Earlier this year, Katten represented Reflect Systems, Inc., a Richardson-headquartered digital signage company, in its merger with and into a subsidiary of Creative Realities Inc., a publicly traded company listed on the NASDAQ. This article highlights certain standard associate tasks in M&A transactions and details how such tasks may differ in a transaction involving a publicly traded company.
Diligence and Disclosure Issues
In public M&A transactions, information gathering and diligence serve two different purposes: (i) providing accurate information to the buyer and (ii) providing accurate and material information to shareholders who will vote on whether to approve the transaction. In a standard diligence process, the buyer will ask the seller to provide a number of documents and agreements related to almost every facet of the business (e.g. contract items, employment documents, intellectual property, etc.). Both the buyer’s attorneys and the seller’s attorneys will review the documents made available in the seller’s data room in effort to confirm that the seller has fully disclosed and made available all of the applicable documents in response to buyer’s diligence requests. Additionally, the seller’s attorneys will review the documents in the data room against the representations and warranties in the applicable transaction documents in order to prepare the disclosure schedules and otherwise verify the accuracy of the representations and warranties. As the signing or closing dates near, it is standard practice for both buyer’s attorneys and seller’s attorneys to review drafts and provide comments to the disclosure schedules to confirm that (i) seller has made available to buyer documents evidencing each disclosure made in the disclosure schedules and (ii) the disclosure schedules accurately represent all the disclosures required under the reps and warranties in the transaction documents.
In the Reflect transaction, a large number of contracts and other documents were required to be scheduled in the disclosure schedules. As we reviewed the data room and drafted the disclosure schedules, we found it most helpful to have a member of our client’s management be directly involved in reviewing our drafts and answering our questions. In order to use their time most effectively, we drafted the applicable disclosures and had our client review and correct the disclosures as needed. While management’s involvement with the disclosure schedules changes from deal to deal, we found our client’s help to be invaluable in this transaction given the number and type of disclosures that were required under the applicable reps and warranties in the merger agreement.
In addition to the standard M&A diligence process summarized above, attorneys must also perform capital markets diligence and prepare disclosure regarding the target company that will be included in the proxy statement included in the SEC filed Form S-4 Registration Statement (or proxy statement) sent to shareholders. As a private company, our client had never before prepared public company disclosure, and our role was to provide our client with initial drafts of all relevant sections of the proxy statement, including risk factors regarding its business and operations, a business overview and management’s discussion and analysis of financial condition and results of operations. The proxy statement is a publicly filed document containing information regarding the buyer, the seller and the transaction that is sent to shareholders ahead of their vote on whether or not to approve the transaction.
We were able to leverage some of the work already done on the M&A diligence, as well as use the existing public company disclosures of our clients’ competitors, to prepare such disclosures. In contrast to M&A diligence, where exhaustive and detailed disclosures about almost every aspect of the business must be made in disclosure schedules, the objective of public company disclosure is to provide shareholders with material information in a digestible and plain English format, in compliance with SEC rules. As with the M&A diligence, it was critical to have management involved in reviewing all disclosure that would eventually be included in the proxy statement in order to ensure that the disclosure regarding our client did not contain any untrue statement of material fact or omit to state any material fact necessary in order to make the statements included therein not misleading. However, given the large workload shouldered by our client’s management, it was our job as their counsel to provide as complete drafts as possible using all information we had available to us in the M&A data room.
When planning a timeline between signing and closing for a public M&A deal, counsel must advise their clients of certain gate keeping items, which include: required refresh of financial statements included in the proxy statement as financial statement staleness dates approach, possibility of SEC review and comments following initial filing of the registration statement (the SEC will provide notice of whether it will review the registration statement within 10 days of initial filing) and the SEC requirement that the final prospectus be sent to security holders no later than 20 business days prior to the date the shareholder’s meeting is to be held. The legal teams are primarily responsible for meeting SEC driven deadlines, and there are a number of such deadlines in the period between signing the merger agreement and closing. For example, the first deadline we faced after signing the merger agreement was getting the first draft of the registration statement on file with the SEC before the most recently available financial statements of the acquirer and our client went stale (i.e., were too old and need to be updated). Since all registration statements on Form S-4 may be reviewed by the SEC, both parties wanted to file the registration statement as soon as possible to start that process (even if the financial statements would need to be updated in subsequent filings of the registration statement). Although the period between signing and closing usually lasts several months, associates need to keep interim deadlines in mind and prepare for several pushes to meet those deadlines along the way to closing.
