from pli’s treatise raising capital in today’s markets--reactions … · 2009-03-13 · from...

From PLI’s TreatiseRaising Capital in Today’s Markets--Reactions to Current Conditions#20975

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EXECUTIVE COMPENSATION GROUPADVISORY — DISCLOSURE DEVELOPMENTS: EXECUTIVECOMPENSATION

Ernest W. Torain, Jr.Vedder Price P.C.

Disclaimers and Suggested References: The outline

that follows provides a general overview of retiree

medical benefit VEBAs, with specific focus on the

VEBAs recently proposed by the Big Three U.S.

automakers. The author is by no means an expert on

medical benefit plans or VEBAs. Nor can the author

claim special insight into any aspect of the Big Three

VEBAs. The information in this outline is gleaned

entirely from public sources. For two very practical

references on retiree medical and VEBAs see: (1) the

ABA-JCEB teleconference “Shifting Retiree Health

Benefits from Employers to VEBAs” (December 6,

2007—available in archived teleconf format or CD), in

which Nell Hennessey, Douglas Greenfield, Karen

Handorf and Vicki Hood do a terrific job describing the

background on union retiree medical and the Big Three

VEBAs and (2) Jones Day Commentary—Who Killed

Yard-Man (Apr. 2007), a Jones Day client newsletter

available on-line which provides an excellent summary

PLI One-Hour Audio WebcastPLI One-Hour Audio Webcast

Raising Capital in Today’s Markets:

Reactions to Current Conditions

February 3, 2009

Norman D. Slonaker Thomas W. YangSidley Austin LLP Banc of America Securities LLCSidley Austin LLP Banc of America Securities LLC

Current Market ConditionsHave you opened your 2008 401(k) statement yet?

• In 2008, the S&P 500 declined 38.5% (worst year since 1937) and the DJIA slumped 34% (worst year since 1931). All told, about $7 trillion of shareholders’ wealth – the gains of the last six years – was wiped out in 2008wiped out in 2008.

• What about the hedge funds?Th h N b 2008 h d f d l b ll l t 18%Through November 2008, hedge funds globally lost 18% on average, according to Hedge Fund Research, a Chicago firm that tracks the industry.Hedge fund assets fell 48% in 2008 because of investmentHedge-fund assets fell 48% in 2008 because of investment losses and client defections, according to TrimTabs Investment Research and BarclayHedge. In December alone, hedge-fund investors withdrew a record $148.8 billion.

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Current Market Conditions (cont’d)• Stock market volatility

The Chicago Board Options Exchange Volatility Index, or the “VIX” is a measure of how much investors are paying forVIX is a measure of how much investors are paying for insurance from stock declines in the options market. It is also known as the “fear gauge.”The VIX jumped 78% to 40 at the end of 2008, compared withThe VIX jumped 78% to 40 at the end of 2008, compared with an average VIX of 15.60 from 2003 through Feb. 2007. It had never exceed 50 before October 2008, but closed at a record 80.86 on Nov. 20 when the S&P 500 tumbled to its lowest level since 1997 (So rce Bloomberg )since 1997. (Source: Bloomberg.)

• U.S. IPO MarketThe last U.S. IPO that came to market was Grand Canyon Education, which priced on Nov. 19, nearly 11 weeks ago.That IPO ended the longest drought in U.S. IPO history since 1975 ith almost fo r months passing since the last IPO priced

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1975, with almost four months passing since the last IPO priced before Grand Canyon (Rackspace, Aug. 7).

Current Market Conditions (cont’d)So how is 2009 shaping up thus far?

Th DJIA d li d 8 84% i J th t i it ti hi t• The DJIA declined 8.84% in January, the worst in its entire history. The S&P 500 fell 8.57% in January, also its worst January ever.

• And don’t forget about the so-called "January effect” – data showsAnd don t forget about the so called January effect data shows that the market's performance in the first month of the year often predicts how it will fare generally in the remainder of the year.

Quote from WSJ article “January Was Dow’s Worst in 113 Years”• Quote from WSJ article “January Was Dow’s Worst in 113 Years” (1/31/09): “Smart investors are sitting on the sidelines. There’s not much conviction one way or the other.”

• Quote from NYT article “Investors Gloomy as January Disappoints” (1/31/09): "Investors are just kind of paralyzed right now. I think investors have no clue what to do and they're just sitting there waiting. It's virtually impossible to have any idea where this

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t e e a t g t s tua y poss b e to a e a y dea e e t smarket is heading on a daily basis."

