DealLawyers.com Blog

– by John Jenkins, Calfee Halter & Griswold

Sometimes you can’t blame deal lawyers for feeling like Bill Murray’s character in Groundhog Day – there are just some things that seem to happen over and over again in almost the same way on practically every deal. When it comes to public company deals, having to decide whether or not to disclose pending negotiations is defin itely one of those recurring events.

Assuming you’re not dealing with an auction or some other process where the seller has decided to hang a “for sale” sign on itself, nobody involved in the transaction wants the world to know that talks are going on until the parties are ready to announce a signed deal. Among other issues, premature disclosure may create problems for the buyer and the seller with key constituencies – like their employees, customers and in some cases, shareholders – that they would like to postpone until a later date when they have had time to map out a communications strategy.

The SEC cuts public companies some slack when it comes to disclosure of merger negotiations. In general, the Staff’s position is that even though MD&A’s “known trends” disclosure requirement might be read to require companies to address pending talks, if the company doesn’t otherwise have an obligation to disclose preliminary talks, then disclosure won’t be required in response to this line item in an Exchange Act report. (See, e.g., Securities Act Rel. No. 6835 (May 18, 1989)).

The SEC’s position is helpful, but this issue isn’t confined to Exchange Act reporting. Public companies have a duty to disclose material information under other circumstances as well, including situations involving leaks for which the corporation or insiders are responsible – and it’s these situations in which the disclosure issue usually arises.

Legally, there are two major issues to keep in mind in deciding whether you need to say something. The first is whether you’ve got a duty to disclose that you’re engaged in discussions. While there’s no general obligation to dispel rumors in the marketplace that you aren’t responsible for, the problem is that you’ll seldom be able to determine whether you’ve got responsibility for the leak or not – and there’s a pretty good chance that you might.

The second legal issue is whether information about the potential deal is “material.” That question, as everybody knows, is a function of its probability and its magnitude under the test announced by the Supreme Court in Basic v. Levinson. There are a lot of ways to look at Basic’s requirements, but it goes without saying that the further down the path you are, the more likely it is that information about your deal is going to be considered material.

While lawyers naturally tend to focus on the legal issues, business concerns frequently drive a decision to go public with negotiations. Companies may feel that their hands are forced by the media’s decision to run with a story on the rumored deal, or by inquiries from the Nasdaq or the NYSE about the reasons behind unusual market activity. Once information leaks, the need to manage the potential damage to key relationships may also make a compelling business case for disclosure. What’s more, there’s sometimes concern that speculation may cause the market to get carried away. That can lead to the unpleasant situation where the market price rises above the price levels that the parties are negotiating.

Once a decision to disclose pending talks is made, the next issue becomes, how much do you say? Often, people want to say as little as possible. The parties may decide not to identify the buyer, and sometimes, will avoid making any disclosure about the price as well. Sometimes, discussions about what you’re going to say can get pretty contentious, as the two sides may have conflicting views when it comes to the extent of disclosure that’s appropriate.

If you’ve got a relatively efficient market for your stock, and you don’t feel a need to reach out to other constituencies, a minimalist approach may work. Just bear in mind that the less you say, the less freely you can communicate with your key constituencies and the more you remain at risk for the consequences of market speculation. If you don’t say enough, you may find yourself needing to make a second announcement, which only further complicates everyone’s life.

When leaks happen, companies often find themselves in a completely reactive position, with very little time to think through all of the implications of their decisions about disclosure. That’s why I think the best advice is to address the possibility of leaks early on in the process, and chart out a course for managing the disclosure process if they do occur.

Advance planning won’t stop leaks from happening, but it will put everyone in a better position to respond to them if they do. Getting a jump on this issue may make it less painful when you hear the familiar sound of Sonny & Cher’s “I Got You Babe” coming through your clock radio, followed by a couple of morning DJ’s cheerily reminding you that “It’s Groundhog Day!”

Again.

Broc’s note: A great version of “I Got You Babe” is the one by UB40 and the Pretender’s Chrissie Hynde.