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Timing Is Everything – A look Into The M&A Closing Process

Monday, July 20, 2020

How best practices can eliminate market and trading confusion during your public company merger

Companies and their representing counsel should carefully consider their merger timing. Issuers risk making the wrong decisions as they go through the filing process and set the closing of their merger. 

“It is critical for companies to understand the most beneficial time to close their transaction given all the related variables involved.” — Joe Conte, Head of Corporate Actions Products, Capital Markets, EQ

Public companies, and even those who are considered market savvy, often don’t understand how each facet of the merger process really works. More specifically, issuers need to understand how and when shareholders will be receiving their merger consideration and how the trading markets are directly impacted by suspended trading.

Public companies should align how their security is traded with notification timing so that the merger is deemed effective under the laws of their state in which they are incorporated. Although trading markets are also governed by the relevant state legal jurisdictions for admitting and maintaining the listed status of a company and their security, these same exchanges and self-regulatory organizations (SROs) operate in an individual and distinct manner.

When the time of day for the closing is applied by these market governing bodies, trading and legal priorities may begin to compete with each other.

When setting the M&A closing timeline, it will be easier and more likely for you to achieve transparency if you can get a clear understanding on how and when your securities will be trading during the closing process.

The existing landscape for closing – and how it affects you

You gain more control in your messaging to the marketplace when best closing practices are followed.

These practices can be used for companies listed on both the NYSE and NASDAQ exchanges – and on other publicly-traded U.S. equity markets, such as SROs.

The Challenges

1. The legal filing process

The merger transaction filing process can vary dramatically depending on your state or jurisdiction, including:

  • Certificate or articles of merger
  • Advance filings and pre-clearance requirements
  • Electronic filings vs. physical filings/manual stamp
  • Certificate or articles of merger for foreign companies (can be especially challenging)

The solution: Know the filing requirements of your relevant jurisdiction. Align how your security is traded with notification timing so that the merger is deemed effective in your state or incorporation. Be aware exchanges and SROs operate in an individual and distinct manner.

2. Timing – the current situation

The NYSE, NASDAQ and over-the-counter (OTC) markets share similar approaches to how a security is suspended from trading when it is being acquired and exchanged for cash and/or shares of the acquiring company.

Given how each state or legal jurisdiction offers different capabilities to effectuate a merger, not all companies will be in a position to provide definitive confirmation that their merger will be deemed automatically effective at a certain time before the market opens the following day.

They will look to suspend trading prior to the opening of the trading market if the company or their representatives can confirm that the merger is deemed effective prior to the opening bell. If the filing of effectiveness occurs after the opening bell, trading of the acquired company shares will continue to trade throughout that business day. These shares will be suspended prior to the opening on the next business day.

Therefore, the exchanges and SROs will not be able to provide the relevant information to the trading community and to the Depository Trust & Clearing Corporation (DTCC) that governs the merger allocation process on behalf of the brokerage community as participants.

The exchanges will apply their own policy in the event that confirmation can only be given in the morning – sometimes minutes – before the markets open.

NASDAQ has recently modified its policy and will look to halt after-hours trading of the acquired security the night prior to effectiveness. NASDAQ will resume trading for the opening bell if the merger doesn’t occur. If the merger does become effective, they will suspend trading and the acquired shares will not be allowed to trade.

The NYSE and other SROs do not share this same policy – they will continue to allow an acquired security to trade after-hours the day prior to the merger closing. They will only suspend trading once the certificate of merger or other confirmation document has been presented as confirmation that the merger is effective.

The solution: Understand how shareholders receive merger consideration and how suspended trading impacts trading markets. Public companies should align security trading with notification timing so that the merger is deemed effective in their relevant jurisdiction.

The right timing policy can guide companies that heed this information – and it can positively affect the success of your mergers and your reputation for transparency. These best timing practices will also minimize risk and confusion by the trading and settlement community.

3. How it all gets settled

There are two types of investors who hold a company’s shares that represent an individual’s ownership interest: beneficial and registered. The general understanding is that all holders receive the same entitlement. Although the beneficial shares are fully electronic and allocated through the DTCC system, DTCC has certain requirements that are governed under their rules and regulations that it must follow.

DTCC must wait until they get a definitive confirmation by the trading governing body of the acquired security before they can allocate the merger consideration.

This process is accomplished via an overnight script that DTCC releases in its systems in addition to the notification is given to all the participants that they are swinging their positions.

The solution: If a merger transaction cannot be confirmed to become automatically effective overnight – or prior to the official start of trading the next business morning when the company and its trading governing body can announce this transaction publicly – the next best situation is closing the merger during the business day or shortly after the opening bell.

In this situation, the company can still be mindful of the following actions:

  • Publicly announce that the merger has closed and that this day will be the last day that their shares are expected to be trading.
  • Avoid trying to file that same morning where their shares (if traded on the NASDAQ) will be halted for aftermarket trading.
    • Avoid where DTCC cannot allocate the consideration to all participants until the next day.
    • This could prevent certain merger-entitled holders to trade their new shares of the combined company if their old shares are being exchanged for new shares in the transaction.
Some of these holders may be at a disadvantage by not being able to trade their new entitlement if the merger consideration is in the form of acquiring company shares or an entirely new security.

4. How it all appears on your financial account statement

Broker/dealers who have their own participant account at DTCC or who use a clearing broker (who is a participant at DTCC) are required to fully reconcile their positions in their DTCC account daily.

If DTCC swings their position before the acquired security is set to settle in its normal (T+2) settlement cycle, these financial institutions/broker dealers will need to adjust orders for trades that have not yet settled into the merger consideration.

Although brokers and financial institutions are highly regulated and must comply with strict securities laws, they also have their own process and procedures in place on how M&A entitlements are applied to individual client accounts.

Some of these firms apply consideration when the legal ownership has been established, regardless of whether DTCC has performed the allocation process. Other firms will not allocate the consideration until DTCC has fully credited and adjusted their participant account.

The solution: Understand how your merger timing processes integrate with relevant DTCC processes.

5. How regulatory approvals and requirements can influence everything

In addition to finalizing and receiving approval from the state of incorporation for the acquired company, many public companies are also regulated by different jurisdictions and governmental departments and agencies.

Getting all the necessary approvals that these other ruling bodies require to close the merger can be a challenge on its own.

As mergers are often delayed from their expected closing timeline, public companies are often pressed to file their articles or certificate of merger immediately, depending on what their state will allow. This haste and anxiety to close can influence the company and its counsel to lose sight of the other issues pointed out above.

What makes matters more complicated, public companies are also required to file their financial statements (SEC Form 10-K or 10-Q) within a certain time frame after the company’s previous quarter has ended.

Although a company is no longer deemed to be a public company after effectively filing to close their merger and their shares are no longer traded in the public market, the deregistration process with the SEC is not so immediate.

It can take an additional 10 days for this SEC process to be finalized after the exchange or SRO has completed their delisting confirmation filing, usually in the form (SEC Form-25).

The solution: To avoid the cost associated with the preparation and filing of the financials, the company should focus on closing the merger transaction as early as possible, creating more assurance that they will not be obligated to file.

At EQ, our team has guided some of the best brands in the world on their corporate events like mergers and acquisitions for more than 50 years and we have provided customized solutions that fit the most demanding corporate transaction requirements.

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