United States Securities Laws Implications of Corporate

Restructurings The objective of most corporate restructurings or recapitalizations1 is the restoration of the issuer’s fiscal health and preservation of the business enterprise. Accordingly, the key to the successful restructuring is the exchange, replacement, and/or modification of outstanding financial obligations that previously have been issued (often years earlier) in connection with capital raising transactions, strategic investments, mergers, acquisitions, and other forms of business combinations. These obligations routinely take the form of senior, mezzanine, and/or subordinated debt securities, and in some cases, redeemable preferred equity securities that, due to changed market and economic conditions beyond the issuer’s control (which may not have been foreseeable at the time the obligations were incurred), are now financially burdensome, or worse, in default.

By decreasing indebtedness, maximizing cash flows, and reducing or eliminating interest expense and principal payments, among other things, the highly leveraged or underperforming company often can obtain the breathing room necessary to implement management’s business plan and pursue long-term corporate goals. A broad array of financial remedies may be pursued, such as suspending or reducing interest and dividend payments, extending maturity dates, eliminating amortization requirements, modifying “reset” (i.e., interest adjustment) features, refinancing outstanding obligations, altering conversion and exchange premiums, changing subordination features, and amending financial and other covenants, to name but a few.

To accomplish these aims, the issuer necessarily will encounter a variety of complex structural considerations and regulatory hurdles under United States federal securities laws. The securities laws consist principally of six statutes, administered and enforced by the SEC.2 In appropriate cases, the U.S. Department of Justice also may prosecute criminal violations of these laws. In addition to express statutory remedies made available by the U.S. Congress to private investors, the U.S. federal courts also have implied the existence of certain private rights of action in favor of the investing public.

1 Although there are technical distinctions, unless the context otherwise requires, the terms “restructuring,” “refinancing,” and issuer “recapitalization” are used synonymously. Unless otherwise noted, the discussion in this chapter assumes that the issuer is a United States corporation. 2 These statutes are the Securities Act; the Exchange Act; the Public Utility Holding Company Act of 1935, ch. 687, 49 Stat. 803 (codified as amended in scattered sections of 15 U.S.C.); the Trust Indenture Act of 1939, ch. 411, 53 Stat. 1149 (codified as amended in scattered sections of 15 U.S.C.); the Investment Company Act of 1940, ch. 686, 54 Stat. 789 (codified as amended in scattered sections of 15 U.S.C.); and the Investment Advisers Act of 1940, ch. 686, 54 Stat. 847 (codified as amended in scattered sections of 15 U.S.C.).

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While each of the securities statutes may have applicability to restructuring transactions (whether in the bankruptcy or nonbankruptcy context), the Securities Act and the Exchange Act specifically regulate, among other matters, the offer, purchase, sale, exchange, amendment, and trading of debt and equity securities, and therefore, have the most influence on formulating and executing these transactions.

Although each corporate restructuring tends to be factually distinct and generally involves a protracted series of related transactions requiring many months (sometimes more than a year) to effect, this chapter attempts to describe those transactions commonly undertaken by financially troubled issuers and the basic federal securities laws that are implicated. Indeed, apart from tax considerations and accounting principles, the conduct, structure, and execution of these transactions may be driven by securities law concerns. Accordingly, the text that follows is organized principally as a discussion of relevant provisions of the Securities Act and the Exchange Act, as well as a discussion of certain specific restructuring or recapitalization techniques.

Addressed below are the registration requirements of the Securities Act (applicable to the offer and sale of securities), the most commonly used exemptions therefrom, and related transferability considerations. Presented next is a discussion of the Exchange Act requirements relating to the conduct of tender and exchange offers (i.e., the Williams Act amendments to the Exchange Act3), a description of so-called “going-private” transactions (applicable to transactions involving the Exchange Act deregistration or securities exchange or NASDAQ delisting of publicly traded securities), the applicability of federal proxy regulations to the solicitation of securityholder consents or plan acceptances (both in and outside the bankruptcy court), and a discussion of the general disclosure obligations for issuers subject to Exchange Act periodic reporting requirements.4 This chapter then describes certain unique interpretive and structural issues that arise in connection with consent solicitations (i.e., the deemed offer and sale of a “new security” under the Securities Act and the applicability of the federal proxy rules thereto) and the interplay of the Securities Act, the Exchange Act, and the Trust Indenture Act of 1939 with the bankruptcy laws, particularly as they relate to “prepackaged” chapter 11 cases.

Restructuring transactions may have a variety of federal securities law aspects that do not fit neatly or exclusively within one particular statutory scheme. For example, the issuer may seek to reduce interest expense by refinancing, pursuant to an exchange offer, its high yield obligations with lower coupon debt or by substituting newly issued equity securities. Alternatively, the issuer may incur bank debt to fund the redemption of its debt obligations or finance a cash tender offer for its outstanding equity securities. The issuer might condition consummation of its tender offer on the receipt of “exit consents” to

3 Pub. L. No. 90–439, 82 Stat. 454 (codified as amended at 15 U.S.C. §§ 78m (d)–(e), 78n (d)–(f). 4 As used throughout this chapter, “periodic” Exchange Act reports refers generically to the annual and quarterly reports on forms 10–K and 10–Q, respectively, the current reports on form 8–K, and the proxy and information statements and related materials required to be filed by issuers whose securities are registered under section 12 of the Exchange Act or who, by reason of having filed a registration statement under the Securities Act, are subject to mandatory reporting (for a limited period of time) under section 15(d) of the Exchange Act. See Exchange Act §§ 12, 15(d), 15 U.S.C. §§ 78m, 78o (d).

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amend the terms of securities listed on the New York Stock Exchange, Inc. (NYSE) or otherwise registered under the Exchange Act. It might conduct a public exempt exchange offer pursuant to section 3(a)(9) or section 3(a)(10) of the Securities Act, but nevertheless be required to comply with regulation 14E under the Exchange Act and to file with and have qualified by the SEC a debt indenture pursuant to the Trust Indenture Act. If consummation of the tender or exchange offer would result in the issuer’s securities ceasing to be registered under the Exchange Act or being delisted from the NYSE (i.e., a “going private” transaction), compliance with the “fairness” disclosure requirements of rule 13e-3 under the Exchange Act would be required. A private placement may be conducted to infuse new equity capital quickly, followed by a registered public offering. Often one or more out-of-court exchange offers and consent solicitations precede a “prepackaged” bankruptcy filing or a traditional, nonaccelerated chapter 11 case.

There are numerous additional examples of transactions that have multiple Securities Act, Exchange Act, and Trust Indenture Act ramifications. This chapter is intended merely to provide a general overview of the federal securities regulatory landscape applicable to corporate restructurings and recapitalizations.

THE SECURITIES ACT

REGISTRATION REQUIREMENTS

Section 5 governs the offer and sale of securities and is the heart of the Securities Act.5 Essentially, it is a disclosure requirement which provides, among other things, that in the absence of an available exception, no securities may be offered for sale unless the person making the offer has filed a registration statement with the SEC, and no securities may be sold until the registration statement has been declared effective by the SEC. Generally speaking, the SEC has jurisdiction to regulate the offers and sales of securities when made through the use of any means or instruments of interstate commerce.

Thus, the offer and sale of new securities, whether by means of an exchange offer or issuance for cash must, in the absence of an available exemption, be registered under the Securities Act.6 The principal benefits of Securities Act registration are the free transferability of securities issued in the restructuring transaction and the ability to conduct widespread marketing and solicitation efforts to promote investor participation in the transaction.

However, in view of the financial urgency of most corporate restructurings, and thus, the impatience of issuers and their securityholders, Securities Act registration of offerings—which typically requires two to three months to complete—generally is not the method of first choice. If available, issuers generally use one of the exemptions from registration afforded by the Securities Act and underlying regulations. The two

5 Securities Act § 5, 15 U.S.C. § 77e. 6 As previously noted, the offer and sale of debt securities also requires compliance with the Trust Indenture Act under certain circumstances.

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exemptions most frequently relied upon are those contained in section 3(a) (9) and section 4(2) of the Securities Act.7

REGISTRATION EXEMPTION UNDER SECTION 3(a) (9)

Section 3(a) (9) provides an exemption from registration where “any security [is] exchanged by the issuer with its existing securityholders exclusively [and] no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.”8

Because the exemption is from registration only, the antifraud provisions of the Securities Act still apply. Moreover, the public offer and sale of debt securities pursuant to section 3(a) (9) may not be commenced until an application for qualification of the indenture (or similar governing instrument) and indenture trustee under the Trust

7 15 U.S.C. §§ 77c (a) (9), 77d (2). Another (although less frequently used) exemption that is available to facilitate an issuer recapitalization is provided by section 3(a) (10) of the Securities Act. Generally, section 3(a) (10) exempts the issuance of securities “issued in exchange for one or more bona fide outstanding securities, claims or property interests, or partly in such exchange and partly for cash” where the transaction is approved, after a hearing upon the fairness of the transaction, by a court or governmental authority. Id. § 3(a) (10), 15 U.S.C. § 77c (a) (10). In certain cases, the exemption can be invoked in a reorganization case. See, e.g., Fairway Land Co., SEC No-Action Letter, [1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 79,449 (Feb. 6, 1990) (where the SEC staff took the position that it would not recommend enforcement action if a company, in reliance on counsel’s opinion that the section 3(a)(10) exemption is available, issues securities in connection with the company’s reorganization without complying with the registration requirements of the Securities Act). Recapitalizations effected pursuant to section 3(a) (10) are not subject to the structural and promotional constraints of section 3(a) (9) and the restricted or unrestricted character of the securities that are exchanged are not altered by the transaction. See, e.g., St. Ives Holding Co., Inc., SEC No-Action Letter, [1987 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 78,465 (July 22, 1987).

Although outside the scope of this chapter, it should be noted that in 1990, the SEC adopted Regulation S, which sets forth various conditions that, if satisfied, provide safe harbor exemptions from Securities Act registration of issuer offers and sales and securityholder resales of securities conducted entirely outside the U.S. Availability of the issuer safe harbor depends on, among other things, the nationality of the issuer, whether debt or equity securities are to be issued, the size of the offering, whether the issuer is subject to the reporting requirements of the Exchange Act, and the existence and degree of the U.S. market interest in securities of the issuer. Offerings eligible for the issuer safe harbor are divided into three categories, based on the general guidelines described above. Those offerings within the first category (as to which the securities issued are deemed least likely to enter the U.S. market) are entitled to safe harbor protection, even if the buyers include U.S. persons, as long as all offers and sales occur outside of the U.S. and no selling efforts are directed to the U.S. Offerings in the second and third categories (as to which the securities are deemed more likely to enter the U.S. market) also must be conducted wholly outside the U.S. and involve no U.S.-directed selling efforts. Offerings in the second and third categories also are subject to various transactional restrictions (including a prohibition on offers and sales to U.S. persons, distribution compliance periods of up to a year for some types of securities offerings by some types of issuers, manner of sale and legend requirements, etc.) in an effort to assure that the securities being offered do not prematurely enter (or “flow back” to) the U.S. markets. Perceived abuses under Regulation S by U.S. issuers led to the SEC’s decision in 1998 to reclassify equity securities offered and sold abroad by such issuers in reliance upon the safe harbor as restricted securities, and to impose certain additional constraints. The resale safe harbor is available to persons other than the issuer, a distributor, and their respective affiliates (with limited exceptions for officers and directors of the issuer), but only for resales outside the U.S. that satisfy specified conditions. 8 15 U.S.C. § 77c (a) (9).

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Indenture Act has been filed with the SEC.9 Of course, as with all restructuring transactions, the applicability of Exchange Act regulations (discussed later in this chapter) must be considered separately.

The section 3(a)(9) exemption can be separated into four requirements: (i) issuer continuity, (ii) the presence of an exchange transaction, (iii) securityholder exclusivity, and (iv) the absence of solicitation payments. The failure to satisfy any one of these requirements will render the exemption unavailable.

Issuer Continuity. This requires that the issuer of the outstanding securities that are the subject of the exchange transaction and the issuer of the new securities being offered for exchange be the same. Although this requirement appears straightforward enough, interpretive problems frequently arise where the restructuring involves the exchange of parent company securities for those of one or more of its subsidiaries, or a successor corporation seeks to effect an exchange of securities issued by its predecessor. The SEC’s Division of Corporation Finance, in response to no-action requests, has permitted the issuer-continuity requirement to be satisfied where the offeror is jointly and severally liable for, or has provided an unconditional guarantee of payment or is the primary obligor of, the old securities.10 Indeed, in a number of no-action letters, the SEC staff permitted a parent company to guarantee unconditionally the payment of its subsidiary’s debt securities for the sole purpose of consummating a section 3(a) (9) exchange of the parent’s newly issued debt.11

Exchange Transaction. This requires that the transaction involve a “swap” of newly issued securities for the issuer’s outstanding securities. There can, however, be a cash component of the transaction (i.e. the issuer may pay some cash to the exchanging holders).

