(The article featured
below is a selection from Federal
Securities Law Reporter, which is available to subscribers of that
publication.)
Legal Bulletin Clarifies Registration
Exemption for Reorganizations
In the first staff legal bulletin in
almost three years, the SEC staff has clarified the registration exemption for
securities issued in reorganizations. The exemption, found in Section 3(a)(10)
of the Securities Act, is available when the securities are issued in exchange
for other securities, not for cash, and the fairness of the exchange is approved
by a court or governmental entity. The fairness hearing must be open to everyone
to whom securities would be issued in the proposed exchange.
The Section 3(a)(10) exemption is
available without any action by the staff or the Commission, but issuers unsure
of whether the exemption is available for a specific transaction they are
contemplating may request a no-action position. The bulletin discusses issues
that commonly arise in those no-action requests.
The staff said that it will not issue
a no-action response concerning a transaction after the fairness hearing has
been held. Thus, an issuer must submit its no-action request before the fairness
hearing. Also, the staff cautioned issuers not to submit a no-action request
very close to the fairness hearing date since that may not give the staff
adequate time to consider the issues presented and respond before the hearing.
Statutes governing fairness hearings
often require a shareholder vote before the hearing, which could be at a time
when the issuer is not certain it will be able to rely on the Section 3(a)(10)
exemption. In these situations, the SEC staff has not objected to a vote before
the fairness hearing, even though this means an investment decision is made
before the fairness hearing, since the transaction is not effected unless the
court or other authority approves it. In the staff's view, the issuer should
submit to the court or approving authority the disclosure materials offering the
securities before it mails them to the offerees.
In addition, the staff believes that
the court or authority making the fairness determination must have sufficient
information before it to determine the value of the securities, any claims or
interests to be surrendered, and the securities to be issued in the proposed
transaction. The staff will allow a foreign court to approve the transaction if
all requirements that apply to exchanges approved by U.S. courts are satisfied
and the issuer provides an opinion from counsel in the foreign jurisdiction
stating that, before the foreign court can give its approval, it must approve
the fairness of the proposed exchange to persons receiving securities in the
exchange.
While the issuer must provide
appropriate and timely notice of the fairness hearing, the statute does not
specify the information that must be included in the required notice. The staff
does not address the adequacy or appropriateness of the information provided to
persons who have a right to appear at the hearing, except to broadly require
that the notice adequately advise those who are to be issued securities in the
exchange of their right to attend the hearing and give them the information
necessary to exercise that right. The staff also cautions issuers relying on the
Section 3(a)(10) exemption to consider whether, as a practical matter, imposing
prerequisites to appearance will prevent those persons from having a meaningful
opportunity to appear at that hearing.
The staff also clarified the status
of fairness hearings conducted under state securities laws. The National
Securities Markets Improvements Act amended Section 18 of the Securities Act to
preclude any state from requiring registration or qualification of covered
securities, which are nationally listed securities. One effect of this was that
an issuer could not use a state fairness hearing as a basis for relying on the
Section 3(a)(10) exemption.
The staff said that Congress'
prohibiting reliance on state fairness hearings was inadvertent. The staff noted
that Congress corrected this situation in the Securities Litigation Uniform
Standards Act, which amended Section 18 to add securities issued under Section
3(a)(10) as a category exempt from the definition of covered securities. Thus,
the staff believes that an issuer may rely upon a fairness hearing conducted
under state securities law to perfect an exemption under Section 3(a)(10) for
securities that otherwise would be covered securities.
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