereby eliminating the issue. As for the requirement that the purchase price not be contingent on the market price at any time on or after the effective date of the registration statement, the use of market price formulas and collars in merger transactions has not been subject to the same kind of abuses as in capital-raising transactions, and should therefore be found permissible by the SEC staff so long as the other requirements are satisfied.38

If the acquiror is unable to rely on the “lock-up” analysis, it would have to either comply with the Rule 155(b) safe harbor (for abandoned private offerings followed by registered offerings) or allow for an adequate cooling off period.39 If the acquiror elects to comply with the 155(b) safe harbor, it is unclear how the private offer should be “terminated” or how long the acquiror should wait before continuing to negotiate the terms of a merger agreement with target management or before filing a Form S-4 registration statement. Although the SEC staff has not expressly interpreted the Rule 155(b) safe harbor in the context of mergers, if the acquiror terminates its discussions (i.e., offerings) with non-management target stockholders, limits all subsequent merger negotiations to only high-level target management, files a Form S-4 at least 30 days or more after the private offering discussions are terminated and otherwise complies with the requirements of Rule 155(b), the initial private offering should not be integrated with the subsequent registered offering.

In the event the SEC staff were to recharacterize the registered resales as an “indirect primary” offering on behalf of the acquiror there may be several negative consequences. For example, a Rule 415 offering on Form S-3 may not satisfy the form’s $75 million “public float” test for primary offerings. Moreover, although Rule 415(a)(l)(i) is available for secondary offerings, primary offerings must meet the requirements of the other subsections of that rule. In addition, the target stockholders would need to be named as “underwriters” in the prospectus, resulting in added Section 11 liability as well as prospectus delivery obligations. In more egregious cases, the SEC staff may insist on disclosure in the prospectus relating to a potential violation of Section 5 of the Securities Act, or the registration statement may need to be withdrawn and not refiled until the private transaction is completed and the securities have come to rest.

Conclusion The many technical requirements and conditions imposed by years of staff interpretation and rulemaking in the area of registering securities for resale can produce a minefield of traps for the unwary. While practitioners may be generally familiar with the issues of integration and resale registration in the capital-raising context, where most of the staff interpretation and rulemaking has developed, the same concepts can have unexpected consequences in merger transactions. With the prospect that resales following business combination transactions are likely to become even more common as a result of the current political and regulatory environment, practitioners are well-advised to analyze these issues before an acquiror contacts target stockholders for their support on a proposed merger transaction or undertakes registration obligations with respect to their stock. Absent a full appreciation of these nuances in structuring merger and resale transactions, participants may encounter unnecessary delays in the SEC review process and, in more serious cases, incur liability for violations of the federal securities laws.

Abandoned Offerings and Rule 155 Integration issues also may arise in merger transactions in the context of abandoned offerings, which call into question the safe harbor contained in Rule 155 under the Securities Act. An acquiror may, for example, initially seek to effect a merger on a private placement basis, but later decide to register the transaction if it realizes that the practical difficulties of complying with the limitations imposed on private placements outweigh the benefits obtained or discovers that the number and nature of the target stockholders simply do not permit the transaction to be consummated on a private basis. Provided the acquiror has limited its contacts with the target’s stockholders to only key stockholders and affiliates of the target, those contacts should be permitted to

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NOTES

on all exchanges and/or automated quotation systems during the four calen dar weeks preceding the sale; and (3) the average weekly trading volume in

1.

the relevant class of (acquiror) securities reported through the consolidated

The no “sale” theory was predicated on the fact that, in business com-

bination transactions requiring by state law a stockholder vote, the change in

transaction reporting system during the same four-week period.

a stockholder’s status occurs by operation of law and not as a result of the

13. Form S-3 is available for secondary offerings of securities if securities

stockholder’s individual investment decision. Rule 145 applies to reclassifi-

of the same class are listed and registered on a national securities exchange

cations, mergers, consolidations, and sales of assets in their entirety or sub-

or quoted on an automated quotation system and the issuer otherwise meets

stantially in their entirety.

the registrant eligibility requirements of that form, including having been a

2.

reporting company under the Exchange Act, and having timely filed all SEC

See Preliminary Note to Rule 145 and General Instruction A.1 to

Form S-4.

reports, during the previous 12 calendar months. See General Instruction I. to

3.

As defined in Section 2(11) of the Securities Act.

Form S-3 and Manual of Publicly Available Telephone Interpretations of the

4.

The practice has developed in public company mergers to require direc-

Division of Corporation Finance of the SEC (the Interpretation Manual),

tors, officers, and principal stockholders of the target company to deliver

Section D (Rule 415), Interpretation 40. The acquiror could file a Form S-3

“affiliate letters” to the acquiror, essentially acknowledging that they are

covering the resale stock as a post-effective amendment on Form S-3 to the

subject to, and will comply with, the provisions of Rule 145.

