1 Relevant Authorities and Legislation
1.1 What regulates M&A?
The United States has a federal system of government. Accordingly, regulation of M&A activity falls within the dual jurisdiction of the federal government and the individual state in which the target company is incorporated. Generally, the federal government regulates sales and transfers of securities through the Securities and Exchange Commission (SEC), and polices competition matters through the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC). Other federal agencies impose additional requirements over acquisitions in certain regulated industries.
Tender offers in the United States are subject to the federal rules and regulations on tender offers and beneficial ownership reporting under the Securities Exchange Act of 1934, as amended (Exchange Act). Acquisitions completed by means of a merger are governed by the law of the state of incorporation of the target company. The solicitation of votes to approve a merger by the target company shareholders must comply with federal rules and regulations on proxy statements under the Exchange Act. If the bidder offers securities as consideration to the target company shareholders, the registration requirements of the Securities Act of 1933, as amended (Securities Act), will also apply, unless an exemption from the registration requirements is available.
The law of the state of incorporation of a company regulates the internal affairs of a company, including the fiduciary duties owed by the company's board of directors to its shareholders in responding to a takeover bid and the applicable statutory requirements for approving and effecting merger transactions. The ability of a target company to impose anti-takeover devices also will largely be determined by the law of its state of incorporation.
Many states, including Delaware (where many of the largest corporations in the United States are incorporated), have antitakeover statutes. State anti-takeover statutes generally take one of two forms: control share acquisition statutes or business combination statutes. Control share acquisition statutes generally provide that an acquiring shareholder is not permitted to vote target company shares in excess of certain percentage ownership thresholds, without first obtaining approval from the other shareholders. Business combination statutes generally provide that after acquiring securities in the target company in excess of a specified threshold (e.g., 15%), a shareholder is barred from entering into business combination transactions with the target company for a specified period of time, unless the shareholder has obtained approval from a supermajority (e.g., 66⅔%) of the shares held by the target company's other shareholders or, prior to acquiring such specified ownership threshold, target company board approval. Companies incorporated in the state may opt out of the protection of the state's anti-takeover statutes in their certificate of incorporation. Delaware has a business combination statute.
Finally, the exchange upon which the company's securities are listed may impose additional rules, in particular with respect to corporate governance matters and shareholder approval for certain actions.
1.2 Are there different rules for different types of company?
If the target company's securities are registered under the Exchange Act (regardless of whether the target company is incorporated in the United States), the bidder must comply with the detailed disclosure requirements of the U.S. tender offer rules, and a number of procedural requirements (including withdrawal rights for target company shareholders throughout the offer period, and certain timing and offer extension requirements). If the target company's securities are not registered under the Exchange Act but the target company has security holders in the United States, or if the target company is a foreign private issuer (i.e., its securities are registered under the Exchange Act) and U.S. security holders hold 10% or less of the class of securities sought in the offer, the bidder is not required to comply with the specific disclosure provisions of the U.S. tender offer rules (if the target company is a foreign private issuer and U.S. security holders hold between 10% and 40% of the class of securities sought in the offer, some of the provisions of the U.S. tender offer rules apply). Nevertheless, in any tender offer in which security holders in the United States may participate, the bidder must comply with general anti-fraud and anti-manipulation rules that apply to all tender offers in the United States. These rules prohibit the use of materially misleading statements or omissions in the conduct of any offer, prohibit market purchases of the target company's securities "outside the offer", and mandate a minimum offer period of at least 20 business days.
Regardless of whether the target company is incorporated in the United States, if a bidder is offering securities as consideration in an offer in the United States, the bidder must register the securities with the SEC, unless an exemption from registration is available. Following the registration of securities in the United States, the registrant, its directors and its officers become subject to the ongoing reporting and disclosure obligations established by the Exchange Act. The registrant, its directors and its officers will also be liable for misstatements and omissions in reports filed with the SEC. In addition, following registration of its securities in the United States, the registrant, its directors and its officers will become subject to the ongoing corporate governance, certification and other requirements set out in the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act).
The rules governing certain M&A transactions will vary depending on the state of incorporation of the target company. The laws of the state of incorporation of a company will regulate the shareholder and board approvals required in connection with a merger transaction, or a transaction involving the sale of all or substantially all of the assets of a company, as the laws of the state of incorporation of a company are the source of statutory requirements for effecting these transactions. As described in the response to question 1.1, the fiduciary duties owed by the company's board of directors to its shareholders in responding to a takeover bid and the ability of a target company to impose anti-takeover devices will largely be determined by the law of its state of incorporation. In addition, anti-takeover statutes may vary from state to state.
1.3 Are there special rules for foreign buyers?
Section 721 of the Defense Production Act of 1950, as amended, gives the Committee on Foreign Investment in the U.S. (CFIUS) broad authority to identify and mitigate risks to U.S. national security arising from foreign investments in U.S. businesses. Industries viewed as particularly sensitive by CFIUS include defence, aerospace, utilities, transportation, computer and electronics manufacturing, scientific and technical services, information technology and telecommunications, with increasing focus on data privacy, economic espionage and intellectual property with potential military applications. The Foreign Investment Risk Review Modernization Act of 2018, enacted in August 2018, expanded CFIUS's jurisdiction over previously uncovered transactions, most notably over certain non-controlling transactions, and codified certain CFIUS regulations and practices. The legislation also includes certain administrative changes with respect to timing and filing fees. The U.S. Department of Treasury has issued interim regulations that implement some of the legislation's procedural changes, including mandatory short form filings for certain foreign investments. The legislation also provides a statutory pathway for judicial review of CFIUS decisions. The CFIUS review and investigation process is described in more detail in the responses to questions 2.13 and 2.14.
