Financing in Close Proximity to an Acquisition December 2014

Transcription

1 Financing in Close Proximity to an Acquisition December 2014 mofo.com

2 Agenda During today s program we will review a number of the principal securities exchange, disclosure and structuring considerations that arise when a public company seeks to finance in close proximity to, or in order to complete, an acquisition by using a series of hypotheticals. 2

3 The Acquisitive Company 3

4 Acquisitive Company Some companies may seek to grow through acquisitions and from time to time may want to finance in order to raise proceeds to deploy if, and when, they identify an acquisition target Hypo: Company X has completed a number of acquisitions in recent years. At present, Company X is considering various possible acquisition targets. Company X would like to raise cash in an offering so that it can pursue one of the more promising acquisition opportunities. 4

5 Acquisitive Company (cont d) What type of financing alternatives should Company X consider? If Company X has an effective shelf registration statement, can it do a shelf takedown? Is the shelf current? Has Company X filed all of the required financial statements in respect of its prior, completed acquisitions? Is there any reason why Company X s shelf registration statement cannot be used? Diligence relating to the shelf takedown may require a review of the prior completed acquisitions Deliverables: to the extent that any of Company X s prior acquisitions were material and required the preparation and filing of acquired company historical financials, consider whether a comfort letter will be obtained relating to the acquired company s historical financials (which are incorporated by reference) 5

6 Acquisitive Company (cont d) Disclosure: for the current offering, is Company X s disclosure grid complete? For example, has Company X reviewed its risk factors, business section and MD&A to ensure that these reflect Company X s results (giving effect to the prior completed acquisitions)? Use of Proceeds: how will Company X describe its Use of Proceeds? What if no acquisition target has been identified? What if Company X has entered into a nonbinding term sheet relating to a potential acquisition? Is there an obligation to disclose earlier than one otherwise would simply because Company X is undertaking a securities offering? What if Company X is a bidder in an auction process? Marketing considerations: will investors want to see a more detailed or specific use of proceeds for the offering? 6

7 The Bidder 7

8 The Bidder Company Y has been participating in an auction process. Company Y has entered into an NDA. It also has conducted diligence on the potential target, and will be asked to submit its bid for target Company Y has been advised that target and its advisers will only consider bids without a financing condition Company Y can use some portion of stock consideration in connection with the acquisition Company Y can finance in advance of the offering to raise the cash (or a cash portion) What should Company Y consider in determining its next steps? Is the acquisition probable? Determining whether an acquisition is probable will require careful consideration by Company Y, Y s counsel, and Y s auditors probable may turn on whether there is a letter of intent that has been fully negotiated, whether the diligence phase has been completed, whether there is a diligence out, whether a definitive agreement has been negotiated, etc. 8

9 The Bidder (cont d) Would the acquisition be material? Significance is evaluated under Rule 3-05 of S-X (assuming issuer is not a REIT) Tests for evaluating significance include: The investment test, which compares the acquirer s investment in target s business to the acquirer s total assets The total asset test, which compares the acquirer s share of the acquired business total assets to the acquirer s consolidated total assets The pre-tax income tax test, which compares the acquirer s equity in the acquired business income from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principles to the income of the acquirer As a general matter (with certain exceptions), the tests are run using the acquirer s and the target s most recent annual audited financial statements; there are rules that address special circumstances 9

10 The Bidder (cont d) Once these accounting tests are run, the level of significance triggers financial statement filing requirements Below 20% significance: no requirement to include audited or interim financial statements 20% significance: if acquired business exceeds 20% of any test, audited financial statements for the most recent fiscal year of the acquired company and the latest unaudited interim period preceding the acquisition are required 40% significance: if the acquired business exceeds 40% of any of the three criteria, then audited financial statements for the two most recent fiscal years and the latest unaudited interim period financials are required 50% significance level: if the acquired business exceeds 50% of any of the three criteria, then audited financial statements for the two most recent fiscal years and the latest unaudited interim period financials are required Individually insignificant acquisitions also need to be considered and in aggregate may rise to a significance level (often referred to as the basket test) 10

11 The Bidder (cont d) In addition, pro forma information also would need to be prepared and filed A condensed pro forma balance sheet as of the most recent period for which the issuer is required to present its balance sheet data A condensed pro forma income statement for the issuer s most recently completed fiscal year and its most recent interim period Pro formas will be prepared by the issuer Should give effect to the acquisition Changes directly resulting from the acquisition Assumptions must be reasonable and capable of being supported Diligence will be required to confirm that the pro formas have been prepared in accordance with S-X guidance and that Bank and counsel understand the assumptions 11