So what does this mean for ECM deal ti ?execution?

• Issuers facing continuing need to deleverage their balance sheets.g g g

• However, due to economic uncertainty and ongoing volatility in the stock market, investors in new ECM issues are selective and price-sensitivesensitive.

• Current market conditions have led issuers and investment banks to consider alternative methods to raise capital, which may not have been considered in a more traditional market environment.

• Two examples:at the market (“ATM”) offering programs (aka “dribble programs”at-the-market ( ATM ) offering programs (aka, dribble programs or “controlled equity offerings”)confidential pre-marketing of offerings

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At-the-market (“ATM”) OfferingsWhat are they?

Sh “d ibbl d t” b th i i t th k t• Shares are “dribbled out” by the issuer into the market on a registered basis at intervals over an extended period of time at varying prices.

• Contrast vs. a large follow-on offering that the issuer announces, where it is obligated to sell all of the shares at once.

Issuer will engage one or more broker/dealers to act as placement• Issuer will engage one or more broker/dealers to act as placement agent under the program to sell shares on an agency basis.

• Issuer determines the timing, amount, floor price and duration of anyIssuer determines the timing, amount, floor price and duration of any issuance of shares under the program, and can cease an issuance at any time.

The placement agent typically charges a commission of 1 3%

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• The placement agent typically charges a commission of 1-3%.

At-the-market (“ATM”) Offerings (cont’d)

Quote from International Financing Review (August 2008)

• “At-the-market or share distribution programmes are not uncommon, though they are generally used by smaller companies that frequently need equity capital over time or arecompanies that frequently need equity capital over time or are hesitant to take on market risk of a relatively large underwritten transaction.”

However, please note the recently filed precedents listed on the next slide…

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Notable recent precedents (programs ≥ $200 million)

• 1/27/09 – FPL Group (FPL) – $400 million – Credit Suisse• 1/26/09 – Freeport-McMoRan (FCX) – $750 million – J.P.Morgan

1/16/09 Kinder Morgan Energy Partners (KMP) $300 million UBS• 1/16/09 – Kinder Morgan Energy Partners (KMP) – $300 million – UBS• 12/17/08 – Delta Air Lines (DAL) – $203 million – Citi• 12/1/08 – UAL Corporation (UAUA) – $200 million – J.P.Morgan, Morgan

StanleyStanley• 11/26/08 – Chesapeake Energy Corporation (CHK) – $1 billion – Credit

Suisse, Morgan Stanley, UBS (but see next slide)• 11/6/08 – Health Care REIT (HCN) – $250 million – UBS11/6/08 Health Care REIT (HCN) $250 million UBS• 10/31/08 – Carnival Corporation (CCL) – $550 million – Merrill Lynch• 10/22/08 – Continental Airlines (CAL) – $200 million – UBS, Morgan Stanley• 10/2/08 – Ford Motor Company (F) – $500 million – Goldman Sachs

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10/2/08 Ford Motor Company (F) $500 million Goldman Sachs


Form of announcement / how to educate Investorsabout the existence of an ATM programabout the existence of an ATM program

• Press release vs. 8-K filing vs. 424(b) filing

R l 10b 5 l i ill d d th i d t i lit f th• Rule 10b-5 analysis will depend on the size and materiality of the program

• “Seasoning” question (prior to selling any shares off the program)

• Chesapeake Energy example:issuer filed its ATM prospectus supplement at 4:58 p.m. on Wednesday, Nov. 26 (the day before Thanksgiving) – price listed on the front cover was $18.24issuer filed a press release announcing the ATM program at 7:01 a.m. on Friday, N 28 b f th k t dNov. 28 before the market openedstock fell 15.12% on the news that day (half day of trading) and dropped 44% over the course of the following week to close at $11.32 on Friday, Dec. 5on Sunday evening, Dec. 7, the issuer announced that it was terminating the ATM program and its stock jumped 24% the next day to close at $14.08

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ATM program and its stock jumped 24% the next day to close at $14.08

At-the-market (“ATM”) Offerings (cont’d)( ) g ( )

Manner of selling shares / SEC Rule 153

• Brokers or dealers that effect transactions in compliance with SEC Rule 153 on an exchange or through any trading facility registered with the SEC are deemed to satisfy their prospectus delivery obligations without any additional stepsobligations without any additional steps.

• Accordingly, agents typically execute sales under an ATM offering through an automated order execution system or Designated Order T d (“DOT”) tTurnaround (“DOT”) system.

