Number 1305 March 15, 2012 Client Alert Latham & Watkins Capital Markets Group The Bought Deal Bible: A User’s Guide to Bought Deals and Block Trades It’s Monday morning and you’ve been • Will the underwriter need to promise told that your favorite seasoned issuer is wall-crossed accounts a “free-to- planning a bought deal that is scheduled trade” date that might require to launch after the close of trading on issuer disclosure if the deal does not Wednesday. What do you do? Well, you proceed? don’t need to panic — we have you • Will the underwriter need a covered. All you need to do is answer preliminary prospectus supplement at the following simple questions: the time of launch? • Will it be a public offering? • Will there also be a press release at “This Client • Is the issuer a well-known seasoned the time of launch? issuer? Alert provides a • Will the sale by the underwriter be comprehensive • Is there available room under an in a fixed price offering or a variable effective shelf? price reoffering? review of all of the legal and practical • Does the issuer’s disclosure need • Will there be a “pricing” press release topping up in light of recent or after pricing? issues you will pending events or announcements? • Will there be any selling stockholders? face in executing • Does the issuer need to file a Form • Do the selling stockholders (or their a bought deal. In 8-K with any necessary topping board designees) have any material up disclosure or will a prospectus Annex A, we have non-public information? supplement or press release be included a sample sufficient? • Are there any underwriting timeline for a agreement issues to be negotiated? • Is the fact that a deal is pending registered bought material? • What lock-ups will be required from existing stockholders, if any? deal that will help • Will the underwriter be pre- you get control of marketing the deal prior to public • Are there any NYSE or Nasdaq issues the process.” announcement? to consider? • Will the underwriter be wall- • Will a FINRA filing be required? crossing potential investors prior to • Are there any “blue sky” issues? announcement? • Are there any difficult comfort or due diligence issues? 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Latham & Watkins | Client Alert This Client Alert provides a SIFMA Guidelines comprehensive review of all of the legal In March 2008, the Securities Industry and practical issues you will face in and Financial Markets Association executing a bought deal. In Annex A, published a set of guidelines for we have included a sample timeline for bought deals entitled “Block Trade a registered bought deal that will help Guidelines.”1 The SIFMA guidelines you get control of the process. You now emphasize the importance of having all have the tools you need to answer all of documentation ready prior to launch to these questions. enable the underwriter to confirm trades For simplicity’s sake, we will start by as soon as a deal is struck between the discussing bought deals as if they are issuer and the underwriter. always for the account of the issuer. Preparedness is everything in the In practice, however, this is often context of a bought deal. Delay can not the case. There are a number of result in major financial losses — special issues that apply to bought minutes can mean millions of dollars. deals involving resales of outstanding securities by selling stockholders. Shelf Registration We review those issues below under “Special Issues in Secondary Trades.” The first question to ask when contemplating a registered bought deal What’s a Bought Deal or a is whether the issuer has an effective shelf registration statement with Block Trade Anyway? sufficient available capacity. If so, you’re In this Client Alert, when we refer to off to the races.2 a “bought deal,” we mean a securities Even if not, you’re still good to go if offering in which an underwriter agrees the issuer qualifies as a well-known to purchase an issuer’s securities at an seasoned issuer, since WKSIs can file agreed price (or pricing formula) without an immediately effective automatic a prior marketing process. The term shelf registration statement on Form “block trade” means a sale of a block S-3 without SEC Staff review.3 Non- of securities (typically 10,000 or more WKSI issuers without an effective shelf shares of stock or $200,000 or more in registration statement, by contrast, principal amount of bonds) and is often will not be in a position to consider a used interchangeably with the term registered bought deal, because they bought deal, particularly where the will not typically have the time to wait seller is an existing stockholder rather for a new Form S-3 to become effective. than the issuer. As a result, bought deals for non-WKSI A bought deal decreases execution risk issuers are sometimes accomplished for the issuer or selling stockholder and through an exempt offering. Bought shifts market risk to the underwriter deals involving newly issued common earlier in the transaction by allowing stock are usually done on a registered sellers of securities to lock in the seller’s basis, however, because the Rule 144A price before launch and without an exemption from registration is generally extensive issuer marketing process. Of not available for securities that are course, there is no such thing as a free fungible with a class of securities listed lunch. Bought deals demand execution on a US national securities exchange, within a very quick timeframe, e.g., common stock listed on the NYSE while at the same time requiring the or the Nasdaq. maintenance of customarily strict due If the issuer has an effective shelf, the diligence and documentation standards. question becomes whether there is They are not for the faint of heart. sufficient capacity under the shelf to do the bought deal. Once again, it’s good 2 Number 1305 | March 15, 2012 Latham & Watkins | Client Alert to be a WKSI. In the first place, a WKSI obstacle for WKSIs than for non-WKSIs, shelf can be filed without specifying a given that a WKSI can simply put up deal size or a number of securities under a new automatic shelf registration Securities Act Rule 430B(a). Instead, statement. You should be aware of a WKSI can rely on the “pay-as-you- the possibility that a particular bought go” provisions of Securities Act Rules deal may not be successfully resold 456(b) and 457(r) to pay fees at the immediately, in which case an expiring time the final pro supp for the offering underlying shelf can be problematic. is filed under Rule 424(b). Even if the Note also that the expiration date WKSI shelf specifies a maximum deal issue does not apply to resale shelf size and there is insufficient remaining registration statements covering resales capacity, a WKSI can simply file a new, by selling stockholders. immediately effective automatic shelf. Issuers that are Form S-3 eligible Assessing Your Disclosure but are not WKSIs don’t enjoy the Package: The Section 11 and luxuries of an automatically effective Section 12 Files registration statement or the pay- as-you-go fee system. Their options The Section 11 File are much more limited if they have Section 11(a) of the Securities Act insufficient shelf capacity remaining imposes liability if any part of a for the proposed bought deal. One registration statement, at effectiveness, possibility is to upsize an existing shelf contained a material misstatement or by filing an immediately effective omission. Section 11 liability covers short-form registration statement under only the registration statement and Securities Act Rule 462(b). However, information included in the registration the Rule 462(b) option can only be statement (and accordingly, would not used once per shelf and is limited to typically cover free writing prospectuses 20 percent of the remaining unused or road show slides). capacity of the original shelf.4 The issuer For the purposes of this Client Alert, we could, of course, file a new Form S-3 use the term “Section 11 file” to cover registration statement, but that would all of the information deemed to be introduce timing uncertainties. Even part of the registration statement at the if the SEC Staff chooses not to review relevant moment of effectiveness. the new registration statement, that determination itself takes a few days, A shelf registration statement can have and the shelf filing may send signals multiple effective times: to the market and generate downward • the time of original effectiveness; selling pressure that the issuer would prefer to avoid. Given these limitations, • the time a post-effective amendment a non-WKSI issuer should file a shelf became effective; registration statement well in advance • the time of filing an annual report of an anticipated bought deal and pay that is incorporated by reference in the requisite filing fees for any and all the shelf and acts as an update under securities anticipated to be sold in the Securities Act Section 10(a)(3); and offering.5 • at each takedown off the shelf.6 When considering whether a currently effective Form S-3 shelf is suitable for a As a result, the Section 11 file changes planned bought deal, keep in mind that over time.