SEC Guidance on Common Financial Reporting Issues Facing Smaller Reporting Companies

Posted by Rick Jordan on April 03, 2013

The SEC recently posted to its website a slide deck (PDF) from a staff presentation at the Forums on Auditing in the Small Business Environment.  The slides describe, among other things, some of the issues that the SEC frequently encounters in periodic filings made by smaller reporting companies.

When commenting on the periodic reports of smaller reporting companies, the SEC generally requests:

  • additional information;
  • additional or clarifying disclosure in future filings; or
  • filing amendments to revise financial statements or disclosure.

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A Twist in the Delaware Two-Step: A Proposed Amendment to the Delaware General Corporation Law Would Eliminate Required Stockholder Vote

Posted by Rick Jordan on April 01, 2013

A two-step merger is a common acquisition structure for public company sale transactions.  Under this structure, the buyer commences a tender or exchange offer to obtain over 50% of the target’s voting shares, followed by a second-step merger to acquire the remaining voting shares.  Generally speaking, unless the buyer obtains 90% or more of the target’s voting shares in the first-step tender or exchange offer (or through exercising a "top-up option," if any), the target’s stockholders must vote to approve the second-step merger.  This stockholder vote requires a proxy statement or an information statement to be delivered to the target’s stockholders, which can be onerous.

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Maximizing Stockholder Value Through a Go-Shop Process

Posted by Chris Converse on April 01, 2013

In early February 2013, Dell Inc. announced that it had agreed to a $24.4 billion leveraged buyout transaction with an investment group led by the company’s founder and CEO, Michael Dell and private equity firm, Silver Lake. Under the terms of the deal, Dell stockholders would receive $13.65 in cash per share, and following completion of the transaction, the company’s shares would be delisted. The proposed transaction implies a 37% premium over the average closing share price during the 90 days ending Jan. 11, 2013, and values the company at $24.4 billion, making it the largest leveraged buyout since the financial crisis.

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A Net Too Wide - SEC Seasoning Rules and Their Applicability to Newly Public Companies

Posted by Chris Converse on March 27, 2012

According to published reports, 25% of all securities fraud class action lawsuits filed during the first half of 2011 involved Chinese companies that have gone public through reverse mergers.  A 2011 report by Cornerstone Research stated that 12 securities class action complaints were filed in 2010 against Chinese companies listed on U.S. stock exchanges, representing 42.9% of all class action filings against foreign issuers listed in the U.S.  Commentators assert that one factor fueling this trend is the fact that many Chinese issuers have gone public through reverse mergers with listed U.S. shell companies – a process which, in some cases, results in a significant lack of disclosure associated with the newly public business.

Due in part to increasing allegations of fraud by foreign reverse merger companies, in late 2011, the SEC approved new rules imposing additional requirements on companies intending to list their shares on one of the three major U.S. stock exchanges.  These rules, including applicable exceptions, are described in our prior posts found here and here.  However, it remains to be seen whether these rules will actually help to remedy many of the disclosure issues associated with foreign issuers going public through reverse mergers.

OUR TAKE:  The problem with these seemingly heavy-handed new rules is that they fail to directly address the lack of financial disclosure sometimes associated with foreign issuer reverse mergers.  For example, by requiring reverse merger companies to undergo one year of trading in a systemically under-regulated environment like the OTC Bulletin Board, the SEC may be simply imposing a bureaucratic holding pattern rather than creating targeted, meaningful regulation.

Exchange Roadblocks to Going Public in Reverse Are Now in Place

Posted by Gardere Wynne Sewell LLP on November 23, 2011

In August 2011, we commented on proposals by the major national securities exchanges to impose additional listing requirements on companies completing a reverse merger with a shell company.  The SEC announced earlier this month that it approved each of the rule changes, as amended, on an accelerated basis.  It just became significantly harder for the shares of a reverse-merger shell company to become listed.