Pursuant to rule 149 under the Securities Act, cash payments made by securityholders to the issuer in a section 3(a)(9) exchange offer are permitted to the extent they are “necessary to effect an equitable adjustment in respect of dividends or interest paid or payable on the securities involved in the exchange.”12 Accordingly, the SEC has permitted the waiver of accrued interest or dividends and the relinquishment of causes of action and contractual rights against the issuer. For example, in an exchange offer

9 Section 306 of the Trust Indenture Act requires that, prior to making an offer to sell securities governed by that statute, an application for qualification of the indenture governing those securities must be filed with the SEC. 15 U.S.C. § 77aaa. Form T-3 under the Trust Indenture Act is used for qualification of the indenture, and in the case of corporate trustees (e.g., the corporate trust subsidiary of a commercial bank), an application to qualify the indenture trustee is filed on form T-1. 10 See, e.g., Orbital Sciences Corp., SEC No-Action Letter, 1995 WL 606620 (Oct. 13, 1995); IMCO Realty Services, Inc., SEC No-Action Letter, [1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 79,434 (Feb. 6, 1990); Financial Corp., SEC No-Action Letter, 1987 WL 108244 (June 22, 1987); ECL Indus. & Narlin Corp., SEC No-Action Letter, 1985 WL 55891 (Dec. 16, 1985). 11 See Time Warner, Inc., SEC No-Action Letter, 1996 WL 588513 (Oct. 10, 1996); Echo Bay Mines, SEC No-Action Letter, 1992 WL 180224 (July 27, 1992); FHC-CompCare, Inc., SEC No-Action Letter, 1989 WL 246432 (Oct. 12, 1989); Daisy Sys. Corp., SEC No-Action Letter, [1989–1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 79,314 (Apr. 10, 1989). 12 17 C.F.R. § 230.149 (2005).

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following a management buyout, in order for securityholders to participate in the transaction, they might be required to release the issuer and management from potential and existing claims. The inclusion of a release as a condition to the exchange offer does not alter the principal character of the exchange transaction, and therefore, would not run afoul of section 3(a)(9).

Similarly, pursuant to rule 150 under the Securities Act, cash payments made by the issuer to securityholders in addition to the issuance of new securities are permitted if the payments are part of the total consideration package being offered to securityholders and are disclosed as such in the offer materials.13 These payments can take the form of fractional consideration, accrued interest, dividend settlements, and cash “sweeteners.”14

Securityholder Exclusivity. This requirement overlaps with the exchange requirement because it requires that the offer be made only to existing equity investors in, or creditors of, the issuer. Unlike a straight cash offering, the premise of a section 3(a) (9) exchange transaction is the consensual adjustment of an issuer’s capital structure and relationship with existing securityholders, not a pure capital-raising or financing transaction. In determining whether the exclusivity requirement has been satisfied, the possibility of integration of the offering with a prior or subsequent offering to securityholders that is a capital-raising or financing transaction must be considered. If the offering can be “integrated” (deemed part of a unitary offering or one in a series of such transactions), the requirement may not be met. In this connection, the SEC has identified five factors to consider when determining whether offering transactions should be integrated:

(1) whether the offerings are part of a single plan of financing; (2) whether the offerings involve the issuance of the same class of securities; (3) whether the offerings are made at or about the same time; (4) whether identical consideration is to be received; and (5) whether the offerings are made for the same general purpose.15

Under a staff-created exception, certain successive or concurrent private and registered (public) offerings that otherwise would be subject to integration under the foregoing five-factor analysis nevertheless may proceed without integration subject to specified conditions.16 It is important to note, however, that the issuer must have a valid exemption for the private placement.

If a perceived integration issue arises that cannot be resolved on the basis of published SEC and/or staff positions, the issuer should consider contacting the SEC staff before commencing the restructuring transaction so that it can gauge the SEC’s thinking on the subject. Although issuer counsel may try to present the issue on a “no-names” basis (i.e., without identifying the issuer), experience teaches that the staff generally will

13 Id. § 230.150. 14 See, e.g., Exxon Mobil Corp., SEC No-Action Letter, 2002 WL 1438789 (June 28, 2002). 15 See Securities Act Release No. 4552 (Nov. 6, 1962); 17 C.F.R. § 230.502. 16 See Black Box, Inc., SEC No-Action Letter, [1990 Transfer Binder] Fed. Sec. L. Rep (CCH) 79,510 (June 26, 1990); Squadron, Ellenoff, Pleasant & Lehrer, SEC No-Action Letter, 1992 WL 55818 (Feb. 28, 1992).

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request identification of the issuer as a condition to entertaining counsel’s request. In some cases, the staff even may ask for an opinion of counsel that integration is not compelled and/or registration is not required,17 or insist that the request be presented in written no-action form.

No Solicitation Payment. This perhaps is the most troublesome element of section 3(a) (9). Unlike the other components of section 3(a) (9), which primarily are structural in emphasis, the fourth requirement focuses on the manner in which the section 3(a) (9) transaction is conducted. Stated simply, compensatory payments to persons and entities for solicitation-related activities and services that are ministerial or mechanical in character are permitted, whereas payments to persons and entities to market or promote the exchange generally are prohibited.

The analysis becomes important where legal and financial advisors, public relations firms, and information and exchange agents are retained by the issuer to manage the transaction. The SEC staff has highlighted three areas of concern when evaluating the use of outside advisors in connection with a section 3(a) (9) exchange offer: the nature of the services to be performed, the method of compensation for those services, and the interaction between the issuer’s advisors and securityholders. Although the determinations in this area necessarily are fact-specific and the SEC staff explicitly declines to concur in the issuers’ legal analysis, the following general guidelines can be derived from published SEC staff no-action positions.18

An issuer’s employees, including management, may directly contact, negotiate with, and solicit securityholders, provided that they are not compensated separately for doing so and they attend to their regular employment duties.

Financial advisors and investment banking firms may consult with and advise the issuer as to the terms and timing of the exchange offer and assist the issuer’s counsel with respect to documenting the transaction, perform financial analyses and deliver fairness and valuation opinions to management, contact the legal and financial representatives of securityholder committees, and conduct a range of administrative and ministerial activities of the type discussed below with respect to information agents. Conversely, financial advisors may not express to securityholders management’s opinions, recommendations, or assessments of the merits and risks involved in the exchange offer, directly solicit securityholders or contact them for any purpose if it has published a fairness opinion in connection with the transaction, receive a “success fee” or compensation based on the percentage or value of securities exchanged in the transaction,

17 This typically occurs in a Black Box, Inc. scenario. 18 See, e.g., Calton Inc., SEC No-Action Letter, 1991 WL 199473 (Sept. 30, 1991); Int’l Controls Corp., SEC No-Action Letter [1990–1991 Transfer Binder] Fed. Sec. L. Rep. ¶ 79,604 (Aug. 6, 1990); Seaman Furniture Co., No-Action Letter, 1989 WL 246485 (Nov. 8, 1989).

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function as a dealer-manager in connection with the transaction, or perform underwriting, placement, or marketing services.

Information agents, depositaries, trustees, and financial advisors may perform administrative services, including mailing exchange offer materials to securityholders and inquiring as to their receipt, responding to procedural inquiries, referring securityholders to the offering documents and the issuer’s employees in response to substantive questions, maintaining registers and securityholder lists, issuing stock certificates, and contacting custodians, nominees, and “clearing agencies.”

Disclosure Requirements. Unlike in the case of a registered exchange offer, there are no line item disclosure requirements applicable in connection with a section 3(a) (9) exchange offer.19 At the same time, the antifraud provisions of the federal securities laws continue to apply.20 Accordingly, issuers must disclose information necessary and appropriate to enable their existing securityholders to make an informed investment decision. However, because no registration statement is filed with the SEC, strict liability under section 11 of the Securities Act does not apply to issuers and their directors and officers.21

Resale of Section 3(a) (9) Securities. Newly issued securities received in a section 3(a) (9) exchange offer retain the “restricted” or “unrestricted” character of the securities for which they were exchanged.22 This is because section 3(a) (9) is deemed to be a “securities” rather than a “transactional” exemption.23 If a security held prior to the transaction is a restricted security within the meaning of the Securities Act (i.e., because it was issued in a private placement rather than a registered public offering), the securities received in exchange also would be restricted.24 The characterization of whether a security is restricted or unrestricted is of particular importance to financial institutions that are subject to regulatory restrictions on the liquidity and rating of their securities portfolios. As discussed below, if the surrendered securities were restricted, resales into the public markets of the newly issued securities may, for example, only be effected 19 See, e.g., Regulations S-K, S-X, 17 C.F.R. §§ 229, 210 (2005). 20 15 U.S.C. § 77q (a); 17 C.F.R. § 240.10b-5 (2005). 21 15 U.S.C. § 77K. 22 See, e.g., Mr. Coffee, Inc., SEC No-Action Letter, 1991 WL 178808 (June 6, 1991); Terminal Data Corp., SEC No-Action Letter, 1990 WL 304941 (Nov. 19, 1990); Clevepak Corp., SEC No-Action Letter, 1984 WL 44974 (Mar. 23, 1984). 23 Generally, sections 3 and 4 of the Securities Act contain the statutory exemptions from registration. Section 3 exempts specified securities and section 4 addresses exempt transactions. Securities Act §§ 3, 4, 15 U.S.C. §§ 77c, 77d.In view of this, section 3(a) (9) seemingly is misplaced because the four elements of the exemption have little or no relationship to the characteristics of the securities, and instead, concern the structure of and participants in the transaction. The legislative history of section 3(a) (9) indicates that when first drafted the exemption was included as a subsection of section 4 of the Securities Act. See H.R. REP. NO. 73–1838 (1934). 24 It may be argued that where a section 3(a) (9) exchange offer is conducted with a small group of investors, the transaction is private in nature, and therefore, results in the issuance of restricted securities even if the securities surrendered for exchange were unrestricted. To date, the SEC has not taken a formal position on this.

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consistent with the conditions of resale safe-harbor rules 144 and 144A. Alternatively, investors often require that registration rights be granted at the time of the initial exchange offer and that those rights become exercisable within a reasonable time period (e.g., 90 to 120 days) after consummation of the transaction.25

REGISTRATION EXEMPTION UNDER SECTION 4(2) AND REGULATION D

Known as the “private offering” exemption, section 4(2) of the Securities Act exempts from registration “transactions by an issuer not involving any public offering.”26 Section 4(2) generally is available where securities are offered for sale to a limited number of sophisticated or institutional (i.e., “accredited”) investors that have been afforded access to such business and financial information concerning the issuer as is necessary to reach an informed investment decision27 and that have not purchased the new securities as part of a distribution of the securities for the issuer’s account. The information requirement is more easily satisfied where the issuer is subject to the periodic reporting requirements of section 13 or section 15(d) of the Exchange Act.

Rule 506 of Regulation D (adopted by the SEC under section 4(2)) provides a “safe harbor” exemption which, if its various conditions are satisfied, affords an issuer some assurance that an unregistered offering would not be deemed a “public offering” within the meaning of section 4(2).28 As indicated in the preliminary notes to the regulation, “[a]ttempted compliance with . . . Regulation D does not act as an exclusive election; the issuer can also claim the availability of any other applicable exemption” from registration under the Securities Act.29 In addition to rule 506, Regulation D consists of a series of rules that prescribe, among other things, the nature and number of prospective purchasers, investor information/disclosure requirements, the “integration” considerations discussed above, the manner of conducting the offering, limitations on the resale of securities issued pursuant to the regulation, and notice of sale requirements. Generally, under rule 506 (and related provisions) of Regulation D:

securities may not be sold to more than thirty-five purchasers that either alone or together with their purchaser representatives, if any, are nonaccredited investors;30

all nonaccredited investors, either alone or with their purchaser representatives, must have such knowledge and expertise as is needed to evaluate the merits and risks of the prospective investment, or the

25 See, e.g., Mary Kay Cosmetics Inc., SEC No-Action Letter, [1991–1992 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 76,016 (June 5, 1991). 26 15 U.S.C. § 77d (2) (2005). 27 See SEC v. Ralston Purina Co., 346 U.S. 119 (1953) (offeree under § 4(2) must have access to the type of information furnished in a Securities Act registration statement and offeror must determine that no offeree needed the protections of Securities Act registration). 28 Securities Act § 4(2), 15 U.S.C. § 77d (2). 29 17 C.F.R. § 230.501 preliminary note 3 (2005). 30 Id. § 230.506(b) (2) (i).

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issuer reasonably believes that the purchaser comes within this description;31

no general solicitation or advertising with respect to the offering may be conducted by or on behalf of the issuer;32

certificates evidencing securities must bear restrictive legends and the issuer must conduct a reasonable inquiry as to whether the securities are being purchased for the account of other persons and/or with a view towards distribution;33

offers and sales of securities made within the six-month period preceding, and the six-month period following, the offering may under certain circumstances, have to be integrated with (and therefore, become subject to the terms and conditions of ) that offering;34 and

not later than fifteen days after the first sale of securities is consummated, the issuer must file five copies of a notice of sale with the SEC on form D.35

Unlike offerings eligible for exemption under section 3(a)(9), offerings conducted in reliance upon section 4(2) or rule 506 of Regulation D are not limited principally to exchange transactions and can be used solely to raise cash proceeds. In addition, the offeror can pay solicitation fees to financial advisors (provided that there is no widespread solicitation or general advertising).36 Similar to section 3(a)(9), only the antifraud provisions apply to private offerings under section 4(2) or Regulation D, although unlike section 3(a)(9), indenture qualification under the Trust Indenture Act is not required.37 In addition, securities issued pursuant to the private placement exemptive provisions are restricted, and therefore, not freely saleable without subsequent registration or the availability of a resale exemption (e.g., the ordinary trading transaction exemption codified in section 4(1) and the safe harbor rule 144 thereunder).

