Essentials of Equity Trading for the Loan Market

Transcription

1 June 28, 2011 Essentials of Equity Trading for the Loan Market Attorney Advertising andrewskurth.com

2 Outline of Presentation I. What Is A Security? II. Section 5 Of Securities Act III. 4(2) Private Placement Exemption IV. 4(1) Exemption V. What Is An Underwriter? VI. Rule Safe Harbor From Being Considered An Underwriter VII. Rule 144A VIII. Section 4 (1½) Case Law Exemption IX. In-Court Restructuring And Section 1145 X. Liabilities & Recourse XI. Big Boy Letters XII. Operative Issuer Documents XIII. Other Regulatory and Statutory Concerns XIV. Market Trends 1

3 What Is A Security? Section 2(a) of Securities Act of 1933, as amended (the Securities Act ) defines what a security means broad definition Bank Debt/Syndicated Secured Loans Historically Not Considered A Security See Banco v. Expanol De Cremin v. Security Pac. Nat l Bank, 973 F.2nd 51 (2d Cir. 1992) (applying four factor family resemblance test under Reeves, court held notes issued in conjunction with participation interest similar to notes evidencing loans by commercial banks funding operations) Key statutory language in definition of security unless context otherwise applies Not public trading market Sophisticated parties who generally don t need protections of securities laws / can fend for themselves 2

4 Section 5 Of Securities Act Section 5 of Securities Act provides that unless a Registration Statement is in effect as to a security, it shall be unlawful for any person to sell such security 3

5 4(2) Private Placement Exemption Pursuant to Section 4(2) of the Securities Act, Section 5 of Act doesn t apply to transactions by an Issuer not involving any public offering Supreme Court in Ralston Purina held that an offering to persons who are shown to be able to fend for themselves is a transaction not involving any public offering Safe Harbor of Regulation D No General Solicitation Unlimited Accredited Investors and not» 35 other purchasers Issuer availability Securities issued are Restricted Securities Typically will have Legend 4

6 4(1) Exemption Provides that provisions of Section 5 of Securities Act shall not apply to Section 4(1) 4(1) Exemption Transactions by any person not involving an issuer, underwriter or dealer (ordinary investor exemption) What is an Issuer? What is a Dealer? Any person who engages as agent, broker and principal in business of offering, buying or otherwise trading in securities 4(3) - Dealer Exemption 5

7 What Is An Underwriter? Under Section 2(a)(11) of Securities Act Underwriter means any person who has purchased from an issuer with a view to distribution As used in Sec 2(a)(11) the term Issuer includes any person directly or indirectly controlling another person Statutory Underwriter concept Under Rule 405, control means power to direct or cause direction of management Since difficult to determine mental state at time of acquisition re whether purchased with a view to distribution, subsequent acts are looked at with respect to such determination (whether securities have come to rest) 6

8 Rule 144 Safe Harbor From Being Considered An Underwriter - Comply with 144 Rules not considered to be engaged in a Distribution Applies to sales of Restricted securities and control securities Depending on type of securities sold different rules apply under Rule 144 Securities acquired pursuant to Rule 144 are not Restricted Securities Calculation of holding period and tacking 7

9 Rule 144 Safe Harbor From Being Considered An Underwriter (continued) Restricted Securities of Reporting Issuers Restricted Securities of Non- Reporting Issuers Affiliate or Person Selling on Behalf of an Affiliate During six-month holding period - no resales under Rule 144 permitted. After six-month holding period - may resell in accordance with all Rule 144 requirements including: Current public information, Volume limitations, Manner of sale requirements for equity securities, and Filling of Form 144 During one-year holding period - no resales under Rule 144 permitted. After one-year holding period - may resell in accordance with all Rule 144 requirements, including: Current public information, Volume limitations, Manner of sale requirements for equity securities, and Filing of Form 144. Non-Affiliate (and Has Not Been an Affiliate During the Prior Three Months) During six-month holding period - no resales under Rule 144 permitted. After six-month holding period but before one year - unlimited public resales under Rule 144 except that the current public information requirement still applies. After one-year holding period - unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements. During one-year holding period - no resales under Rule 144 permitted. After one-year holding period - unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements. 8

10 Rule 144A 144A Transaction Acquire Restricted Securities Available for securities not fungible with securities listed on exchange Sales must be made to Qualified Institution Buyers that have access to issuer information QIB generally means an entity that owns at least $100,000,000 in securities of unaffiliated issuers 9

