'The Road Not Taken' (At Least Not Often)

Banks and bank holding companies often look for the most efficient way to undertake a merger. The stock of the acquiring holding company often is the consideration (at least in part) for the acquisition. When common stock (or any security) of the acquiring company is issued in the merger, either the issue of the stock must be registered with the US Securities and Exchange Commission (SEC), which makes the acquiring company public, or an exemption must be found. There are some exemptions that can be used in a merger if the facts fit, such as a “private” offering under SEC Regulation D or an intrastate offering under Rule 147A for stock issued only to stockholders of the state where the acquiring company is located. Many times, those exemptions do not work. Registration might be the only path.

An exemption from registration with the SEC that is rarely used, and widely unknown, is found in Section 3(a)(10) of the Securities Act of 1933. Section 3(a)(10) provides that an exemption exists when a security is issued for bona fide outstanding securities (as in a merger) where the terms and conditions of such issuance and exchange are approved after a hearing upon the fairness of such terms and conditions. The persons who will receive the securities (i.e., the shareholders of the company being acquired) must have a right to appear before “any court” or before an agency of the United States or any US state, such as a state banking regulatory agency or securities commission. If a hearing is to be held not by a court but by any agency, the agency must be “expressly authorized” to grant such approval. Only eight states have such an agency for appeal of the transaction. The leading states are California, North Carolina, Ohio, Oregon, and Georgia. In Georgia, the state securities commission holds the hearing. Under Section 3(a)(10), however, a court is not subject to such limitation in terms of being authorized by statute. The court is simply authorized by Section 3(a)(10) of the Securities Act.

Thus, one way to seek the exemption is to file with a state court that has jurisdiction over the acquiring company or with a federal court that hears matters in the federal district where the acquiring company is located. Significant information such as a draft of the offering circular and procedures for the meeting must be filed with the court. In addition, the stockholders of the company acquired must be given notice of the hearing and informed that they will have the opportunity to attend and be heard. Under Section 3(a)(10), the SEC does not take part in the hearing and does not require a notice to be filed with the SEC.

Perhaps the main issue with the exemption is the hope that the court will be able to review the material and hold a hearing to grant the exemption in a timely manner so that the acquisition will proceed timely. Consideration of the exemption under Section 3(a)(10) is well worth the effort.