DealLawyers.com Blog

Over on TheCorporateCounsel.net, I recently blogged about the SEC’s enforcement action against Andeavor LLC, which arose out of the company’s implementation of a stock buyback at a time when was about to resume negotiations with a potential buyer. This Goodwin memo discusses what the proceeding has to say about when merger negotiations may constitute material nonpublic information, and says that the SEC’s cease & desist order in the case provides some helpful guidance on this topic. Here’s an excerpt:

The question of whether merger discussions or other circumstances constitute MNPI is always a facts and circumstances assessment, so this case is not dispositive of that question under other sets of facts. But the SEC’s cease and desist order offers important lessons for assessing whether a company is in possession of MNPI in the context of ongoing M&A discussions.

First, the order highlights the importance of the process used to determine the existence of MNPI. The SEC found that the target had used an “abbreviated and informal process” that “did not require conferring with the persons reasonably likely to have potentially material information regarding significant corporate developments.” While the order does not detail steps that the target did take, it highlights that the target’s process took at most one day and did not include discussing the likelihood of a transaction with the target’s CEO, who was the “primary negotiator” of the transaction.

The SEC’s position is that a company should employ a formal process that includes “conferring with persons reasonably likely to have potentially material information regarding significant corporate developments” and yields “an accurate and complete understanding of the facts and circumstances necessary to determine whether [the company is] in possession of material non-public information.”

Second, the order highlights certain considerations relevant to determining whether a potential M&A transaction is sufficiently likely as to constitute MNPI. The SEC criticized the target’s failure “to appreciate that the probability of [a transaction] was sufficiently high as to be material to investors.” Citing Basic, Inc. v. Levinson, 485 U.S. 224 (1988), the SEC noted that “an acquisition need not be more likely-than-not to occur for it to be material” to investors.

The order identifies a number of factors that the memo suggests were relevant to the SEC’s determination that the probability of a transaction was high enough to conclude that the resumption of negotiations was MNPI. These include, among other things, the duration of the pre-“pause” negotiations & the resolution of the issues that prompted the pause; the sharing of information under a confidentiality agreement & the drafting of a merger agreement.

– John Jenkins