June 28, 2011
Essentials of Equity
Trading for the Loan
Market
Attorney Advertising
andrewskurth.com
Outline of Presentation
I.
What Is A Security?
II.
Section 5 Of Securities Act
III.
4(2) Private Placement Exemption
IV.
4(1) Exemption
V.
What Is An Underwriter?
VI.
Rule 144 - Safe Harbor From Being Considered An Underwriter
VII.
Rule 144A
VIII. Section 4 (1½) Case Law Exemption
IX.
In-Court Restructuring And Section 1145
X.
Liabilities & Recourse
XI.
“Big Boy” Letters
XII.
Operative Issuer Documents
XIII. Other Regulatory and Statutory Concerns
XIV. Market Trends
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What Is A Security?
– Section 2(a) of Securities Act of 1933, as amended (the “Securities Act”)
defines what a “security” means  broad definition
– Bank Debt/Syndicated Secured Loans Historically Not Considered A
Security
–
See Banco v. Expanol De ‘Cremin v. Security Pac. Nat’l Bank, 973 F.2nd 51 (2d
Cir. 1992) (applying four factor family resemblance test under Reeves, court
held notes issued in conjunction with participation interest similar to notes
evidencing loans by commercial banks funding operations)
–
Key statutory language in definition of security “unless context otherwise
applies”

Not public trading market

Sophisticated parties who generally don’t need protections of securities
laws / can fend for themselves
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Section 5 Of Securities Act
–
Section 5 of Securities Act provides that “unless a Registration Statement
is in effect as to a security, it shall be unlawful for any person” to sell such
security
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4(2) Private Placement Exemption

Pursuant to Section 4(2) of the Securities Act, Section 5 of Act doesn’t
apply to “transactions by an Issuer not involving any public offering”
–
Supreme Court in Ralston Purina held that an offering to persons “who are
shown to be able to fend for themselves is a transaction not involving any
public offering”
–
Safe Harbor of Regulation D
–
–
–
–
No General Solicitation
Unlimited Accredited Investors and not » 35 other purchasers
Issuer availability
Securities issued are “Restricted Securities  Typically will have
Legend
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4(1) Exemption
–
Provides that provisions of Section 5 of Securities Act shall not apply to
Section 4(1)
–
4(1) Exemption – Transactions by any person not involving an issuer,
underwriter or dealer (ordinary investor exemption)
–
What is an Issuer?
–
What is a Dealer?

Any person who engages as agent, broker and principal in business
of offering, buying or otherwise trading in securities

