As noted on this MoFo blog, FINRA has filed a proposed rule with the SEC which would reduce the regulatory burden for broker-dealers that limit their activities to M&A and certain corporate financing transactions. The proposed rule would create a new category of broker-dealers called “Capital Acquisition Brokers” or “CABs.” The proposed rule was published in the Federal Register on December 23th and will become effective after SEC approval, which normally occurs within 45 days after the date of publication.
Here’s an excerpt from this Cleary Gottlieb blog:
The past few years have witnessed a resurgence in the mergers and acquisitions and initial public offering markets—particularly for health care. Many private companies have pursued a dual-track M&A/IPO process, in which the company simultaneously pursues an IPO and a confidential sale. The dual-track process has been growing in popularity among health care companies, since the IPO process can be helpful in generating momentum for a potential sale in a consolidating industry.
Examples of large private companies that have successfully gone down the dual-track road include Bausch & Lomb, which was nearing the launch of its IPO road show when it was bought by Valeant in May 2013, and Biomet, which had already filed with the Securities and Exchange Commission for an IPO when it announced its merger with Zimmer. And these are not the only examples.
Dual-track processes allow companies to leverage their preparatory work, and to some extent the publicity surrounding the SEC filing process for an IPO, to pursue both an IPO and a sale of the company simultaneously. In particular, the publicity around a potential IPO provides a deadline for potential acquirors, creating a greater sense of urgency to sign up a deal before the target goes public, since it is significantly more expensive and complicated–and riskier–to acquire a public company.
As more health care companies, including “emerging growth companies” (EGCs) under the JOBS Act, plan for monetization events, they need to weigh several considerations when planning for a dual-track process:
– Confidentiality issues EGCs are permitted to submit registration statements confidentially with the SEC, and only file publicly 21 days prior to the roadshow. Filing confidentially may allow for a smoother IPO process by avoiding market speculation about IPO timing and valuation–and the company’s responses to SEC comments. But a confidential filing will not be helpful in generating acquiror demand, and it cannot be used by potential acquirors to expedite their due diligence. Companies pursuing a dual-track process that qualify as EGCs should consider filing publicly, particularly if a sale of the company is their primary focus.
– Investor/Acquiror meetings EGCs are permitted to engage in IPO “testing-the-waters” investor meetings, even prior to filing a registration statement. Because the SEC may request any written materials used in testing-the-waters meetings, companies should make clear in meetings with potential acquirors that they are being provided in connection with a sale of the company and not part of the IPO process. To the extent written materials are used as part of M&A meetings, they should be consistent with the IPO registration statement, since they may be discoverable in any IPO disclosure lawsuit. Also, potential acquirors should sign nondisclosure agreements to help protect against leaks or misuse of information by a competitor.
– Due diligence The same data room used for due diligence by potential acquirors can be used as the basis for the IPO due diligence to be conducted by the underwriting banks. Typically, an acquiror would conduct more extensive due diligence than an underwriter, and, as a result, an M&A data room will contain more documents than an IPO data room. For that reason, companies can start with the M&A data room and pare it back for IPO due diligence.
Here’s news from Cliff Neimeth of Greenberg Traurig:
Since the Delaware Court of Chancery’s decision a couple of years ago in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), and the adoption effective August 1, 2015 of Section 115 of the DGCL (which essentially codified Boilermakers), I’ve adopted exclusive forum bylaws (“EFBs”) for dozens of Greenberg Traurig’s Delaware corporate clients pursuant to unilateral board action. We’ve especially counseled such adoption concurrently with, or immediately preceding, the public announcement of merger, business combination and similar extraordinary corporate transactions (in general anticipation, but obviously prior to the commencement or overt threat, of fiduciary litigation challenging the transaction and the actions and decisions of the board). Such “same-day” adoption was expressly upheld in City of Providence v. First Citizens BankShares, Inc., 99 A.3d 229 (Del. Ch. 2014), although the decision was legislatively modified on other grounds pursuant to Section 115 of the DGCL.
To date, hundreds of mostly (but not exclusively) public Delaware corporations have adopted EFBs and, when challenged in litigation outside of Delaware, the courts of several non-Delaware states – mostly in preliminary “stay” and other delayed-intervention hearings – have deferred to Delaware’s strong policy interest, at least in the first instance, in seeking to retain exclusive jurisdiction over the adjudication of intra-corporate disputes animating the internal affairs of Delaware corporations before subjecting the corporation to the defense of multi-jurisdictional litigation arising out of the same facts and circumstances and the risk of inconsistent judgments and erroneous interpretations of Delaware’s statutory and judicial corporate law.
The decision of the Oregon Supreme Court (Roberts v. TriQuint Semiconductor, Inc.) is significant – not just because it is the latest non-Delaware court decision acknowledging the facial and contractual validity of Delaware EFBs – but because it appears to be the only reported non-Delaware appellate court decision, to date, fully addressing on the merits the contextual (i.e., “as-applied”) validity of the EFBs. Moreover, the decision (which reversed the decision of the lower Oregon court) confirmed that an EFB adopted two days prior to the announcement of an MOE involving the subject corporation did not constitute unreasonable proximity.
The decision essentially reiterates the policy rationale for upholding EFBs that the Delaware courts (and certain non-Delaware courts) have articulated to date, although the Oregon Supreme Court noted that Oregon law controlled the determination by an Oregon court of whether the EFB of a Delaware corporation was enforceable.
It’s important to make sure that an EFB expressly allows the Delaware corporation to waive the EFB and/or consent to the jurisdiction of a non-Delaware forum. Indeed, there may be circumstances where the adoption of an EFB is inappropriate or unreasonable and, as oft-cited by the Delaware courts (especially in an “as-applied” fiduciary litigation), inequitable action does not become permissible just because it is legally possible. Also, remember that pursuant to Section 115 of the DGCL it is permissible for an EFB to expressly confer on a non-Delaware court jurisdiction over the adjudication of non-Delaware disputes, provided that such extra-Delaware jurisdiction is not exclusive. It is in this latter regard that the City of Providence decision was legislatively modified by Section 115 of the DGCL.
Notably, despite ISS’ and Glass-Lewis’ general disdain for EFBs adopted without stockholder approval and their policy of recommending “withhold authority” against corporate governance committee chairs in such context, that tail shouldn’t – in itself – wag the dog in a situation where the adoption of an EFB is otherwise warranted as determined in good faith by the Board after careful consideration of all the relevant facts, risks and merits. This is especially true when an extraordinary corporate transaction is being announced and the surrounding facts are such that it is a “clear day” for adoption of the EFB. To date, EFBs adopted unilaterally have not faced significant adverse reaction from the portfolio managers and proxy voting departments at leading national index funds, quant investors and regulated asset management firms.
The TriQuint decision should help further deter the commencement of multi-jurisdictional litigation against Delaware corporations in a (non-Delaware) jurisdiction where such corporation is headquartered or otherwise has a strong commercial nexus. Time, of course, will tell.