Tagged: SEC

M&A Today: August 2016 Issue

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Massachusetts Wage and Hour Laws: Legal Risks for Businesses in Transition – Scott J. Connolly
The laws governing payment of wages, overtime pay, and commissions have become a leading source of employee claims and employer liability. Mistakes in this area can be costly and penalties in Massachusetts include treble damages and individual liability against certain individual corporate officers. Buyers and sellers in corporate transactions must pay close attention to these risks where the transaction may result in termination of employees’ employment.

Read more about wage and hour laws legal risks.

SEC to Funds: Watch the Broker-Dealer Activities – Mark J. Tarallo
On June 1, 2016, the United States Securities and Exchange Commission (the “SEC”) announced and issued an enforcement action (the “Enforcement Action”) against Blackstreet Capital Management, LLC (“BCM”), and its founder, Murry Gunty (“Gunty”). The Enforcement Action arose out of actions taken by funds advised by Blackstreet that the SEC alleges required registration by Blackstreet as a broker-dealer

Read more about unregistered broker-dealer activity.

Importance of Closing Conditions in Mergers – Williams Companies, Inc. v Energy Transfer Equity, L.P. – Court of Chancery of the State of Delaware – Matthew R. Loecker
On June 24, 2016 the Delaware Court of Chancery ruled on a dispute with implications for lawyers and companies negotiating closing conditions in a merger agreement. The dispute in Williams Companies, Inc. v Energy Transfer Equity, L.P. centered on a legal opinion to be delivered by the purchaser’s tax counsel prior to closing. The purchasers were able to terminate the merger agreement when their counsel refused to deliver the opinion. Practitioners negotiating merger agreements will want to pay special attention to the lessons of Williams before agreeing to any closing conditions or committing to use “commercially reasonable” efforts to meet pre-closing obligations.

Read more about M&A closing conditions.

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NASAA Proposes State Law Exemption for M&A Brokers

By Mark TaralloCorproate

In a no-action letter dated January 31, 2014 (revised February 4, 2014) (the “No-Action Letter”) the United States Securities and Exchange Commission (“SEC”) indicated that it would not recommend taking enforcement actions against an “M&A Broker” not registered as a broker-dealer with the SEC that was engaged in securities transactions in connection with the sale of a privately-held business.  In the No-Action Letter, the SEC defined an M&A Broker as “a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company (as defined below) through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company.”  While the No-Action Letter provided relief from broker-dealer registration with the SEC, it did not address any state law concerns.

In order to address state law issues, the North American Securities Administrators Association (“NASAA”) recently proposed a model uniform state rule (the “Model Rule”) that if adopted would provide an exemption from registration at the state level (where required) along similar lines of the No-Action Letter.  The Model Rule uses the term “Merger and Acquisition Brokers” defined as “any broker and any person associated with a broker engaged in the business of effecting securities transactions solely in connection with the transfer of ownership of an eligible privately held company, regardless of whether that broker acts on behalf of a seller or buyer, through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the eligible privately held company…”  There are some other conditions (for example, the entity involved in the transaction has to have revenues of less than $250,000,000 for its last fiscal year).  Transactions involving a public shell are not eligible for the exemption, and the Model Rule identifies certain “Excluded Activities” that would render the broker ineligible for the exemption from registration.

For anyone wishing to provide comments to NASAA, including responses to specific questions posed in the release, the comment period will remain open until February 16, 2015.

For more information please contact Mark Tarallo.

“Conflict Minerals” Reps and Warranties Appearing in M&A Deals

Corproate By: Mark Tarallo

In connection with the Dodd-Frank Act, the SEC adopted certain reporting requirements for companies that use “conflict minerals” in their product-tantalum, tin, tungsten or gold that are sourced from the Democratic Republic of the Congo and surrounding nations.  The conflict minerals reporting obligations went into effect as of May 31, 2014, and apply to any issuer that files periodic reports with the SEC.  The disclosure obligations are very broad, and require the issuer to conduct some reasonable due diligence to determine if it (or any of its suppliers) uses conflict minerals in connection with the products and services of the issuer.

