Preparation

Due diligence requirements
What due diligence is necessary for buyers?

Diligence is not mandated, but buyers typically conduct extensive due diligence before executing a definitive agreement. Diligence typically covers business, accounting, tax and legal review.

The depth and breadth of diligence can vary greatly among buyers and transactions and depends on numerous factors, including factors related to a buyer’s appetite for risk, timing and costs.

Information
What information is available to buyers?

The information available to the buyer typically depends on whether the seller is a private or public company.

For private companies, publicly accessible data is often limited. Therefore, information is typically supplied by a seller in response to a diligence request list prepared by the buyer’s counsel.

Public companies must disclose various categories of information to the public. Therefore, certain documents of a public company can be obtained via the Securities and Exchange Commission’s (SEC) website (edgar.gov), including:

  • financial reports;
  • organisational documents;
  • certain shareholder information; and
  • material agreements and events.

What information can and cannot be disclosed when dealing with a public company?

US securities laws generally prohibit a public company from intentionally disclosing material non-public information. Any material non-public information that is unintentionally disclosed must be publicly disclosed promptly. One exception is that a company may provide such information to persons who expressly agree to keep the disclosed information confidential.

In addition, under US securities laws, individuals are generally prohibited from trading on material non-public information.

Accordingly, targets will typically require buyers to execute a confidentiality agreement which, in the public company context, will often include a standstill that prevents a potential buyer from acquiring target securities, other than in a transaction approved by the target’s board of directors. It is usually only in this context that public targets will provide information to potential buyers.

Stakebuilding
How is stakebuilding regulated?

Stakebuilding is regulated through a combination of state and federal laws. Acquisitions of more than 5% of any class of a target’s equity securities that are registered with the SEC must be disclosed through the SEC within 10 days of acquisition. Some of the applicable rules also require disclosure updates on certain changes in investment intent.

Moreover, acquisitions resulting in holdings exceeding certain dollar thresholds may require both the buyer and the target to make antitrust filings with the federal government. Further, generally, all transactions undertaken by the bidder in a public company’s securities that occur during the 60-day period before the commencement of a tender offer must be disclosed through the SEC.

State statutes may also affect a buyer’s ability to stakebuild. For example, the Delaware General Corporation Law, subject to certain exceptions (which in a negotiated transaction are usually easy to comply with), prohibits an owner of 15% or more of the outstanding voting stock of a corporation from engaging in a business combination for three years after acquiring the 15% stake.

In addition, stakebuilding in certain industries – such as banking, insurance and gaming – may require regulatory approval.

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