As the Securities Act Reform Release, or as I like to call it “The Aircraft Carrier Part II”, steams ahead it is a good time to review some of the proposed rules that may disappear in the wake of the Swift Boat. Namely proposed Rule 159!
Before parties sign a merger agreement or engage in a significant business combination transaction legal counsel is often confronted with the dilemma of deciding exactly who can be “locked up” in the deal without violating Section 5 or committing proxy or tender offer “gun jumping”. While there is little guidance out there on this topic, those of you who practice in this area are no doubt familiar with the staff’s position on where the line is drawn. For those of you who don’t know where the line is drawn, read on . . . .
The only official written guidance on this subject is set forth in the SEC’s Current Issues Outline and the Aircraft Carrier release under the title proposed Rule 159 which was supposed to codify the staff’s views on lock-ups. Under proposed Rule 159 parties to a business combination transaction could lock-up prospective purchasers before a registration statement was filed if:
(i) the lock up agreements involved only executive officers, directors, affiliates, founders and their family members, and holders of 5% or more of the equity securities of the target company;
(ii) the persons signing lock-up agreements owned less than 100% of the voting equity securities of the target company; and
(iii) votes are solicited from shareholders of the target company who have not signed lock-up agreements and who would otherwise be ineligible to purchase securities under Section 4(2) or 4(6) of the Securities Act or Rule 506 of Regulation D.
In proposing Rule 159, the Commission attempted to draw a circle around the types of persons who could be locked-up prior to the filing of a registration statement without it resulting in a Section 5 violation. Unfortunately, the Commission did not express its views on lock-ups in other contexts such as all-cash mergers or cash tender offers. Rather, the Commission simply asked the question, what should we do about other types of transactions?
Well that has not stopped practitioners from applying the guidance in the Aircraft Carrier to cash tender offers and cash mergers. Of course, in a tender offer there is no vote, so the proxy rules are not implicated. In cash mergers, the parties often look to Rule 14a-2(b)(2) for help — that is the exemption for solicitations of ten persons or less. In registered exchange offers, there is always proposed Rule 159.
But in the Securities Act Reform Release the Commission has replaced old proposed Rule 159 with new proposed Rule 159 which happens to be entirely unrelated to lock-ups. As a result, when the swift boat sails over the finish line it is likely that old proposed Rule 159 will be lost in the sea of SOX legislation and rulemaking. Which makes it an excellent time to review where the line is drawn on lock-ups! For more information on this topic you may want to review:
– Resales of Stock Acquired in Merger Transactions, by L. Borgogni and J. Moloney, Insights, Vol. 18, No. 2 (Feb. 2004);
– SEC Current Issues Outline, Related Public and Private Offerings at Section VIII. A. 9. (Nov. 14, 2000);
– SEC Release No. 33-7606, The Aircraft Carrier, Lock-up Agreements at Section X.C.1.c. (Nov. 3, 1998)
– Metaphysics Status Report, The Corporate Counsel, Vol. XX, No. 2 (March – April 1995).