12 The Bidder (cont d) Returning to our story... Hypo 1: Company 1 is simply a bidder in the auction and there is no assurance the target will accept Company Y s offer. However, the acquisition (if it were to be completed) would be significant and would trip at least the 20% test Company Y should seek to confirm that target has audited financial information and has the most recent unaudited interim period financials prepared. This will become important to Company Y. If target is a foreign company, then in the course of its diligence, Company Y will want to understand whether target s financial statements were prepared under US GAAP or using IFRS as adopted by the IASB, whether financials were prepared using US auditing standards, etc. Depending on the significance, the target may or may not be required to present a US GAAP reconciliation 12

13 The Bidder (cont d) The Bidder, Company Y, would like to raise capital in advance of knowing whether its bid has been accepted Private placement option Company Y will conduct a private placement to institutional investors Placement agent will wall cross institutional investors and institutional investors will agree not to trade in issuer s stock (and, if public, in the target stock) Placement agent and Company Y will share with investors that are wall-crossed a PPM (or other offering materials) Use of proceeds will describe potential acquisition Possible for proceeds to be escrowed and released only if Company Y is winning bidder, or Proceeds would be released to Company Y regardless of whether Company Y prevails and wins the bid. Company Y would use proceeds for future acquisitions. 13

14 The Bidder (cont d) There are a number of special considerations if Company Y will pursue a private placement Discount: will investors insist on a discounted price? Lock up : will investors agree to be prevented from trading for a sufficiently long period of time? When will Company Y put out a release after definitive purchase agreements are executed? What will it say? Liquidity: Investors will be focused on how quickly they can obtain liquidity Company Y will need to agree to prepare and file a resale registration statement that covers the resale from time to time of the securities sold to investors in the private placement Company Y and counsel will need to consider carefully the significance of the acquisition and, if significant, how long it will take to get historical financials and pro forma financials on file Investors may exact a more significant discount if the periods to file a resale registration statement and/or to have the resale registration statement declared effective are longer than they would expect (typically period is usually 30 or 60 days) 14

15 The Bidder (cont d) Securities Exchange rules: Nasdaq imposes shareholder vote requirements in various instances Issuances in connection with an acquisition where an officer, director or substantial shareholder has a 5% or greater interest (or such persons collectively have a 10% or greater interest) in the Company or assets to be acquired or in the consideration to be paid and the issuance of stock could result in an increase in outstanding common shares or voting power of 5% or more Issuances that may exceed 20% of the total shares outstanding (tso) or voting power of the issuer if they are connected with the acquisition of stock of another company or, more generally, with the acquisition of any asset(s) This applies to both above and below market issuances 15

16 The Bidder (cont d) An above market offering may fall under the acquisition rule rather than the 20% rule if it is completed in close proximity to an acquisition In determining which rule to apply to an offering, NASDAQ will rely on the following factors: Proximity of the financing to the acquisition Timing of the board approvals for the offering and the acquisition Stated contingencies in the financing/acquisition documents Stated use of proceeds of the offering Note: Proceeds from an offering may be allocated among several uses to avoid triggering the rule 16

17 The Bidder (cont d) Could Company Y use its effective shelf registration statement to undertake a takedown? In advance of winning bid: is acquisition probable? Significance: is the acquisition significant? would historicals/pro formas be required? or, is shelf still current? Fundamental change: would the acquisition nonetheless represent a fundamental change to Company Y s business? 17

18 The Successful Bidder 18

19 Successful Bidder Hypo: Company Z has won a bid to acquire a division of a foreign issuer Is the division a business? Facts and circumstances based analysis A subsidiary, a separate legal entity and a separate division may be presumed to be a business A group of businesses might also be viewed together as a single combined business Company Z will need to consult with its counsel and its auditors in making this assessment If it is a business, is the acquisition significant? The division may not have standalone, audited financials Company Z needs to undertake a financing Company Z cannot use its shelf registration statement (information is not current) 19

20 Successful Bidder (cont d) Investment bank cannot undertake a traditional 144A offering where the bank acts as the initial purchaser (taking principal risk) Bank would not be able to receive a comfort letter given Division s lack of audited historical financial statements 20

21 Successful Bidder (cont d) Investment bank can act as a placement agent in an offering by Company Z where the offering is made only to institutional investors that are QIBs (a Rule 144A Qualifying Deal) Company Z engages bank as placement agent Bank wall crosses investors Company Z produces an offering circular. Offering circular will contain information about Division and about combined company Risk factors relating to the acquisition Risks relating to the Division s business if different from risks associated with Company Z s business Financial information about the Division (this will not be S-X compliant) 21

