If your company is considering a public offering of securities—whether in connection with an initial public offering, a follow-on offering, the registration of securities on a shelf for an eventual takedown, or in connection with a merger or acquisition—you may face the task of preparing a Securities Act registration statement on Forms S-1, S-3, or S-4. This article discusses the steps you can take to simplify the SEC review process for a registration statement on Form S-4. Our prior guidance for offerings registered on Form S-1 can be found here:http://www.nelsonmullins.com/newsletters/form_s-1 and our prior guidance for offerings registered on Form S-3 can be found here: http://www.nelsonmullins.com/newsletters/form_s-3
The Division of Corporation Finance of the Securities and Exchange Commission selectively reviews filings made on Forms S-1, S-3, or S-4 to ensure compliance with disclosure requirements. The Division issues comment letters where disclosures appear to be inconsistent with SEC rules or applicable standards, or appear to be materially deficient in their rationale or in clarity.
Filing a registration statement is a complex process that can result in a long and costly review by the SEC. Some registration statements are always reviewed, such as filings on Form S-1 for an initial public offering. Other registration statements are rarely or never reviewed. For example, registration statements filed on Form S-3 are much less likely to receive a full review, and registration statements filed by well-known seasoned issuers (WKSIs) in connection with a shelf takedown are not reviewed at all.
A Form S-4 registration statement is required for registration under the Securities Act of 1933 of securities to be issued in transactions that include business combinations, mergers, consolidations and exchange offers. The Division of Corporation Finance first “screens” all Form S-4 registration statements to determine whether the Form S-4 should be reviewed in depth, receive a limited review, or be quickly cleared without further review. This Client Alert outlines some of the steps that a registrant can take to improve the chances of receiving a “no review” of its Form S-4 by the SEC Staff (the “Staff”) or, if there is a review, to keep the number or types of comments to a minimum.
A Form S-4 registration statement must comply with the item requirements contained in the instructions to Form S-4, as well as Regulations S-K, S-X and M-A. In addition, the Staff may also provide comments to address disclosure issues that are not obvious from a reading of these rules and regulations. The SEC publishes its comment letters on EDGAR after its review of the filing has ended, thereby providing some insight into the more nuanced comments the Staff is likely to issue and how the Staff expects registrants to address them. Before filing its registration statement, a company and its counsel should review comment letters relating to offerings within its industry, as well as comment letters relating to transactions that are similar in type and size.
Items of Particular Interest to the Staff
Our experience advising companies during the SEC review process, our attorneys’ experience while working at the SEC, and a review of SEC comment letters over the past decade reveal that some disclosure points tend to receive greater attention from the Staff than others.
For Form S-4 registration statements, the Staff has a history of issuing comments regarding (1) fairness opinions, (2) background and reasons for the merger, (3) board books, and (4) projections and comparisons.
(1) Fairness Opinions. Registrants often obtain fairness opinions in connection with mergers to support the position that the merger is fair to its stockholders. A summary of the fairness opinion is required in the prospectus, with the fairness opinion itself included as an appendix. A review of published comment letters issued by the Staff provides useful guidance regarding subjects the Staff may focus on in connection with fairness opinions. For example:
- The Staff often inquires about any pre-existing relationship between the financial advisor and the registrant that may affect the impartiality of the financial advisor. For example, the Staff may want to know whether the financial advisor has acted as an underwriter for the registrant within the past several years or whether there are any agreements for future representation.
- The Staff will require the registrant to provide a complete description of the fees to be paid to the financial advisor, and may ask whether the fees to be paid to the financial advisor are contingent upon the successful completion of the merger.
- As with legal opinions, the Staff will not permit the financial advisor to disclaim liability for its fairness opinion as it relates to stockholders, and will issue a comment where it appears that the financial advisor has included language in its opinion prohibiting stockholders from relying upon the fairness opinion.
- When a significant amount of time has passed between the date of the fairness opinion and the Form S-4, the Staff may ask the registrant to confirm that no events have occurred that might cause the fairness opinion to be inaccurate.
Anticipating these potential comments and addressing them in the first draft of the registration statement can reduce the chances of SEC review or, if there is a review, can minimize its duration.
(2) Background and Reasons for the Merger. The section of the prospectus detailing the events leading up to the merger, also known as the “Background and Reasons for the Merger” section, is designed to tell the story of the merger, including how the parties came to learn of one another, when the parties first had contact with one another about the merger, how negotiations proceeded, how the parties decided on the merger consideration, how the boards of directors of the companies determined the merger was fair to stockholders, and whether directors or executive officers have interests in the transaction that are different from the interests of the stockholders.
