Are stock-for-stock public offers feasible in spite of burdensome prospectus regulations?

Jan Willem Hoevers
De Brauw Blackstone Westbroek, Amsterdam
janwillem.hoevers@debrauw.com

Report on the joint session of the Banking Law Committee and the Securities Law Committee at the 37th International Financial Law Conference in Venice

Friday 13 May 2022

Session Co-Chairs

Jan Willem Hoevers De Brauw Blackstone Westbroek, Amsterdam

Patrick Schleiffer Lenz & Staehelin, Zürich

Speakers

Michele Barbone Goldman Sachs Bank Europe, Succursale Italia, Milan

Alyssa K Caples Cravath, Swaine & Moore, London

Federica Munno Bonelli Erede Lombardi Pappalardo Studio Legale, Milan

The panel's discussion began with a case study of a mergers and acquisitions (M&A) transaction involving a listed acquirer and the (partial) payment of shares in the listed entity as consideration. The panel – assisted by members of the audience – discussed why a share consideration component could be useful; for example, if the parties want to both remain involved in the combined business.

It appears that cash deals are much more common than stock-for-stock deals, but stock-for-stock deals are certainly not rare.

One of the complexities in stock-for-stock deals concerns the constantly changing share price of the stock exchange listed acquirer. It is important to ensure that the share interests after a merger are ‘equal’ (assuming it is a merger of equals) and to avoid the scenario in which movements in the share price on the stock exchange trigger a mandatory public tender offer obligation. These issues can be mitigated, to some extent, using a share price minimum or a collar as part of the transaction terms.

The discussion then moved to relative valuation and bank fairness opinions. What are the consequences of share price movements between announcement and closing? A debate on whether it could be useful for parties or boards to ask for a fairness opinion led to the conclusion that having different banks offer fairness for the same deal might do more harm than good.

The panellists then discussed how one can do due diligence and in particular, if and how sensitive facts, such as mid-term and long-term projections, can be shared and the implications from a market abuse perspective. The panel agreed that the information can probably be ‘cleansed’ by disclosing mid-term or long-term ‘headline’ guidance to the public. Note that, in the European Union, if a cash consideration component would need to be raised in a public share offering involving banks, any cleansing (or other) guidance qualifying as a ‘profit forecast’ might trigger a request from these banks to provide them with auditor comfort as part of their due diligence exercise.

If the transaction were to require disclosure in the form of a prospectus, pro forma financial statements may be needed. The panel discussed that preparing pro formas may be time-consuming (in the EU, auditor certification is required). This is even more complex in deals with parties from jurisdictions with different accounting standards; one set of accounts would need to be converted into other generally accepted accounting principles (GAAP). Also, if the prospectus must be published early in the transaction, the time required for preparing pro formas would potentially add significantly to market risk, making the transaction potentially less interesting for one or both parties.

The panel considered that prospectus analysis should be done early, taking into account the rules in the various jurisdictions involved. In the United States, prospectus review is generally public – and if it is not, it will be when the document is final – which leads to investors seeing what has changed over time, which may open the parties up to criticism.

The panel then shifted to a technical discussion of prospectus requirements. A brief overview drew attention to the different types of prospectuses that may be required in such a transaction: a prospectus for an offer of securities and a prospectus for listing newly issued securities. The event triggering the prospectus requirement will determine the timing of the prospectus, and if a prospectus is required early in the transaction (eg, at the time of calling the shareholders meeting for the transaction), this may have a significant effect on timing. In some jurisdictions, such as the EU, an increase of the outstanding share capital by less than 20 per cent will not trigger a prospectus for listing securities, and issuers have smartly combined share issuances at the time of the transaction with the issuance of convertible bonds to raise more equity but stay below this 20 per cent threshold.

Clearly, if a prospectus is due in multiple jurisdictions, not only will timing play a role and the sequence of comments being received from regulators on the draft document, but also diverging content requirements. Spending sufficient time bottoming out these topics early in the transaction may provide crucial insights into the optimal structure of the deal to ensure the shortest possible time to get things done. Another complexity is that often – early in the deal – a shareholder circular is made available for the extraordinary general meeting (EGM), which must be consistent with the prospectus that is sometimes prepared and published many months down the line. As divergence between disclosure documents is undesirable, the prospectus workstream should be involved at the earliest stages.