On April 5, President Obama signed into law the Jumpstart Our Business Startups Act (the “JOBS Act”), which as we’ve previously noted represents a very significant loosening of restrictions around the IPO process and post-IPO reporting obligations. While most of the commentary on this legislation has thus far focused on its impact on capital markets matters, there are implications for private company mergers and acquisitions as well.
Late-stage private companies contemplating an M&A or IPO exit often undertake so-called “dual-track” processes in which they simultaneously file an IPO registration statement with the SEC and hold discussions with prospective acquirors. The IPO side of the process effectively becomes a stalking horse for M&A discussions and tends to force the hand of prospective acquirors that might otherwise not move as quickly as the target would like. The publicly filed registration statement both attracts attention and provides prospective acquirors with a sort of first-stage diligence that theoretically helps encourage bids.
Under the JOBS Act, emerging growth companies or “EGCs” will now have the ability to file their registration statements confidentially, so long as the confidential filings are ultimately released at least 21 days before the road show. Whether confidential filings will become the norm remains to be seen; there are a number of reasons why an IPO candidate might want to continue to use the traditional public filing process, including the publicity, customer and employee-related benefits of having a highly visible registration statement. For many companies, however, these benefits will be outweighed by the competitive advantages of keeping early filings confidential. The optionality that confidential filings create may be hard to resist: A confidential filer can now pull its deal without the stigma associated with withdrawing a publicly filed registration statement.
The ability to file confidentially creates another sort of optionality for a company undertaking a dual-track process, in that it can now conduct both sides of the process outside the public eye. The ability to tell a prospective buyer that the IPO process is already reasonably far along is a powerful tool, and being able to surprise a buyer with a registration statement that has already been through multiple rounds of SEC review will give targets a greater degree of control in dual-track negotiations. Companies pursuing a dual-track process will need to balance these advantages against the alternative approach of making their IPO filings fully visible to prospective acquirors, which could theoretically attract additional bidders or facilitate the process by making their diligence easier. If confidential registration statements become the norm, a non-confidential filing may come to suggest something other than an ordinary IPO process. But a company that files confidentially may also be sending a signal to buyers if it ostensibly starts the 21-day clock by publicly releasing its filings and then fails to begin its road show within a reasonable period of time.
Lastly, the relaxation of restrictions on “test the waters” pre-marketing has implications for private targets regardless of whether they undertake a dual-track process or a standalone M&A process. As we noted in our March 26 memorandum, there is a potential inconsistency in the JOBS Act regarding whether an EGC can engage in such pre-marketing more than 21 days before a public filing. Regardless of how the inconsistency is resolved, however, the EGC’s advisers can engage in pre-marketing to qualified institutional buyers and accredited investors, which provides an additional way to conduct a market check for a company that has an acquisition offer in hand – or for that matter, even one in the midst of price negotiations.
For additional information on the JOBS Act, see our March 9 memorandum, Quicker to Market? U.S. House of Representatives Passes the Jumpstart Our Business Startups Act, our March 26 memorandum, The JOBS Act: Implications for Capital Markets Professionals, Pre-IPO Companies and Private Offerings and our March 28 memorandum, The JOBS Act: Implications for Broker-Dealers.