The Application of U.S. Securities Laws to Overseas Business Transactions
Bohrer, Stephen D., Stanford Journal of Law, Business & Finance
Non-U.S. companies may consider privately placing securities in the United States in lieu of a registered public offering in order to avoid becoming subject to the Sarbanes-Oxley Act and other U.S. securities regulations. This strategy, however, can be thwarted in a subsequent business acquisition. U.S. securities laws can apply to an overseas business acquisition and require an Acquiror to register its securities in order to close the deal.
One might think that a tender offer or merger involving non-U.S. companies would not need to comply with U.S. securities laws. However, U.S. securities laws are drafted broadly enough to cover transactions involving companies located outside the United States which have U.S. shareholders. Non-U.S. companies selling securities in the U.S. private capital markets may not recognize the potential additional expenses, delays, and exposure to liability that they may experience if U.S. securities laws apply to their subsequent corporate activities. The application of U.S. securities laws to an overseas transaction can create difficult structuring and disclosure issues that can ultimately jeopardize the completion of the deal. Finding an available exemption to the application of U.S. securities laws, therefore, can be a determining factor for whether a company pursues a particular business opportunity.
Depending on the method used to acquire another company, U.S. tender offer rules under the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and/or the registration requirements under the U.S. Securities Act of 1933, as amended (the "Securities Act") can apply to the transaction.1 Having U.S. tender offer rules apply to a transaction can have a variety of consequences that may increase the cost and uncertainty of completing the deal, including conflicting regulations regarding (i) commencement of the offering, (ii) minimum offering periods, (iii) withdrawal rights, (iv) purchases outside the offer, (v) defensive tactics and (vi) disclosure obligations. Registering a transaction under the securities Act has a variety of consequences that the person making the offer (the "Acquirer") may consider unacceptable if it is a first time filer with the U.S. securities and Exchange Commission (the "sec"), such as:
* preparing an offer document that contains extensive disclosure about itself, the company being acquired (the "Target"), the background and reasons for the transaction, and the fairness of the consideration being offered to shareholders;
* producing financial statements prepared in accordance with U.S. generally accepted accounting principles (or reconciled to U.S. generally accepted accounting principles);
* subjecting the offer document to the review and comments of the SEC, which can delay the completion of the transaction by several months;
* complying with the requirements of the Sarbanes-Oxley Act and the U.S. Foreign Corrupt Practices Act;
* becoming subject to the periodic filing requirements of the Exchange Act;
* restricting the form and timing of publicity about itself and the transaction; and
* increasing its exposure to U.S. securities law litigation.
A violation of or failure to comply with U.S. securities laws can lead to criminal, civil, or administrative proceedings arising from the alleged violation of law. The SEC can seek a variety of remedies pursuant to an administrative proceeding, such as ordering the Acquirer to cease and desist from committing any violations or causing any future violations of U.S. securities laws, or barring the Acquirer from accessing the U.S. capital markets in the future. Violations of the registration requirements of the securities Act may also allow purchasers to have the right, for a period of one year from the date of the violation (though in no event may a suit commence more than three years after the securities were bona fide offered), to obtain recovery of the consideration paid for the security or, if they have already sold the security, the losses resulting from the transaction. …