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.
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.