March 2008
B
LOCKT
RADEG
UIDELINESIntroductory Note
SIFMA, on behalf of its member firms, has developed these guidelines to assist outside counsel when participating in a registered block trade (done through an existing shelf or a WKSI filing). Your law firm has received these guidelines because, from time to time, you may be asked to act as issuer’s/seller’s or underwriter’s counsel for such trades.
General Guidelines
Registered “block trades” are underwritten sales of equity securities, typically off of a shelf registration statement, through an underwriter with little or no marketing. The process is almost identical to a typical, marketed underwritten offering, except that (i) it is done very quickly (and therefore the offering participants have less time to do all of the things they need to do in an underwritten offering) and (ii) there are unique issues associated with the announcement of the offering and its pricing terms. Unlike open market trades, these deals have the same disclosure and liability concerns of any registered public offering. While block trades reduce the marketing time spent by management of the issuer, they do not shift securities law liability risk away from the issuer, which is strictly liable for material
misstatements and omissions, or from the seller, which may also have liability. The need for complete disclosure available to the market at the time of pricing and for due diligence is not reduced. The purchase agreements for block trades typically include all of the terms and conditions in a traditional underwriting agreement.
Block trades are often “put out to bid” among potential underwriters. Generally, as soon as possible after an issuer/seller has accepted an underwriter’s block bid, the underwriter will seek to offset its risk by contacting investors and trying to resell the securities. The
underwriter will also seek to allocate the shares it has purchased as soon as possible after the launch of the offering (which could be as early as the evening the offering is launched).
Any delays, even if only a matter of minutes, can have significant adverse economic consequences. Ideally, anything that could delay the underwriter from launching the sales
effort and/or allocating the shares should be fully resolved prior to the submission of bids for the block. If this is not possible, it is critical that any such matters be brought to the underwriter’s attention prior to the submission of such bids. In addition, to avoid post-launch issues, the issuer should consider pre-post-launch organizational calls and diligence calls between the bidders and the issuer and its auditors and pre-launch coordination between the bidders and counsel for the underwriters.
To be completed prior to solicitation of bids in all cases: Registration statement
Prior to the time bids are solicited from the underwriters, the registration statement for the transaction must be filed and declared effective by the SEC; or
WKSI Shelf Registration
In the case of an automatically effective WKSI shelf registration to be filed in connection with the block trade, the registration statement must be in final, execution form, which means that prior to the bidding:
• Issuer’s, underwriter’s and, if applicable, seller’s counsel have each confirmed that there are no outstanding/pending comments or edits from any relevant parties and no further word processing needed;
• No disclosure of company-related information needs to be made to investors in connection with the offering other than as contained in the registration statement or included in previously filed documents incorporated by reference;
• All consents and signatures have been obtained and all exhibits have been finalized; and
• EDGAR test filing has been successfully performed and the issuer’s financial printer has confirmed that filing the registration requires only the “push of a button.”
The WKSI shelf registration statement must be filed immediately upon acceptance of the underwriter’s bid.
Press Release
The fact that an issuer is contemplating a “block trade” may be material, non-public information -- its materiality being a function of the size of the block relative to the issuer’s public float, the issuer’s ADTV, use of proceeds, etc. Accordingly, a press release will often be required in the case of primary offerings by issuers and secondary sales by affiliates/controlling shareholders, and may be required in certain other situations.
If required, a press release announcing the transaction must be in final form, which means:
• Issuer’s, underwriter’s and, if applicable, seller’s counsel have each confirmed that there are no outstanding comments, edits or approvals from any relevant party (note that such sign-offs can take time, so advance preparation is critical); • No further word processing is needed;
• The issuer has made arrangements with its news wire service (e.g., PR Newswire, Business Wire, etc.) to publish the press release immediately upon receipt; and • The issuer’s Investor Relations or media personnel are standing by to ensure
transmission of the press release to the issuer’s news wire service as soon as
Note: Attached hereto as Exhibits A and B are model press release templates for primary and secondary offerings, respectively.
Note: As a general matter, due to the high volume of press releases issued by companies immediately after the market close, it could take anywhere from 20 to 30 minutes for a press release to be publicly issued once the issuer has transmitted the final press release to its news wire service and it is “in queue” for release.