In addition, there are specific industries in which various levels of non-U.S. ownership or control will trigger governmental reviews or may be prohibited. They include: maritime vessels engaged in domestic trade or coastal shipping; broadcasting; and in states restricting "alien" ownership; federal mining leases; banks or bank holding companies; primary dealers in U.S. government securities; air carriers with U.S. domestic routes; and nuclear energy facilities. Since July 2014, the U.S. government has imposed sectoral sanctions that limit certain sectors of the Russian economy from gaining access to U.S. capital and debt markets, as well as to U.S. technology and expertise in the energy sector. The U.S. Congress approved additional sanctions against Russia in 2017 which target persons and entities that undermine U.S. cybersecurity, invest in Russia's export pipelines and transact with Russian defence and intelligence agencies. The U.S. Departments of Treasury and State announced additional sanctions in 2018 against several individuals and entities in connection with Russian cyber operations and other activities characterised by the U.S. government as contrary to international norms.
1.4 Are there any special sector-related rules?
Certain industries, such as public utilities, insurance, gaming, banking, media, transportation and mining, are highly regulated, and therefore subject to industry-specific rules that regulate the ability of any acquirer, whether U.S. or foreign, to engage in business combinations.
Additionally, certain types of entities, such as Real Estate Investment Trusts (REITs), often include in their organisational documents unique requirements with respect to changes in ownership in order to protect their tax status.
1.5 What are the principal sources of liability?
Failure to comply with the disclosure and procedural requirements applicable to a transaction may be a source of liability under the U.S. federal securities laws for the bidder or a target in a tender offer or a merger. The structure of the transaction (i.e., tender offer, exchange offer or merger), the form of consideration and the involvement of target company insiders will determine the particular disclosure and procedural rules applicable to the transaction. (If a bidder owns a significant stake in a company and then wishes to take that company private, or if the bidder is a buyout group which includes members of the company's senior management (each, a "going private" transaction), additional disclosure rules will be applicable to the transaction.) Section 14(e) of the Exchange Act prohibits material misstatements and omissions and fraudulent, deceptive or manipulative acts or practices, in connection with any tender offer. If the transaction is structured as a merger, no solicitation, whether oral or written, may be false or misleading. This applies to any solicitation, including those prior to the delivery of a definitive proxy statement (which must be sent to a target company's shareholders before they may vote on a merger), as well as to statements included in any proxy statement/prospectus (the requirements for the use of a prospectus are discussed in the response to question 2.6). Controlling persons may also have liability for violations of the Exchange Act, unless they acted in good faith and did not directly or indirectly induce the act constituting the violation.
In a tender offer or exchange offer (i.e., a tender offer in which the consideration consists, in whole or in part, of securities), a bidder must make its offer available to all holders of securities of the same class, and the price paid to each holder must be the best price paid to any holder of the same class of securities. Violation of this "all holders/best price" rule may subject the bidder to liability to all shareholders who were paid less consideration for their securities than any other shareholder in the offer. The all holders/best price rule is discussed in further detail in the response to question 2.5.
If a bidder offers securities as consideration for shares of the target company, the bidder, as well as its directors, principal executive officers and its underwriters, may have liability under Section 11 of the Securities Act for material false and misleading statements or omissions in the registration statement registering such securities. Defendants other than the bidder may avoid liability if they can prove they made a reasonable investigation and had a reasonable basis to believe, and did believe at the time the registration statement became effective, that there were no material misstatements or omissions. Additionally, anyone who controls another person with liability under Section 11 of the Securities Act may also have liability, unless the controlling person did not have knowledge of the material misstatement or omission.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), enacted in 2010 as a response to the financial crisis, was intended to decrease the risks in the U.S. financial system. Among other things, the Dodd-Frank Act codified the extraterritorial reach of the SEC to enforce the antifraud provisions of the federal securities laws so long as there exists significant conduct in the U.S. or effect on the U.S. securities markets, or some combination of the two. Although the Trump administration and Congress made several efforts in 2017 and 2018 to roll back some of the provisions of the Dodd-Frank Act, such efforts have not garnered the requisite support in Congress, and the Dodd-Frank Act remains in effect.
Members of the target company board may have liability to the target company shareholders if the directors fail to properly exercise their fiduciary duties in responding to an offer. As discussed in the responses to questions 3.3 and 8.2, the conduct of the target board will be subject to an enhanced level of scrutiny by the courts in a change of control transaction to determine if the board's conduct was reasonable. If the offer is a going private transaction, in many states, including Delaware, the conduct of the target board may be reviewed using an "entire fairness" standard, which requires that both the price and process be fair to the target company shareholders. As discussed more fully in the response to question 3.3, the "deferential business judgment" rule is applicable in going private transactions where certain procedural safeguards are employed.
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 and related rules (Hart-Scott-Rodino Act) imposes notice requirements and waiting periods in connection with the acquisition of voting securities or assets in excess of certain thresholds, as described in more detail in the response to question 2.14. Failure to comply with the Hart-Scott-Rodino Act may result in a monetary penalty of $40,000 per day.
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Originally published in ICLG
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