Demystifying Google's Rescission Offer
Last Wednesday, Google filed a rescission offer in a new registration statement with the SEC (which was then amended on Friday), offering to repurchase more than 23 million shares of its stock and 5.6 million options that were illegally issued to approximately 1,000 of its employees and consultants. This rescission offering is not directly related to the IPO.
According to media reports, some state regulators (e.g. California) are actively investigating violations raised by Google's prior offerings and these reports claim that Google's IPO has been postponed due to these investigations. However, the fact that this rescission offering is happening should not have been surprising to the mainstream media since the IPO prospectus - since April - has included a section entitled "Rescission Offer" that revealed these violations and the proposed resolution. This is not something that by itself should hold up the IPO - much less imperil it - since it was clearly planned for from the beginning. Rather, it's a soft IPO market that likely is forcing a postponement of the IPO.
According to Google's disclosure, the shares causing the violations are from Google's option plans. Although there are specific federal and state exemptions for sales of shares underlying options, it is not too uncommon for private companies to technically pop out of those exemptions and be left with no exemptions to rely on and no way to register the sales. The SEC likely will not do anything about Google's Rule 701 violations unless there was fraud involved, which doesn't seem to be the case. Remember that under Section 12, purchasers - not the SEC - have a cause of action to seek rescission.
Although it isn't disclosed, it's possible that Google crossed the Section 12(g) threshold some time back and was required to register its common stock under the '34 Act (companies that have more than 500 shareholders and $10 million in assets at calendar year end must register under Section 12(g)). Since it hadn't conducted a public offering, Google probably never imagined - as is the case for a number of larger private companies - it could possibly be required to file a Form 10 with the SEC.
Now that a IPO appears imminent (despite the postponement), any offerees that accept the rescission offer would be out of their minds as Google's anticipated IPO offering range is between $108 and $135 a share and the rescission offers are well below those levels; as low as a dollar and change in some cases.
The rescission offer prospectus does include a risk factor that alludes to this disparity: "The amount you would receive in the rescission offer is fixed and is not tied to the fair market value of our common stock at the time the rescission offer closes. As a result, if you accept the rescission offer, you may receive less than the fair market value of the securities you would be tendering to us." But this risk factor doesn't mention the anticipated range of the IPO. It will be interesting to see if any rescission offerees tender their shares.
Does a Federal Right of Rescission Survive a Rescission Offer?
One risk factor in the Google rescission prospectus raises an interesting issue: "If you affirmatively reject or fail to accept the rescission offer, it is unclear whether or not you will have a right of rescission under federal securities laws after the expiration of the rescission offer. The staff of the Securities and Exchange Commission is of the opinion that a person's right of rescission created under the Securities Act of 1933 may survive the rescission offer. However, federal courts in the past have ruled that a person who rejects or fails to accept a rescission offer is precluded from later seeking similar relief."
If Google's stock price tanked in the aftermarket, could rescission offerees attempt to exercise their rescission rights then (note that the rescission prospectus states that the offer expires in September - most states require that rescission offers remain open for at least 30 days)? E-mail your thoughts (and any materials on rescission offerings) on this topic to me and I will address it later in the week as we are in the midst of building a "Rescission Offerings" Practice Area.
Is a Dutch Auction a Postive Development for Investors?
Yesterday's Washington Post contained this editorial from Yale School of Management professor Barry Nalebuffon on this hot topic.
By the way, here is Google's IPO auction website...