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Essentials of Equity Trading for the Loan Market Attorney Advertising June 28, 2011

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Presentation on theme: "Essentials of Equity Trading for the Loan Market Attorney Advertising June 28, 2011"— Presentation transcript:

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

2 Andrews Kurth1 Outline of Presentation I.What Is A Security? II.Section 5 Of Securities Act III.4(2) Private Placement Exemption IV.4(1) Exemption V.What Is An Underwriter? VI.Rule 144 - Safe Harbor From Being Considered An Underwriter VII.Rule 144A VIII.Section 4 (1½) Case Law Exemption IX.In-Court Restructuring And Section 1145 X.Liabilities & Recourse XI.Big Boy Letters XII.Operative Issuer Documents XIII.Other Regulatory and Statutory Concerns XIV.Market Trends

3 Andrews Kurth2 What Is A Security? –Section 2(a) of Securities Act of 1933, as amended (the Securities Act) defines what a security means broad definition –Bank Debt/Syndicated Secured Loans Historically Not Considered A Security –See Banco v. Expanol De Cremin v. Security Pac. Natl Bank, 973 F.2nd 51 (2d Cir. 1992) (applying four factor family resemblance test under Reeves, court held notes issued in conjunction with participation interest similar to notes evidencing loans by commercial banks funding operations) –Key statutory language in definition of security unless context otherwise applies Not public trading market Sophisticated parties who generally dont need protections of securities laws / can fend for themselves

4 Andrews Kurth3 –Section 5 of Securities Act provides that unless a Registration Statement is in effect as to a security, it shall be unlawful for any person to sell such security Section 5 Of Securities Act

5 Andrews Kurth4 4(2) Private Placement Exemption Pursuant to Section 4(2) of the Securities Act, Section 5 of Act doesnt apply to transactions by an Issuer not involving any public offering – Supreme Court in Ralston Purina held that an offering to persons who are shown to be able to fend for themselves is a transaction not involving any public offering –Safe Harbor of Regulation D –No General Solicitation –Unlimited Accredited Investors and not » 35 other purchasers –Issuer availability –Securities issued are Restricted Securities Typically will have Legend

6 Andrews Kurth5 –Provides that provisions of Section 5 of Securities Act shall not apply to Section 4(1) –4(1) Exemption – Transactions by any person not involving an issuer, underwriter or dealer (ordinary investor exemption) –What is an Issuer? –What is a Dealer? Any person who engages as agent, broker and principal in business of offering, buying or otherwise trading in securities 4(3) - Dealer Exemption 4(1) Exemption

7 Andrews Kurth6 –Under Section 2(a)(11) of Securities Act Underwriter means any person who has purchased from an issuer with a view to distribution –As used in Sec 2(a)(11) the term Issuer includes any person directly or indirectly controlling another person Statutory Underwriter concept –Under Rule 405, control means power to direct or cause direction of management –Since difficult to determine mental state at time of acquisition re whether purchased with a view to distribution, subsequent acts are looked at with respect to such determination (whether securities have come to rest) What Is An Underwriter?

8 Andrews Kurth7 - Comply with 144 Rules not considered to be engaged in a Distribution –Applies to sales of Restricted securities and control securities Depending on type of securities sold different rules apply under Rule 144 –Securities acquired pursuant to Rule 144 are not Restricted Securities –Calculation of holding period and tacking Rule 144 – Safe Harbor From Being Considered An Underwriter

9 Andrews Kurth8 Rule 144 – Safe Harbor From Being Considered An Underwriter (continued) Affiliate or Person Selling on Behalf of an Affiliate Non-Affiliate (and Has Not Been an Affiliate During the Prior Three Months) Restricted Securities of Reporting Issuers During six-month holding period - no resales under Rule 144 permitted. After six-month holding period - may resell in accordance with all Rule 144 requirements including: Current public information, Volume limitations, Manner of sale requirements for equity securities, and Filling of Form 144 During six-month holding period - no resales under Rule 144 permitted. After six-month holding period but before one year - unlimited public resales under Rule 144 except that the current public information requirement still applies. After one-year holding period - unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements. Restricted Securities of Non- Reporting Issuers During one-year holding period - no resales under Rule 144 permitted. After one-year holding period - may resell in accordance with all Rule 144 requirements, including: Current public information, Volume limitations, Manner of sale requirements for equity securities, and Filing of Form 144. During one-year holding period - no resales under Rule 144 permitted. After one-year holding period - unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.