There may be other relevant third party or governmental approvals that will driving timing in public M&A transactions. For example, larger transactions may require Federal Trade Commission or Hart-Scott Rodino Act approval pursuant to applicable federal antitrust laws.
Communication with Shareholders
Communication with the shareholders, particularly the selling shareholders, is a key aspect of ensuring a seamless closing and a smooth post-closing period. Typically, junior M&A associates will be in charge of sending out and compiling signature pages to confirm that all of the required signatures are received prior to signing and prior to closing, as applicable. In the period leading up to closing, we worked closely with our client’s management to ensure that we had accurate contact information for all of our client’s shareholders in order to ensure a smooth process for obtaining votes and signatures. In addition, we helped our client tabulate the votes at the special shareholders meeting and prepare and deliver letters of transmittal to each of the shareholders in effort to reduce the administrative burden, facilitate their receipt of the merger consideration in a timely manner and articulate to each of the shareholders what amount of merger consideration they would be entitled to receive.
Since the shareholders will be in direct communication with the junior M&A associates for signature purposes, it is not uncommon for the shareholders to reach out to the associates during the post-closing with any issues or concerns.
Following the closing of the Reflect transaction, we received multiple emails from former Reflect shareholders with questions that were best answered by the escrow agent. However, due to the sheer amount of documents that the escrow agent was reviewing and processing, the escrow agent was unable to respond to every question and a number of shareholders were confused as to how to proceed. In an effort to minimize our post-closing involvement and ensure that the shareholders questions were answered, we worked with the shareholders’ representative to compile a list of outstanding questions from the shareholders and then placed the shareholder’s representative in direct communication with the escrow agent to answer these questions. Once the shareholder’s representative was satisfied with the escrow agent’s responses, he was able to respond to and resolve the majority of the questions from the former Reflect shareholders.
Issues Arising Between Signing and Closing
The Reflect transaction had a bifurcated signing and closing, meaning that the merger agreement was signed on one date and then closed on a later date. A public M&A deal will usually have a bifurcated signing and closing because of the SEC requirements described above. When M&A transactions have a bifurcated signing and closing, additional provisions must be added to the transaction documents to specifically govern the actions which the target company may take in the time period between signing and closing (e.g., a “no shop” provision, “break up” fees, etc.). There will also be certain reps and warranties concerning the actions of both parties during the time period between signing and closing. As part of negotiating the merger agreement, we paid specific attention to the language of the reps and warranties in order to avoid unreasonably restricting the actions Reflect could take during the interim period. It was important to Reflect that it could continue to operate in the interim period in a similar manner which it had previously operated and that reps and warranties of the merger agreement would not negatively impact the day to day service that Reflect provided to its clients.
Third-party financing was a significant component of the transaction that was finalized between signing and closing. The buyer did not have sufficient cash on hand to fully fund the cash portion of the purchase price, so it needed to raise a combination of debt and equity financing from a third-party source in order to consummate the transaction. While obtaining financing was a condition precedent to closing, the fact that financing was not committed prior to signing created a certain amount of deal uncertainty. The third-party financing process, which neither we nor our client had any control over, drove timing on the transaction on several occasions, including when a last-minute third-party financing issue required that the closing be delayed by a day. Although there are many moving parts to a public M&A deal, the attorney’s job is to ensure that the aspects that they have control over do not delay the transaction in any way.
In summary, the tasks typically assigned to associates in a public M&A transaction are not exceedingly different than those of a private M&A transaction. However, a public M&A transaction may involve:
- a larger volume of diligence and disclosures to review and prepare, including public disclosure filed with the SEC;
- a more stop-and-go timeline driven by third parties or regulatory agencies;
- an increased need for communication with the shareholders, both pre- and post-closing; and
- issues that arise between the signing and closing of the transaction.
For those reasons, it is of paramount importance that associates work diligently and communicate effectively with the attorneys who are leading the transaction to ensure that all parties are working together towards a smooth process for signing and closing.
Publisher’s Note: Katten is a sponsor of The Texas Lawbook’s Corporate Deal Tracker/M&A section page.