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New Roadblock to Going Public in Reverse

Posted by Gardere Wynne Sewell LLP on August 11, 2011

Soon it may just be a little harder to go public through a reverse merger transaction.  The SEC published proposed rule changes from both the New York Stock Exchange (PDF) and NYSE Amex (PDF) on Aug. 4, 2011 that, if approved, may make you reconsider the reverse-merger route and probably makes the shell-company industry wince.

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LINKEDIN WOULD LIKE TO ADD YOU TO ITS PROFESSIONAL NETWORK; DO YOU WANT TO ACCEPT?

Posted by Gardere Wynne Sewell LLP on May 18, 2011

Professional networking giant LinkedIn is courting investors in advance of its IPO, but its dual-class share structure gives cause for consideration.  No stranger to media heavyweights, including Facebook, Google, the Washington Post and the New York Times, a dual-class share structure is touted by some for its benefits, including the ability of controlling shareholders to:

•    protect corporate culture;

•    avoid the short-sightedness of quarterly performance expectations; and

•    thwart hostile takeovers.

But shareholders have cried foul in the past.  After a federal court struck down the SEC’s attempt to prohibit dual-class share structures in the late 1980s, the stock exchanges took matters into their own hands with rules forbidding exchange-listed companies from adopting a dual-class share structure.  The glaring loophole, however, remains: a company with an existing dual-class share structure can list its shares.

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POISON PILL UPHELD BY DELAWARE CHANCERY COURT

Posted by Gardere Wynne Sewell LLP on February 16, 2011

The Delaware Chancery Court upheld Airgas, Inc.'s poison pill defense in a ruling on Feb. 15, 2011 (PDF).  The Airgas poison pill had blocked a $5.9 billion hostile bid from Air Products & Chemicals Inc., which dropped the bid following the ruling.

As reported by The Wall Street Journal today, the Delaware court ruled that the “power to defeat an inadequate hostile tender offer ultimately lies with the board of directors.”  The court held that the poison pill was a reasonable response to the Air Products’ takeover attempt.  The key is that the court found the Airgas board of directors to be acting in good faith and complying with its fiduciary duties.

Bloomberg Businessweek reported today that the Air Products’ offer, which was made public on Feb. 4, 2010, was the eighth-longest-running U.S. hostile takeover bid since Bloomberg started tracking takeover offers.  Airgas subsequently announced a $300 million share buyback.

OUR TAKE:  This was an anticipated decision because poison pill cases are typically settled or dropped before the cases can be decided.  The Chancery Court has reinforced the viability of a poison pill as an appropriate response to a hostile bid that a board of directors in good faith believes is inadequate. 

DELAWARE CHANCERY COURT DELAYS STOCKHOLDER VOTE

Posted by Gardere Wynne Sewell LLP on February 15, 2011

The Delaware Chancery Court has delayed the Del Monte Foods Co. stockholder vote, scheduled for February 15, in a proposed multibillion sale to a KKR & Co.-led group.  In In re Del Monte Foods Co. S'holders Litig., C.A. No. 6027-VCL (Del. Ch. Feb. 14, 2011) (PDF), the Delaware court delayed the stockholder vote for 20 days based upon a preliminary finding that the Del Monte directors breached their fiduciary duties. The court also enjoined the proposed buyers' deal protection devices, including a termination fee and matching rights in conjunction with a go-shop provision. 

The Delaware court determined that the advice the Del Monte board of directors received from a financial advisor was tainted because of the financial advisor's conflicts of interest, including an effort to provide buy-side financing for the deal before there was an agreement on price and certain activities with potential bidders.  The court pointed to the board's ultimate responsibility for the process and the requirement to take "an active and direct" role.  The court also identified inappropriate activities by the potential buyers.

A Bloomberg report on Feb. 15, 2011 noted that both Del Monte and the financial advisor defended the sales process as achieving the best price for the Del Monte stockholders.

OUR TAKE:  While this case is not final, it serves as a wake-up call to a public company board to be fully engaged in the sale process.  This includes managing the relationship with the company's financial advisors, which, in an increasingly competitive environment, may have multiple, and potentially conflicting, interests in a sale transaction.