RESALE EXEMPTIONS FOR “RESTRICTED” AND AFFILIATE-HELD SECURITIES

Two of the more common resale exemptive provisions relied upon are those contained in rule 144A38 and rule 14439 under the Securities Act.

Rule 144A provides a nonexclusive safe harbor codifying an exemption from the registration requirements of the Securities Act for resales of restricted securities to qualified institutional buyers (commonly known as “QIBs”), subject to specified 31 Id. § 230.506(b) (2) (ii). 32 Id. § 230.502(c). 33 Id. § 230.502(d). 34 Id. § 230.502(a). 35 Id. § 230.503(a). 36 Id. § 230.502(c). 37 Id. § 230.502. 38 Id. § 230.144A. 39 Id. § 230.144.

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conditions designed to prevent spillover of these securities into the public trading markets absent registration or another available exemption. Under the rule, a “qualified institutional buyer” includes insurance companies, banks, securities dealers, registered investment companies, small-business development companies, plans established and maintained by a state or its political subdivisions for the benefit of employees, employee benefit plans, trust funds, investment advisers, and savings and loan associations that purchase securities for their own accounts (or for the accounts of other qualified institutional buyers) and that, on a discretionary basis, own and invest in at least $100,000,000 (or in the case of securities dealers, $10,000,000) of the securities of unaffiliated issuers.40

Additionally, certain conditions must be complied with in order to qualify for the exemption under rule 144A. First, the seller and anyone acting on its behalf must take reasonable steps to ensure that the purchaser is aware that the seller may rely on the exemption from registration pursuant to the rule.41 Next, rule 144A does not exempt the offer or sale of securities which, at the time of their issuance, were securities of the same class as securities then listed on a national securities exchange or authorized for inclusion in an automated interdealer quotation system.42 Restricted securities that are sold pursuant to rule 144A remain restricted in the hands of transferees and resales by transferees must again be effected pursuant to Securities Act registration or an exemption.43 Finally, subject to certain qualifications, the seller and a prospective purchaser designated by the seller have the right to obtain from the issuer, prior to consummation of the sale, reasonably current information as to the nature of the business of the issuer and copies of the issuer’s most recent financial statements.44

If rule 144A is unavailable, holders of restricted securities may be able to sell their securities pursuant to the more limited resale provisions of rule 144 under the Securities Act. Generally, rule 144 provides that if certain conditions are met (e.g., volume limitations, holding periods, manner of sale, availability of current issuer information), persons that resell “restricted securities” (or affiliates of the issuer that resell securities that are no longer restricted) will not be deemed “underwriters” as defined in section 2(a)(11) of the Securities Act.45 In other words, a seller’s compliance with the conditions of rule 144 offers the buyer assurance that its seller has not purchased the securities in question with a view to, as a participant in, or otherwise in connection with, a public distribution of the securities.

Subject to certain exceptions, a person (or persons whose securities are aggregated) that (i) is not an affiliate46 of the issuer and whose securities have been outstanding and not owned by an affiliate for a period of at least one year or (ii) is an affiliate and has

40 Id. § 230.144A (a) (i)–(iv). 41 Id. § 230.144A (d) (2). 42 Id. § 230.144A (d) (3) (i). 43 Id. § 230.144A preliminary note 7. 44 Id. § 230.144A (d) (4) (i), (ii). 45 Id. § 230.144(b). 46 An “affiliate” is defined as a “person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.” 17 C.F.R. § 230.405.

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beneficially owned its securities for a period of at least one year, is entitled to sell, within any three-month period, a number of securities that does not exceed the greater of either one percent of the outstanding securities or the average weekly trading volume of the outstanding securities during the four calendar weeks prior to the date of filing of the rule 144 notice of sale.47 These limitations would not apply to restricted securities sold by a holder that is not an affiliate of the issuer at the time of the resale and that has not been an affiliate for the three-month period immediately prior to the resale, provided that at least two years have elapsed since the later of the date on which that holder acquired the securities from the issuer or from an affiliate of the issuer.48 However, affiliates remain subject to the volume and manner of sale limitations of rule 144 even when the securities are no longer restricted.49

For purposes of determining the length of time restricted securities have been held, rule 144 expressly permits the holding period of securities acquired pursuant to a dividend, stock split, or recapitalization transaction to be aggregated with the holding period of the primary securities.50 Similarly, securities acquired solely upon conversion of other securities of the issuer are deemed to have been acquired on the date the convertible securities were acquired, as long as no cash consideration is paid for conversion or exercise.51 This aggregation of holding periods is commonly referred to as “tacking.”

Practical applications of tacking arise frequently in issuer restructurings. For example, assume an issuer of unregistered debt commenced an exchange offer of common stock for the debt in reliance on section 3(a) (9). As discussed earlier, the new equity would retain the restricted character of the unregistered debt, and therefore, would be subject to the holding period requirements of rule 144. Would the recipient of common stock have to wait a year before selling the common stock under rule 144? When confronted with this issue, the SEC concluded that the holding period of the common stock could be tacked to the holding period of the debt securities, thereby broadening the “conversion” requirement of rule 144 to include nonconvertible securities surrendered in an issuer exchange offer if no cash consideration was paid by the holder.52 Other questions arise where payments accompany the security being surrendered for conversion or exchange due to the “solely upon conversion” language.53 Although these situations must be examined on a case-by-case basis, if the security was deemed fully paid and the holder’s original economic stake in the issuer has not, since the date of initial investment, materially changed pursuant to subsequent recapitalizations, tacking generally is permitted.

47 17 C.F.R. § 230.144(e) (1), (2). 48 Id. § 230.144(k). 49 Id. § 230.144(d) (1). 50 Id. § 230.144(d) (3) (i). 51 Id. § 230.144(d) (3) (ii). 52 See, e.g., ARA Group, Inc., SEC No-Action Letter, 1990 WL 304989 (Dec. 19, 1990); Automotive Indus., SEC No-Action Letter, [1989–1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 79,340 (July 20, 1989). At the time of these no-action letters, the minimum holding period under rule 144 was two years. 53 See 17 C.F.R. § 230.144(d) (3) (ii).

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REGISTRATION OF SECURITIES

If neither section 3(a) (9), neither section 4(2), Regulation D, nor any other exemption from Securities Act registration is available to the issuer, the offer and sale of the new securities must be registered under the Securities Act. The registration process is a time-consuming endeavor which, in the case of an issuer not already subject to Exchange Act reporting requirements, could take ninety days or more from inception to consummation. Disclosure of the purpose, terms, and marketing of the offering must be included in the prospectus contained in the applicable registration statement form,54 as well as detailed descriptions of the issuer’s business, the use of proceeds from the offering, management’s discussion and analysis of the issuer’s financial condition and results of operations, the underwriting arrangements and plan of distribution, the issuer’s capital structure, tax consequences of the investment, the risks incident to an investment in the issuer’s securities, and disclosure of executive compensation, management composition, and affiliate transactions.55 The issuer may be held strictly liable for material misstatements in and omissions from the registration statement at the time it is declared effective.56 Lastly, by reason of having filed a registration statement under the Securities Act, the issuer automatically becomes subject to the reporting requirements of section 15(d) of the Exchange Act for the fiscal year in which the registration statement was declared effective, and thereafter, until the securities which are registered are held of record by less than 300 persons either at fiscal year end or other points in time, at which time the issuer may apply to the SEC to terminate its reporting obligations.

Generally, once the registration statement is filed with the SEC, the issuer (through its managing underwriters) can market the offering. In a registered offering, unlike offerings pursuant to sections 3(a) (9) and 4(2), new investors may be solicited and widespread domestic and foreign marketing efforts can be conducted. Except in limited circumstances where the SEC does not review the registration materials or conducts only a limited review (e.g., where the issuer already is public, has a strong market following, financial stability, and qualifies for the use of a short-form registration statement on form S-357), the SEC review-and-comment and response process typically lasts anywhere from 54 Eligibility to use a particular registration statement form (and thus, the magnitude and format of the disclosure) depends on a variety of factors, including: the length of time, if any, the issuer has complied with the periodic reporting requirements of section 13 or 15(d) of the Exchange Act; the jurisdiction of incorporation of the issuer; whether the issuer has defaulted in respect of its debt, equity, and other obligations; whether the offering is being made for cash or involves an exchange of securities; the aggregate market value and trading volume of the issuer’s public equity; if debt is to be offered, the investment grade rating of the securities; whether the offering is primary (for the issuer’s own account ) or secondary (for the account of selling securityholders); and whether derivative securities (options, warrants, and rights) are being offered. See Forms, reprinted in SECURITIES ACT HANDBOOK 6601 (Aspen Publishers, Inc. ed., 2005). Generally, a registered restructuring would be effected by use of form S-4, which is the registration statement form specified for exchange offers, recapitalizations, and various business combination transactions. 55 See Securities Act sched. A, reprinted in id. at 65. 56 Securities Act § 11(a), 15 U.S.C. § 77k (a). 57 The SEC has relaxed the eligibility requirements for use of registration statement form S-3 which permits the incorporation by reference to periodic Exchange Act reports of a significant portion of the line-item disclosure requirements of Regulations S-K and S-X. See Securities Act Form S-3, reprinted in SECURITIES ACT HANDBOOK, supra note 53, at 6631. In the case of a primary offering for cash, an issuer is eligible to

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six to eight weeks. Where significant accounting and general disclosure comments are made (which may be extensive depending on the complexity of the offering) experience indicates that the registration statement will not be declared effective until it has been adequately revised in response to SEC disclosure concerns.

Notwithstanding certain advantages (e.g., unrestricted securities and widespread marketing activity), including in particular, the recent Securities Act reforms that make it much simpler to use the short-form shelf registration process and otherwise to communicate with investors in most shelf and non-shelf offerings (assuming issuer eligibility), registration is the least attractive means of effecting an issuer recapitalization because of the delays in that process. However, as suggested above, depending on the structure and terms of the transaction and the nature and activities of the parties involved, exemptions from Securities Act registration simply may not be available.

THE EXCHANGE ACT

REGULATION OF EXCHANGE AND TENDER OFFERS

The Exchange Act and the SEC’s rules thereunder govern everything from secondary trading, market making activities, issuer recordkeeping, broker/dealer activities, the conduct of transfer agents and registrars, margin loans, electronic quotation, insider trading, and periodic reporting requirements, to issuer repurchases, short-selling, market stabilization, proxy solicitations (including election contests), and tender offers.

As previously noted, corporate restructurings are likely to be accomplished by means of cash tender and/or exchange offers, consent solicitations, prepackaged plans, and the like. To regulate these types of transactions further, in 1968 Congress enacted the Williams Act, which added sections 13(d), 13(e), 14(d), 14(e) and 14(f ) to the Exchange

use form S-3 if: the issuer is organized under the laws of the United States or any state or territory or the District of Columbia; the issuer has a class of securities registered pursuant to either section 12(b) or to section 12(g) of the Exchange Act or is required to file reports pursuant to section 15(d) of the Exchange Act; the issuer has complied timely with its Exchange Act reporting and proxy requirements for the preceding twelve months; the issuer has not been in default of any of its dividend, interest, and lease payment obligations since the end of the preceding fiscal year; and the issuer’s voting stock has a market value of at least $75,000,000. Id.

Effective December 1, 2005, new and/or amended SEC rules adopted in the summer of 2005 under the Securities Act will make it easier for companies, and in most cases, their underwriters, to communicate with potential investors outside the four corners of a statutory prospectus in a registered offering context. See 70 Fed. Reg. 44722 (Aug. 3, 2005). These reforms also will facilitate the conduct of short-form shelf registered offerings on forms S-3 and F-3 by seasoned public companies; a new class of “super-seasoned” issuers known as “Well-Known Seasoned Issuers” (defined to include primary S-3/F-3 eligible companies that have more than $700,000,000 in worldwide public equity float or have issued more than $1,000,000,000 in nonconvertible debt or preferred stock for cash in the last three fiscal years, and are otherwise eligible) will be able to offer securities on immediately effective short-form shelf registration statements and pay the registration fee at the time of each takedown. The SEC also has dispensed with final prospectus delivery in most registered offerings, subject to specified conditions (including the timely filing of the final prospectus). The SEC staff has published guidance on transition questions raised under the Securities Act reforms in the form of “Frequently Asked Questions.” See Securities Offering Reform Transition Questions and Answers, available at http://www.sec.gov/divisions/corpfin/transitionfaq.htm.

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Act.58 The SEC then promulgated regulations 14D and 14E, and rules 13e-1, 13e-3, and 13e-4 under the Exchange Act. Because most tender offers in the context of restructurings are conducted by the issuer or an affiliate of the issuer, this chapter focuses on rule 13e-4 and regulation 14E, which are applicable to these situations.

Consistent with the aim of federal securities regulation, the Williams Act regulatory scheme requires, among other things, disclosure of material information by offerors and prescribes minimum time periods during which offerees must be allowed to assess the information disseminated to them in connection with their decision whether to participate in a tender or exchange offer.59 The provisions of the Williams Act, together with the federal proxy requirements of regulations 14A and 14C, form the cornerstone of restructurings implemented under the Exchange Act.60 If a debt restructuring is conducted by means of a tender or exchange offer, certain tender offer rules of the Williams Act apply. The general requirements of regulation 14E (and rule 14e-1 promulgated thereunder) apply to all issuer (and third party) tender and exchange offers, including offers for nonconvertible debt securities.61 In addition, an issuer that has equity securities registered under section 12 of the Exchange Act62 or is subject to the periodic reporting requirements of section 15(d) of the Exchange Act must comply with the requirements of rule 13e-4 if it conducts a tender or exchange offer for its equity securities, and under certain circumstances, also may be subject to rule 13e-3, the SEC’s so-called “going private” rule.

