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Last month, the Eleventh Circuit affirmed a district court’s dismissal of a complaint filed under Section 11 brought by investors who were 30% shareholders in a company that merged with defendant company in APA Excelsior III L.P. v. Premiere Technologies. This case is about whether the sophisticated investors who signed traditional lock-ups/irrevocable proxies at the outset of arms-length merger negotiations should be able to recover under Section 11 based on the subsequently filed registration statement for a stock-for-stock merger.

The court found that the plaintiffs made a legally binding investment decision when they signed their shareholders’ agreements, months before the registration statement was filed – so that the plaintiffs weren’t entitled to an implied presumption of reliance on the registration statement when they made their investment decision. The court highlighted that these particular types of investors have access to even better information than what is traditionally disclosed in the registration statement by virtue of their due diligence rights.

As Section 11 does not normally require a showing of reliance, the court looked to the legislative history of the liability provision to interpret it as setting forth a presumption of reliance – not a strict liability statute – and further found the presumption was rebutted here due to the “pre-registration commitment theory.”

What Might Be the SEC’s View of the APA Excelsior Decision?

A decade ago, when the SEC proposed the Aircraft Carrier package of reforms, the SEC provided an interpretation that shares in these types of mergers could be registered on a Form S-4, even if investors were really making their investment decision at the time they entered into these types of shareholders’ agreements. In the Aircraft Carrier proposing release, the SEC stated it would be “codifying” a Staff position – and since the Commission voted to propose the release, I think an argument can be made that the SEC blessed the Staff’s interpretation of the issue even though the proposed rule never got adopted.

Here is the relevant excerpt from the Aircraft Carrier proposing release: “The use of lock-up agreements in business combinations has become common. As part of the negotiations for these combinations, the acquiring party usually requires that management and principal security holders of the company to be acquired commit to vote for the acquisition. These so-called “lock-up” agreements are made when the acquisition agreement is finalized, before any action by the public security holders. These agreements could be considered investment decisions under the Securities Act. If they are, the offers and sales of securities were made to persons who entered into those agreements before the business combination is presented to the non- affiliated security holders for their vote. Under this reasoning, those offers and sales could not be included in the registration statement for the offering to the persons not entering into lock-up agreements.

In recognition of the legitimate business reasons underlying the practice, the staff has permitted the registration of offers and sales under certain circumstances where lock-up agreements have been signed. We propose a rule that codifies this position. Our proposed rule would allow registration of those offers and sales when: (i) The lock-up agreements involve only executive officers, directors, affiliates, founders and their family members, and holders of 5% or more of the voting equity securities of the company being acquired; (ii) The persons signing the agreements own less than 100% of the voting equity securities of the company being acquired; and (iii) Votes will be solicited from shareholders of the company being acquired who have not signed the agreements and who would be ineligible to purchase in an offering under Section 4(2) or 4(6) of the Securities Act or Rule 506 of Regulation D.

The first condition would assure that the only persons who signed the agreements were insiders with access to corporate information who arguably would not need the protections of registration and prospectus disclosure. The last two conditions would make certain that registration under the Securities Act is required to accomplish the business combination. Where no vote is required or 100% of the shares are locked up, no investment decision would be made by non-affiliated shareholders and the transaction would have been completed via the lock-up agreement. If the non-affiliated shareholders were able to purchase under one of the private offering exemptions from registration, the entire transaction would be more akin to a private placement and registration of only resales would follow from that characterization.”

After McNulty: Changes in the Attorney-Client Privilege and Investigations

Tune in tomorrow for our webcast – “After McNulty: Changes in the Attorney-Client Privilege and Investigations” – to hear David Becker of Cleary Gottlieb, Peter Moser of DLA Piper, Keith Bishop of Buchalter Nemer, Joseph Burby of Powell Goldstein, and Christian Mixter of Morgan Lewis discuss the changing processes of government and internal investigations after the long-awaited McNulty memo, which provides prosecutors with a revised set of corporate fraud charging guidelines, including new policies on waiver of the attorney-client privilege and the advancement of attorney’s fees to employees under investigation. As an aside, here is a speech by Attorney General Alberto Gonzales at last week’s ABA White Collar Crime Conference.

The SEC’s 8-K Rule Changes: How They Impact You

We have posted the transcript from the CompensationStandards.com webcast: “The SEC’s 8-K Rule Changes: How They Impact You.”