Regulatory
Considerations
Character is doing the right thing
when no one is looking.
—J.C. Watts
Course Layout: M&A & Other
Restructuring Activities
Part I: M&A
Environment
Part II: M&A
Process
Part III: M&A
Valuation &
Modeling
Part IV: Deal
Structuring &
Financing
Part V:
Alternative
Strategies
Motivations for
M&A
Business &
Acquisition
Plans
Public Company
Valuation
Payment &
Legal
Considerations
Business
Alliances
Regulatory
Considerations
Search through
Closing
Activities
Private
Company
Valuation
Accounting &
Tax
Considerations
Divestitures,
Spin-Offs &
Carve-Outs
Takeover Tactics
and Defenses
M&A Integration
Financial
Modeling
Techniques
Financing
Strategies
Bankruptcy &
Liquidation
Cross-Border
Transactions
Current Chapter Learning Objectives
• Primary objective: To enable students to understand
the key elements of selected federal and state
regulations applicable to M&A
• Secondary objective: Provide students with an
understanding of
– Pre-notification and disclosure requirements of
current security and antitrust legislation
– How decisions are made in security and antitrust
enforcement agencies
– How environmental, labor and benefit laws affect
M&As
– Key elements of the Sarbanes-Oxley legislation
Federal Securities Laws
• Securities Act (1933)
• Requires registration of
publicly offered securities
• Securities Exchange Act
(1934)
• Empowers SEC to revoke
registration
– Section 13
– Defines content &
frequency of SEC filings
– Section 14
– Defines proxy disclosure
requirements
• Williams Act (1968)
– Section 13 D
• Regulates tender offers
– Defines disclosure
requirements
Summary of Regulatory Pre-Notification
Filing Requirements
• Williams Act
– Schedule 13 D must be filled with the SEC within 10 days of
acquiring 5% of stock in another firm.
– Schedule 14 D-1 must be filed with the SEC for tender offers
– Tender offers must stay open a minimum of 20 business days
• Hart-Scott-Rodino Act
– Filing necessary with FTC when buyer purchases assets or
securities >$63.4 million or buyer or seller has annual sales or
assets ≥ $126.9 million and other party has sales or assets ≥
$12.7 million. These thresholds increased annually by change in
GDP implicit price deflator
– 30 day waiting period before transaction can be completed
Federal Antitrust Laws
• Sherman Act (1890)
– Section 1
– Section 2
• Clayton Act (1914)
• Celler-Kefauver Act (1914)
• Hart Scott Rodino Antitrust
Improvement Act (1976)
• Establishes criminal
penalties for restraint of
trade
– Makes mergers creating
monopolies illegal
– Applies to firms already
dominant in served
markets
• Created FTC
• Amended Clayton Act to
include asset as well as
stock purchases
• Requires waiting period
before transaction can be
completed
Discussion Questions
1.
2.
3.
What is the purpose of pre-notification and disclosure
requirements of current security and antitrust
legislation? Be specific.
How might such requirements affect the size of
purchase price premiums paid to target firms? Be
specific.
Based on your answer to question 2, what is the
potential impact on abnormal returns to acquiring
company shareholders?
State M&A Laws
• Anti-takeover Laws
• Antitrust Laws
• Define conditions
under which a change
in corporate
ownership can take
place.
• Similar to federal laws
– States may sue to
block mergers
even if not
challenged by
federal regulators
Other Applicable Legislation
• Environmental laws
(federal and state)
• Banking,
communications,
railroads, defense,
insurance, and public
utilities
• Define disclosure
requirements
• Labor and benefit laws
(federal and state)
• Define disclosure
requirements
• Applicable foreign laws
• Cross-border
transactions subject to
laws of countries in which
participants have
operations
• Industry specific laws
Navigating Antitrust Laws
(Horizontal Mergers)
• Step 1: Define market and determine concentration.
– Herfindahl-Hirschman Index
• Step 2: Determine potential adverse competitive effects of mergers.
– Coordinated interaction
– Differentiated products
– Similarity of substitutes
• Step 3: Identify entry barriers.
– Proprietary technology, patents, government regulations,
investment requirements, or exclusive ownership of natural
resources.
• Step 4: Identify potential efficiencies resulting from business
combinations.
• Step 5: Assess continued viability of firm without merger.
Navigating Antitrust Laws
(Vertical Mergers)
• Steps described for horizontal mergers also
apply to vertical mergers
• Regulators unlikely to challenge vertical mergers
unless
– Relevant market highly concentrated
– Merger limits access by others to a key
supplier
Navigating Antitrust Laws
(Collaborative Efforts)
• Alliances and JVs do not generally require approval of
regulatory authorities if
– The combined strength of partners does not result in
a dominant market share in the global market for the
product or service
– Smaller companies not holding dominant market
shares are unaffected
– Access to key resources by competitors is not
restricted
– Pricing practices or customer allocation among
partners does not unreasonably restrict trade
State Anti-takeover Laws
• Fair price provisions require that all target shareholders
receive the same price when tender shares
• Business combination provisions preclude sale of assets
for a specific period following buyout, thereby inhibiting
financing of purchase price
• Cash-out provisions require acquirers purchasing more
than a stipulated amount of target stock to offer to
purchase 100% of remaining stock at same price.