11 Section 4 (1½) Case Law Exemption Not formal statutory registration exemption Used by practicioners and recognized by case law and SEC as technique for transferring restricted securities see Gilligan Will & Co. v. SEC, 267 F.2d 461 (2d. Cir.); Ackerberg v. Johnson, 892 F.2d 1328 (8 th Cir. 1989) Represents Hybrid between 4(1) and 4(2) in which the selling shareholder utilizes practices that an issuer uses to sell securities in 4(2) private placement Limiting resale to only sophisticated parties/accredited investors Able to fend for themselves Offer made without any publicity or other General Solicitation Buyer acknowledges that securities Buyer shall acquire shall be restricted securities 10

12 In-Court Restructuring and Section 1145 In Chapter 11 reorganization equity typically issued pursuant to 1145 Need to check plan and confirmation order Under Section 1145 offers and sales of securities done in accordance with 1145(a)(1) are deemed to be a public offering Disclosure Statement akin to prospectus in registered offering If sold in accordance with 1145(a)(1) such securities may be freely traded However, 1145(a)(1) doesn t apply to entities that are Bankruptcy Underwriters 11

13 In-Court Restructuring and Section 1145 (continued) Unless ordinary trading transaction exemption applies, an entity is a bankruptcy underwriter if: Purchases claim with a view to distribution of any security received or to be received in respect of such claim Generally will not be a bankruptcy underwriter if original holder of claim or plan not proposed when acquire claim An entity is also a bankruptcy underwriter if it is a control person/affiliate of issuer When buying need rep Seller not an Affiliate to ensure getting freely tradable securities LSTA Proceeds Letter provides no affiliate rep by Seller 12

14 In-Court Restructuring and Section 1145 (continued) Note no underwriter status for non-affiliates engaging in ordinary trading transactions narrow definition of bankruptcy underwriter Ordinary trading transactions do not have indicia of classic underwriting activity No coordinated action to acquire and distribute securities with special incentive to resell such securities Securities issued in bankruptcy not pursuant to 1145 Rights Offering where new $ put in such securities acquired are generally restricted unless subsequently registered or exemption applies Visteon example May have haircut for sale of restricted securities as opposed to freely tradeable shares without restriction 13

15 Liabilities & Recourse Section 12(a)(i) of Securities Act Gives Purchaser right of recission for any offer or sale of a security in violation of Section 5 Statute of Limitations One year of the Section 5 violation 14

16 Big Boy Letters Rules 10b-5 requires that a person who has material non-public information either disclose such information or abstain from trade 10b-5 prohibits any person in connection with the purchase or sale of a security (whether public or private) from making any untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading No disparity of information Disclosing information may create issues with respect to confidentiality agreements Parties sometimes use Big Boy Letters Are Big Boys enforceable? See SEC v. Barclays Bank; R2 v. Salomon Section 29 of Exchange Act (contract cannot waive compliance with rules of Exchange Act) Certain institutions reluctant to utilize Big Boys with counterparties LSTA Proceeds Letter has no waiver of disparity of information 15

17 Operative Issuer Documents Shareholders Agreement Registration Rights Agreement Articles of Incorporation / Bylaws LLC Agreement / Partnership Agreement 16

18 Operative Issuer Documents (continued) Shareholders Agreement Comply with transfer provisions Typical provisions No sale to competitor Sign joinder Sale won t result in > 500 holders Opinion Letter (if requested) or certifications to company Pre-emptive rights ROFR Tag-along / Drag-along Confidentality Provisions Advance notice of sale Consent by company or board may be required 17

19 Operative Issuer Documents (continued) Articles of Incorporation / By-Laws Transfer Provisions May include restrictions to preserve NOL s May limit transfers to ensure compliance with regulated industry rules limiting foreign ownership May limit transfers to foreign entities for tax reasons 18

20 Other Regulatory and Statutory Concerns - Broker-Dealer Regulations FINRA Rules Regulation T (Delivery v. Payment timing) Rule 10b-10 of Exchange Act (Confirmation Delivery) Gaming industry Energy industry (FERC) (Mach Gen Example) Broadcasting / Telecommunications (FCC) Tribune / Young Broadcasting Foreign Underwriter Issues Hart Scott Rodino Size of Transaction and size of person test $66,000,000 size of transaction Anti-takeover and Business Combination Statutes DGCL Section 203 Section 13 and Section 16 (Publicly Traded Equities) Tax Concerns Offshore Investors 19

21 Market Trends When Outside Counsel Used? Equity that has some form of transfer restrictions & not generally traded on public markets Equity with legend and/or restricted Use of Documentation by Market Wide spectrum of views with respect to use of private purchase and sale agreement ( PSA ) between buyer and seller Most dealers & buy-side parties utilize some form of PSA However, certain dealer parties generally push back on use of PSA 20