The term “tender offer” is not codified in the federal securities laws despite a number of informal rulemaking initiatives by the SEC over the years. However, several federal courts have used a multifactor test to assess whether a particular transaction has the characteristics of a tender offer. In Wellman v. Dickinson,63 the seminal case in this area, the court determined that a conventional tender offer typically has the following indicia:

58 The Williams Act is now codified as amended at 15 U.S.C. §§ 78m (d)–(e), 78n (d)–(f). 59 Disclosure includes the identity of issuer and the proponent of the transaction, the material terms and purpose and effects of the transaction, plans and proposals of the issuer and affiliate, the source and amount of funds or other consideration being used to effect the transaction, historical and pro forma financial information, and descriptions of past or existing relationships and contractual arrangements between the person conducting the transaction and the issuer and among the transaction proponents and its affiliates. 15 U.S.C. § 78m (d) (1) (A)–(E). 60 Rule 13e-1 of the Exchange Act also plays a role in corporate restructurings because it is applicable to repurchases of equity securities effected by an issuer during the course of a third party tender offer. 17 C.F.R. § 240.13e-1 (2005). Generally, rule 13e-1 applies to purchases by an issuer or its affiliate of the issuer’s common stock and places an affirmative duty to file disclosure documents with the SEC on an issuer that, during the period of a tender offer, desires to purchase equity securities of which it is the issuer. Id. These provisions give rise to a variety of considerations and the advice of experienced securities counsel is essential to prevent inadvertent violations of these regulations. 61 17 C.F.R. § 240.14e-1. 62 Generally, section 12(b) requires Exchange Act registration of all securities (debtor equity) which are listed on a national securities exchange and section 12(g) requires registration of equity securities held of record by more than 500 persons and issued by an issuer having more than $10,000,000 in total assets. See Exchange Act §§ 12(b), 12(g), 15 U.S.C. §§ 78l (b), 78l (g). 63 475 F. Supp. 783 (S.D.N.Y. 1979), aff’d on other grounds, 682 F.2d 355 (2d Cir. 1982), cert. denied, 460 U.S. 1069 (1983).

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active and widespread solicitation of public securityholders; solicitation of a substantial percentage of outstanding securities;

an offering price that represents a premium to market; nonnegotiable terms; a minimum and/or maximum number of securities sought to be purchased;

a limited period of time during which the offer remains open; pressure on securityholders to participate in the transaction; and

public announcements and other forms of publicity.64

In Wellman, the fact that no public announcements were made was not deemed determinative by the court. It is unclear which, if any, of the foregoing factors are dispositive in determining whether a “tender offer” exists. Some courts, considering the public disclosure policy of the Williams Act, have emphasized the sophistication and knowledge of the offerees to determine whether they need that Act’s protections in situations where only a few sophisticated shareholders are being solicited.65 Therefore, the flexibility exists for the courts to review these transactions on a case-by-case basis. At the same time, bear in mind that the SEC has at least implicitly endorsed the eight-factor test.66

RULES 14e-1 AND 14e-3

Rule 14e-1 governs the timing and procedures for all tender and exchange offers. Generally, it requires that: the offer remain open for at least twenty business days from the date of commencement; the offer remain open for at least ten business days after the percentage of securities being sought, the consideration being offered, or the dealer’s solicitation fee being paid in the transaction, is increased or decreased; tendered securities be paid for or returned to the securityholders (which deposited them for payment or exchange) “promptly” following the termination or withdrawal of the offer; and the period of time during which an offer remains open be extended by means of press release or other public announcement which discloses the particulars of the extension and the approximate number of securities deposited to date.67

64 Id. at 823–24. 65 The Second Circuit Court of Appeals declined to follow the Wellman eight-factor approach and ruled that it would be “unnecessary” to use the Wellman factors as a “mandatory litmus test,” but that many of the factors would be “relevant” for the purposes of determining whether a particular solicitation amounts to a tender offer. The court determined that the question of whether a solicitation constitutes a tender offer turns on whether there appears to be a likelihood that “unless the pre-acquisition filing strictures of that statute are followed, there will be a substantial risk that solicitees will lack information needed” to consider the proposal before them. Hanson Trust PLC v. SCM Corp. 774 F.2d 47, 57 (2d Cir. 1985); see also Iavarone v. Raymond Keyes Assocs., 733 F. Supp. 727, 733 (S.D.N.Y. 1990). 66 See SEC Interpretation: Commission Guidance on Mini-Tender Offers and Limited Partnership Offers, SEC Release No. 34-43069 (July 24, 2000), available at http://www.sec.gov/rules/interp/34-43069.html. 67 Note that in a series of no-action letters, the SEC staff indicated that it would not object if the twenty-day and ten-day requirements were not complied with in the case of certain tender offers for nonconvertible debt securities subject only to section 14(e) and Regulation 14E. See, e.g., Playtex FP Group, Inc. SEC No-Action Letter, [1989 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 78,954 (Nov. 22, 1988); Shearson

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Unlike rule 13e-4 (discussed below), no express right to withdraw previously tendered securities is conferred by rule 14e-1. However, a withdrawal right may be inferred from the requirement that an offer remain open for twenty business days. This makes sense when considering the usefulness of the requirement without the corresponding right of offerees to withdraw from their previous investment decisions.

Under rule 14e-1, no tender or exchange offer statement need be filed with the SEC.68 However, under section 14(e), the general antifraud provisions of the Exchange Act (e.g., section 10(b) and rule 10b-5) would apply, and if the securities are offered in an exchange offer, there also could be liability under the Securities Act (e.g., section 17).

Where tender or exchange offers are conditioned upon the receipt of exit consents, the consent of tendering securityholders is deemed to constitute an integral part of the tender or exchange offer consideration. Accordingly, the consent solicitation component of the offer would be subject to rule 14e-1, and if applicable to the transaction, rule 13e-4 (discussed below). For example, if consent payments are offered to induce the participation of securityholders, the offer and consent solicitation would need to remain open at least ten business days from the date of any increase or decrease in the amount of such payments.69

Although a detailed discussion of insider trading is beyond the scope of this chapter, it bears mentioning that rule 14e-3 provides, among other things, that if a person has taken substantial steps to commence a tender offer, no other person can trade in the target securities if that other person possesses material nonpublic information about the tender offer that has been acquired from the bidder or from an insider of the issuer of the target securities.70 Rule 10b-5 similarly would prohibit the use of such information in connection with the purchase and sale of securities.71

In addressing insider trading in the tender offer context,72 the United States Supreme Court endorsed the “misappropriation theory” of liability pursuant to which a corporate “outsider” (in this case, a fiduciary of the source of the information) violates rule 10b-5 by misappropriating “confidential information for securities trading purposes, in breach of a duty owed to the source of the information.”73 This misappropriation theory complements the “traditional” or “classical theory” of insider trading liability where a corporate “insider” that owes a fiduciary duty to the corporation trades in the

Lehman Bros., Inc., SEC No-Action Letter, 1986 WL 67463 (Dec. 3, 1986); Merrill Lynch, Pierce, Fenner & Smith, SEC No-Action Letter, 1986 WL 67037 (July 2, 1986); Kidder, Peabody & Co., SEC No-Action Letter, 1986 WL 66825 (May 5, 1986); Goldman, Sachs & Co., SEC No-Action Letter, 1986 WL 66561 (Mar. 26, 1986). But see Salomon Bros., Inc., SEC No-Action Letter, [1990–1991 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 79,643 (Oct. 1, 1990) (suggesting that SEC’s earlier no-action positions were limited to all-cash tender offers for investment-grade debt only). 68 17 C.F.R. § 240.14e-1 (2005). 69 Of course, consent payments per se would not be permissible in an exchange offer conducted pursuant to section 3(a) (9) of the Securities Act. 70 17 C.F.R. § 240.14e-3. 71 Id. § 240.10b-5. 72 United States v. O’Hagan, 521 U.S. 642 (1997). 73 Id. at 652.For a discussion of the misappropriation theory and the O’Hagan decision, see Chapter [19].

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corporation’s securities on the basis of material confidential information.74 Therefore, it appears that the Supreme Court has broadened the scope of liability under rule 10b-5 to include fiduciaries that breach their duty of confidentiality to the source of the information, rather than their duty to the trading party.

Additionally, persons that are privy to or obtain material non-public information regarding an issuer’s plans to effect a restructuring75 are precluded from trading in any issuer securities. In this connection, however, the SEC has conceded that although members of creditors and reorganization committees are “temporary insiders” of the issuer for purposes of the insider trading laws, financial institutions that serve on those committees and that trade regularly in securities should be permitted to continue those activities, provided that appropriate screening procedures to prevent the leak of committee information are implemented.76 If material nonpublic information is disclosed to others outside the issuer who do not owe a duty of trust or confidence to the issuer or who have not expressly agreed to keep the disclosed information in confidence, regulation FD requires the issuer to make a public disclosure of such information immediately.

RULE 13e-4

In addition to the requirements of Regulation 14E, certain issuer tender or exchange offers must comply with rule 13e-4. Rule 13e-4 governs offers for equity securities conducted by issuers or their affiliates that have an outstanding class of equity securities registered pursuant to section 12 of the Exchange Act or otherwise are subject to the mandatory reporting requirements of section 15(d) of the Exchange Act.77 Rule 13e-4 contains various substantive requirements relating to the structure of an issuer tender offer.78 The central requirements include: withdrawal rights, proration of an oversubscribed partial bid, the so-called “all-holders/best price” rule, a ten-day cooling-off period after the termination/withdrawal of the offer, and line-item disclosure, each of which is addressed briefly below.

Withdrawal Rights. The securityholder that has tendered its equity securities to (i.e., deposited with) an issuer must be afforded the right to withdraw its tender at any time during the period the offer remains open for acceptance (including during any extensions of that period), or if not previously accepted for payment or exchange, after the expiration of forty business days from the commencement of the offer. This requirement affords the offeree the ability to reassess its investment decision during the pendency of the transaction without having made an irrevocable commitment.79 If the offer was

74521 U.S. at 652. 75 These persons may be officers, directors, or employees of the issuer, in professional trust or advisory capacities vis-à-vis the issuer, or otherwise individuals known to have such relationships, capacities, or other duties with or to the issuer. Id. 76 See, e.g., Bekhor Sec. Corp., SEC No-Action Letter, 1993 WL 315722 (Aug. 12, 1993). For a discussion of such screening procedures, see Chapter [19]. 77 17 C.F.R. § 240.13e-4 (2005). 78 Id. 79 As a practical matter, most offerees tend to deposit their securities on the last day of the offer period.

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conditioned on the receipt of an exit consent, withdrawal rights extend the securityholder’s ability to revoke a previously furnished consent until the expiration date of the offer.

Proration of Oversubscribed Partial Bid. If an issuer or its affiliate commences a partial tender or exchange offer (i.e., an offer for less than all outstanding securities of the class subject to the offer) subject to rule 13e-4 and a greater number of securities are tendered for purchase (or surrendered for exchange) than the offeror seeks or is committed to accept, the deposited securities must, subject to certain de minimis exceptions, be purchased on a pro rata basis. The rationale behind this requirement is to prevent owners of large positions, such as institutions, broker/dealers, money management funds, arbitrageurs, and other securities market professionals, from foreclosing small securityholders from participating in the offer.80

All-Holders/Best Price Rule. This rule provides for equality of treatment with respect to price and other material terms of the offer. The offeror must pay the highest consideration paid to all holders whose securities are accepted for purchase or exchange.81 If the offer is conditioned on the receipt of exit consents, structural complications may arise when the issuer seeks to establish a record date. If the tender or exchange offer is governed by rule 13e-4, a cut-off date for the validity of consents seemingly frustrates the all-holders requirement because purchasers of securities after the record date would not be permitted to participate in the consent solicitation. One solution is to set the record date as the last day of the offer.

Cooling-Off Period. This prohibits the offeror from purchasing any security that is the subject of the tender or exchange offer until the expiration of ten days after the offer has terminated,82 thus allowing the market price and trading volume of the security to settle down.

Line-Item Disclosure. The offeror in a bid subject to rule 13e-4 must file with the SEC an issuer tender offer statement as soon as practicable after the commencement of the offer. This requires disclosure of information about the identity of the issuer and its management; the principal market, if any, on which the target security is traded; the source and amount of funds being used to consummate the transaction; the purpose of the offer and related plans and proposals concerning the bidder; transactions by the issuer (or affiliates) in the securities subject to the offer; contracts, arrangements, and understandings concerning the issuer’s securities; information regarding the retention, employment, and compensation arrangements concerning professional advisors; and certain historical and pro forma financial information.83

80 17 C.F.R. § 240.13e-4(f) (3). 81 Id. § 240.13e-4(f) (8). 82 Id. § 240.13e-4(f) (6). 83 The tender offer statement is filed on schedule 13E-4, which in practice, functions as a glorified cross-reference sheet to the offering circular or prospectus distributed to securityholders pursuant to the offer. See 17 C.F.R. § 240.13e-3(e).

