M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Monday, January 4, 2010

Fairness Hearings and Going Private Transactions

Is it the new year already?

I have posted on the 3(a)(10) fairness hearing process before.  The 3(a)(10) fairness hearing provides a valid exemption for the issuance of stock so that such stock can be freely traded without being registered with the SEC.  In the deal context, buyers will sometime rely on a 3(a)(10) fairness hearing in lieu of an S-4 when they are using stock as consideration and the sellers want that stock to be able to trade immediately.  The advantages of the fairness hearing are chiefly in the price and speed.  When the amount of stock being issued is relatively small and/or parties are looking to avoid a potentially protracted SEC review process, the fairness hearing can be an attractive alternative.  This is particularly true in California, which has more experience than most in conducting fairness hearings.   

Now, comes a situation that raises an eyebrow.  Typically when a controlling shareholder takes a company private, they'll do so by by following the 13e-3 going private rules.  In general these rules require that any (series of ) transaction(s) (merger, tender, etc) where an affiliate purchases the issuer and causes the issuer to go private has to be accomplished under the 13e-3 rules.  Because of the inherent risk of loyalty problems arising from these kinds of transactions, the SEC will give them closer review than normal, including additional disclosures, etc. 

Now comes tiny Regan Holding Corp.  Last month they announced that management will be taking the company private and eliminating outside shareholders.  Just another company turning out the lights in the face of the costs of being public (they estimate approximately $700,000 per year).  It's probably the right move for them.  But here's the thing - rather than do the transaction pursuant to 13-e-3, they are proposing to do a merger with a Legacy Alliance, a privately-held, affiliated company that is controlled by the directors of RHC and formed solely for the purpose of accomplishing the reorganization.  In the merger, Legacy Alliance will issue unregistered stock of the buyer to shareholders of RHC. The exchange ratio assures that the number of shareholders from approximately 3,400 to less than 300.  Presumably after they get to the magic number of 300, they'll file a Form 15 and go dark.  Because the stock is unregistered, Legacy needs an exemption and this is where 3(a)(10) comes in.  

I suspect RHC didn't go the 13e-3 route for the same reason that it decided to go dark - cost.  This is route is a lot simpler, but I suspect this short series of transactions (a reorg eliminating a large number of shareholders followed by the filing of a Form 15) may just be a way to skirt the 13e-3 rules and save some money.   I guess they figure that the examiner at the Department of Corporations who will review this transaction for fairness won't mind these maneuverings.  We'll see.

Happy New Year!


Update:  A reader helpfully pointed out that RHC filed their 13e-3 today and also that they had intended to do this for some time.  Maybe too much egg-nog for me over the holidays?


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