M&A Flashcards
A large media company is offering to exchange $600,000,000 of 6.90% senior notes for securities originally sold under Rule 144A. The exchanged notes will not be restricted securities. The company is not raising additional capital. The company:
Must file Form 144 with the SEC
Must file a Form S-4 with the SEC
Must file a Form S-1 with the SEC
Is not required to file any form with the SEC
B: SEC Rule 145 of the 1933 Act applies to situations where securities are offered as a result of business combinations due to mergers, acquisitions, consolidations, reclassifications of securities, or transfers of corporate assets. Securities issued under this rule may be registered using Form S-4. Form S-1 is used when a company files for an IPO, or is not permitted to use any other type of registration form. Form 144 is used when a person sells restricted or control stock. [61034]
Little Cub Enterprises is seeking to become an attractive acquisition candidate. It is contemplating a workforce reduction prior to approaching Big Bear LLC to discuss being acquired. How would the timing of this workforce reduction impact the seller’s tax situation?
All termination expenses incurred within a 90-day period that precedes or follows the closing of the transaction would be treated as part of the seller’s proceeds
All termination expenses not covered by a golden parachute agreement that are incurred within a 6-month period preceding, or following, the closing of the transaction, would be considered part of the seller’s basis
All termination costs incurred prior to the acquisition would be currently deductible by Little Cub
Severance costs associated with a deal are always treated as a current expense of the acquirer and would have no effect on Little Cub’s tax situation
C: The purchaser may decide to reduce the workforce of an acquired business following an acquisition, or a seller may downsize a company to make it a more attractive acquisition candidate. The tax treatment of payments made to employees terminated before the purchase, and to those terminated after the purchase, is handled differently. Severance payments made when downsizing prior to an acquisition are generally deductible to the target company, and are considered an assumed liability (part of the purchase price) for the acquirer, since the liability exists at the time of the acquisition. Workforce reductions that occur after the acquisition are (typically) not treated as part of the buyer’s acquisition cost. [61075]
A third party is making a tender offer for the shares of BAZ Inc. The tender offer announcement appeared in the newspaper on October 15. Two weeks later, the third party wants to extend the length of the tender offer. This is permitted provided:
All shareholders are provided with written notification
Shareholders who have not already agreed to tender their shares are given written notification
A press release is issued within 10 business days of the extension
A press release is issued no later than the morning of the day following the scheduled expiration date of the offering
D: According to SEC Rule 14e-1 (Unlawful Tender Offer Practices), if a person extends the length of a tender offer, they are required to issue a notice of the extension through a press release or other public announcement. This is required no later than 9:00 a.m. Eastern Time, on the next business day following the scheduled expiration date of the offer. The notice must include the approximate number of securities deposited to date. [61059]
The CEO of MiniCo has a severance agreement that guarantees a payout of five times her annual compensation in the event of a change of corporate ownership. How is this payment treated under IRS rules?
The entire payment is deductible by the corporation
The entire payment is not deductible by the corporation
A portion of the payment may not be deductible by the corporation
The payment is only deductible by the corporation if the recipient agrees not to contest any potential personal excise tax penalties incurred
C: A golden parachute is a payment made to a senior officer of a company in the event of a takeover, or a change in control. Under Internal Revenue Service rules (IRC Section 280G), companies paying excess golden parachute payments (defined as those greater than three times the individual’s average annualized compensation as computed over the prior five years) could potentially lose the corporation’s tax deduction for such payments, and expose the recipient to an excise tax of 20%. These provisions were created to protect a corporation’s shareholders from a potential loss in the value of their holdings that results from excessive compensation payments made in connection with a change in ownership, or control of a corporation. The excess payment is the portion of the parachute payment that is subject to excise taxes (and nondeductibility). This is defined as the excess of payments above a base amount. The base amount is computed as the average annualized taxable compensation for the most recent five tax years, prior to the change in ownership or control. [74400]
After failing to negotiate a merger with Company B, Company A has launched a public tender offer for all of Company B's outstanding common stock. How many days must the tender offer be kept open? 20 business days 20 calendar days 10 business days 10 calendar days
Tender offers generally must be held open for at least 20 business days from the time they are announced to security holders. [61046]
Your firm is representing a Nasdaq-listed company that is in the process of purchasing a privately held software developer. The seller has asked your client to include an indemnification basket in the Definitive Purchase Agreement. What is the meaning of this provision?