10 Andrews Kurth9 –144A Transaction Acquire Restricted Securities –Available for securities not fungible with securities listed on exchange –Sales must be made to Qualified Institution Buyers that have access to issuer information –QIB generally means an entity that owns at least $100,000,000 in securities of unaffiliated issuers Rule 144A

11 Andrews Kurth10 –Not formal statutory registration exemption –Used by practicioners and recognized by case law and SEC as technique for transferring restricted securities see Gilligan Will & Co. v. SEC, 267 F.2d 461 (2d. Cir.); Ackerberg v. Johnson, 892 F.2d 1328 (8 th Cir. 1989) –Represents Hybrid between 4(1) and 4(2) in which the selling shareholder utilizes practices that an issuer uses to sell securities in 4(2) private placement –Limiting resale to only sophisticated parties/accredited investors –Able to fend for themselves –Offer made without any publicity or other General Solicitation –Buyer acknowledges that securities Buyer shall acquire shall be restricted securities Section 4 (1½) Case Law Exemption

12 Andrews Kurth11 In-Court Restructuring and Section 1145 –In Chapter 11 reorganization equity typically issued pursuant to 1145 –Need to check plan and confirmation order –Under Section 1145 offers and sales of securities done in accordance with 1145(a)(1) are deemed to be a public offering –Disclosure Statement akin to prospectus in registered offering –If sold in accordance with 1145(a)(1) such securities may be freely traded –However, 1145(a)(1) doesnt apply to entities that are Bankruptcy Underwriters

13 Andrews Kurth12 In-Court Restructuring and Section 1145 (continued) –Unless ordinary trading transaction exemption applies, an entity is a bankruptcy underwriter if: –Purchases claim with a view to distribution of any security received or to be received in respect of such claim –Generally will not be a bankruptcy underwriter if original holder of claim or plan not proposed when acquire claim –An entity is also a bankruptcy underwriter if it is a control person/affiliate of issuer –When buying need rep Seller not an Affiliate to ensure getting freely tradable securities –LSTA Proceeds Letter provides no affiliate rep by Seller

14 Andrews Kurth13 In-Court Restructuring and Section 1145 (continued) –Note no underwriter status for non-affiliates engaging in ordinary trading transactions narrow definition of bankruptcy underwriter –Ordinary trading transactions do not have indicia of classic underwriting activity –No coordinated action to acquire and distribute securities with special incentive to resell such securities –Securities issued in bankruptcy not pursuant to 1145 –Rights Offering where new $ put in such securities acquired are generally restricted unless subsequently registered or exemption applies –Visteon example –May have haircut for sale of restricted securities as opposed to freely tradeable shares without restriction

15 Andrews Kurth14 –Section 12(a)(i) of Securities Act –Gives Purchaser right of recission for any offer or sale of a security in violation of Section 5 –Statute of Limitations – One year of the Section 5 violation Liabilities & Recourse

16 Andrews Kurth15 Big Boy Letters –Rules 10b-5 requires that a person who has material non-public information either disclose such information or abstain from trade –10b-5 prohibits any person in connection with the purchase or sale of a security (whether public or private) from making any untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading –No disparity of information –Disclosing information may create issues with respect to confidentiality agreements –Parties sometimes use Big Boy Letters –Are Big Boys enforceable? –See SEC v. Barclays Bank; R2 v. Salomon –Section 29 of Exchange Act (contract cannot waive compliance with rules of Exchange Act) –Certain institutions reluctant to utilize Big Boys with counterparties –LSTA Proceeds Letter has no waiver of disparity of information

17 Andrews Kurth16 –Shareholders Agreement –Registration Rights Agreement –Articles of Incorporation / Bylaws –LLC Agreement / Partnership Agreement Operative Issuer Documents

18 Andrews Kurth17 –Shareholders Agreement –Comply with transfer provisions –Typical provisions –No sale to competitor –Sign joinder –Sale wont result in > 500 holders –Opinion Letter (if requested) or certifications to company –Pre-emptive rights –ROFR –Tag-along / Drag-along –Confidentality Provisions –Advance notice of sale –Consent by company or board may be required Operative Issuer Documents (continued)

19 Andrews Kurth18 –Articles of Incorporation / By-Laws –Transfer Provisions –May include restrictions to preserve NOLs –May limit transfers to ensure compliance with regulated industry rules limiting foreign ownership –May limit transfers to foreign entities for tax reasons Operative Issuer Documents (continued)

20 Andrews Kurth19 - Broker-Dealer Regulations –FINRA Rules –Regulation T (Delivery v. Payment timing) –Rule 10b-10 of Exchange Act (Confirmation Delivery) –Gaming industry –Energy industry (FERC) (Mach Gen Example) –Broadcasting / Telecommunications (FCC) –Tribune / Young Broadcasting –Foreign Underwriter Issues – Hart Scott Rodino –Size of Transaction and size of person test –$66,000,000 size of transaction –Anti-takeover and Business Combination Statutes –DGCL Section 203 –Section 13 and Section 16 (Publicly Traded Equities) –Tax Concerns Offshore Investors Other Regulatory and Statutory Concerns

21 Andrews Kurth20 Market Trends –When Outside Counsel Used? –Equity that has some form of transfer restrictions & not generally traded on public markets –Equity with legend and/or restricted –Use of Documentation by Market –Wide spectrum of views with respect to use of private purchase and sale agreement (PSA) between buyer and seller –Most dealers & buy-side parties utilize some form of PSA –However, certain dealer parties generally push back on use of PSA

22 Andrews Kurth21 Market Trends (continued) –Trade Confirmations: –Majority of participants use a form of trade confirmation signed by both parties –Parties in market give different titles to such agreements –Trade Confirmation –Notice of Execution –Equity Trade Confirmation –Commitment Letter