• Share control provisions require acquirers whose
purchases exceed some threshold to get approval of
shareholders owning large blocks of target stock before
proceeding with merger
State Antitrust Laws
• States granted increased antitrust power
as part of Hart-Scott-Rodino Act of 1976
• Powers often similar to federal laws
• States have right to sue to block mergers
they consider anti-competitive, even if the
DoJ or FTC do not challenge them
Sarbanes-Oxley Bill (7/31/02)
• Created Public Company Accounting Oversight
Board whose responsibilities include:
--Registering public accounting firms
--Establishing auditing standards
--Establishing code of conduct
• Prohibits accounting firms from offering certain nonauditing services (e.g., information technology)
• Requires audit committees to consist of independent
directors
• Requires CEOs/CFOs to certify financial statements
• Provides for disclosure of all material off-balance sheet
transactions
• Increases criminal penalties to include prison sentence
of up to 20 years
Dodd-Frank Act of 2010: Governance &
Executive Compensation
• Say on Pay: In a nonbinding vote, shareholders may vote
on executive pay every 3 yrs.
• Say on Golden Parachutes (executive severance
packages): Proxy statements seeking shareholder approval
of M&As or sale of most of a firm’s assets must disclose
pay agreements with target or acquirer executives
• Clawbacks: Public firms must disclose mechanisms for
recovering incentive pay paid during 3-yrs prior to earnings
restatements.
• Proxy Access: SEC has authority to require public firms to
include nominees submitted by shareholders in proxy
materials
• Broker Discretionary Voting: Stock exchanges must
prohibit brokers from voting shares without direction from
owners in election of directors and executive compensation
Dodd-Frank Act of 2010: Systemic
Regulation and Emergency Powers
• Financial Stability Oversight Council (FSOC): Monitors U.S. financial
markets to identify banks and nonbank banks exhibiting “systemic” risk.
• New Fed Bank/Nonbank Supervisory Powers: Banks/nonbanks with
total assets ≥ $50 billion must
– Submit plans for their rapid dissolution in event of failure
– Limit their credit exposure in any unaffiliated firm to 25% of its
capital
– Conduct semiannual stress tests to determine capital adequacy
– Provide advance notice of intent to buy voting shares in financial
firms
• Leverage Limitations: Fed may require banks with assets ≥ $50 billion
to maintain debt-to-equity ratio of no more than 15 to 1.
• Size Limitations: No bank or nonbank can hold deposits > 10% of
deposits nationwide; does not apply to mergers involving failing banks.
• FDIC Guaranty Powers: May guaranty liabilities of solvent banks if
FSOC and Fed determine appropriate to do so.
• Orderly Liquidation Authority: FDIC may seize and liquidate banks
threatening U.S. financial stability
• New Bank Capital Requirements: At discretion of regulators.
Dodd-Frank Act of 2010:
Capital Markets
• Office of Credit Ratings: Sets rules for transparency,
conducts audits and makes it easier to sue rating
agencies.
• Securitization: Issuers of asset-backed securities must
retain an interest of at least 5% of any security sold to
third parties.
• Hedge and Private Equity Fund Registration: Must
register with SEC as investment advisors if assets ≥
$100; those with < $100 million subject to state
regulation.
• Clearing and Trading of OTC Derivatives: Must be
traded on formal exchanges to provide real time data
reporting to market participants.
Dodd-Frank Act of 2010:
Financial Institutions
• Volcker Rule: Prohibits insured banks from buying and
selling securities with their own money (i.e., proprietary
trading) or sponsoring or investing in hedge funds or
private equity funds; banks may do so if they have no
control over funds.
• Consumer Financial Protection Bureau: Writes rules
governing financial institutions offering consumer
financial products
• Federal Insurance Office: Monitors insurance industry
and recommends which firms should be considered
systemically important.
Discussion Questions
1. Do you believe that current M&A regulations
are sufficient to minimize abuse? Explain your
answer.
2. Are there other ways in which you believe that
M&As should be regulated? Be specific.
3. Do you see areas of potential conflict between
federal and state antitrust laws? Be specific.
4. How do you believe the Sarbanes-Oxley Act
will impact the number of initial public offerings
and the number of firms converting from public
to private status? Explain your answer.
Things to Remember
• Securities Acts of 1933 and 1934 established the SEC and require
that all securities offered to the public must be registered with the
government.
• Williams Act requires those acquiring 5% or more of another firm to
file a Schedule 13 D disclosing their ultimate intentions
– Firms initiating tender offers must disclose their intentions and
business plans in a Schedule 14 D-1.
• Sherman and Clayton Acts make illegal agreements to fix prices,
allocate customers among competitors, or to merge with another
firm if it reduces competition
• Hart-Scott-Rodino Act requires that mergers exceeding a certain
size must notify the FTC and DoJ at the time it makes an offer to the
target.
• Antitrust regulators determine whether to challenge a merger by an
analysis of market concentration, potential for price fixing, ease of
entry, impact on innovation, potential for improved efficiency, and the
likelihood the target firm will fail on its own.