The buyer is required to pay the seller an unlimited amount of compensation if there is a breach of the contract
The seller is required to pay the buyer an unlimited amount of compensation if there is a breach of the contract
The seller does not have any liability until the amount of the buyer’s losses exceeds a certain dollar amount of the purchase price if there is a breach of the contract
The seller’s liability is limited to a maximum amount based on the purchase price if there is a breach of the contract
C: One of the provisions that may be included in a Definitive Purchase Agreement relating to an M&A transaction is indemnification. Indemnification clauses are often requested by buyers as protection against a seller’s material breach of contract after the deal has closed. These clauses are used mostly in the purchase of private companies and quantify the amount of compensation that is due the buyer if officers and directors of the selling firm fail to meet their legal obligations. Examples include misrepresentation of financials and/or failure to disclose a material event such as the loss of a major client prior to closing. These agreements are heavily negotiated since the seller would prefer a short time frame and a limited dollar amount of liability. An indemnification basket sets a certain dollar amount of liability that must occur based on a breach in the contract in order for the buyer to claim any compensation. This amount is usually based on a percentage of the purchase price and is included, so the seller is not liable for a negligible amount. Choice (d) defines an indemnification cap, which limits the seller’s liability to a maximum amount of money based on the sale price, if there is a breach in the contract. Rarely would a contract be signed that creates an unlimited amount of liability for the buyer or seller. [61393]
Northern Railways is a publicly traded company. Forty percent of the shares are owned by Pathway, a publicly traded investment group. Your firm is advising Northern Railways on a capital restructuring. If possible, Northern Railways would like to avoid a prospectus delivery requirement when the restructuring takes place. You would advise the company that all of the following events would require a prospectus to be delivered to Northern Railways shareholders, EXCEPT a(n):
Transfer of assets of Northern Railways to another company
Exchange of Northern Railways shares for shares of Pathway
Repurchase of its shares by Northern Railways
Reclassification of Northern Railways’ shares
C: SEC regulations require issuers to provide a prospectus to shareholders in advance of the various transactions, including reclassifications, mergers, consolidations, and the transfer of assets to another party. A repurchase by a company of its own stock is regulated under Rule 10b-18 of the 1934 Act. The activity does not require a prospectus delivery to shareholders. [61013]
Company AZX has announced a partial tender offer for Company BHQ. A stockholder of Company BHQ is long 1,000 shares of stock, and is short 5 BHQ calls and long 2 BHQ puts. For the purpose of tendering shares, the stockholder may tender: 1,000 shares 800 shares 500 shares 300 shares
An investor who holds stock in a company that is the subject of a tender offer may only tender stock that he holds long. Short tendering is not permitted. If a shareholder has written call option positions against the long stock, the options positions will reduce his net-long holdings in the stock. The long puts do not affect the client’s net-long position. [61065]
Spawnwell Conglomerate is seeking to divest its SterileType Plastics Container division through an auction process. Once nondisclosure documents have been signed, potential bidders would be sent a(n): Bidding procedures letter Auction due diligence agreement Indication of interest agreement Binding bid contract
A: A bidding procedures letter (bid process letter) is sent to prospective buyers of a company, or division, if the sale is conducted by way of an auction. The letter will indicate a deadline for prospective bids, as well as other requirements, such as a description of the buyer’s funding sources and/or financing commitment letters. [61103]
A customer has securities that were received as part of a merger. The customer discloses that the securities are subject to SEC Rule 145. Which of the following statements is TRUE?
In order to sell the securities immediately, several conditions of Rule 144 may need to be satisfied
The securities must be registered with the SEC before they can be sold
The resale of the security is not subject to any conditions, provided the amount sold is 5,000 or fewer shares, worth $50,000 or less
The securities are subject to a minimum six-month holding period
A: Securities that are subject to Rule 145 may not always be resold freely. If the shares that were held prior to the business combination were restricted, then the shares received as a result of the business combination would be restricted and subject to resale under Rule 144. These securities are usually received by affiliates of one of the companies involved in a merger, reclassification, consolidation, or transfer of assets. The securities can be resold according to any one of the following three conditions.
The person sells the securities in accordance with the conditions prescribed in Rule 144 for public information, limitations on the amount sold, and the manner of sale (through a broker’s transaction, or directly with a market maker).
The person is not an affiliate of the issuer, has held the securities for at least six months, and the public information condition is met.
The person has not been an affiliate of the issuer for at least three months and has held the securities for at least one year.
Which TWO of the following statements are TRUE regarding a floating exchange ratio?