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DUTCH AUCTIONS

Sometimes an issuer will conduct a so-called “dutch auction” tender offer, in which target securityholders are invited to tender their securities at prices that they select (within a specified range), rather than at a flat price set by the bidder. Tendered securities are then accepted, beginning with those whose holder selected the lowest price, until the bidder has purchased the aggregate number of securities sought in the tender offer.

Although the “best price” provisions of rules 13e-4 and 14d-1 under the Exchange Act seemingly would preclude the use of dutch auction tender offers for equity securities, the SEC, in its adopting release for rule 13e-4, sanctioned so-called “modified” dutch auction tender offers, provided that the issuer discloses the range of consideration to be paid, withdrawal rights are provided throughout the tender period, proration rights are provided to all tendering securityholders, all tendered securities that are accepted for payment are purchased at the highest price paid to any securityholder during the offer, and the price to be paid is announced promptly after it is determined by the issuer.84 Pure dutch auctions in the case of nonconvertible debt are permitted as long as the requirements of rule 14e-1 are satisfied.85

GOING-PRIVATE TRANSACTIONS AND RULE 13e-3

To curtail perceived insider and control person abuses in the conduct of so-called “privatization” or “squeeze out” transactions, in 1977 the SEC adopted rule 13e-386 to mandate, among other things, disclosure as to the fairness of the transactions to public unaffiliated securityholders.87

Broadly speaking, rule 13e-3 governs issuer and affiliate transactions (including tender offers and proxy and consent solicitations) that either have a reasonable likelihood of causing or are designed to cause (a) a class of equity securities that is registered under the Exchange Act to cease to be (i) registered under the Act or (ii) listed on a national securities exchange, such as the NYSE or American Stock Exchange (AMEX), or authorized for quotation on NASDAQ; or (b) the issuer’s periodic reporting obligations under the Exchange Act to be suspended (for section 15(d) purposes) or terminated (for section 12(b) or (g) purposes).88

84 Amendments to Tender Offer Rules All-Holders and Best-Price, Exchange Act Release No. 23421, 1986 WL 73226 (July 11, 1986). 85 17 C.F.R. § 240.14e-1. 86 Id. § 240.13e-3. 87 In a “going private,” “privatization,” or “squeeze out” transaction, the issuer or affiliates of the issuer purchase, for some combination of cash and securities, the outstanding equity securities of the issuer from its public stockholders. As a result, the former public company becomes either privately held or the public (and thus, liquid) market for the company’s equity securities is all but eliminated. Proponents of rule 13e-3 believed that insider purchasers of this type have an inherently unfair advantage over the public because of their personal knowledge of the company. 88 17 C.F.R. § 240.13e-3(a), (b), (c).

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The proponent of the going-private transaction is required to file a schedule 13E-3 transaction statement with the SEC.89 Although the time when the filing must be made varies according to the means by which the going private transaction is effected (e.g., tender offer, proxy solicitation, or otherwise), schedule 13E-3 generally is filed together with the other transaction materials (e.g., proxy statement, registration statement, schedule 13E-4) first filed with the SEC.

While extensive transactional disclosure is required, the real “sting” of rule 13e-3 lies in the requirement to disclose the views of the issuer and other affiliates engaged in the going-private transaction as to the fairness of the transaction to nonaffiliated securityholders. Schedule 13E-3 requires, among other things, a reasonably detailed description of:

alternative transactions considered by the proponent of the transaction;

the reasons for the structure and timing of the transaction;

the benefits and detriments of the transaction (to be quantified if practicable);

whether any director dissented to or abstained from voting on the transaction (and if known, the reasons therefor);

the factors relied on in determining whether the transaction is fair to unaffiliated securityholders (including the relative weight and importance assigned to each factor);

any reports, opinions, or appraisals received by the proponent of the transactions and the qualifications and independence of the provider of such reports;

whether the transaction was structured to require approval by a majority of unaffiliated securityholders; and

various other financial and qualitative analyses of the overall fairness of the transactions to the issuer, its affiliates, and unaffiliated securityholders.90

The descriptions of these matters, most of which must be included in the transactional documents delivered to shareholders, can be quite detailed and litigation-sensitive, particularly in view of the instructions to schedule 13E-3, which state that mere conclusory statements will be deemed nonresponsive.91

89 Id. § 240.13e-3(e) (1). 90 Exchange Act sched. 13E-3, reprinted in SECURITIES ACT HANDBOOK, supra note 54, at 7069. 91 Id.

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Rule 13e-3 contains several exceptions, the most frequently used being rule 13e-3(g) (2). This exception is available in the case of “equity swaps”—where securityholders are offered or receive a new equity security in exchange for their existing equity security, provided that the new equity security has “substantially the same rights as the equity security that is the subject of the rule 13e-3 transaction,” the new equity security is registered pursuant to section 12 of the Exchange Act or the issuer is a section 15(d) reporting company, and if the equity security which is the subject of the rule 13e-3 transaction was either listed on a national securities exchange or authorized for quotation on an interdealer quotation system, the new equity security is similarly listed or quoted.92 The premise of this exception is that by substituting one public equity security with its functional equivalent, the status quo has been maintained.

Although the express language of the foregoing exception refers to transactions in which securityholders are offered or receive “only” an equity security, the SEC has permitted the option of receiving cash in lieu of a new equity security if the cash option is available to all securityholders and substantially is equal in amount to the value of the new security.93 Moreover, the SEC in recent years has been flexible in determining whether the new equity security has substantially the same rights (with respect to, among other things, dividends, voting, and liquidation) as the old security.

FEDERAL PROXY RULES

Section 14(a) of the Exchange Act94 and Regulations 14A95 and 14C96 regulate the conduct of proxy and consent solicitations and the form of proxies (including consents), and provide various disclosure and public dissemination requirements in connection with the solicitation of securityholder votes and consents. The federal proxy rules apply only to securities that are registered pursuant to section 12 of the Exchange Act. Accordingly, an issuer that is subject to the reporting requirements of the Exchange Act (e.g., pursuant to section 13 or section 15(d)) and that conducts an exit consent solicitation with respect to non-section 12 debt need not comply with the federal proxy requirements.

Conversely, if in the course of a restructuring transaction an issuer conditions its offer on the receipt of exit consents to proposed debt amendments and the debt in question was convertible into equity and was, for example, listed on the NYSE, the solicitation and form of exit consents would be governed by regulation 14A.97 Hence, the issuer would be required to file with the SEC the information prescribed by schedule 14A and furnish that information to all holders from which proxies or consents were being solicited.98

92 17 C.F.R. § 240.13e-3(g) (2). 93 See generally Exchange Act Release No. 34–17720, 1981 WL 31470 (Apr. 13, 1981). 94 Exchange Act § 14(a), 15 U.S.C. § 78n (a). 95 17 C.F.R. § 240.14a. 96 Id. § 240.14c. 97 Id. § 240.14a. 98 Id. § 240.14a-3.

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Pursuant to rule 14a-6, preliminary forms of the proxy materials to be used in the solicitation must be filed with the SEC (on a confidential basis if such treatment is available under rule 14a-6(e)(2)) for review at least ten calendar days in advance of furnishing definitive materials to securityholders.99 Thus, compliance with the federal proxy rules results in a minimum ten-day delay of the consent solicitation. In practice, the preparation, filing, obtaining, and SEC “clearance,” of preliminary proxy materials takes considerably longer.

As discussed above, securities issued as part of a restructuring transaction outside chapter 11 often are registered under the Securities Act (due either to the lack of an available exemption or to other structural reasons). If the transaction is subject to the proxy rules, the issuer can combine the registration and proxy disclosure by filing a registration statement on form S-4, which provides for dual compliance with applicable Securities Act and Exchange Act disclosure requirements in a combined proxy statement prospectus that is delivered to shareholders being asked to vote. One advantage of this combined approach is that the issuer may have the option to elect to file the disclosure materials on a confidential basis for review by the SEC as preliminary proxy materials rather than as a public Securities Act registration statement if it is a transaction covered by item 14 of Regulation 14A. Following the SEC review and comment period, the registration statement containing the final proxy statement prospectus is filed in definitive form and is declared effective. The confidential filing and review process is useful to an issuer that seeks to delay public disclosure in connection with its restructuring plan. Such treatment is not available for going-private transactions or for transactions in which the issuer makes public communications that go beyond the scope of Securities Act rule 135.

Alternatively, the issuer may elect to disseminate a “red herring” prospectus promptly pursuant to section 5(b)(1) of the Securities Act,100 which (as construed by the SEC in the case of registration statements on form S-4) permits the issuer to make the distribution ten days after the registration statement is first filed with the SEC (i.e., the waiting period for mailing definitive proxy materials pursuant to rule 14a-6(a) under the Exchange Act), as long as no proxies, consents, or letters of transmittal are included in the materials distributed to securityholders and a final prospectus under rule 424(b) is delivered to securityholders on the effective date of the registration statement.

There is no exemption from the federal proxy rules for an issuer conducting a prepackaged chapter 11 plan solicitation. Although § 1125 of the Bankruptcy Code provides an exemption for the solicitation of plan acceptances after the commencement of a chapter 11 case, as discussed below, §§ 1125(g) and 1126(b) expressly mandate compliance with applicable nonbankruptcy law governing the adequacy of disclosure in connection with prepetition solicitations.101 Thus, if the claims or interests subject to a prepetition solicitation are equity or debt convertible into equity registered under section 12 of the Exchange Act, compliance with regulation 14A is necessary.

99 Id. § 240.14a-6. 100 Securities Act § 5(b) (1), 15 U.S.C. § 77e (b) (1). 101 11 U.S.C. §§ 1125(g), 1126(b).

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Note that the solicitation of proxies and consents and requirements for obtaining stockholder approval prior to effecting corporate transactions also are regulated by state corporate law and the requirements of the NYSE, AMEX, and NASDAQ.

GENERAL DISCLOSURE OBLIGATIONS

The central theme of the federal securities laws is the prompt, accurate, and complete disclosure of information that is material to securities investment decisions. For example, Exchange Act reporting companies are required to file with the SEC periodic financial and business information, such as “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in their annual and quarterly reports on forms 10-K and 10–Q. Under the 2002 Sarbanes-Oxley amendments to the Exchange Act, moreover, public companies are required to institute controls and procedures designed to assure the accuracy and completeness of all corporate communications with the public, whether contained within the four corners of a periodic report or other SEC filing under the Securities Act or Exchange Act, or in an oral communication with an analyst or investor governed by Regulation FD. Importantly, the chief executive officers and chief financial officers of public companies also are required to certify the accuracy and completeness of all 10-Ks and 10-Qs, on pain of criminal and/or civil prosecution.102

In the case of “regulated” transactions, both the Securities Act and the Exchange Act provide various public filing and disclosure requirements depending on the transaction. Even if a particular transaction is not subject to specific information and dissemination requirements, the general antifraud provisions of the federal securities laws prohibit material misstatements and omissions and manipulative practices in connection with the purchase, sale, and voting of securities.103 Moreover, the regulated national securities markets (e.g., the NYSE, AMEX, and NASDAQ) impose a variety of public announcement and securityholder communication requirements on issuers whose securities are listed for trading on those markets.

Notwithstanding this “right to know” policy, there may be situations where the disclosure of corporate information, although material to investors, may be detrimental to the issuer. In the case of truly proprietary (e.g., trade secrets) or confidential (e.g., management earnings and cash flow projections) information, the harm from premature or reckless public disclosure is easy to perceive. Where, however, the issuer is or is potentially in financial extremis or in a restructuring mode, striking a balance between public disclosure (which is reinforced by antifraud liability exposure) and corporate damage control can be difficult.

Drawing from actual examples, assume that senior financial personnel of a publicly traded issuer have just been informed of certain unanticipated events which, if not remedied promptly, likely would result in defaults of the issuer’s senior debt instruments. This, in turn, would trigger cross-defaults on the issuer’s subordinated debt. Assume that, based on the issuer’s relationship with and the diversity of its bank group, there is

102 See 15 U.S.C. § 7241; 18 U.S.C. § 1350. 103 See 17 C.F.R. § 240.10b-5 (2005); id. § 240.14a-9.

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significant uncertainty as to whether waivers of the defaults could be obtained and that not all the senior lenders are fully secured. Further assume that three weeks earlier, the issuer’s earnings release resulted in new “buy” recommendations and a material jump in stock price, and several days after the release senior officers exercised options and sold a portion of their stock on the open market at a profit. Also assume that a meeting with analysts and rating agencies is scheduled in two days, and due to unsubstantiated rumors of a pending application for Food and Drug Administration approval of a new pharmaceutical product, the NYSE has inquired as to known or impending corporate developments. Finally, assume that management is in the midst of negotiating a joint venture with a key foreign supplier which is sensitive to the issuer’s debt load and cash flows.

Obviously, the issuer is in a difficult position. On the one hand, delayed disclosure could result in significant litigation exposure, reputation damage, and loss of business, whereas premature or careless disclosure could result in a sharp stock decline, the loss of trade credit and customers, and employee and stockholder panic, making negotiations with creditors and the conduct of operations significantly more difficult.

There is no simple answer or suggested course of action to resolve these disclosure issues. However, discussed below are suggested guidelines that should be followed even if the issuer is not engaged in a corporate restructuring.

