Mergers and Acquisitions

The SEC’s Division of Trading and Markets stated that it would not recommend enforcement action if a “mergers and acquisitions broker” were to engage in the sale or purchase of a privately held company without registering as a broker-dealer under Securities Exchange Act of 1934 Section 15(b). Lee M&A Brokers, SEC, No-Action Letter, avail, 1/31/14,

An “M&A broker” is a broker in the business of effecting securities transactions solely in connection with the transfer of control and ownership of a privately held company via transactions involving securities assets of the company, to a buyer that will actively operate the company.  A private company does not have its securities registered with the SEC, and is not subject to Exchange Act reporting requirements.  Further, if the transaction were structured as an asset sale not involving the sale of securities, a person would not be required to register as a broker-dealer.

The Staff granted the request for no-action relief.  The Staff noted in particular, the following representations:

  • the M&A broker will not have the ability to bind a party to an M&A transaction;
  • the M&A broker will not provide financing for an M&A transaction;
  • the M&A broker will not handle funds or securities issued or exchanged in connection with an M&A transaction;
  • no M&A transaction will involve a public-offering and no party to an M&A transaction shall be a shell company, other than a “business combination related shell company”;
  • if an M&A broker represents both buyers and seller, it will provide clear written disclosure and will obtain written consent from both parties;
  • an M&A broker may facilitate an M&A transaction with a group of buyers only if the group is created without the broker’s assistance;
  • the buyer will actively control the company with the assets of the business;
  • an M&A transaction shall not result in the transfer of interests to a passive buyer;
  • any securities received by the M&A broker or the buyer will be “restricted securities” under Securities Act of 1933 Rule 144(a)(3); and
  • the M&A broker has not been barred from association with a broker-dealer; and is not currently suspended.

The staff said its position is limited to the registration requirements of Exchange Act Section 15(a).

In short, this is a very limited departure for the SEC, and is consistent with prior no-action relief.

Recently, the SEC’s Division of Trading and Markets Staff issued no action relief allowing those persons and entities specializing in mergers and acquistions (“M&A Broker”) to avoid broker-dealer registration.  See

The staff defined a M&A Broker as “a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company … through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company…  .” Id.  However, the Staff did not permit unfettered non-registration for M&A Brokers.  Instead, the Staff limited the work these people and entities could perform to instances where the M&A Broker was not able to: (1) bind a party to any transaction; (2) hold funds or securities as part of the transaction;  (3) participate in a public offering; and (4) participate unless the buyer, ultimately, owned a private company.   As is typical, the Staff said the no-action letter only applied to the described transaction, however, it does shed light on the Staff’s thinking in this area.

In short, this no-action letter may prove to be a major opening into avoiding broker-dealer registration.  However, we caution our readers that it may be sometime before the effects are all played out, and please keep in mind that the Staff is notorious for providing inconsistent positions in subsequent no-action letters.

A German company sought the Staff’s assurance that it does not have to register as a broker-dealer if it is retained outside the U.S. by non-U.S. clients in connection with certain M&A transactions, initiates contact directly with potential U.S. targets, and engages in additional activities regarding the U.S. targets.

The M&A transactions may involve the proposed acquisition or disposal of operations of a company or division of a company, the proposed acquisition or sale of a company or division through an equity securities transaction, or the proposed acquisition or sale of a company or division through a combination asset and securities transaction.  Any U.S. target approached by the company on behalf of a non-U.S. client would fall within the meaning of the term “major U.S. institutional investor” as defined in Securities Exchange Act of 1934 Act Rule 15a-6(b)(4).  For any transaction with a U.S. target, the company will not represent or advise the U.S. target and will not receive, acquire or hold funds or securities.

This no action letter is consistent with the Staff’s previous pronouncements concerning its jurisdiction.

A popular two-tier merger and acquisition structure may trigger certain prohibitions under the Securities Exchange Act of 1934.  In particular, this problem relates to the so-called “Burger King” structure, arising from the private equity fund acquisition of the fast-food chain by a private equity fund, and its simultaneous pursuit of a tender offer and a traditional one-step merger. 

The Burger King deal required that the PE firms agree that, if they could not reach a share majority in the tender offer of generally 90 percent, the PE firms could swith to the one-step merger in the middle of the transaction.  Such a practice would allow the PE firms to save time as well as move faster on the ultimate acquisition.  This practice has been adapted in several other transactions.

Nonetheless, there are always issues.  This dual structure may violate Exchange Act Rule 14e-5.  This Rule prohibits buying or offering to buy the target company’s securities outside of the tender offer.  This happens in the Burger King process although a preliminary proxy statement is actually filed with the SEC, triggering this problem.

Subsequently, the SEC has warned of this potential predicament.  However, the SEC has not offered any clarity on this point or if there will be a Staff statement on this potential problem.  That leaves those who wish to pursue this method in a bind.  If they seek no-action relief from the SEC Staff, they will have to address the Staff’s concerns or outright refusal to go along with the transaction.  In any event, those working on these transactions should be careful with the timing of the filing of these proxys with the SEC, and consider contacting the SEC prior to any filing in the hope the Staff may offer some “pre-clearance.”

Well, as Chaucer said, “all good things must come to an end,” however, we still have the Whopper.

Corporate officials, who did not disclose merger talks with a competitor, did not commit securities fraud.  See Filing v. Phipps, 6th Cir., No. 11-4157, 10/23/12,

The court determined that the discussions were at the time not material, thus, not requiring disclosure.  This transaction involved tortured negotiations that did not culminate until 16 months later and well after the investor sold shares.  Consequently, the court refused to hold that these initial merger talks were material.

These corporate executives were able to escape liability because the deal was essentially not “ripe” at the time the investor sold shares.