The buyer will not know how many shares it will need to issue to purchase the seller
The buyer will know how many shares it will need to issue to purchase the seller
The seller will not know the final purchase price of the transaction
The seller will know the final purchase price of the transaction
I and III
I and IV
II and III
II and IV
B: If an M&A transaction has a floating exchange ratio, the board of directors of the buyer has agreed to purchase the seller for a fixed-dollar amount. The number of shares the buyer would need to issue is uncertain and will fluctuate between the announcement date and the closing. Therefore, the seller will know the final purchase price of the transaction. For example, RSR agrees to purchase all the outstanding shares of EXA at $14.00 a share. The company has 1,000,000 shares outstanding. The transaction is valued at $14,000,000. If RSR stock is trading at $56.00 a share, it must issue 250,000 shares ($14,000,000 / 56.00), and initial exchange ratio would be .25 ($14.00 / $56.00). If RSR stock declined to $51.00 at closing, the new exchange ratio would be .2745 ($14.00 / $51.00) and the number of shares the buyer would need to issue would increase to 274,510 ($14,000,000 / $51.00). One of the disadvantages to the buyer is additional dilution due to the increase in the number of shares that may be issued, because of a decline in its stock price. [61179]
A broker-dealer is representing the owner of a Subchapter S Corporation that is in the process of selling the corporation. The buyer’s banker has asked for an indemnification cap to be included in the definitive purchase agreement. What does this provision stipulate?
The buyer is required to pay the seller a limited amount of compensation if there is a breach of the contract
The seller does not have any liability until the amount of the buyer’s losses exceeds a certain dollar amount of the purchase price if there is a breach of the contract
The seller is required immediately to pay the buyer a limited amount of compensation if there is a breach of the contract
The seller’s liability is limited to a maximum amount based on the purchase price if there is a breach of the contract
D: Indemnification is one of the provisions that may be included in the definitive purchase agreement established for an M&A transaction. Indemnification clauses are often requested by buyers as protection against a seller’s material breach of contract after the deal has closed. These clauses are used mostly in the purchase of private companies and quantify the amount of compensation that is payable to the buyer if the officers and directors of the selling firm fail to meet their legal obligations. Examples of these failures include the misrepresentations of financials and not disclosing material events (e.g., losing a major client prior to closing). These agreements are heavily negotiated since sellers prefer a short time frame and a limited dollar amount of liability. An indemnification cap limits the seller’s liability for breach of contract to a maximum amount of money based on the sale price. It is rare for a contract to be signed that creates an unlimited amount of liability for either the buyer or seller. An indemnification basket (choice b) sets a certain dollar amount of losses that must be experienced due to a breach of contract in order for the buyer to claim any compensation. The amount is usually based on a percentage of the purchase price and is included so that the seller is not liable for a negligible amount. (79640)
Who typically signs a confidentiality agreement in a proposed merger? Potential buyers Potential sellers Both potential buyers and sellers The seller's accountants and attorneys
C: A confidentiality agreement (a.k.a. a nondisclosure agreement or NDA) is used when one company is planning to disclose confidential or proprietary information to another party, in connection with a potential sale or merger. Typically, both the disclosing party and the party receiving the information sign the agreement. Attorneys and accountants who are already working for the seller are normally bound by nondisclosure requirements as part of their ongoing relationship. [61095]
An investment banking firm has been approached by a client who wants to sell his company. The firm has determined that, prior to the sale, it should improve its total enterprise value to EBITDA (TEV / EBITDA). Which TWO of the following choices would help MOST to achieve this result?
Selling off a division which has been losing money for the last two years
Changing the method used to calculate the amount of depreciation and amortization
Hiring additional administrative personnel instead of outsourcing certain Human Resources functions
Launching a new product
I and III
I and IV
II and III
II and IV
B: In order to improve its TEV / EBITDA, the company can focus on its EBITDA growth strategy (increase revenue and decrease costs). Of the choices listed, accelerating sales growth by marketing and launching a new product, and selling off a losing business unit could accomplish this goal. Other methods could include general business expansion and growth through acquisitions, as well as other types of cost reductions and restructuring, for example, reducing (not increasing) administrative costs by outsourcing certain Human Resources functions. Changing the method of depreciation and amortization in order to reduce the company’s taxes would have no effect on EBITDA, since it is a pretax number. (74392)
OfficeNick is offering to purchase 25% of its common stock through a Dutch Auction tender offer. The company has approximately 94,500,000 shares of common stock outstanding. If more than 25% of the shares are tendered, the company will purchase the shares on a pro rata basis. The price range for the tender offer is $30.00 to $34.00 per share. The issuer will purchase all shares at the same purchase price, even if tendering shareholders have selected a lower purchase price. OfficeNick will not purchase any shares tendered at prices above the purchase price selected by tendering shareholders. Which of the following statements is TRUE?