The Staff’s primary role in the review of any registration statement is to seek to ensure that all material information necessary to an informed investment decision is included in the prospectus. Accordingly, as the Staff reviews the registration statement they are likely to issue comments where disclosure about the circumstances of the transaction creates unanswered questions. In this regard, we recommend that after the Background section is drafted, the registrant and its counsel to go back through the document and ask themselves whether, if they were members of the Staff, any of the disclosures regarding the parties, merger consideration, fairness of the transaction, insider relationships and compensation, and other information would prompt additional questions. For example:
- if the registrant discloses that a meeting was held between the CEOs of both companies and legal counsel, the Staff might inquire about what was discussed at that meeting, or whether any material terms were agreed upon at that meeting;
- if the registrant disclosed that a material contract of one of the parties to the merger was terminated during merger negotiations, the registrant would want to explain what caused the termination, and whether it was a result of the contemplated merger;
- if the registrant discloses that it considered several different merger targets before deciding to acquire the target, the registrant should consider discussing why it chose one target over the others; and
- if the registrant discloses that it considered different types of merger consideration before ultimately settling on one, the registrant should consider explaining why it chose that type of consideration and rejected the others.
To the extent the registrant determines certain disclosure might prompt additional questions, addressing those questions in the first draft of the Form S-4 can minimize the number of comments from the Staff.
(3) Board Books. Per Item 4(b) of Form S-4, the Staff will require board books to be filed as exhibits where a report, opinion, or appraisal materially relating to the transaction has been received from an outside party, and the report, opinion, or appraisal is referred to in the prospectus. As a practical matter, board books are not usually filed as exhibits to the Form S-4 because they are not referred to in the prospectus. However, the Staff will typically ask for copies of the board books to ensure that the registrant has not omitted any material information from the board books that should have been included in the prospectus.
When preparing the registration statement, counsel should take care not to inadvertently refer to written materials from third parties received by the registrant during the course of the merger activities unless they are prepared to provide the Staff with copies of the materials. In the situation where the references to written materials do not meet the definition of board books in Item 4(b), it is customary to amend the Form S-4 to delete the reference to the written material and explain to the Staff that the information does not qualify as a board book. Careful preparation of the discussion regarding the materials reviewed by directors in connection with the merger can minimize potential comments from the Staff regarding board books.
(4) Projections and Comparisons. Financial advisors often use financial projections and comparisons of similar companies when making presentations to directors in connection with merger negotiations. These projections and comparisons are often used as a general frame of reference for the current market and might not be material to the registrant’s decision on the merger. In this situation, the registrant would likely determine that the projections and comparisons need not be discussed in the Form S-4, or that to discuss them could potentially mislead stockholders.
Including discussion of financial projections and company comparisons in the Form S-4 can carry with it some of the same risks found with the discussion of board books, namely that the Staff will ask for the materials supporting the disclosure and require the registrant to amend the Form S-4 to make significant revisions. Where the registrant has already considered the issue and determined that the projections, company comparisons, or documents are not material or that their disclosure could be misleading, this can create several issues. Where the board has determined the disclosure of the projections and comparisons should not be made, the preparer of the registration statement should take care not to allude to the existence of these projections and comparisons, for the Staff will likely issue comments to the extent it appears the projections and comparisons should have been more fully disclosed or furnished to the Staff for review.
Helpful Tips in Dealing with the Staff During the Review Process
Generally speaking, the Staff will not comment on a registration statement until the registration statement has been filed through EDGAR. However, registrants may request a pre-filing conference with the Staff for unique issues that must be addressed before filing. If the Staff agrees to review pre-filing issues, it will ordinarily request a letter from the registrant or its counsel explaining the issues. When engaging in calls with the Staff, registrants should ensure that they include all necessary parties to address Staff questions. If the issues pertain to the interpretation of legal or accounting rules, then the registrant’s professional advisors can lead the call with the Staff on behalf of the registrant. If the call will require company specific information, then the Staff will not object to participation of the appropriate company officer.
Once the registration statement has been filed, the Staff will usually try to contact the registrant or counsel within five to six business days to advise whether there will be (a) a full review of the registration statement, (b) a “monitor” (or targeted/limited review) of the registration statement, or (c) a “no review” of the registration statement. A full review of the registration statement typically means that the Staff will assign two attorneys and two accountants to review the whole document. A monitor, or targeted review, means that the Staff will only conduct a limited review of the document focused on certain specific sections.
If you haven’t heard from the Staff within the five- to six-day period, you can always call the number for the Assistant Director Office that corresponds with the registrant’s industry. Assistant Director Offices are generally composed of between four and eight staff attorneys, four and eight staff accountants, an assistant chief accountant, two accounting branch chiefs, a special counsel, a legal branch chief, a senior assistant chief accountant, and an assistant director. A list of the Assistant Director Offices and their phone numbers is available on the sec.gov website at:
Once the registration statement has been assigned for review, the Staff generally tries to provide comments within 27 calendar days of the filing date. For subsequent amendments to the registration statement, the Staff generally tries to respond within 10 business days. There may be circumstances in which the registrant disagrees with a position taken by the Staff in charge of reviewing its filing. In this situation, registrants may request to have a conference with the supervisors of that particular Assistant Director Office. The highest ranking attorneys in each Assistant Director Office are the associate director and the legal branch chief. The highest ranking accountants in each Assistant Director Office are the senior assistant chief accountant and the accounting branch chiefs. Associate directors oversee the Assistant Director Offices, which in turn report to the deputy director and director of the Division of Corporation Finance. When making a request for a higher level review of the point or points of disagreement, the registrant or its counsel should be sure to inform the Staff members who performed the initial review of the registrant’s request.