Generally, an issuer is required to disclose promptly the occurrence of material developments affecting its business or financial condition, such as pending material litigation, operating or financial developments, the execution of a material contract (such as a loan agreement or contract to acquire or dispose of a line of business or a material percentage of assets), changes in management, defaults, securities issuances and repurchases, stock splits, dividends, and changes in dividend policy.104 The first place to look for a disclosure duty in these circumstances is a line-item requirement of the SEC. The form 8-K reforms that became effective in August 2004 have heightened the emphasis on real-time disclosure of events deemed “per se” material by the SEC, including but not limited to, executive and director compensatory arrangements, the entry into and termination of material contracts outside the ordinary course of business, the entry into or acceleration of obligations under material off-balance sheet arrangements, and the hiring and termination of specified principal officers and directors. Focusing specifically on the distressed issuer context, relevant form 8-K reporting triggers include, among other events, default under direct financial obligations (particularly where cross-default provisions are implicated), triggering event that causes the company’s financial obligations to be increased or accelerated, delisting notice from the NYSE or NASDAQ, and filing of a chapter 11 bankruptcy petition.105 Where not otherwise defined as material by the line-item requirements, as under the accelerated and expanded form 8-K reporting scheme, a particular development must be analyzed under traditional antifraud principles of duty and materiality, as discussed below. 104 See 17 C.F.R. § 229 (Regulation S-X, which sets out the disclosure of these types of information, applies to the nonfinancial statement portions of the registration statements under the Securities Act, in addition to other documents to be filed under the Exchange Act). 105 SECURITIES ACT HANDBOOK, supra note 54, at 6913.

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Although there is no litmus test for what is “material” under the general antifraud provisions of the securities laws, the courts have found a fact to be material if a reasonable investor would deem that fact, in light of the total mix of information available to the investor, to be important in making a decision to buy or sell (or to vote) the issuer’s securities.106 The SEC took a similar approach in its release adopting regulation FD. While Regulation FD does not define what is “material,” the SEC noted in its adopting release that Regulation FD relies on existing definitions of what is material established in the case law.107 Accordingly, the SEC noted that “[i]nformation is material if ‘there is a substantial likelihood that a reasonable shareholder would consider it important’ in making an investment decision. To fulfill the materiality requirement, there must be a substantial likelihood that a fact ‘would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.’”108

The Supreme Court has announced that in determining whether preliminary merger negotiations should be disclosed, the issuer must assess the “magnitude” of the prospective transaction and the “probability” of its occurrence.109 By analogy, the same approach can be used to determine whether preliminary restructuring negotiations or plans need to be disclosed. The magnitude of a potential restructuring transaction can be measured by the economic effect on the issuer, the amount of debt and/or equity involved, the effect, if any, on employees, customers, and suppliers, and the anticipated reaction of the market for the issuer’s securities. The probability of occurrence may be gleaned from the steps taken by the issuer to effect the transaction (e.g., whether professional advisors have been engaged, formal proposals have been submitted, due diligence has been substantially completed, actual negotiations have commenced, agreements have been executed, and board action has been taken).

An affirmative duty of disclosure has been held to arise in a number of specific circumstances, including where there has been unusual or significant trading activity by insider(s),110 where there are unconfirmed rumors about an issuer that may be attributed to the issuer,111 and where a prior press release would appear to be current but there has been a change in the reported facts which requires updating or correcting.112 Moreover, the SEC and the national securities exchanges and NASDAQ have urged all issuers to establish strict internal procedures designed to avoid problems relating to the release and

106 See Piper v. Chris-Craft Indus., 430 U.S. 1 (1977); TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976); Kaufman v. Trump’s Castle Funding (In re Donald J. Trump Casino Sec. Litig.), 7 F.3d 357, 369 (3d Cir. 1993), cert. denied, 510 U.S. 1178 (1994); Basic Inc. v. Levinson, 485 U.S. 224 (1988). 107 See Securities Act Release No. 7881, Exchange Act Release No. 43154, IC-24599, File No. S7-31-99 (Aug. 15, 2000) 108 Id. 109 Basic, 485 U.S. at, 238–39 & n.16. 110 See, e.g., Cady, Roberts & Co., SEC No-Action Letter, 1961 WL 3743 (Nov. 8, 1961). 111 See State Teachers Retirement Bd. v. Fluor Corp., 654 F.2d 843, 850 (2d Cir. 1981). 112 Manchester Mfg. Acquisitions, Inc. v. Sears, Roebuck & Co., 802 F. Supp. 595 (D.N.H. 1992) (holding that even if no duty to disclose restructuring information existed originally, partial disclosure of future business plans gave rise to duty of full disclosure). But cf. PPM Am., Inc. v. Marriot Corp., 875 F. Supp. 289 (D. Md. 1995) (holding that during the months preceding corporate restructuring, corporation had no duty to update any prior disclosures).

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improper withholding of corporate information.113 Regulation FD’s adoption in 2000 underscored the importance of defining carefully the personnel who are authorized to speak for the company and when the company will or will not speak to the markets (e.g., the so-called quiet periods before earnings are released). This protects the company not only from FD enforcement, but also from potential 10b-5 liability for unauthorized tipping or trading by insiders. There should be clear lines of authority, responsibility, and accountability within the issuer, and particularly identifying which persons are authorized to communicate with the financial community and the news media.

The issuer’s employees should be advised of these general guidelines, including the obligations to maintain confidentiality of undisclosed material information and to refrain from trading in any of the issuer’s securities or “tipping” others outside the issuer who might illegally trade on the basis of such information. Persons authorized to communicate with the financial community, and if applicable, the news media, should be kept well informed about all material corporate developments and should be instructed to make no public statements unless their accuracy is verified by senior management of the issuer. The significance of this admonition was illustrated in a highly publicized case in which an international food and beverage manufacturer was subject to significant liability and exposure when a corporate official, unaware of pending merger discussions, unknowingly informed the press that there were no material corporate developments.114

Not all developments that are reportable in the issuer’s next quarterly report on form 10–Q or current report on form 8–K are of sufficient importance to require earlier disclosure by means of a press release. However, information that is material and nonpublic which has been selectively disclosed to others outside of the company not owing a confidentiality obligation to the company must be disclosed to the public pursuant to Regulation FD. The disclosure issue is fact sensitive and one of degree, and therefore, it is critical to consult with legal counsel whenever any development occurs, preferably before it does, especially when the issuer can reasonably anticipate it might become an issue. More often than not, the issue is when (rather than if) the disclosure should be made. For example, a mineral rights development and exploration company was permitted to withhold temporarily the public announcement of a major ore discovery while it sought to acquire the overlying land on the basis that an announcement would have caused an increase in the acquisition price.115 However, until the announcement was made, directors, officers, and other “insiders” were precluded from buying or selling the issuer’s securities in the public markets.116

The failure to issue a timely press release in appropriate circumstances, the public announcement of material misstatements of fact, or the omission of material facts in an otherwise facially accurate announcement, can result in substantial issuer liability to persons that bought or sold the issuer’s securities during the relevant period. 113 Coordination of the Disclosure System, Securities Act Release No. 5196, 1971 WL 11229 (Oct. 4, 1971). 114 See Carnation, Exchange Act Release No. 22214, [1984–1985 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 83,801 (July 2, 1985). 115 See SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). 116 Id. at 848.

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Accordingly, press releases should be considered potential liability documents and should be reviewed and edited, as necessary, by experienced securities counsel before issuance. Further, once a press release is issued, subsequent material changes relating to the matters reported should be disclosed in subsequent releases.117

Care must be taken to avoid limited disclosure of material information through telephone discussions or interviews with analysts and reporters. It is perfectly acceptable to discuss general or background information, but specific material corporate developments should not be discussed unless the company is prepared to issue a press release simultaneously. For example, disclosure to one analyst (whether intentionally or inadvertently) of financial projections could result in an obligation to disclose those projections to the general public under Regulation FD118—a result few issuers would desire in view of the potentially significant liability associated with such disclosure. Although form 8-K provides that information submitted under item 7.01 to satisfy Regulation FD requirements is not automatically incorporated by reference into registration statements or subject to liability for false or misleading statements under section 18 of the Exchange Act, it is subject to 10b-5 liability.119

Similarly, it is important to avoid inadvertent disclosure to an analyst or reporter. After being told by the issuer that management cannot divulge its earnings forecasts, the analyst or reporter may offer his own estimates or assumptions and then ask whether that is “in the ball park.” Answering “no,” if the analyst or reporter is correct, is false; answering “yes” may lead to a need for public disclosure. The proper response is that it is established corporate policy for the issuer not to confirm or deny rumors and not to publish estimates.

Finally, to centralize and better control the dissemination process, only one relatively high-ranking employee should be designated to communicate regularly with analysts and reporters, and all incoming inquiries should be referred exclusively to that individual.

117 There is an affirmative obligation to update and correct stale information if it is still being relied upon in the marketplace. See, e.g., Ross v. A.H. Robins Co., 465 F. Supp. 904 (S.D.N.Y.) (holding that there is a duty to correct or revise a prior statement which, although accurate when made, has become misleading due to subsequent events), rev’d on other grounds, 607 F.2d 545 (2d Cir. 1979), cert. denied, 446 U.S. 946 (1980); see also Elkind v. Liggett & Myers, Inc., 635 F.2d 156 (2d Cir. 1980) (issuer has no duty to correct misstatements by third parties); Electronic Specialty Co. v. International Controls Corp. 409 F.2d 937 (2d Cir. 1969) (issuer has no duty to correct or verify market rumors that cannot be attributed to the issuer). But see Backman v. Polaroid Corp., 910 F.2d 10 (1st Cir. 1990) (issuer does not have a duty to update prior public announcements that were not false, misleading, or “forward-looking” when made, and absent a fiduciary or other duty to make that disclosure, the mere possession of material nonpublic information does not, in itself, engraft a disclosure obligation to an issuer).

Of course, notwithstanding these judicial positions, economic reality may dictate a need for the issuer to correct or respond to public announcements. Moreover, the rules of the national securities exchanges may require disclosure in these circumstances. See, e.g., New York Stock Exchange, LISTED COMPANY MANUAL § 202.03 (2005) (addressing rumors or unusual market activity); AMERICAN STOCK EXCHANGE, Company Guide §§ 401–05 (2005) (disclosure). 118 See Regulation FD, reprinted in SECURITIES ACT HANDBOOK, supra note 54, at 3261. 119 See Securities Act Form 8-K, reprinted in SECURITIES ACT HANDBOOK, supra note 54, at 6914, General Instruction B.2.

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“EXIT CONSENTS,” DEEMED OFFERS, AND SALES OF A NEW SECURITY

The discussion thus far has addressed the actual offer and sale of new securities of the issuer. However, there are instances where the issuer may be “deemed” to have conducted an offer and sale of a new security through amendment of the terms of an outstanding security. This issue frequently arises in the context of consent solicitations. The solicitation of consents (or proxies) to modify the terms of existing securities is commonplace in the restructuring of corporate debt and equity. Consents may be solicited for a variety of reasons, including to permit consummation of transactions contemplated by the restructuring,120 and to modify payment terms, redemption rights, conversion and exchange features, and remedies for default.

Section 316(a) (2) of the Trust Indenture Act121 provides that in determining whether holders of the requisite principal amount of indenture securities have concurred in any directions to the indenture trustee or in certain interest payment waivers, securities owned by the issuer or its affiliates are to be disregarded. As a result, indentures generally provide that securities owned or held by the issuer and its affiliates are not deemed outstanding for purposes of any waivers and consents. Therefore, an issuer cannot simply purchase the requisite percentage of its debt securities122 and then vote in favor of proposed amendments. For this reason, the solicitation of “exit consents” has increased in popularity.

The term “exit consent” is derived from the practice of requiring securityholders to consent to proposed securities amendments or waivers as a condition precedent to the issuer’s purchase or exchange of its securities through a tender or exchange offer.

The consent is delivered in tandem with the securities being surrendered for purchase or exchange. Typically, the terms of the tender or exchange offer provide that no securities will be purchased or exchanged unless accompanied by a properly completed consent, and that subsequent revocation of the consent will invalidate the related tender of securities. This technique is designed to induce potential nonparticipants in the offer (so-called “holdouts”) to surrender their securities for purchase or exchange, rather than be left with securities that have been modified without their consent and often in a manner that is adverse to the holder.123

In addition, if the exit consents are sought in respect of equity or debt convertible into equity registered pursuant to section 12 of the Exchange Act, the conduct of the

120 Such transactions may include the repurchase of outstanding securities, the payment of interest or dividends that are restricted by an issuer’s debt instruments, the incurrence of additional indebtedness, changes in the ranking of existing debt, the amendment of financial covenants, the deletion of change-in-control provisions, the granting of liens and security interests, and transactions with affiliates of the issuer. 121 15 U.S.C. § 77ppp (a) (2). 122 The purchase may not be by means of tender or exchange offer, open market purchase, private acquisition, or redemption. 123 For a discussion of the issuer’s duty of “fair dealing” in the conduct of soliciting exit consents, see Chapter 3.