If the tender offer is completed at $33.00 per share, the total cost for the issuer would be $756,000,000
Any shareholder who tenders shares with a price above the purchase price will receive a pro rata amount
Shareholders are required to select a purchase price between $30.00 and $34.00
If the tender offer is completed at $33.00 per share and a shareholder tendered shares with a selected a price of $31.50, she would receive $33.00 per share
D: SEC Rule 13e-4 pertains to issuers that make a tender offer for their own securities. A modified Dutch Auction allows, but does not require, shareholders to select the price within a price range at which they are willing to sell their shares. A company will normally select the lowest price that will allow the purchase of the number of shares specified in the tender offer. If the tender offer is completed at $33.00 per share and a shareholder has tendered shares with a selected price of $31.50, she would receive $33.00 per share, since the issuer will purchase all shares at the same purchase price, even if a lower purchase price was selected. If the tender offer is completed at $33.00 per share, the total cost for the issuer would be $779,625,000 (94,500,000 x 25% = 23,625,000 shares, multiplied by $33.00 a share). Any shareholder who tendered shares with a price above the purchase price will not be able to participate in the tender offer. Shareholders are not required to select a purchase price and can agree to tender shares at whatever price is determined in the tender offer. [61215]
Place the following items in order from highest priority to lowest if a bankrupt corporation is being liquidated. Preferred stockholders Common stockholders Administrative expenses of the bankruptcy such as lawyers' fees and wages Employee back wages IV, III, I, II III, IV, I, II I, III, IV II III, I, II, IV
B: Subsection 503(b) of the U.S. Bankruptcy Code details nine types of expenses that are allowed as administrative expenses and, therefore, are entitled to priority. Administrative expense claims generally include debt incurred by the debtor, with court approval, after the bankruptcy filing, including the necessary costs of preserving the estate and generally including wages, salaries, lawyers’ fees, accountants’ fees, trustees’ expenses, etc. (as well as claims by trade vendors supplying goods after bankruptcy filing and the value of goods received by the debtor within 20 days before the petition date). Employee back wages (but only to the extent of $10,000 for each individual or corporation, earned within 180 days before the date of the filing of the petition) receive a lower priority than the administrative expenses (Current wages after filing do get priority as an administrative expense.) The last claim would be the equity holder, first preferred then finally the common stockholders. [61355]
shareholder rights plan AKA
poison pill
A notice has been published concerning the transfer of assets of a company. The notice contains the name of the company, a brief description of the transaction, and the parties to the transaction. This notice is:
Not required to be filed with the SEC
Required to be filed with the SEC with no additional disclosures
Required to be filed with the SEC with additional disclosures
Required to be filed with the SEC and sent to shareholders with additional disclosures
A: According to SEC Rule 135, an issuer is permitted to publish a notice that contains only limited information. Such notices are not required to be filed with the SEC. The notice must have a legend explaining that it does not contain an offer to sell securities. If the notice concerns a business, SEC Rule 145 applies to situations in which securities are offered as a result of business combinations due to mergers, acquisitions, consolidations, reclassifications of securities, or transfers of corporate assets. The only information permitted is:
The name of the person whose assets are to be sold in exchange for the securities to be offered
The names of any other parties to the transaction
A brief description of the business of the parties to the transaction
The date, time and place of the meeting of the security holders to vote on, or consent to the transaction
A brief description of the transaction and the basic terms of the transaction
If an offer is made in connection with a business combination, any communications prior to the filing of a registration statement are:
Not permitted
Permitted if the communication is filed with the SEC
Permitted if the communication is filed with the SEC and a disclosure is made that urges investors to read all relevant information related to the transaction, once it becomes available
Permitted if the communication is filed with the SEC and all communications are forwarded to shareholders with a disclosure that urges investors to read all relevant information, once it becomes available
C: Under SEC Rule 165, written communications are permitted once there is a public announcement of a business combination (a merger, acquisition, exchange, or reclassification). If the securities to be issued are required to be registered with the SEC, usually Form S-4 is used. Any written communication made in connection with, or relating to, the transaction must be filed with the SEC according to SEC Rule 425. If both companies are publicly traded, each must file with the SEC. Each document must contain a prominent legend that urges investors to read all relevant information concerning the offering on the SEC’s Web site. There is no requirement to send these communications to shareholders. [61039]
A company in bankruptcy would like to sell major assets of the firm outside the normal course of its business. Which of the following statements is TRUE concerning the sale of these assets while the firm is in bankruptcy?