• Upshot is that, for ATM sales executed pursuant to SEC Rule 153: (i) there is no prospectus delivery requirement and (ii) there is no(i) there is no prospectus delivery requirement, and (ii) there is no “notice of registration” is required to be delivered to the buyer under SEC Rule 173.

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Statutory underwriter liability

• The broker/dealer, even though acting as placement agent under the program, has statutory “underwriter” liability.

S th l t t h ld i th t dili• So the placement agent should require the customary diligence protections that are afforded underwriters in firm commitment registered offerings, such as legal opinions and comfort letters.

• The issuer and the agent typically enter into a distribution agency agreement (DAA); it is similar to an underwriting agreement, including representations and warranties, indemnification and requiring delivery of legal opinions and comfort lettersrequiring delivery of legal opinions and comfort letters.

• At the inception of the program, the DAA is signed, a prospectus supplement is filed and the placement agent receives signed legal

i i d f t l tt

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opinions and comfort letters.


Periodic law firm 10b-5 statements and auditor comfort lettersletters

• Issuers should be made aware that there are ongoing cost and timing considerations involved in terms of due diligence “deliverables.”

• Frequency of delivery – what is the appropriate interval?

• Is a medium-term note (MTN) program an appropriate precedent for an ATM ( ) p g pp p pprogram?

differences in issuer type, security type and investor typerecent volatility in the stock market

• Ability to obtain monthly negative assurance comfort under SAS 72.

• Risk analysis: when the music stops and the agent has sold tens/hundreds of millions of dollars of shares over the course of weeks/months under the

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of millions of dollars of shares over the course of weeks/months under the program, what due diligence documentation should it possess in its files?


Periodic law firm 10b-5 statements and auditor comfortletters (cont’d)letters (cont d)

• Share or dollar thresholds

As traditional follow-on offerings have disappeared due to the recent stock market dislocation, ATM programs have gotten increasingly larger in size.

For example, within a span of two calendar months (August-October), Ford p , p ( g ),set up two, back-to-back ATM programs totaling $1 billion in proceeds.

The placement agent may wish to include share or dollar thresholds in the DAA that are tied to specific periods of time. Once a specific threshold is

t ithi th ifi d ti f ( i th i l t d li d l lmet within the specified time frame (since the issuer last delivered a legal opinion and a comfort letter to the placement agent), a fresh set of legal opinions and comfort letters must be delivered to the agent before any further selling can take place.

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At-the-market (“ATM”) Offerings (cont’d)( ) g ( )

Selling during issuer trading blackout periods

• Most issuers have insider trading policies that impose trading “blackout” periods during which insiders are prohibited from selling shares of the issuer that they hold.

• During a trading blackout, insiders are expected to more likely be in possession of material, non-public information regarding the issuer’s financial results for that fiscal quarter.

• Periods generally begin prior to the end of a fiscal quarter and last until a specified number of days following an issuer’s earnings release after the market has had time to absorb the announcementrelease, after the market has had time to absorb the announcement.

• Should a placement agent sell shares under an ATM program during an issuer’s trading blackout?

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Periodic prospectus supplement filings

• Frequency of ongoing 424(b) prospectus supplement filings disclosing the number of shares issued and aggregate proceeds raised under the ATM programraised under the ATM program.

• 10-Q/10-K disclosure approach.

• Practice varies widely, though the market appears to have moved in favor of disclosure via quarterly 424(b) filings.

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Confidential Pre-marketing of Offerings

Background

• Given extreme market volatility, focus on speed of execution has intensified.

A lt t ECM ff i h b k t d• As a result, recent ECM offerings have been marketed over an overnight or one-day period to shorten exposure to price/market risk.

• Additionally issuers and underwriters have confidentially pre-Additionally, issuers and underwriters have confidentially premarketed their offerings prior to the public announcement.

• Of the seven equity offerings in excess of $250 million priced from S t 15 (L h b k t fili ) t th d f 2008 fiSept. 15 (Lehman bankruptcy filing) to the end of 2008, five confidentially pre-marketed the offering.

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Confidential Pre-marketing (cont’d)

Methodology

• A proposed offering is confidentially marketed prior to the public announcement to a select group of institutions, including:

Mutual funds and hedge funds that are among the issuer’s largest shareholdersPrivate equity investorsSovereign wealth funds

• For SEC-registered offerings, confidential pre-marketing should notg g p gbe done without an effective shelf registration statement in place.

