January 24, 2017

The SEC Drops the Hammer as Reminder that Tenders are Different

Here’s a blog that I posted last week on the new “John Tales” Blog on

Yesterday, the SEC announced that Allergan had admitted securities law violations and agreed to pay a $15 million penalty for failing to disclose merger negotiations that were taking place with third parties while the Company was the target of a tender offer from Valeant in 2014. The SEC’s order summarized the applicable disclosure requirement:

Rule 14d-9 and Item 7 of Schedule 14D-9 (incorporating Item 1006(d) of Regulation M-A) provide . . . that the person filing the statement must disclose “subject company negotiations.” Item 1006(d) requires disclosure of any negotiation which is underway or is being undertaken and which relates to, among other things, a tender offer or a transfer of a material amount of assets by the subject company. Item 1006(d)(2) of Regulation M-A requires disclosure of any transaction, board resolution, agreement in principle, or signed contract that is “entered into in response to [a] tender offer.” Item 1006(d)(1) of Regulation M-A requires a subject company to state “whether or not [it] is undertaking or engaged in any negotiations in response to [a] tender offer” that relate to an extraordinary transaction.

Allergan ran afoul of these requirements by failing to disclose discussions with two prospective merger partners – one of which it was looking to buy – that took place while the tender offer was ongoing. The admission is an unusual step, but it may reflect the fact that the Staff raised the possible need for disclosure of these negotiations on several occasions – and Allergan pushed back for some time before ultimately making disclosure.

In other settings, the Staff has taken a flexible approach to disclosure of preliminary merger negotiations. For example, it generally takes the position that MD&A’s known trends requirement does not mandate disclosure of such negotiations. However, if your deal is a tender offer, and you engage in negotiations with another bidder after the tender offer’s been launched, you’ll have an obligation to disclose those negotiations without regard to how preliminary they are.

Why? Because – as the SEC’s order points out – there is a specific line item in Schedule 14D-9 that will prompt this disclosure. Item 7 of Schedule 14D-9 – and Item 1006 of Reg M-A, which is incorporated into it – requires the target of a tender offer to disclose if any negotiations are going on. In some circumstances, you may be able to avoid disclosing the identity of the other party or the terms of the transaction, but you’ll still have to disclose the existence of those negotiations. (This is also true for “Going Private” deals – even if they don’t involve a tender – Item 1006 of Reg M-A applies there too.)

If the negotiations are ongoing when you make your first 14D-9 filing, you need to disclose them there. If they happen after you file the 14D-9, you’ll have to immediately (as in one day) amend it to disclose them. The SEC is dead serious about this and has been for a long time – when I started practice, a very prominent Wall Street lawyer got in the enforcement staff’s cross hairs because he told his client that it didn’t have to disclose merger negotiations during the pendency of a tender offer until they were material.

Unfortunately for him, he was a director of the company, and the SEC went after him for causing their violation of law. The ABA and the securities bar went ballistic – and the full SEC ultimately backed off – but nobody who was practicing in this area at the time will ever forget that situation. In fact, it even got a mention in the poor guy’s obituary when he passed away a few years ago.

Every 33 Years Like Clockwork: ABA’s Newly Revised “Model Business Corporation Act”

The ABA recently announced that it has issued the first comprehensive revision to the “Model Business Corporation Act” since 1984:

Beginning in 2010, the Corporate Laws Committee has undertaken a thorough review and revision of the Model Act and its Official Comment. This effort has resulted in the adoption and publication of the Model Business Corporation Act (2016 Revision). The 2016 Revision is based on the 1984 version and incorporates the amendments to the Model Act published in supplements regularly thereafter, with changes to both the Act and its Official Comment. Also included are notes on adoption and revised transitional pro­visions that are intended to facilitate legislative consideration in adopting the new version of the Model Act.

The MBCA is the model for more than 30 state corporate statutes, so it’s an extremely influential publication.  On a personal note, the foreward to the new edition gives special recognition to the MBCA’s Reporter Emeritus – the late Prof. Michael Dooley.  I was fortunate enough to have Prof. Dooley for Securities Regulation when I was in law school – he was an excellent teacher, a distinguished scholar & a real gentleman.

Board Committees: How the S&P 500’s Approach is Evolving

This EY study addresses how practices regarding the use of board committees are evolving among large-cap companies. The study reviewed board structure at S&P 500 companies between 2013 and 2016 made five observations about changes in committee practices during that period:

– Over 75% of S&P 500 companies have at least one board committee in addition to the required audit, nominating/governance and compensation committees, up from 61% in 2013.
– Executive committees are the most common type of additional committee. Finance, compliance and risk committees are also becoming more common, reflecting the benefits to some boards of having specialist committees on these oversight areas.
– Cyber & IT matters are not only for the Audit Committee. While over half of the companies that address these matters ,a growing number assigned responsibility to an additional committee. In the past year alone, the number of such committees grew by one-third.
– Compliance, risk & technology committees have seen the most growth over the past three years.

What about small caps? EY reviewed the S&P SmallCap 600 board committee structure and noted that 46% of smaller companies have at least one additional board committee, with the five most common being the executive, risk, finance, strategy & compliance committees.

John Jenkins