23 Andrews Kurth22 Market Trends (continued) –Substance of Trade Confirm –Substantively trade confirms are generally similar –Trade date –Party names –Issuer name –Price/amount of equity –Dividends benefit buyer from and after trade date –Subject to reasonably acceptable contracts and instruments of trade –Binding Trade no impact by subsequent events –Costs and expenses (Opinion Letter costs?) –Confidentiality –Transfer complies with operative documents (i.e. LLC Agreement) –Delivery of Operative Documents (if not SH)

24 Andrews Kurth23 Market Trends (continued) –Trade Confirmation Issues for Market Maker in Middle of Trade –Right of First Refusal (ROFR) and tag-along rights –Insert Subject to successful completion of purchase of equity being sold and purchased –Assignment only and default to economic equivalent –Common provision –Aware of certain reps & warranties specific to issuers equity? –Regulators concerns? –Competitor representation? –Big Boy reps and warranties – often in confirm –Sophisticated party and financial wherewithal –Own investment decision –Non-reliance –Accredited Investor or QIB

25 Andrews Kurth24 Market Trends (continued) –Necessary to Use Private Purchase and Sale Agreement? –Depends on factors –What is required issuer documentation? –Do reps and warranties inure to benefit of buyer and seller? –Full-blown PSA? –Simple certificates? –UCC Article VIII – Is it applicable? –Under §8-108 of UCC, certain reps and warranties automatically apply to transfers of certain securities for value will transferred equity security be governed by UCC Article VIII? –Corporation applicable –LLCs or partnerships opt-in? –Need to review & see organization documents

26 Andrews Kurth25 Market Trends (continued) –If UCC Article VIII applicable then purchaser of equity security for value without knowledge of adverse claim receives warranty from seller (automatically by law) that there is no adverse claim to security become a protected purchaser

27 Andrews Kurth26 Market Trends (continued) Benefits of using PSA –Get direct representation and warranties from counter parties –Indemnity provisionattorney fees –Set forth conditions to closing –Delivery v. payment (who goes first?) –Need Title Rep if UCC Article VIII not applicable

28 Andrews Kurth27 Market Trends (continued) –Typical Representations and Warranties and Other Provisions in PSA –Clean title representation free from liens –Sophisticated party and financial wherewithal –No reliance on other party –Accredited investor (if 144A need higher QIB Standard) –No general solicitation –Not acquiring with a view to distribution in violation of Securities Act –Affiliate representation from seller –Is it 1145 or 4(2) issuance? –Affects seller rep regarding acquisition of security –Bankruptcy Underwriter rep from seller –Buyer rep acknowledging limitations on transfer on resale –Depends if 1145 or private issuance –Distributions

29 Andrews Kurth28 Market Trends (continued) –Other Typical Provisions of PSA –Closing conditions –Fact-specific representations –Not acquiring > 25% (i.e., no tag-along implicated) –Not competitor –Buyer Rep - Received & Reviewed Operative Documents (aware of contractual restrictions on resale) –Further assurances

30 Andrews Kurth29 Market Trends (continued) –Miscellaneous Matters –Opinion Letter requirement (certifications in lieu of opinion available?) –Develop good relationship with issuer counsel & transfer agent early in process –Determine steps needed for closing

31 Andrews Kurth30 Market Trends (continued) EXAMPLES: - 1145 Issuance – Readers Digest (LSTA proceeds letter; officers certificates & no opinion unless 10% holder selling) - MGM (LSTA proceeds letter; officers certificate (not affiliate; not acquire with view to distribution and own less than 10%) - Philly News (1145; certificated) - Mark IV (1145; form of transfer agreement for all parties benefit) - 4(2) Issuance - Panavision (shares issued as amendment fee; opinion required by company) - Mach Gen (FERC issues; restricted selling to < 10% holders; transfers not of record approved by Milbank)

32 Copyright © 2011 by Andrews Kurth LLP. All rights reserved. This presentation has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create (and receipt of it does not constitute) an attorney-client relationship. Readers should not act on this information without seeking professional counsel. Prior results do not guarantee a similar outcome and depend on the facts of each matter. AUSTIN 111 Congress Avenue Suite 1700 Austin, Texas 78701 512.320.9200 BEIJING Room 2007, Capital Mansion No. 6 Xin Yuan Nan Lu, Chao Yang District Beijing, China 100004 86.10.8486.2699 DALLAS 1717 Main Street Suite 3700 Dallas, Texas 75201 214.659.4400 HOUSTON 600 Travis Street Suite 4200 Houston, Texas 77002 713.220.4200 LONDON Level 16, City Tower 40 Basinghall Street London EC2V 5DE England 44.20.7382.0550 NEW YORK 450 Lexington Avenue New York, New York 10017 212.850.2800 THE WOODLANDS Waterway Plaza Two 10001 Woodloch Forest Drive Suite 200 The Woodlands, Texas 77380 713.220.4800 WASHINGTON DC 1350 I Street, NW Suite 1100 Washington, DC 20005 202.662.2700

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