While most commentary regarding theJOBS Act has focused on capital markets issues and the impact the new rules will have on capital-raising transactions, the JOBS Act can also have significant implications in the merger and acquisition context.
While many of the provisions of the JOBS Act were primarily intended to reduce the costs and risks associated with initial public offerings for “Emerging Growth Companies” (“EGCs”), the SEC has confirmed that certain provisions can extend benefits to parties to a merger or acquisition when one of the parties to the transaction does not qualify as an EGC. In this regard we note that on September 28, 2012, the Division of Corporation Finance released 13 additional FAQs, a number of which address this point.
For example, the FAQs clarify that where a target company that does not qualify as a smaller reporting company will be acquired by an EGC (that is not a shell company) presenting only two years of its financial statements in a registration statement for an exchange offer or merger, then the target company need only present two years of financial statements, as well.The Staff’s FAQs also detail how the various disqualification provisions from being an EGC can apply in the context of forward acquisitions and reverse mergers between various types of companies. The full list of FAQs regarding EGCs is available at: http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm. Questions 42 through 47 relate to the merger and acquisition context.
Section 106 of the JOBS Act is another provision with significant implications in the merger and acquisition context. Pursuant to Section 106, an EGC may submit a confidential draft registration statement to the SEC for confidential, non-public review, provided that the initial confidential submission and all amendments are filed publicly 21 days before the EGC’s roadshow. We discussed the new process for submitting draft registration statements in a prior post at: http://securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=184.
This provision may benefit late stage private companies pursuing a “dual-track” strategy, where the company files an IPO registration statement while simultaneously holding discussions with prospective acquirors.Companies typically undertake a dual-track approach when they wish to (i) put pressure on potential buyers by introducing the threat of a viable IPO process and (ii) retain flexibility regarding their exit options.This approach is particularly common among private equity-backed companies.
An EGC pursuing a dual-track could use the confidential submission process to its advantage in negotiations with potential acquirors. For instance, the EGC could inform potential acquirors that it has confidentially submitted a draft registration statement to the SEC and that it considers an IPO a viable alternative without those acquirors knowing how far along the company is in the IPO process. An EGC could respond to all comments from the Staff and be a mere 21 days from a road show without the public knowing. This makes the threat of a quick IPO much more credible.
Additionally, if a deal falls apart, the confidential submission process will allow an EGC to pull its registration statement without the public knowing, thus avoiding the stigma associated with a failed transaction or IPO. This process also allows EGCs to keep sensitive information, such as financial statement information, trade secrets and names of key customers, out of the public eye until 21 days before the company conducts a road show. If the EGC is ultimately acquired and does not go public, this information will never need to be disclosed to the public.
Of course, EGCs must weigh the benefits of confidential submission against the potential advantages of filing publicly. A publicly-filed registration statement can send a strong signal to potential acquirors. In addition, it can have a positive impact on customers and employee recruiting.