4(3) - Dealer Exemption
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What Is An Underwriter?
–
Under Section 2(a)(11) of Securities Act “Underwriter’ means any person
who has purchased from an issuer with a view to distribution
–
As used in Sec 2(a)(11) the term “Issuer” includes any person directly or
indirectly controlling another person  “Statutory Underwriter” concept
–
–
Under Rule 405, “control” means power to direct or cause direction
of management
Since difficult to determine mental state at time of acquisition re whether
purchased with a view to distribution, subsequent acts are looked at with
respect to such determination (whether securities have come to rest)
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Rule 144 – Safe Harbor From Being Considered An Underwriter
-
Comply with 144 Rules not considered to be engaged in a “Distribution”
–
Applies to sales of “Restricted” securities and “control” securities
 Depending on type of securities sold different rules apply under Rule
144
–
Securities acquired pursuant to Rule 144 are not “Restricted Securities”
–
Calculation of holding period and tacking
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Rule 144 – Safe Harbor From Being Considered An Underwriter (continued)
Affiliate or
Person Selling on Behalf of an Affiliate
Restricted
Securities of
Reporting Issuers
Restricted
Securities of NonReporting Issuers
Non-Affiliate (and Has Not Been an
Affiliate During the Prior Three Months)
During six-month holding period - no resales
under Rule 144 permitted.
During six-month holding period - no resales
under Rule 144 permitted.
After six-month holding period - may resell in
accordance with all Rule 144 requirements
including:
• Current public information,
• Volume limitations,
• Manner of sale requirements for equity
securities, and
• Filling of Form 144
After six-month holding period but before one
year - unlimited public resales under Rule 144
except that the current public information
requirement still applies.
During one-year holding period - no resales under
Rule 144 permitted.
During one-year holding period - no resales
under Rule 144 permitted.
After one-year holding period - may resell in
accordance with all Rule 144 requirements,
including:
• Current public information,
• Volume limitations,
• Manner of sale requirements for equity
securities, and
• Filing of Form 144.
After one-year holding period - unlimited public
resales under Rule 144; need not comply with
any other Rule 144 requirements.
8
After one-year holding period - unlimited public
resales under Rule 144; need not comply with
any other Rule 144 requirements.
Andrews Kurth
Rule 144A
–
144A Transaction Acquire “Restricted Securities”
–
Available for securities not fungible with securities listed on exchange
–
Sales must be made to “Qualified Institution Buyers” that have access to
issuer information
–
QIB generally means an entity that owns at least $100,000,000 in
securities of unaffiliated issuers
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Section 4 (1½) Case Law Exemption
–
Not formal statutory registration exemption
–
Used by practicioners and recognized by case law and SEC as technique
for transferring restricted securities see Gilligan Will & Co. v. SEC, 267
F.2d 461 (2d. Cir.); Ackerberg v. Johnson, 892 F.2d 1328 (8th Cir. 1989)
–
Represents Hybrid between 4(1) and 4(2) in which the selling shareholder
utilizes practices that an issuer uses to sell securities in 4(2) private
placement
–
Limiting resale to only sophisticated parties/accredited investors
–
Able to fend for themselves
–
Offer made without any publicity or other “General Solicitation”
–
Buyer acknowledges that securities Buyer shall acquire shall be
restricted securities
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In-Court Restructuring and Section 1145
–
In Chapter 11 reorganization equity typically issued pursuant to 1145
–
–
Need to check plan and confirmation order
Under Section 1145 offers and sales of securities done in accordance with
1145(a)(1) are deemed to be a public offering
–
Disclosure Statement akin to prospectus in registered offering
–
If sold in accordance with 1145(a)(1) such securities may be freely traded
–
However, 1145(a)(1) doesn’t apply to entities that are “Bankruptcy
Underwriters”
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In-Court Restructuring and Section 1145 (continued)
–
Unless “ordinary trading” transaction exemption applies, an entity is a
bankruptcy underwriter if:
–
Purchases claim with a view to distribution of any security received or
to be received in respect of such claim
–
–
Generally will not be a bankruptcy underwriter if original holder
of claim or plan not proposed when acquire claim
An entity is also a bankruptcy underwriter if it is a control person/affiliate
of issuer
–
When buying need rep Seller not an Affiliate to ensure getting freely
tradable securities
–
LSTA Proceeds Letter provides “no affiliate” rep by Seller
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In-Court Restructuring and Section 1145 (continued)
–
Note no underwriter status for “non-affiliates” engaging in “ordinary
trading transactions”  narrow definition of bankruptcy underwriter
–
Ordinary trading transactions do not have indicia of classic underwriting
activity
–
–
No coordinated action to acquire and distribute securities with special
incentive to resell such securities
Securities issued in bankruptcy not pursuant to 1145
–
Rights Offering where new $ put in  such securities acquired are
generally “restricted” unless subsequently registered or exemption applies
–
Visteon example
–
May have haircut for sale of restricted securities as opposed to
freely tradeable shares without restriction
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Liabilities & Recourse
–
Section 12(a)(i) of Securities Act
–
Gives Purchaser right of recission for any offer or sale of a security
in violation of Section 5
–
Statute of Limitations – One year of the Section 5 violation
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Big Boy Letters
–
Rules 10b-5 requires that a person who has material non-public
information either disclose such information or abstain from trade
–
–
No disparity of information
–
–
10b-5 prohibits any person in connection with the purchase or sale of a security
(whether public or private) from making any untrue statement of a material fact
or omitting to state a material fact necessary in order to make the statements
made, in light of the circumstances under which they were made, not misleading
Disclosing information may create issues with respect to confidentiality
agreements
Parties sometimes use “Big Boy Letters”
–
–
Are “Big Boys” enforceable?
–
See SEC v. Barclays Bank; R2 v. Salomon
–
Section 29 of Exchange Act (contract cannot waive compliance with rules
of Exchange Act)
Certain institutions reluctant to utilize Big Boys with counterparties
–
LSTA Proceeds Letter has no waiver of disparity of information
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Operative Issuer Documents
–
Shareholders Agreement
–
Registration Rights Agreement
–
Articles of Incorporation / Bylaws
–
LLC Agreement / Partnership Agreement
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Operative Issuer Documents (continued)
–
Shareholders Agreement
–
Comply with transfer provisions
–
Typical provisions