22 Successful Bidder (cont d) Bank and Company Z will obtain a big boy letter from each QIB Scope of big boy letter Limits on enforceability Bank (broker-dealer) will want each QIB to state that for FINRA purposes it is an institutional investor and is not relying on the Bank QIBs may want to conduct their own diligence Transaction can settle through DTC securities will bear restricted CUSIP, but can be delivered (DWAC) through DTC 22

23 Successful Bidder (cont d) Hypo 2: Company Z has won a bid to acquire a company. Acquisition is material. Company Z would like to finance in order to raise proceeds for cash consideration Acquisition will be subject to numerous closing conditions, including receipts of regulatory approvals Acquisition is determined to be probable Bid was accepted; definitive agreement is negotiated and will be signed shortly 23

24 Successful Bidder (cont d) Financing Alternatives: Bank has discussed with Company Z a private placement with a resale registration statement as an option, as well as a Rule 144A-qualifying transaction However, Company Z would like to undertake a shelf takedown Company Z s registration statement is not current if acquisition trips the 50% test If target has audited historical financial statements and interim unaudited financials, then Company Z should be in a position to file the information and proceeds with the takedown 24

25 Successful Bidder (cont d) Depending upon the desired timing: Bank (underwriter) can wall cross investors Company Z will work with target and target s auditors to produce an 8-K to be filed containing target historical information and combined pro formas Company Z will want to consider the totality of its disclosures and evaluate whether it will need to update risk factors and/or its business description, description of acquisition When will new risk factors and updated disclosures be filed? Shared with investors? Special Diligence Considerations Bank and its counsel will need to diligence the target (may be difficult if Bank has not been advising Company Z on the potential acquisition) Bank and its counsel will need to understand target-related risks, target s financials and historical results Bank and its counsel will need to diligence the pro forma assumptions 25

26 Successful Bidder (cont d) Process Bank can gauge investor interest during wall-crossed phase What is shared with wall-crossed investors? How is the information conveyed? At public launch, Company Z will have had to: Issue press release regarding acquisition File an 8-K with press release, definitive agreement, financials Takedown pro supp will incorporate by reference the requisite financial information, as well as any other new or updated disclosures Documentation Underwriting agreement will address definitive agreement and may contain certain representations relating to target, pro formas Deliverables: the underwriters will be delivered a comfort letter from Company Z s auditor and a comfort letter from target s auditor Opinions: underwriter and counsel may want to consider whether additional opinions are desirable 26

27 Successful Bidder (cont d) What if the acquired business falls below the 50% threshold? Can Company Z use its shelf registration statement? Company Z technically may have a period of time (74-day requirement) in which it can prepare and file the requisite financial information of target However, does the acquisition result in a fundamental change, setting aside this grace period? If so, should the issuer consider the shelf registration statement to be blacked out until it is brought current? Should Company Z voluntarily include sufficient information regarding the transaction so that the market has a full picture of the acquisition and the resulting combined company? 27

28 Successful Bidder (cont d) Company Z may want to pursue a bought deal Why a bought deal? In a bought deal, the Company will bid out the deal to multiple banks usually banks familiar with the Company The underwriters may or may not have time to pre-market in advance of submitting their bid The underwriter will commit to a price, and will then have to sell the securities Underwriters may recommend that Company Z undertake a traditional firm commitment underwritten offering; however, in connection with an acquisition, the underwriters might suggest that Company Z undertake an equity forward Company Z has certainty regarding a price and the availability of the proceeds Company Z not required to complete the deal (settle the forward) until it is ready to close on the acquisition 28

29 Special situations To the extent that the issuer is a REIT then instead of relying on Rule 3-05, which we set out earlier, the relevant rule would be Rule 3-14 In general, many of the principles underlying 3-05 and 3-14 are similar However, there are differences between the two For example, under 3-14: There is only one significance test (the investment test) Instead of the tiered thresholds, there is one threshold: 10% significance Financial statement requirement is simpler: one year and unaudited interims (for real estate acquired from third parties) Significance (aggregate) for individually insignificant acquisitions is calculated differently under 3-14 than under 3-05 If 3-14 financials are required for individually insignificant properties and such financials have not been provided for properties over 50% of the aggregate purchase price of the insignificant properties, no additional financials are required Individually insignificant properties acquired after the date of the most recently completed fiscal year should be combined with probable acquisitions; and 29

30 Special situations Property acquisitions that do not require Rule 3-14 financials should be excluded from the calculations on significance. Under 3-14, financial statement requirement is not triggered at the time of a takedown off of an effective shelf registration statement 30