Introduction to Securities Law , Tax, and Antitrust in Mergers

1. Introduction to Securities Law, Tax, and Antitrust in Mergers Chapter 3 Part Two

2. Law Shaping the Space in Moving to Closing • Securities • Antitrust • Tax • All are federal law-- in contrast to corporate law found in state law

3. Securities Law • Disclosure to protect investors triggered by: • Issuance of securities (Securities Act of 1933); • Solicitation of Proxies (Securities Exchange Act of 1934- Section 14(a)) • Making a Tender Offer (Section 14(d) added by the Williams Act in 1968) • Going Private Section 13(e) • Periodic Reporting • Rule 10b-5 Antifraud: • Misstatements • Insider Trading

4. Issuance– the 1933 Act • Can’t sell (Section 5) without full disclosure • (I.e. registration statements S-1, S-2, S-3) • Available to investors (a prospectus- Section 10) • Strict liability of issuer for any misstatements (Section 11); • directors, underwriters, accountants liable if negligent • Reliance and causation presumed • When does an acquisition involve issuance? • What is the impact on the deal?

5. Proxy Solicitation • Disclosure similar to prospectus required– Form 14A • Triggered by “solicitation” • When does an acquisition involve solicitation?

6. Tender Offer • Disclosure when shareholders are asked to tender • shareholder “selling” seen as a parallel decision to voting or buying and need for same information; Section 14(d); Schedule TO • Section 13(d) of the Williams Act—any 5% shareholder must disclose block • early warning of possible takeover • When does an acquisition involve a tender offer?

7. Rule 13(e)-3 Going Private • Disclosure triggered by transactions causing stock to be delisted or deregistered • Requires a firm to file a Schedule 13E-3. • Firm must disclose sources of funds to be used in the transaction • management equity participation and employment arrangements • potential conflicts of interest, offers by unaffiliated parties over the prior 18 months • Requires statement whether board reasonably believes the transaction is fair

8. Periodic Disclosure • Annual and Quarterly Reports (10-K and 10-Q) • Real-time Reporting (8-K) • Used to be only unusual events and filed at a leisurely pace; • now expanded (because of Enron) and must be filed more quickly

9. Integrated Disclosure • Schedule S-K (a hub and spoke approach) • A core disclosure package • All forms (S-1, 14A, TO, and 10-K) will refer you to items of S-K that you have to disclose • 60 items and 100 pages in the rule book

10. Antifraud (Rule 10b-5) • Lies/Misstatements • In mandatory disclosure • In voluntary statements (Basic) • Half-Truths • Silence • Common law--Only if there is duty to speak • Fiduciary duty • Regulatory law Blue Horseshoe loves Anacott Steel . . .

11. Antitrust • Sherman and Clayton Acts: • The traditional concern about monopoly and restraint of trade • Hart-Scott-Rodino Act– advance notice • Enforcement: • Department of Justice and Federal Trade Commission • International I.e. European Union, China

12. Antitrust- Sherman & Clayton Acts • Sec. 2 Sherman Act– prohibits monopoly, attempt to monopolize or conspiracy; • Sec. 1 Sherman Act- contracts, combinations in restraint of trade; • Sec. 7 Clayton Act- stock or asset purchases where the effect “may be to substantially to lessen competition or to tend to create a monopoly;” • Injunctive relief for government; treble damages for some private litigants.

13. Antitrust: Hart-Scott-Rodino • Pre-merger Notification– • if one party sales/assets > $100 m and the other sales/assets > $10 m; • At least 15% stake; “creeping acquisitions” covered • Information requirement • Waiting Period • Second Requests • # of deals where competitive concern identified-10%; • where second request-5%; • where some enforcement action-many.

14. Antitrust: Merger Guidelines • Resulting Market Concentration: Herfindal-Hirshman Index (HHI)- square each entrant’s market share; • If < 1500 generally not interested • If 1500-2500, a change of 100 will provoke scrutiny; • If >2500, a change of 100 will provoke a scrutiny; 200 presumed challenge; • Other Factors: entry conditions; ease of collusion; efficiency gains; target’s viability

15. International antitrust authorities • GE & Honeywell merger blocked by European authorities • NYSE – Deutsche Borse merger blocked • Chinese regulators increasingly important

16. Tax – 2 key issues • Does the deal trigger tax recognition for the shareholders or the companies? • Does the deal create wealth transferred from the government because of tax treatment (e.g. NOLs, debt)?

17. Tax-Free Reorganizations • IRC Section 368 (Internal Revenue Code) • (A) Statutory Merger • (B) Stock Acquisition (e.g. via tender offer with stock as the consideration or acquired from a parent or block seller); • (C) Asset Acquisition ( e.g. Target’s sale of substantially all assets for “A” stock followed by Target’s dissolution and distribution of “A” stock to T shareholders). The theme is continuity of interest . . .

18. Continuity of interest • The common theme of these three definitions is continuity. • If the investment that the T shareholders had before is similar enough to what they have now, no taxes are owed immediately on the transaction. • There are specific rules about “boot” that can be received without destroying the non‐recognition, but not covered by us

19. Tax: Wealth Transfer Opportunities (i.e. Government Subsidies) • NOLs (Net Operating Losses) • Targets carryovers to shield A’s Income from tax • diminished by 1986 Tax Reform • Debt: • tax shield • affects valuation • more important in MBOs