–
–
–
–
–
–
–
–
–
–
No sale to competitor
Sign joinder
Sale won’t result in > 500 holders
Opinion Letter (if requested) or certifications to company
Pre-emptive rights
ROFR
Tag-along / Drag-along
Confidentality Provisions
Advance notice of sale
Consent by company or board may be required
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Operative Issuer Documents (continued)
–
Articles of Incorporation / By-Laws
–
Transfer Provisions
–
May include restrictions to preserve NOL’s
–
May limit transfers to ensure compliance with regulated industry
rules limiting foreign ownership
–
May limit transfers to foreign entities for tax reasons
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Other Regulatory and Statutory Concerns
-
Broker-Dealer Regulations
–
FINRA Rules
–
Regulation T (Delivery v. Payment timing)
–
Rule 10b-10 of Exchange Act (Confirmation Delivery)
–
Gaming industry
–
Energy industry (FERC) (Mach Gen Example)
–
Broadcasting / Telecommunications (FCC)
–
–
Tribune / Young Broadcasting
–
Foreign Underwriter Issues
Hart Scott Rodino
–
Size of Transaction and size of person test
–
–
$66,000,000 size of transaction
Anti-takeover and Business Combination Statutes
–
DGCL Section 203
–
Section 13 and Section 16 (Publicly Traded Equities)
–
Tax Concerns  Offshore Investors
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Market Trends
–
When Outside Counsel Used?
–
Equity that has some form of transfer restrictions & not generally
traded on public markets
–
–
Equity with legend and/or restricted
Use of Documentation by Market
–
Wide spectrum of views with respect to use of private purchase and
sale agreement (”PSA”) between buyer and seller
–
Most dealers & buy-side parties utilize some form of PSA
–
However, certain dealer parties generally push back on use
of PSA
20
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Market Trends (continued)
–
Trade Confirmations:
–
Majority of participants use a form of trade confirmation signed by
both parties
–
Parties in market give different titles to such agreements
–
–
–
–
Trade Confirmation
Notice of Execution
Equity Trade Confirmation
Commitment Letter
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Market Trends (continued)
–
Substance of Trade Confirm
–
Substantively trade confirms are generally similar
–
–
–
–
–
–
–
–
–
–
–
Trade date
Party names
Issuer name
Price/amount of equity
Dividends benefit buyer from and after trade date
Subject to reasonably acceptable contracts and instruments of
trade
Binding Trade  no impact by subsequent events
Costs and expenses (“Opinion Letter” costs?)
Confidentiality
Transfer complies with operative documents (i.e. LLC
Agreement)
Delivery of Operative Documents (if not SH)
22
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Market Trends (continued)
–
Trade Confirmation Issues for Market Maker in Middle of Trade
–
Right of First Refusal (“ROFR”) and tag-along rights
–
–
“Assignment only” and default to economic equivalent
–
–
Common provision
Aware of certain reps & warranties specific to issuer’s equity?
–
–
–
Insert “Subject to” successful completion of purchase of equity being
sold and purchased
Regulator’s concerns?
Competitor representation?
Big Boy reps and warranties – often in confirm
–
–
–
–
Sophisticated party and financial wherewithal
Own investment decision
Non-reliance
“Accredited Investor” or “QIB”
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Market Trends (continued)
–
Necessary to Use Private Purchase and Sale Agreement?
–
Depends on factors
–
What is required issuer documentation?
–
–
–
–
–
Do reps and warranties inure to benefit of buyer and seller?
Full-blown PSA?
Simple certificates?
UCC Article VIII – Is it applicable?
Under §8-108 of UCC, certain reps and warranties automatically apply
to transfers of certain “securities” for value  will transferred equity
security be governed by UCC Article VIII?
–
Corporation  applicable
–
LLC’s or partnerships  opt-in?
–
Need to review & see organization documents
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Market Trends (continued)
–
If UCC Article VIII applicable then purchaser of equity security for value
without knowledge of adverse claim receives warranty from seller
(automatically by law) that “there is no adverse claim to security” 
become a “protected purchaser”
25
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Market Trends (continued)
Benefits of using PSA
–
Get direct representation and warranties from counter parties
–
Indemnity provision—attorney fees
–
Set forth conditions to closing
–
–
Delivery v. payment (who goes first?)
Need Title Rep if UCC Article VIII not applicable
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Market Trends (continued)
–
Typical Representations and Warranties and Other Provisions in
PSA
–
Clean title representation free from liens
–
Sophisticated party and financial wherewithal
–
No reliance on other party
–
Accredited investor (if 144A  need higher QIB Standard)
–
No general solicitation
–
Not acquiring with a view to “distribution” in violation of Securities Act
–
Affiliate representation from seller
–
Is it 1145 or 4(2) issuance?
–
–
–
Buyer rep acknowledging limitations on transfer on resale
–
–
Affects seller rep regarding acquisition of security
Bankruptcy Underwriter rep from seller
Depends if 1145 or private issuance
Distributions
27
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Market Trends (continued)
–
Other Typical Provisions of PSA
–
Closing conditions
–
Fact-specific representations
–
–
Not acquiring > 25% (i.e., no tag-along implicated)
Not competitor
–
Buyer Rep - Received & Reviewed Operative Documents (aware of
contractual restrictions on resale)
–
Further assurances
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Market Trends (continued)
–
Miscellaneous Matters
–
Opinion Letter requirement (certifications in lieu of opinion available?)
–
Develop good relationship with issuer counsel & transfer agent early in
process
–
Determine steps needed for closing
29
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Market Trends (continued)
EXAMPLES:
- 1145 Issuance
– Readers Digest (LSTA proceeds letter; officer’s certificates & no opinion
unless 10% holder selling)
- MGM (LSTA proceeds letter; officer’s certificate (not affiliate; not acquire with
view to distribution and own less than 10%)
- Philly News (1145; certificated)
- Mark IV (1145; form of transfer agreement for all parties benefit)
- 4(2) Issuance
- Panavision (shares issued as amendment fee; opinion required by company)
- Mach Gen (FERC issues; restricted selling to < 10% holders; transfers not of
record approved by Milbank)
30
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214.659.4400
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The Woodlands, Texas 77380
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713.220.4200
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202.662.2700
Copyright © 2011 by Andrews Kurth LLP. All rights reserved. This presentation has been prepared for informational purposes only and does
not constitute legal advice. This information is not intended to create (and receipt of it does not constitute) an attorney-client relationship.
Readers should not act on this information without seeking professional counsel. Prior results do not guarantee a similar outcome and depend
on the facts of each matter.