Form S-4 registering the merger stock, thereby avoiding the payment of a sep-

5.

arate registration fee for the resale stock. See Interpretation Manual, Section

See, e.g., Frank Aquila and Jonathan Gluck, “Sarbanes-Oxley and the

‘Law of Unintended Consequences:’ Public Companies Opting to Go

B (Securities Act Rules), Interpretation 103.

Private,” The M&A Lawyer, October 2002, Vol. 6, No. 5, and Michael J.

14. Occasionally, stockholders selling acquiror stock previously registered

Levitin and Steven S. Snider, “Looking Ahead: The Market for Buyouts of

for resale on a shelf registration statement on Form S-3, wrongly assume that

Public Companies, Part II,” Buyouts, October 21, 2002.

their ability to resell is limited to two years after the shelf was declared

6.

The Sarbanes-Oxley Act of 2002 and related implementing SEC regula-

effective by the SEC. This misconception may derive from the fact that Rule

tions have made it significantly more burdensome and costly for companies,

415(a)(2) under the Securities Act limits the amount of securities that may

especially less seasoned issuers, to remain public and continue reporting

be registered in a primary shelf to an amount that may reasonably be offered

under the Securities Exchange Act of 1934. See, e.g., Charles M. Nathan,

and sold within two years of effectiveness. A secondary offering, however, is

“The Joy of SOX,” The Deal, October 15, 2002. In addition, some states,

not subject to such limitation, and therefore the related Form S-3 is treated

including California, New Jersey, Montana, and Kentucky, have weighed in

as “evergreen” to the extent future periodic reports are incorporated by ref-

with their own form of corporate governance reform and regulation.

erence into the prospectus.

7.

Sections 3(a)(9), 3(a)(10) and 3(a)(11) of the Securities Act are expressly

15. The SEC staff initially took the position that securities included in a

mentioned in the Preliminary Note to Rule 145, in addition to Section 4(2),

shelf registration statement could not be sold under Rule 144 unless either

as statutory exemptions under the Securities Act available for transactions

the related prospectus contained language stating that sales may also be

that may otherwise be subject to the registration requirements of Rule 145.

made pursuant to Rule 144 or the shares were first deregistered. See Release

8.

Rule 144(a)(3)(i) under the Securities Act defines “restricted securities”

No. 33-6099 (August 2, 1979), Question & Answer No. 84. Subsequently,

as securities acquired directly or indirectly from the issuer, or from an affil-

the staff abandoned its position, allowing shelf-registered shares to be sold

iate of the issuer, in a transaction or chain of transactions not involving any

pursuant to Rule 144 even in the absence of language to that effect in the

public offering.

prospectus. See Goldman, Sachs & Co., SEC No-Action Letter (available

9.

Target stockholders who are not initially affiliates of the target but who,

June 9, 1995) and “Staff Confirms That Shelf S-3 Covered Shares May Be

as a result of the merger, become affiliates of the acquiror, are subject to the

Resold, Instead, Under Rule 144,” The Corporate Counsel, Vol. XX, No. 4,

Rule 144 limitations customarily applied to sales by affiliates. See Release

(July–August 1995).

No. 33-6099 (August 2, 1979), Question & Answer No. 85.

16. In agreeing to file a resale S-3 registration statement, the acquiror (par-

10. It should be noted that, because exchange offers (i.e., tender offers

ticularly if the company engages in acquisitions on a regular basis) should,

involving the offer of securities as consideration) are not Rule 145(a) trans

to the extent possible, ensure that the pro forma and other financial informa-

actions, target affiliates receiving stock from the acquiror in an exchange

tion required by Item 11(b) of Form S-3, if applicable, is available and can

offer are not eligible to rely on the safe harbor from underwriter status in

be incorporated by reference in accordance with the terms of that item. If the

Rule 145(d).

acquiror is not eligible to use Form S-3 for secondary offerings, it can regis-

11. See Rules 144(c), 144(e), 144(f) and 144(g) under the Securities Act.

ter the resale of its stock by target affiliates pursuant to Rule 415 on Form

12. The amount limitations are set forth in Rule 144(e)(1) under the

S-1, without the benefit of the incorporation by reference, or covenant to file

Securities Act, which limits aggregate sales to the greater of: (1) one percent

a resale shelf registration statement on Form S-3 as soon as practicable after

of the relevant class of (acquiror) securities outstanding; (2) the average

it becomes eligible to use that form.

weekly reported trading volume in the relevant class of (acquiror) securities

17. See General Instruction A.1 to Form S-4.

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INSIGHTS, Volume 17, Number 2, February 2003

18. See Interpretation Manual, 1999 Supplement, Securities Act Forms,

holders at least 20 business days prior to their meeting to vote on the merger;

Interpretation 25S. A “universal” shelf registration statement is used to reg-

although the acquiror may avoid this further delay if it instead furnishes the

ister a specified aggregate dollar amount of debt and/or equity securities of

information that could otherwise be incorporated by reference together with

an issuer without identifying the precise timing of each subsequent offering

the disclosure document that is sent to the target stockholders. See Release No.

or specific amount of each class to be offered. See General Instruction II.D

33-7760 (October 26, 1999) (adopting Regulation M-A), at note 167.

to Form S-3 and Release No. 33-6964 (October 22, 1992).