Generally, to be completed prior to solicitation of bids, or, if issues remain, to be
brought to the underwriters’ attention prior to the submission of bids:
Preliminary Prospectus / Free Writing Prospectus
If a preliminary prospectus or issuer free writing prospectus (including a final term sheet) is to be distributed to investors in connection with the transaction:
• Issuer’s, underwriter’s and, if applicable, seller’s counsel have each confirmed that there are no outstanding comments, edits or approvals from any relevant party (including the accountants);
• No further word processing is needed on the document; and
• All relevant persons are standing by to ensure that the final version of the
document is emailed to the underwriter as soon as practicable after acceptance of a bid by the issuer or seller.
Note: Any issuer free writing prospectus to be distributed to investors should generally be prepared on a word processing system of one of the parties (preferably counsel), so that changes can be nimbly made and the document quickly finalized. In order to minimize potential delays, an issuer free writing prospectus should generally not be prepared utilizing a financial printer’s system. In cases where the issuer free writing prospectus contains extensive financial statements or similar tabular information or where a preliminary prospectus is to be distributed to investors, use of a printer’s system may be appropriate. If necessary, the document can be shifted to a financial printer’s system after finalization to be EDGARized and filed.
Note: Since there is very little time to resell a block trade once the offering has
launched, it is often more difficult for the underwriter to sell the entire block at a single, fixed price. Accordingly, many underwriters prefer to execute block trades at a variable price instead of a fixed price – in those situations the prospectus supplement should reflect a variable price reoffering approach. This typically entails replacing the pricing table that traditionally appears on the front cover of the prospectus supplement with a sentence or two stating that the underwriter has agreed to purchase the shares from the issuer (or the selling stockholders, as the case may be) at a specific net price per share and that the underwriter will reoffer those shares from time to time in the
over-the-counter market or in one or more negotiated transactions at market prices or at negotiated prices. (Note: regardless of whether the offer is in the form of a variable price reoffer or a fixed offer, the actual net price per share paid by the underwriter should be included only in the final prospectus supplement filing and must be omitted and left blank in any
preliminary prospectus supplement or any issuer free writing prospectus, as well as any press release).
In addition, a suggested form of press release disclosure, which is applicable to both fixed and variable price offerings, is attached hereto. Additionally, more detailed disclosure regarding the variable price reoffering must also be included in the "Underwriting" section of the prospectus supplement. The underwriter's in-house counsel should be consulted as to the specific form of variable price reoffering language to include in the prospectus supplement. On a final note, no changes to the underwriting agreement need to be made if the underwriter chooses to execute the block trade at a variable price instead of a fixed price.
Additional Concerns
The following continue to be important priorities in the execution of a block trade, and potential issues or concerns with respect to these matters should be brought to the immediate attention of each potential underwriter (and their in-house counsel) prior to the time bids are submitted:
• conducting due diligence
• negotiating and executing the underwriting agreement • negotiating, and delivery of, the auditor’s comfort letter • disclosure opinions
• making any necessary FINRA filings (note that the FINRA exemption from the filing requirements of the Corporate Financing Rule (Rule 2710) for Rule 415 offerings by S-3 issuers is only available for issuers that have a three-year reporting history as opposed to only one year)
• making the necessary stock exchange supplemental listing application ____________
The facts and circumstances of block trades differ from trade to trade, as does the amount of prior preparation by and available time commitment from, issuers and sellers. Frequent
communication and coordination with in-house counsel is, therefore, critical. Please contact the relevant underwriter via their SIFMA representative (list attached as Exhibit C) to obtain a current list of relevant in-house legal contacts.
EXHIBIT A -PRIMARY SHARES
XYZ Commences Public Offering of Common Stock
[City], [State], [Today’s Date] – XYZ, Inc. ([NYSE][NASDAQ]: XYZ),
announced today that it has agreed to sell __,000,000 shares of its common stock in an underwritten public offering. The last reported sale price of its common stock on [today’s date] was $__.__ per share. XYZ also has granted the
underwriter[s] a 30-day option to purchase up to _,000,000 additional shares of common stock.1 XYZ intends to use the net proceeds from this offering to [insert brief description of use of proceeds]. Closing of the offering is expected to occur on or about [Closing Date], subject to customary closing conditions. ABC is acting as the sole underwriter for the offering.2
The offering is being made pursuant to an effective shelf registration statement. The offering may be made only by means of a prospectus supplement and the accompanying prospectus, copies of which may be obtained by sending a request to: [insert prospectus department contact details for the underwriter[s].] This press release shall not constitute an offer to sell, or the solicitation of an offer to buy, any of the securities, nor shall there by any sale of these securities, in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities law of any such state.
About XYZ
[Insert company description from the issuer’s most recent press release.] [Insert the issuer’s standard, forward-looking statements safe harbor statement.]
