Mergers & Acquisitions Archives

M&A Broker vs. Broker-Dealer

SEC issues M&A Advisor interpretations.

Securities and Exchange Commission — SEC issues M&A Advisor interpretations.

I have written in the past about the challenges of people looking to facilitate deals without a broker-dealer license. Short answer: You probably can’t get paid.

However, there is an entire industry of business brokers and M&A advisors that seem to get close to the line. In January 2014, the SEC outlined when an M&A advisor could assist in the sale of a privately held company without registering as a broker-dealer. Its been hanging out there for a while, but I figured this was a good enough time to write about it.

First, it defined “M&A Broker” as “a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company (as defined below) through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or the business conducted with the assets of the company.”

In addition, a “privately-held company” is not an SEC filing company

The SEC provided a list of several conditions:

The M&A Broker will not have the ability to bind a party to an M&A Transaction.
An M&A Broker will not directly, or indirectly through any of its affiliates, provide financing for an M&A Transaction.
The M&A Broker may not have custody, control, or possession of or otherwise handle funds or securities issued or exchanged in connection with an M&A Transaction or other securities transaction for the account of others.
No M&A Transaction will involve a public offering.
Any offering or sale of securities will be conducted in compliance with an applicable exemption from registration under the Securities Act of 1933.
No party to any M&A Transaction may be a shell company, other than a business combination related shell company.
To the extent an M&A Broker represents both buyers and sellers, it will provide clear written disclosure as to the parties it represents and obtain written consent from both parties to the joint representation.
An M&A Broker will facilitate an M&A Transaction with a group of buyers only if the group is formed without the assistance ofthe M&A Broker.
The buyer, or group of buyers, in any M&A Transaction will, upon completion of the M&A Transaction, control and actively operate the company or the business conducted with the assets of the business.
Any securities received by the buyer or M&A Broker in an M&A Transaction will be restricted securities within the meaning of Rule 144(a)(3) under the Securities Act.

There are more details in the SEC’s letter, which we may cover in another post. It will be interesting over time to see if the SEC focuses on one or more elements of the interpretation.

‘Barbarians at the Gate’ Available on Youtube

HBO version of classic book.

When I was a simple music student studying classical and jazz guitar in college, I had revelation in the second semester of my third year: I would soon have my BFA in Classical Guitar Performance. Then what?

I was also reading a book that changed the direction of my life. ‘Barbarians at the Gate’ is the chronical of the takeover of RJR Nabisco. After reading that, I decided I wanted to be a part of that world. I had a better understanding of what the lawyers did more than the financial advisors. As a result, I went to law school with the goal of being a corporate/securities lawyer. And the rest was history.

After I had been practicing for a few years, I read it again. It was even better with the benefit of experience.

HBO turned it into a comedy, but it still works. Check it out.

First Public Bitcoin Company, An Ecommerce Reseller Of Consumer Products, Goes Public Using A Reverse Merger

First Bitcoin public company (sort of) went public through reverse merger.

Charles Allen, CEO and CFO, of Bitcoin Shop recently went on CNBC to discuss why a reverse merger was the best choice for his company to go public. His reasons included:

Publicity from being public
Transparency
Time to market, merger done in three weeks
They wanted to be the first public Bitcoin company
Ability to raise funds

For this post, let’s overlook my opinion that reverse mergers are generally a terrible idea. You never know what you are getting into, such as Bitcoin Shop’s recent extensive revisions of two years worth of financial disclosures following the notice of nonreliance on previously issued financial statements and audit reports.

Bitcoin Shop goes public through a reverse merger transaction.

There are private companies that not only can navigate the process, but have the systems set up to successfully transition to being a public company. However, they are few and far between. In addition, the fundraising seldom materializes. To Bitcoin Shop’s credit, they did raise about $1.8 million in a private placement related to the reverse merger.

As to Bitcoin Shop’s Bitcoin-related business, as Mr. Allen described on CNBC, it basically is an affiliate seller of products for other sites. It lists products and permits payment by Bitcoin. It has a goal to be a leading virtual currencly marektplace, but it is not a “Bitcoin” company. It markets stuff sold by others and processes payment and takes fees. It currently has a single vendor, but it plans more.

Bitcoin Shop may be able to earn revenue through markups on products and processing fees and undercut credit and debit card processing fees. Time will tell if this is a viable strategy. But, for all of the technical discussion in its investor presentation and SEC filing discussion the transition, Bitcoin Shop is an ecommerce company that lists products for sale by another vendor and processes payment denominated in Bitcoin.

There is nothing wrong with that, and I would not be surprised to see many more follow suit. However, I am reminded of seemingly hundreds of companies with little relationship to technology slap a “.com” at the end of their name back in the 1990’s. Is history repeating itself?

Delaware Supreme Court Discusses Meaning of “Business Combination” In Activision Vivendi Case

As it turns out, it isn’t ambiguous.

Link: Activision Blizzard Inc. v Hayes

In an appeal of an injunction, the Delaware Supreme Court took a look at whether a stock buyback would be a “business combination” requiring stockholder approval under Activision’s bylaws.

Background

Activision Blizzard fights for its rights to buyback its shares.