27. To the extent that there are any non-accredited target stockholders,

19. The filing of a separate registration statement, in addition to the Form

consideration should be given to cashing them out and then completing the

S-4 filed in connection with the transaction, may be more work than it is

merger on a private placement basis. Rule 506(b)(2)(i) of Regulation D

worth. Furthermore, if a separate Form S-3 is used (which cannot be filed as

under the Securities Act would allow an acquiror to offer its stock in the

an amendment to the Form S-4, as noted previously), a separate registration

merger to up to 35 non-accredited investors. The term “accredited investor”

fee may be required. See Rule 457(f)(5) and (h)(3) under the Securities Act.

is defined in Rule 501(a) of Regulation D.

Some target affiliates, however, may be concerned that the use of the same

28. See, e.g., Black Box, Inc., SEC No-Action Letter (available June 26,

form for primary and secondary sales, in light of Rule 145 and the disclosure

1990), Squadron, Ellenoff, Pleasant & Lehrer, SEC No-Action Letter (avail-

requirements of Item 7 of Form S-4 (with respect to the reoffering by persons

able February 28, 1992) and Verticom, Inc., SEC No-Action Letter (available

and parties deemed to be underwriters), may prompt the staff of the SEC to

February 12, 1986). If practitioners are unable to rely on these interpretative

recharacterize the resale as a primary offering by the acquiror and/or require

letters because their facts differ, or the SEC safe harbors discussed herein are

that the target stockholders be named as underwriters in the prospectus.

not available, the traditional “five-factor” test set forth in Release

20. For a detailed description of the restrictions as well as the procedures

No. 33-4552 (November 6, 1962) should be applied to determine whether the

associated with the filing of an “acquisition shelf ” registration statement on

offerings will be integrated. The five factors, which are now codified in Rule

Form S-4, see Service Corporation International, SEC No-Action Letter

502(a) of Regulation D, relate to whether the offerings: (1) are part of a sin-

(available December 2, 1985), Beatrice Foods Co., SEC No-Action Letter

gle plan of financing; (2) have the same general purpose; (3) are for the same

(available January 17, 1973), and E.H. Crump Companies, Inc., SEC

class of securities; (4) are made at or about the same time; and (5) relate to

No-Action Letter (available October 18, 1979).

securities sold for the same type of consideration. As a last resort, practi-

21. As noted, Form S-4 expressly permits the registration of resales of secu-

tioners may rely on the integration safe harbor in Rule 502(a) of Regulation

rities acquired in the business combination transaction to which the registra-

D, which imposes a six-month hiatus between a Regulation D private place-

tion statement relates. The addition of selling stockholders to an existing

ment and any offers and sales of the same or similar securities made before

registration statement, however, could be deemed a “fundamental” change

or after the Regulation D offering. The SEC has historically applied this safe

(if not a material change to the plan of distribution) under Item 512 of

harbor to all Section 4(2) private offerings whether or not made in reliance

Regulation S-K, requiring the filing of a post-effective amendment to the

on Regulation D. See Release No. 33-7943 (January 26, 2001) (adopting

Form S-4. See Interpretation Manual, Section B (Securities Act Rules),

Rule 155), at note 48.

Interpretation 62.

29. Under the Black Box line of No-Action Letters, if the group of selling

22. “Gun jumping” refers to the offering of securities before a registration

stockholders consists only of “qualified institutional buyers” and a two or

statement covering the securities offered has been filed with the SEC. Under

three large institutional accredited investors, the private placement merger

Section 5 of the Securities Act, such offers are prohibited unless an exemption

and registered resale can be effected simultaneously without restrictions

from registration is available.

under the Securities Act.