22 Market Trends (continued) Trade Confirmations: Majority of participants use a form of trade confirmation signed by both parties Parties in market give different titles to such agreements Trade Confirmation Notice of Execution Equity Trade Confirmation Commitment Letter 21

23 Market Trends (continued) Substance of Trade Confirm Substantively trade confirms are generally similar Trade date Party names Issuer name Price/amount of equity Dividends benefit buyer from and after trade date Subject to reasonably acceptable contracts and instruments of trade Binding Trade no impact by subsequent events Costs and expenses ( Opinion Letter costs?) Confidentiality Transfer complies with operative documents (i.e. LLC Agreement) Delivery of Operative Documents (if not SH) 22

24 Market Trends (continued) Trade Confirmation Issues for Market Maker in Middle of Trade Right of First Refusal ( ROFR ) and tag-along rights Insert Subject to successful completion of purchase of equity being sold and purchased Assignment only and default to economic equivalent Common provision Aware of certain reps & warranties specific to issuer s equity? Regulator s concerns? Competitor representation? Big Boy reps and warranties often in confirm Sophisticated party and financial wherewithal Own investment decision Non-reliance Accredited Investor or QIB 23

25 Market Trends (continued) Necessary to Use Private Purchase and Sale Agreement? Depends on factors What is required issuer documentation? Do reps and warranties inure to benefit of buyer and seller? Full-blown PSA? Simple certificates? UCC Article VIII Is it applicable? Under of UCC, certain reps and warranties automatically apply to transfers of certain securities for value will transferred equity security be governed by UCC Article VIII? Corporation applicable LLC s or partnerships opt-in? Need to review & see organization documents 24

26 Market Trends (continued) If UCC Article VIII applicable then purchaser of equity security for value without knowledge of adverse claim receives warranty from seller (automatically by law) that there is no adverse claim to security become a protected purchaser 25

27 Market Trends (continued) Benefits of using PSA Get direct representation and warranties from counter parties Indemnity provision attorney fees Set forth conditions to closing Delivery v. payment (who goes first?) Need Title Rep if UCC Article VIII not applicable 26

28 Market Trends (continued) Typical Representations and Warranties and Other Provisions in PSA Clean title representation free from liens Sophisticated party and financial wherewithal No reliance on other party Accredited investor (if 144A need higher QIB Standard) No general solicitation Not acquiring with a view to distribution in violation of Securities Act Affiliate representation from seller Is it 1145 or 4(2) issuance? Affects seller rep regarding acquisition of security Bankruptcy Underwriter rep from seller Buyer rep acknowledging limitations on transfer on resale Depends if 1145 or private issuance Distributions 27

29 Market Trends (continued) Other Typical Provisions of PSA Closing conditions Fact-specific representations Not acquiring > 25% (i.e., no tag-along implicated) Not competitor Buyer Rep - Received & Reviewed Operative Documents (aware of contractual restrictions on resale) Further assurances 28

30 Market Trends (continued) Miscellaneous Matters Opinion Letter requirement (certifications in lieu of opinion available?) Develop good relationship with issuer counsel & transfer agent early in process Determine steps needed for closing 29

31 Market Trends (continued) EXAMPLES: Issuance Readers Digest (LSTA proceeds letter; officer s certificates & no opinion unless 10% holder selling) - MGM (LSTA proceeds letter; officer s certificate (not affiliate; not acquire with view to distribution and own less than 10%) - 4(2) Issuance - Philly News (1145; certificated) - Mark IV (1145; form of transfer agreement for all parties benefit) - Panavision (shares issued as amendment fee; opinion required by company) - Mach Gen (FERC issues; restricted selling to < 10% holders; transfers not of record approved by Milbank) 30

32 AUSTIN 111 Congress Avenue Suite 1700 Austin, Texas BEIJING Room 2007, Capital Mansion No. 6 Xin Yuan Nan Lu, Chao Yang District Beijing, China DALLAS 1717 Main Street Suite 3700 Dallas, Texas LONDON Level 16, City Tower 40 Basinghall Street London EC2V 5DE England NEW YORK 450 Lexington Avenue New York, New York THE WOODLANDS Waterway Plaza Two Woodloch Forest Drive Suite 200 The Woodlands, Texas HOUSTON 600 Travis Street Suite 4200 Houston, Texas WASHINGTON DC 1350 I Street, NW Suite 1100 Washington, DC Copyright 2011 by LLP. All rights reserved. This presentation has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create (and receipt of it does not constitute) an attorney-client relationship. Readers should not act on this information without seeking professional counsel. Prior results do not guarantee a similar outcome and depend on the facts of each matter.