This may be accomplished with the approval of the bankruptcy court
The assets may be sold if at least two-thirds of the creditors approve
The assets may be sold only if at least one-half of the creditors approve
Major assets may not be sold while the company is in bankruptcy unless a reorganization plan has been approved
A: The sale of assets outside the normal course of business can be accomplished through a Section 363 sale. The trustee, or debtor, must file a motion with the bankruptcy court seeking the court’s approval. Opponents of the sale will have a period of time to object to the proposed sale. If approved, the debtor or trustee can proceed with the sale. [60997]
From the buyer's prospective, in which order, from first to last, are the following actions performed in the M&A process? The memorandum of understanding (MOU) The confidential information memorandum (CIM) The bid procedures letter Indications of interest I, II, III, IV IV, III, II, I II, III, IV, I II, III, I, IV
C:
Concerning the auction process in an M&A transaction, one of the first steps taken by the seller’s banker is the creation of the teaser. Teaser is the slang term for a business profile. If a potential bidder expresses interest after receiving the teaser, and wants more detailed information on the target, the seller’s banker would deliver a confidential information memorandum. This would provide more detailed information and disclose the identity of the target.
The next step would be the delivery of the bid procedures letter. The bid procedures letter is distributed by the seller to request a preliminary transaction proposal from potential bidders. Those buyers that have an interest in the target, or have been contacted by the seller’s bankers, are invited to submit a nonbinding indication of interest (IOI). The seller’s bankers then narrow the fields that are within the range of what the seller expects. Once the initial due diligence has been completed, the seller often asks the buyer to provide a nonbinding commitment to allow the transaction to proceed further. This formal indication of interest is often referred to as a letter of intent (LOI), term sheet, or memorandum of understanding. This would include a description of the proposed transaction, pricing, deal structure, break-up fees, no-shop and/or go-shop provisions, and employment contract issues. The LOI is usually one of the last steps in an M&A transaction. [99891]
A company has announced a tender offer through a procedure called a modified Dutch Auction. Which TWO of the following statements are TRUE?
Shareholders who tender their shares are not required to select a sale price
Shareholders who tender their shares are required to select a sale price
This type of tender offer is permitted only if the issuer agrees to purchase all the outstanding shares
This type of tender offer is permitted if the issuer agrees to purchase less than 100% of the outstanding shares
I and III
I and IV
II and III
II and IV
B: SEC Rule 13e-4 pertains to issuers that make tender offers for their own securities. A modified Dutch Auction allows, but does not require, shareholders to select the price within a price range at which they are willing to sell their shares. A company will normally select the lowest price that will allow the purchase of the number of shares specified in the tender offer. These types of tender offers are used when the issuer wants to purchase a certain percentage of its common stock. [61048]
Small Fish Ltd. has completed a workforce reduction prior to being acquired by Big Shark Corp. How would the timing of this event impact the buyer’s tax situation?
All termination expenses incurred within 90 days prior to the closing of the transaction are treated as a current expense by the buyer
All termination expenses incurred within six months prior to the closing of the transaction are treated as a current expense by the buyer
All termination liabilities incurred prior to the acquisition would add to the buyer’s basis
Severance costs associated with a transaction are treated as a current expense of the acquired entity and would have no effect on Big Shark’s tax situation
C: The purchaser may decide to reduce the workforce of an acquired business following an acquisition, or a seller may downsize a company to make it a more attractive acquisition candidate. The tax treatment of payments made to employees terminated before the purchase, and to those terminated after the purchase, is handled differently. Severance payments made when downsizing prior to an acquisition are generally deductible to the target company and are considered an assumed liability (part of the purchase price) for the acquirer, since the liability exists at the time of the acquisition. Workforce reductions that occur after the acquisition are (typically) not treated as part of the buyer’s acquisition cost. [61076]
A firm that has filed for bankruptcy is being liquidated. A creditor is owed $400 million by the corporation and has a lien on property worth $310 million. Which of the following statements BEST describes the claim of this creditor?
The creditor is entitled only to an allowed claim of $310 million
The creditor may be considered to have a secured claim for the $310 million and an unsecured claim for the excess
The creditor is considered to have a secured claim for the $310 million and will have the highest priority among unsecured claims for the excess
Since the loan exceeds the value of the asset, the creditor is considered to have only an unsecured claim
B: If a secured creditor has a claim that exceeds the value of the asset, the creditor has a secured claim for $310 million and an unsecured claim for the excess. The unsecured portion would not have the highest priority among unsecured creditors. If the asset is worth more than the claim, the creditor is not entitled to the excess; however, the creditor may be entitled to interest and reasonable costs. [60999]