23. See “Metaphysics Status Report,” The Corporate Counsel, Vol. XX,

30. The SEC did not propose to extend the Rule 152 safe harbor to resales

No.2 (March–April 1995), citing as the rationale for the change in the

by affiliates of the issuer and broker-dealers who had purchased the securi-

SEC staff’s position, Rule 145’s treatment of affiliates of the target as “under-

ties directly from the issuer or an affiliate of the issuer, due to the uncertainty

writers” and the resale restrictions applicable to registered shares received by

surrounding the true nature of those resale transactions as secondary offer-

them under Rule 145(d).

ings by selling stockholders. The proposed amendments, however, would

24. Release No. 33-7606A (November 13, 1998).

have expressly extended the scope of Rule 152, which by its terms only

25. See Current Issues and Rulemaking Projects of the Division of

applies to Section 4(2) offerings, to also cover private offerings under

Corporation Finance of the SEC, dated November 14, 2000 (hereinafter, the

Section 4(6) of the Securities Act or Rule 506 of Regulation D.

Current Issues Outline), at VIII.A.9.

31. See, e.g., the SEC staff’s discussion of “equity line” financing arrange-

26. See the Interpretation Manual, Third Supplement (July 2001), Section

ments in the Current Issues Outline, Quarterly Update, March 31, 2001, at

H (Financial Statements), Question 2, for a description of the circumstances

VIII, and Amy Trombly, “Equity Lines Under the Federal Securities Laws,”

under which such information would be required. Even after effectiveness, if the

Insights (May 2001), p. 2.

acquiror is eligible to incorporate by reference into the Form S-4 information

32. The SEC staff previously adhered to the so-called presumptive under-

relating to itself or the target, it must deliver the prospectus to the target stock-

writer doctrine, under which certain purchasers in public offerings, such

INSIGHTS, Volume 17, Number 2, February 2003

8

36. See General Instruction I.B.3 to Form S-3.

as broker-dealers and other institutional investors, are presumed to be underwriters based on their status and the amount of securities purchased

37. See “Some Helpful Staff Clarification on the 1933 Metaphysics Front,”

in the offer (e.g., 10 percent or more). Subsequently, the staff abandoned

The Corporate Counsel, Vol. XIX, No. 4 (July–August 1994).

this doctrine, at least with respect to institutional investors, other than

38. See Stanley Keller, “The Metaphysics of Integration of Private and

broker-dealers, who purchase securities in the course of their normal busi-

Public Offerings,” August 25, 2000, at V.B.2, available at http://www.

ness practices. See American Council of Life Insurance, SEC No-Action

palmerdodge. com/dspSingle cfm Article. ?ArticleID=312.

Letter (available May 10, 1983) and Interpretation Manual, Section D

39. The cooling off period may need to be the full six-months specified in

(Rule 415), Interpretation 5. As noted previously, the doctrine continues to

Rule 502(a) of Regulation D. In the unlikely event that an acquiror

be embodied in Rule 145(d) under the Securities Act, with respect to resales

were to reconsider its plans to register the sale of stock in a merger

of securities in business combination transactions.

and instead engage in a private placement, if a registration statement

33. See Interpretation Manual, Section D (Rule 415), Interpretations 29

has been filed with respect to the merger (other than one relating to a

and 38.

generic shelf registration) or a press release announcing the transaction

34. In a typical PIPE, a public company (that may be experiencing difficul-

has been issued that exceeds the strict limitations imposed by Rule 135

ties raising funds through a traditional registered offering) issues equity or

under the Securities Act, the private placement’s prohibition on general

equity-linked securities, usually at a discount, to an investor or group of

solicitation or advertising would be violated. As a result, even if public

investors in a private placement and immediately registers the securities (or,

offers under the registration statement had not been made to persons

in the case of convertible securities, the underlying common stock) for public

ineligible to buy in the subsequent private placement, a cooling off

resale by those investors. See, e.g., Steven D. Pidgeon, “PIPE Transactions: An

period would be required or the acquiror would have to comply with

Alternative for Raising Capital in a Bear Market,” Insights (September 2002),

the Rule 155(c) safe harbor for abandoned registered offerings followed

p. 2, and Mark Anson, “Playing the PIPEs: The Benefits and Risks of Private

by private offerings. See Rule 502(c) of Regulation D and the Current

Investments in Public Entities,” The J. of Private Equity, Winter 2001.

Issues Outline, at VIII.A.9. For more on the interplay between integra-

35. See the Interpretation Manual, Section A (Securities Act Sections),

tion and general solicitation, see David B. Harms, “Integration Under

Interpretations 51 and 71, and 1999 Supplement, Securities Act Forms,

the 1933 Act: the SEC Provides New Safe Harbors,” Review of Securities &

Interpretation 3S.

Commodities Regulation, December 12, 2001, Vol. 34, No. 21.

Reprinted from Insights February 2003, Volume 17, Number 2, pages 16 to 23, with permission from Aspen Publishers, Inc., a Wolters Kluwer business, New York, NY, 1-800-638-8437, www.aspenpublishers.com.

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INSIGHTS, Volume 17, Number 2, February 2003