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consent solicitation (as well as the content of the relevant disclosure documents) would be subject to regulation 14A under the Exchange Act (the federal proxy rules).124

Informally, the SEC has taken the position that where the terms of the securities and/or the rights and obligations of the holders and issuer are modified substantially or differ from those that existed at the time the original investment decision was made, the holder’s determination whether to participate in the restructuring offer is, in effect, an investment decision with respect to a new security, and hence, an offer and sale of new securities is deemed to be made.125 This is true irrespective of whether the modification has been effected in compliance with the amendment and consent procedures of the security or governing instrument.

The “new security” doctrine applies equally to debt and equity securities. Although issuers occasionally have solicited consents to amend the voting, dividend, liquidation, and conversion rights, and preferences of common and preferred equity, the issue more frequently arises in connection with indenture and debt security modifications. The doctrine derives from rule 145 under the Securities Act, which counsels in its preamble that “an ‘offer’ . . . and ‘sale’ [within the meaning of § 2(a) (3) of the Securities Act] occurs when there is submitted to securityholders a plan or agreement pursuant to which such holders are required to elect, on the basis of what is in substance a new investment decision, whether to accept a new or different security in exchange for their existing security.”126

As a general rule, the payment attributes of a security, such as interest and dividend rates, pay-in-kind features, maturity dates, redemption rights, and collateral and guaranty provisions, are viewed as so fundamental in nature that the solicitation and adoption of amendments constitute an offer and sale of the modified (i.e., new) security. In addition, section 316(b) of the Trust Indenture Act provides that “the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture security, on or after the respective due dates expressed in such indenture security, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such holder.”127

Amendments to other contractual or bargained-for rights, such as restricted payment provisions, debt limitations, antilayering covenants, negative pledges, financial requirements, sale of assets and merger covenants, and the like tend to be judged on a case-by-case basis based upon the totality of the circumstances.128

124 See Exchange Act § 12, 15 U.S.C. § 78l; 17 C.F.R. § 240.14a (2005). 125 See First Nat’l Corp. & First Nat’l Life Ins., SEC No-Action Letter, 1974 WL 8246 (Apr. 22, 1974); see also Dial Corp., SEC No-Action Letter, 1992 WL 22410 (Feb. 4, 1992) (indicating that the staff would not recommend enforcement action based on the issuer’s argument that because the change in corporate structure did not alter significant economic rights of stockholders, no new investment decision was required). 126 17 C.F.R. § 230.145. 127 15 U.S.C. § 77ppp (b). 128 See, e.g.,Wilson Foods Corp., SEC No-Action Letter, 1984 WL 45483 (Aug. 6, 1984) (no action relief granted where issuer sought waiver of covenant requiring equal and ratable lien on indenture debt and

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A determination of whether any one or more of these types of amendments will result in the deemed offer and sale of a new security generally rests on whether the securityholder continues to have most of the risk protection that originally was bargained for, and whether securityholder rights are amended or waived in an isolated instance—for example, to facilitate a specific transaction or series of transactions. Specific waivers are less likely to constitute deemed exchanges because the fundamental characteristics of the security are not altered permanently. Moreover, in conversations with the SEC staff, it has been suggested that amendments to indenture covenants limiting indebtedness and restricting certain issuer payments would not, in themselves, result in the creation of a new security.

On occasion, the SEC staff has, however, agreed not to recommend enforcement action where the issuer of securities has modified the payment terms of its outstanding debt securities without Securities Act registration or Trust Indenture Act qualification. In these instances, the changes, such as increased interest rates, were beneficial to the securityholders.129 Due to the prevalence of consent solicitations in corporate restructuring transactions and public criticism surrounding their use and allegedly inherent unfairness, in prior years petitions for the adoption of regulatory restrictions were submitted to the SEC. However, no publicly announced rulemaking initiatives have yet begun.130

With respect to deemed offers and sales, a practical difficulty arises if either section 4(2) or Regulation D or both is relied upon to exempt the transaction from Securities Act registration. Where these exemptions are used, it is customary for the issuer to condition its acceptance and payment for deposited securities upon receipt of a certification from the purchasers that they (or the beneficial owners for whom the purchasers act as nominees) are accredited investors that have been given access to material business and

acceleration of maturity dates); Continental Telephone Co., Inc., SEC No-Action Letter, 1983 WL 28303 (June 17, 1983) (no-action relief granted where issuer was to seek amendments to eliminate the requirement for asset appraisals, accountants’ certificates, and legal opinions in connection with certain transactions); NCNB Corp., SEC No-Action Letter, 1982 WL 30443 (Mar. 11, 1982) (no action relief granted where general waivers of debt and restricted-payment covenants were to be sought); Sonderling Broad. Corp., SEC No-Action Letter, 1979 WL 14606 (Mar. 23, 1979) (no action relief granted where issuer sought to eliminate restricted-payment limitations and sale-of-equity restrictions). 129 See, e.g., PLM Cos., SEC No-Action Letter, 1987 WL 108345 (Sept. 14, 1987); Alabama Gas Corp., SEC No-Action Letter, 1982 WL 29099 (Apr. 19, 1982); Eaton Corp., SEC No-Action Letter, 1981 WL 26473 ( Jan. 30, 1981); Sheraton Corp., SEC No-Action Letter, 1978 WL 12166 (Nov. 24, 1978); see also Browning Debenture Holders’ Comm. v. DASA Corp., SEC No-Action Letter, [1975 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 95,071, (Apr. 16, 1975) (no action relief granted where consents were solicited to, among other things, increase interest rate of debt securities), aff’d, 560 F.2d 1078 (2d Cir. 1977). 130 In a letter to the SEC, dated November 16, 1990, a consortium of institutional fund managers and investors led by FMR Corp. (on behalf of Fidelity Investments) and The Prudential Insurance Company of America criticized the practice of tying the submission of exit consents to the issuer’s obligation to purchase its debt securities in a cash tender or exchange offer as being inherently coercive, and depriving the debtholders of a meaningful opportunity to reach an informed investment decision.

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financial information concerning the issuer prior to making their investment decisions.131 This is a simple mechanical procedure in the case of actual tender and exchange offers.

Where, however, a deemed offer and sale has occurred (pursuant to a consent solicitation and subsequent adoption of security amendments), as long as the requisite consents are received and the amendments are adopted in accordance with the terms of the security and governing instruments, the securities of nonconsenting holders will be amended without information regarding the investor status of those holders. Without that information, the issuer may have little or no basis to determine whether the transaction has been structured in compliance with the particular registration exemption being relied on. Thus, one might conclude that prior to conducting an unregistered consent solicitation (which may result in a “new security”), the issuer or its representatives should communicate with as many beneficial owners of the target securities as possible to determine their investor status—a task that typically requires the assistance of an investor solicitation firm or dealer/manager. However, a practical quandary exists—if the issuer’s securities are widely held, the identity of a fair percentage of beneficial owners often will not be readily obtainable. Even if the identity and status of all securityholders are ascertained (e.g., in the case of a more closely held issuer), the issuer, having contacted each holder, might learn conclusively that there is an insufficient number of accredited investors to rely on section 4(2) or Regulation D to exempt the deemed offer and sale under these provisions, and depending on the extent to which security-holders were “solicited,” section 3(a)(9) may no longer be available to exempt the deemed offer and exchange. Hence, the restructuring transaction would either have to be formulated anew or registered under the Securities Act.

INTERPLAY BETWEEN THE SECURITIES ACT AND THE BANKRUPTCY CODE

SECTION 1145(A) EXEMPTION FROM REGISTRATION

As in the case of consensual restructurings, a successful reorganization under chapter 11 of the Bankruptcy Code generally entails the exchange, issuance, or amendment of pre-chapter 11 debt and equity securities.132 Section 1145(a) of the Bankruptcy Code provides an exemption from the registration and prospectus-delivery requirements of the Securities Act (and equivalent state securities and “blue-sky” laws) where new securities of the reorganized debtor are exchanged for pre-chapter 11 securities pursuant to a confirmed plan of reorganization.133 Section 1145(a) exempts such an offer and sale if the securities are issued by a debtor (or its successor) under a plan of reorganization or by an

131 Known as “private investor” or “statutory underwriter” letters, these certifications usually include statements regarding the purchaser’s investment intent and the fact that the purchaser is not an affiliate of the issuer, a representation that the securities have been fully paid for, and an acknowledgement that the offered securities have not been registered under the Securities Act and requiring the use of available registration exemptions and/or opinions of counsel to effect resales. These certificates are used by the offeror to help determine whether the exemption requirements of section 4(2) and/or Regulation D, as the case may be, have been satisfied. 132 11 U.S.C. § 1145(a). 133 Id.For a discussion of the Bankruptcy Code’s plan confirmation requirements, see Chapter [5].

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affiliate of the debtor under a joint plan; the recipients of the securities hold claims (or administrative expense claims) against, or equity interests in, the issuer; and the securities are issued entirely in exchange for the recipient’s claim or equity interest, or principally in such exchange and partly for cash or property.134

Moreover, § 1145(a) expressly exempts from the registration and prospectus-delivery requirements of the Securities Act the offer and sale of warrants, options and rights, the continuing offer of the underlying security, and the purchase (upon conversion, exercise, and exchange) and subsequent sale of the underlying security.135

As with section 3(a) (9) under the Securities Act, this exemption cannot be used where new securities are issued solely to raise cash proceeds. Accordingly, where the debtor seeks to raise cash through the issuance of new securities (e.g., to finance its reorganization expenses), the issuance either must be registered under the Securities Act or issued in compliance with an exemption therefrom, or issued in compliance with an exemption from registration under the Bankruptcy Code (e.g., § 364(f), in the case of debt securities).136

Typically, a proposed chapter 11 plan of reorganization is summarized and appended to the written disclosure statement. The disclosure statement, which is filed with the bankruptcy court, is subject to that court’s approval as containing “adequate information.”137 After approval, the disclosure statement is distributed and holders of impaired claims and interests are entitled to vote to accept or reject the proposed plan.138 Thus, the exchange of securities in a reorganization case seemingly undergoes the functional equivalent of Securities Act registration. Presumably, it is for this reason that §1145(c) provides that an offer and sale of securities pursuant to § 1145 is deemed to constitute a “public offering” resulting in the issuance of unrestricted securities (subject to certain limitations in the case of statutory underwriters, as discussed below). This is an attractive result because, as discussed above, “restricted securities” are not freely tradeable.

Section 1145(a) provides additional exemptions from the registration requirements of the Securities Act. Section 1145(a)(2) exempts the offer of a security through any warrant, option, right to subscribe, or conversion privilege that was distributed pursuant to § 1145(a)(1), or the sale of a security upon the exercise of such a warrant, option, right, or privilege. Next, § 1145(a)(3) provides a limited exemption for the offer and sale of portfolio securities, other than under a plan, as long as those securities were owned by the debtor on the date of filing the chapter 11 petition and the issuer meets certain disclosure and filing requirements. However, this offer or sale must be of securities that do not exceed, during the two-year period following the date of the chapter 11 petition, four

134 11 U.S.C. § 1145(a) (1). 135 Id. § 1145(a) (2). 136 Section 364 of the Bankruptcy Code enables the debtor in possession (or trustee) to obtain credit on behalf of the bankruptcy estate.Section 364(f) exempts certain entities from the registration requirements of the securities statutes.For a discussion of postpetition financing, see Chapter [9]. 137 See 11 U.S.C. § 1125; Chapter [5]. 138 See 11 U.S.C. § 1126; Chapter [5].

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percent of the securities of that class outstanding on the petition date, and during any 180-day period following the two-year period, one percent of the securities outstanding at the beginning of the 180-day period.139 Finally, § 1145(a) (4) exempts a transaction by a “stockbroker” that is executed after a transaction of a kind described in § 1145(a).140

RESALE OF SECURITIES EXCHANGED IN BANKRUPTCY

Securities exchanged under § 1145(a) of the Bankruptcy Code are not restricted and may be resold without limitation,141 unless the seller is deemed to be an “underwriter” within the meaning of § 1145(b) (1). That section defines an underwriter as any entity that purchases a claim against or interest in a chapter 11 debtor with a view towards the distribution of any security to be received in exchange for the claim or interest; offers to sell securities issued under a plan of reorganization on behalf of the recipients thereof or offers to buy the securities issued to those recipients where the offer is made with a view towards the distribution of the purchased securities; or is an issuer as contemplated by section 2(a)(11) of the Securities Act.142 Although the definition of “issuer” is contained in section 2(a)(4) of the Securities Act,143 the reference to section 2(a)(11) includes as “underwriters” all persons that directly, or indirectly through one or more intermediaries, control, are controlled by, or are under common control with, an issuer—in other words, all affiliates of the issuer.144 “Control” means the possession, direct or indirect, of the power to direct or cause the direction of the policies of a person, whether through the ownership of voting securities, by contract, or otherwise.145

Section 1145(b) (1) exempts “ordinary trading transactions of an entity that is not an issuer” from its definition of “underwriter.”146 The SEC staff has asserted that the availability of this exemption will depend on the facts and circumstances of each case.147 For example, the SEC staff has not disagreed with the view that a transaction is an “ordinary trading transaction” if it does not involve certain activities, such as group buying and other forms of “concerted action” by recipients of plan securities, the use of informational (selling) documentation other than disclosure statements and the issuer’s Exchange Act reports, and special broker/dealer compensation.148

The legislative history of § 1145 supports the view that certain securityholders are presumed to be in “control” based solely on the amount of voting securities they receive from the reorganized company emerging from chapter 11. The House Report stated: “It is

139 11 U.S.C. § 1145(a) (3). 140 A “stockbroker,” as defined in the Bankruptcy Code, is a person with respect to which there is a “customer” (as defined in § 741 of the Bankruptcy Code) and “that is engaged in the business of effecting transactions in securities for the account of others, or with members of the general public, from or for such person’s own account.” Id. § 101(53A). 141 Id. § 1145(a). 142 Id. § 1145(b) (1). 143 15 U.S.C. § 77b (a) (4). 144 Id. § 77b (4). 145 17 C.F.R. § 230.405 (2005). 146 11 U.S.C. § 1145(b) (1). 147 See, e.g., Manville Corp., SEC No-Action Letter, 1986 WL 68341 (Sept. 29, 1986). 148 See id.