1
Insert Only if the issuer has granted a green shoe option to the underwriter.
2
If there will be no more than one underwriter, replace this sentence with “ABC and DEF are acting as joint bookrunning managers for the offering.”
EXHIBIT B- SECONDARY SHARES
XYZ Announces Secondary Offering of Common Stock
[City], [State], [Today’s Date] – XYZ, Inc. ([NYSE][NASDAQ]: XYZ), announced today that [an affiliate of][affiliates of] PQR1 [has][have] agreed to sell __,000,000 of [its][their] shares of XYZ’s common stock in an underwritten public offering. XYZ will not receive any proceeds from the offering. [The affiliate[s] of] PQR2 also [has][have] granted the underwriter[s] a 30-day option to purchase up to _,000,000 additional shares of common stock.3 Closing of the offering is expected to occur on or about [Closing Date], subject to customary closing conditions. The total number of shares of common stock outstanding will not change as a result of this offering.
[This sale of previously unregistered shares represents approximately __ percent of the current shares outstanding. Upon completion of this offering, PQR’s interest in XYZ will be reduced to __ percent of the outstanding shares, from the current __ percent.]4 [Upon completion of this offering, [an affiliate of][affiliates of] PQR will no longer own any shares of XYZ’s common stock.]5
ABC is acting as the sole underwriter for the offering.6
The offering is being made pursuant to an effective shelf registration statement. The offering may be made only by means of a prospectus supplement and the accompanying prospectus, copies of which may be obtained by sending a request to: [insert prospectus department contact details for the underwriter[s].]
This press release shall not constitute an offer to sell, or the solicitation of an offer to buy, any of the securities, nor shall there by any sale of these securities, in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities law of any such state.
About XYZ
[Insert company description from the issuer’s most recent press release.] [Insert the issuer’s standard, forward-looking statements safe harbor statement.]
1
If there are multiple financial sponsors/selling stockholders selling, name them individually or replace with “certain [institutional] stockholders.”
2
See footnote no. 1.
3
Insert only if the selling stockholder(s) have granted a green shoe option to the underwriter(s).
4
Insert if the financial sponsor holds a significant amount of the company’s stock and the block to be sold represents a significant portion of those holdings.
5
Insert if this will be a “clean up” trade in which the financial sponsor is selling down completely its remaining stake in the issuer.
6
If there will be more than one underwriter, replace this sentence with “ABC and DEF are acting as joint bookrunning managers for the offering.”
EXHIBIT C–SIFMACAPITAL MARKETS COMMITTEE
KEVIN GENIRS, CHAIR Lehman Brothers
Tel: (212) 526-2614
TODD BASKIN
Banc of America Securities Tel: (646) 313-8184 [email protected] STEVEN BROWN Morgan Stanley Tel: (212) 761-4566 [email protected] STEVEN BURWELL Deutsche Bank AG, NY Tel: (212) 250-8991
EDWARD C. CHOW ABN AMRO Inc. Tel: (212) 409-6152 [email protected] SCOTT COOK Raymond James Tel: (727) 567-2108 [email protected] DAN CORKERY UBS Securities Tel: (212) 821-5260 [email protected] WADE DOUGHERTY CIBC Tel: (212) 667-8306 [email protected] NICHOLAS GANZ Cowen and Company, LLC Tel: (646) 562-1750
LESLIE GARDNER JP Morgan Chase & co. Tel: (212) 622-5290
MICHAEL A. GILBERT Stifel, Nicolaus & Co., Inc, Tel: (443) 224-1229
ARUNAS GUDAITIS Credit Suisse Securities Tel: (212) 325-3199
MARY LOUISE GUTTMANN Wachovia Capital Markets, LLC Tel: (212) 214-6060
DEBORAH H. KAYE The Bank of New York Mellon Tel: (212) 635-6612 [email protected] FRED KNECHT Merrill Lynch Tel: (212) 325-8894 [email protected] JAMES M. MARTIN Piper Jaffray & Co. Tel: (612) 303-8355
ADAM MESHEL
Citigroup Global Markets Inc. Tel: (212) 816-7866
ALEXANDER SHEERS Bear, Stearns & Co. Inc. Tel: (212) 272-7458 [email protected] RICHARD SMITH Barclays Capital Tel: (212) 412-2478 [email protected] RANDOLPH STUZIN Goldman Sachs & Co. Tel: (212) 902-8952
JOSH TARGOFF Jefferies & Co., Inc. Tel: (212) 284-2587