In 2008 Activision bought Vivendi’s video game subsidiary for Activision shares. Vivendi also made a separate cash investment in Activision. Activision’s bylaws were amended to require approval of unaffiliated stockholders with respect to any merger, business combination or similar transaction between Activision and Vivendi. In 2012, Vivendi wanted to sell its Activision stake but found no takers. Activision agreed to a buyback, under which Vivendi would create a non-operating sub, “Amber,” to hold the assets for sale and Activision would purchase Amber. Activision did not seek stockholder approval, which was the part of the reason for the litigation, which resulted in a preliminary injunction.

Court’s Analysis

The court first looked to see if “business combination” was ambiguous. Nope.

“A provision is ambiguous only if it is “reasonably susceptible to more than one meaning,” and the fact that the parties offer two different interpretations does not create an ambiguity. Moreover, a provision “may be ambiguous when applied to one set of facts but not another. Finally, the provision must be read in context.”

The court decided that while the meaning could be ambiguous in some contexts, it was not ambiguous here because under their agreement, Vivendi will sell 429 million shares of Activision stock back to Activision. Because those shares will become treasury stock, control of Activision will shift from Vivendi to Activision’s public stockholders. Vivendi’s holdings will decrease from 61% to 12%, and Vivendi’s representation on Activision’s board will decrease from six appointees to none.

Since there was no “combination or intermingling of Vivendi’s and Activision’s businesses,” it is not a business combination. In fact it is the opposite of a business combination. These companies will be separating themselves. As a result, the stockholder approval requirement does not apply.

In addition, structuring the sale through Amber does not change the analysis. Neither the form of the transaction nor its size changes its fundamental nature. Amber is a shell created to serve as the transaction vehicle. The court stated that calling Amber a business “disregards its inert status” and “glorifies form over substance.”

The size of the deal does not change the analysis. The plaintiffs argued that it was a “value-moving” transaction. However, the bylaws do not require stockholder approval based on size of the deal.

In addition, the bylaws do not require stockholder approval for any deal between Activision and Vivendi, only specified transactions. While the Chancery Court may have been looking out for the non-interested shareholders’ interests, other provisions of the bylaws already provided for independent director approval for related party transactions.

Contracts and the Law – Beer Contracts in Mergers & Acquisitions

Labatt distributor shows why contracts must work with the law and can’t just change it.

Link: Esber Beverage Company v. Labatt USA Operating Company (Ohio Supreme Court)

Every now and then I get a request to draw up an agreement that does not jive with the law. I’ll get suggestions such as, “Just call it something else, like “Consulting Agreement.’” I have to say, “It doesn’t work that way. The contract has to work within the framework of the law. Sorry.”

How is this relevant to anything? Well, because when a manufacturer sell its rights relating to a particular brand of alcohol to a successor, the new owner can terminate any distributor’s franchise without cause. At that point, the new owner’s obligations are notice and compensation.

We learn this because Esber Beverage Company was a long-time distributor of Labatt for InBev. InBev went on to merge with Anheuser-Busch. Because easy is cheap, the U.S. Department of Justice would not allow this merger to proceed without some sort of obstacle. With no consideration at all of the good folks who distribute Labatt, the Justice Department forced the merged company to divest itself of all assets relating to Labatt. A new company backed by private equity firm KPS Capital Partners, L.P. purchased the rights to Labatt and terminated Esber.

Esber sued claiming that the statute only applied when there was no written agreement.

The court didn’t buy it.

Pursuant to the statute, every manufacturer of alcoholic beverages must offer its distributors a written franchise agreement specifying the rights and duties of each party. If the parties do not enter a written franchise agreement, a franchise relationship will arise as a matter of law when a distributor distributes products for 90 days or more. So far so good.

The statute also sets forth how to cancel or terminate a franchise. There are three situations:

With prior consent and 60 days’ notice
With “just cause,” and the statutes explains what this means.

In addition, in either case, the manufacturer must repurchase all of the terminated distributor’s unsold inventory and sales aids.

However, the statute also provides for terminating a franchise when the manufacturer sells a particular brand or product of alcoholic beverage to a successor manufacturer. If a successor manufacturer acquires all or substantially all of the stock or assets of another manufacturer, the successor manufacturer may give written notice of termination, nonrenewal, or renewal of the franchise to a distributor of the acquired product or brand. On termination of the franchise, the successor manufacturer must repurchase the distributor’s inventory and must compensate the distributor for the diminished value of the distributor’s business that is directly related to the sale of the terminated product, including the appraised market value of the distributor’s assets devoted to the sale of the terminated product and the goodwill associated with that product.

This was not enough for Esber, which asserts that the statute does not permit a successor manufacturer to terminate when the successor manufacturer has itself entered into or assumed a written contract with the distributor. The court disagreed and quoted another case for the proposition:

“When a statute’s language is clear and unambiguous, a court must apply it as written.”

It continued:

“The plain language of the statute allows the successor manufacturer to terminate a franchise. The definition of “franchise” includes both written franchise agreements and franchise agreements that have arisen by operation of law.”

As a result, the new owner can terminate Esber and Esber is entitled to compensation. However, the contract does not trump the statute.