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important to note that any creditor with at least ten percent of the securities will be a ‘controlling person’ and therefore an ‘issuer’ who will be subject to the requirements of § 5 [of the Securities Act] regardless of any exemption as an underwriter.”149 Thus, Congress appears to have broadened the traditional definition of an underwriter to include any recipient of ten percent or more of the chapter 11 debtor’s voting equity securities.

Any person that falls within one of the underwriter categories described above would be unable to resell the debtor’s securities in the absence of Securities Act registration or the use of an exemption, such as rule 144. It is for that reason that creditors which might be deemed “underwriters” (including the ten-percent equity securityholders described above) may seek to include demand and/or “piggyback” registration rights150 in the plan of reorganization so that they can sell their securities publicly pursuant to an effective registration statement, and not be restricted.

PREPACKAGED CHAPTER 11 PLANS AND FEDERAL SECURITIES LAWS ISSUES

As mentioned at the outset, issuer restructurings commonly involve the exchange of new securities for outstanding debt and equity having terms that are attractive to all parties in interest. To obtain the economic goals sought by the issuer151 and to protect against disaggregation within a particular class of securityholders,152 out-of-court restructurings typically are subject to high minimum exchange conditions—often ninety to ninety-five percent of the securityholders need to approve the restructuring. Even with the use of exit consents, it is exceedingly difficult to obtain such a high percentage of tenders, especially in the case of widely held securities, and there is often a fair number of “holdouts” from the transaction. However, in a traditional chapter 11 case, the process that ensues from the petition date to confirmation of a plan of reorganization can take years.

One means of addressing this problem is to conduct an out-of-court exchange offer in conjunction with a prepetition solicitation of votes on a “prepackaged” chapter 11 plan of reorganization.153 Unlike a typical out-of-court exchange offer that (except in the case

149 H.R. REP. NO. 95–595, at 238 (1977). However, a determination of “control” properly is based on a number of factors, not just shareholdings. Therefore, the “ten percent” rule of thumb should be viewed as a guideline, not as determinative. 150 “Demand” registration rights enable the holder to require the issuer to effect a Securities Act registration of the securities owned by the holder on the holder’s demand (typically subject to certain limitations). “Piggyback” registration rights enable the holder to participate (in whole or in part) in a Securities Act resale registration statement filed by the issuer either on its own behalf or on behalf of another holder of its securities. 151 These goals may include reducing the annual expense of high-coupon debt or deleveraging the balance sheet by issuing equity in exchange for debt. 152 This protection is important. Nonparticipants might retain their higher yield debt at the expense of participants that agreed to receive new, lower cost debt or decided to forego receiving new equity to retain priority status. 153 See 11 U.S.C. § 1126(b); see, e.g., BURNHAM BROADCASTING, INC., REGISTRATION STATEMENT NO. 33–61136 (Apr. 16, 1993) (preliminary prospectus); MEMOREX TELEX CORP., REGISTRATION STATEMENT NO. 33–41822 (July 19, 1991) (prospectus); MUNSINGWEAR INC., REGISTRATION STATEMENT NO. 33–38565 (Jan. 17, 1991) (prospectus); PRICE COMMUNICATIONS CORP., REGISTRATION STATEMENT NO. 33–31790 (Oct. 5, 1990) (prospectus); SOUTHLAND CORP., REGISTRATION STATEMENT NO. 33–35980 (Oct. 5, 1990) (prospectus); INTERCO INC., REGISTRATION STATEMENT NO. 33–34861 (May 17, 1990) (prospectus);

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of security amendments which can be effected without unanimity) binds only those securityholders which elect to participate in the transaction, a plan of reorganization that is confirmed by the bankruptcy court binds all creditors and equity holders of the debtor, irrespective of whether they have accepted the plan.154

Indeed, for a chapter 11 plan to be

confirmable, the Bankruptcy Code requires acceptance by the holders of only 66⅔% in amount and a majority in number of the claims in each class of impaired claims that are actually voted,155 and acceptance by the holders of only 66⅔% in amount of the equity interests in each class of impaired equity interests that are actually voted.156 Not only are the percentages significantly lower than that usually required to make an out-of-court exchange offer feasible,157 there are no formal quorum requirements.

Among other requirements, the Bankruptcy Code requires the proponent of the prepackaged chapter 11 plan solicitation to comply with “applicable nonbankruptcy law…governing the adequacy of disclosure.”158 In view of this requirement and the fact that section 1145 of the Bankruptcy Code applies to both offers and sales made pursuant to reorganization plans that have been confirmed by the bankruptcy court, the SEC consistently has taken the position that the pre-chapter 11 solicitation of plan acceptances constitutes the offer (and possibly the sale) of a new security.159 Thus, the registration requirements of the Securities Act are implicated, absent an available exemption.160

Certain available exemptions from the requirements of the Securities Act that may be applicable to prepackaged chapter 11 cases are contained in section 3(a) (9), which exempts the exchange of new securities of the issuer for those held by existing securityholders,161 and section 3(a) (10), which exempts the exchange of securities for claims, or partly for claims and partly for cash, where the terms of the offering are approved by a court or governmental authority.162

REPUBLIC HEALTH CORP., REGISTRATION STATEMENT NO. 33–19544 (Apr. 17, 1990) (prospectus); LAS COLINAS CORP., REGISTRATION STATEMENT NO. 33–24488 (May 23, 1989) (prospectus). For an in-depth discussion of prepackaged chapter 11 cases, see Chapter [12]. 154 See 11 U.S.C. § 1141(a). 155 Id. § 1126(c). 156 Id. § 1126(d). 157 This is because typically it is necessary to obtain the acceptance of the holders of a substantial percentage (ninety to ninety-five percent) of the debt securities in order to achieve the economic benefits of the exchange. In addition, under the Trust Indenture Act, certain provisions of public debt securities may not be altered or waived without the consent of each holder. See, e.g., Trust Indenture Act § 316(b), 15 U.S.C. § 77ppp (b). 158 11 U.S.C. § 1126(b); see id. § 1125(g) (authorizing prepetition solicitation of a vote “if such solicitation complies with applicable nonbankruptcy law and if such holder was solicited before the commencement of the case in a manner complying with applicable nonbankruptcy law”). 159 See Abigail Arms, Current Issues and Rulemaking Projects, in CONDUCTING DUE DILIGENCE 1996, at 747, 871 (PLI Corporate Law and Practice Cause Handbook Series No. B4-7131, 1996). 160 Id. 161 15 U.S.C. § 77c (a) (9). 162 Id. § 77c (a) (10).

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In several prepackaged cases, practitioners have bifurcated the prepetition solicitation (offer) and postpetition (exchange) components of the transaction.163 That is, an exemption from Securities Act registration was relied on to conduct the solicitation of plan votes and Bankruptcy Code § 1145(a) was relied on for the exchange of securities on the effective date of the plan of reorganization. Where the debtors’ prepackaged plans contemplated the exchange of reorganized debt and equity for prepetition securities and section 3(a)(9) was available, the debtors were able to rely on section 3(a)(9) to exempt the prepetition offer from Securities Act registration, and § 1145(a)(1) to exempt the postpetition exchange on the effective date of the plan.164 Having fashioned the securities law components of the transactions in this manner, the debtors were able to transform prepetition restricted securities into postpetition securities deemed issued in a public offering under § 1145(c), and eliminate the administrative burden and expense of registration rights.

Certain private conversations with senior members of the chief counsel’s office of the SEC’s Division of Corporation Finance indicate a reluctance by the SEC to endorse the practice of separating the prepetition offer from the postpetition sale of securities. These SEC staff members have expressed concern that, for purposes of sections 2(3) and 5 of the Securities Act, the prepetition solicitation constitutes both the “offer” and “sale” of a new security because the entire investment decision is made at the time votes on the reorganization plan are solicited. As support for this rationale, the SEC has referred to rule 145 under the Securities Act, which, as noted earlier, states that a “sale” occurs where “there is submitted to securityholders a plan or agreement pursuant to which such holders are required to elect . . . whether to accept a new or different security in exchange for their existing security.”165 Moreover, the SEC has noted that § 1145(a), by its express language, applies only to offers and sales of securities by a debtor (or its successor) pursuant to a plan of reorganization or by an affiliate of such debtor under a joint plan. Therefore, no “debtor” exists for Bankruptcy Code purposes until a petition commencing the chapter 11 case has been filed. Thus, the SEC has suggested that the prepetition solicitation of plan votes to facilitate an issuer reorganization (and exchange of new securities for prepetition claims and interests) falls squarely within the ambit of rule 145 and should not be accorded disparate treatment by reason of the bankruptcy context in which the transaction occurs.

Although the SEC’s reading of § 1145(1) and rule 145 technically is accurate, its arguments for challenging the use of § 1145(a) are not necessarily practical and perhaps tautological. Sections 1125(g) and 1126(b) of the Bankruptcy Code deal exclusively with the solicitation of votes, not with the issuance or exchange of securities. It is § 1145 of the Bankruptcy Code that addresses (and expressly makes section 5 of the Securities Act

163 See, e.g., In re MB Holdings, Inc., No. 91-B-15617 (BRL) (Bankr. S.D.N.Y. 1992) (disclosure statement); In re JPS Textile Group, Inc., No. 91-B-10546 (JAG) (Bankr. S.D.N.Y. 1991) (disclosure statement). 164 See In re MB Holdings, Inc., No. 91-B-15617 (BRL) (Bankr. S.D.N.Y. 1991); In re JPS Textile Group, Inc., No. 91-B-10456 (JAG) (Bankr. S.D.N.Y. 1991). Section 4(2) of the Securities Act, 15 U.S.C. § 77d(2), also was relied on to exempt from registration the investment of fresh capital for new equity securities issued to control persons of the debtors. 165 17 C.F.R. § 230.145 (2005).

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inapplicable to) the offer or sale of securities pursuant to a plan. Thus, the Bankruptcy Code has long contemplated and accommodated the practice of bifurcating the “offer” and “sale” components of prepackaged chapter 11 cases, as long as the federal securities laws are complied with in connection with activities conducted prior to the filing of the chapter 11 case.

Another argument against the SEC’s position is that there are too many contingent factors that exist prepetition to consider the investment decision complete during solicitation.166 Moreover, the SEC’s interpretation in this area appears inconsistent with no-action letters issued under § 393(a) of the former Bankruptcy Act of 1898.167 In those letters, the SEC staff took a no-action position where securities were issued pursuant to a prepetition solicitation, because the securities were not actually issued until the plan was confirmed. Section 393(a), subject to certain exceptions, provided an exemption from registration to “any transaction in any security issued pursuant to an arrangement in exchange for claims . . . or partly in exchange for claims and partly for cash.”168 When the Bankruptcy Code was enacted in 1978, this exemption was included and broadened in § 1145.169

One important consequence of disallowing the dual-exemption approach (should it become the formal view of the SEC) is that securityholders which rely on Securities Act exemptions to offer securities for exchange through the prepackaged chapter 11 process would lose the benefits of free transferability conferred by § 1145(a) of the Bankruptcy Code. Moreover, a marked increase in the Securities Act registration of prepetition solicitations (a likely result of the rule 145 theory) would frustrate the many advantages (e.g., reduced time and expense) that can be achieved by using prepackaged reorganizations of the debtor’s capital structure.

CONCLUSION

This chapter is intended to highlight some of the more routine U.S. federal securities laws aspects of corporate restructurings. There are volumes of securities laws, rules, and regulations relevant to the areas referred to in this chapter that have not been addressed. Of those matters that have been discussed, the discussion has been presented intentionally in the most abridged and nontechnical manner possible. There also is a significant body of day-to-day lore and practical considerations which have not been included in this discussion.

One must be mindful that, due to changes in the public markets, prevailing industry conditions, shifting economic cycles, and even political events, Congress and the SEC 166 Examples include whether the chapter 11 case actually will be commenced, the requirement of subsequent bankruptcy court approval of the plan and solicitation, the possibility of nonconfirmation of the plan, the possible need to modify the terms of the plan and/or to resolicit votes from security-holders and other creditors, and the other conditions to the occurrence of the effective date of the plan and issuance of securities. 167 See National Mortgage Fund, SEC No-Action Letter, 1977 WL 12694 (Jan. 27, 1977); National Mortgage Fund, SEC No-Action Letter, 1976 WL 11687 (July 22, 1976). 168 11 U.S.C. § 393(a) (repealed 1978). 169 See 11 U.S.C. § 1145(a).

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routinely survey the federal securities landscape, which leads to frequent legislative and rulemaking initiatives. Accordingly, considerable care should be exercised in the structuring, negotiation, and execution of corporate restructuring transactions, and experienced corporate and expert securities counsel should be consulted early in the process.

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