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Investors are brought “over the wall”

• Investors will be provided material, non-public information (“MNPI”) regarding the issuer/offering:

Wall-crossed investors must agree to keep the MNPIWall crossed investors must agree to keep the MNPI confidential.Wall-crossed investors must agree not to trade while in possession of the MNPI.

• Prior to speaking with the portfolio manager, may want to contact the investor’s internal compliance officer or internal counsel first.

• Initial approach by the issuer’s CEO or CFO to a potential investor (instead of the underwriter) could be deemed, in itself, conveyance f MNPI

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of MNPI.


Form of Non-disclosure Agreement (“NDA”)

• The NDA need not be a formal written agreement; however, it may be prudent to create an some sort of “audit trail” showing the formation of a binding contractual confidentiality agreement betweenformation of a binding contractual confidentiality agreement between the offeror and the offeree. (Avoid the “he said, she said” scenario.)

• E-mail approach – two alternative methods:a one-way e-mail to the potential offeree setting forth the confidentiality obligationa two-way e-mail that asks for confirmation of acceptance of the confidentiality obligation by the potential offeree

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Form of NDA – SEC vs. Mark Cuban

• On Nov. 17, the SEC filed civil insider-trading charges against Mark Cuban.

• The SEC alleges that, in June 2004, the Dallas Mavericks owner dumped his 6% stake in Mamma.com shortly after he heard confidentially that the issuer was about to do a PIPEs offering (but before news of the offering became public).

• When news of the PIPEs offering was made public, Mamma.com’s stock fell 9.3% and Cuban avoided losses in excess of $750,000 by selling the stock prior to the public announcement.

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Form of NDA – SEC vs. Mark Cuban (cont’d)

• The CEO brought Cuban over the wall via a phone conversation. There appear to be no written agreement or e-mails between the CEO and Cuban evidencing a confidentiality obligation on Cuban’sCEO and Cuban evidencing a confidentiality obligation on Cuban’s part.

• After the SEC charges were filed, Cuban posted on his blog a statement prepared by his lawyers claiming that Cuban had not agreed to any confidentiality arrangement with respect to the conveyed MNPIconveyed MNPI.

• Once again, try to avoid the “he said, she said” scenario.

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Confidential Pre-marketing (cont’d)g ( )

After the wall-cross, how to convey MNPI about theff i (d l ifi )offering (deal specifics)

• Any written information about the offering (e.g., an e-mail sent to a y g ( gportfolio manager’s BlackBerry) could be deemed to be an Issuer Free Writing Prospectus required to be filed with the SEC.

Is the writing an “offer”?gIssuer FWP vs. Underwriter FWP.

• To be on the safe side should convey deal-specific information• To be on the safe side, should convey deal-specific information orally.

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After the offering has been confidentially pre-marketed

• If sufficient interest is generated from pre-marketing efforts, the deal is publicly launched and typically priced the same day or the next dayday.

• Some additional marketing may occur after the public launch to upsize the existing commitments. These offers are not made pursuant to NDAs, as news of the offering has already been publicly disseminated.

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Termination or expiration of the NDA

• When do the NDA obligations/restrictions fall away?Under the federal securities laws, when the MNPI is no longer “non-public” or is no longer “material.”

• “Drop dead” date/timeMost institutional accounts will insist on including a “drop dead” (i e expiration) date/time in the NDA before agreeing to be(i.e., expiration) date/time in the NDA before agreeing to be wall-crossed on the issuer name and deal specifics.Because of current market volatility, that drop dead date/time can now be as short as a handful of trading days from the time the NDA is agreed upon (Investors are understandablythe NDA is agreed upon. (Investors are understandably nervous about being stuck on the sidelines too long.)

• That begs the question “what happens next?” after the NDA expires.

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g q pp p

Confidential Pre-marketing (cont’d)g ( )

What if the issuer decides not to proceed with the offering and so it never gets publicly announced?offering and so it never gets publicly announced?

• What if insufficient interest is generated from pre-marketing efforts and the issuer chooses not to move forward with the offering?

• How do you “level the playing field” between the wall-crossed investors who received the MNPI about the fact of a proposed offering and the rest of the issuer’s shareholders (especially retail investors) that never received the MNPI in the first place?

• One approach – the company can publicly issue or file disclosure “ ” fthat “cleanses” the wall-crossed investors of the MNPI:See PNC-National City final merger proxy statement dated 11/21/08 (bottom of p. 75)

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See State Street Corp.’s Q4 earnings release dated 1/20/09

from pli’s treatise raising capital in today’s markets--reactions … · 2009-03-13 · from...

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