In an effort to comply with these new reporting requirements, public companies engaged in acquisitions are conducting conflict mineral-specific due diligence on targets and incorporating conflict mineral representations and warranties into purchase agreements.  Any target of a public buyer (or a private buyer that may plan to go public) should expect to see a representation and warranty as to the seller’s knowledge of the use of conflict minerals in the operation of the seller’s business.  The representation and warranty may further track the reporting requirements and require the seller to identify if the source of such conflict minerals is designated as “conflict free” by a third party audit or whether or not the conflict minerals originate from scrap or recycled sources.  A sample representation and warranty is set forth below:

To the Sellers’ Knowledge, to the extent the Company sources any Conflict Minerals in the operation of its Business, such Conflict Minerals (A) originate in countries other than the Democratic Republic of the Congo or a country that shares an internationally recognized border with the Democratic Republic of the Congo; (B) are obtained from a source set forth on Schedule 3.14(f) designated as “conflict-free” or a similar designation by a third party recognized in the industry for providing such designations or an independent third-party audit, the results of which are made publicly available; or (C) originate from recycled or scrap sources.

Any business contemplating a sale should consider inquiring of their suppliers and contract manufacturers regarding their use of conflict minerals in the seller’s products, in order to be prepared for the likely requests from the buyer.

Any questions, please feel free to contact Mark Tarallo.

SEC Issue No Action Letter Exempting M&A Brokers from Broker-Dealer Registration

Securities and Corporate Attorney Joseph MarrowBy: Joseph Marrow

On January 31, 2014, the Securities and Exchange Commission (“SEC”) Division of Trading and Markets (the “Division”) issued a no action letter (the “No Action Letter”) providing relief to M&A Brokers (as defined below), in certain stated circumstances, engaged in the purchase or sale of privately-held companies from compliance with the registration requirements of Section 15(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). By reason of the no action relief, M&A Brokers may be entitled to receive transaction-based compensation without having to register as a broker-dealer under Section 15(a) of the Exchange Act. A link to the Division’s no action letter in combination with the letter from a group of attorneys requesting relief can be found here. Please be advised that the no action relief only applies to compliance with federal broker-dealer registration requirements. M&A Brokers must still consider state law registration regulations.

The Division’s No Action Letter represents a major shift in the SEC’s stance with respect to M&A Brokers. Traditionally, the SEC has taken the position that an M&A Broker that provides advice in connection with the sale of operating businesses through the sale of securities is required to register as a broker in accordance with the Exchange Act. The time and expense of such registration, particularly for brokers involved in just a few transactions, can be quite burdensome. M&A Brokers furnishing M&A advice in accordance with the parameters of the No Action Letter no longer will have to register as a broker-dealer to receive transaction-based compensation.

For purposes of the No Action Letter, an M&A Broker is defined as “a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company…through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company.” A “privately-held company” is one “that does not have any class of securities registered, or required to be registered, with the Commission under Section 12 of the Exchange Act, or with respect to which the company files, or is required to file, periodic information, documents or reports under Section 15(d) of the Exchange Act.” A “shell” company is excluded from the definition.

In issuing the No Action Letter, the SEC set a number of conditions to be followed, including: (i) a prohibition against the M&A Broker providing financing; (ii) the transaction not involve a public offering of securities; (iii) the M&A Broker not be involved in assembling a group of buyers; and (iv) the buyer control and actively operate the business after the transaction closes.

The No Action Letter permits the M&A Broker to engage in the following activities without the need to register as a broker-dealer: (i) received success-fee compensation in conjunction with the consummation of a transaction; (ii) advertise a privately-held company for sale with information including description of the business and a price range; (iii) provide the parties with advice regarding the issuance of securities or to assess the value of securities sold; and (iv) participate in the negotiation of the transaction.

For more information on this topic, please contact Joe.