Securities Offerings 2012: Preparing Your Registration Statement, Negotiating the Underwriting Agreement and Offering Mechanics Presentation to the Practising Law Institute April 11, 2012 David K. Boston Robert Evans III Pamela A. Long Topics     Preparing Your Registration Statement Underwriting and Distribution Arrangements Offering Mechanics Corporation Finance’s “Top 10” List for the IPO Process 2 Preparing Your Registration Statement April 11, 2012 Presented by Robert Evans III Shearman & Sterling LLP 3 Form S-1 and S-3  Form S-1: The default form for U.S. issuers, and used in IPOs  Form S-3: Allows more flexibility if certain requirements are met, including: U.S. issuer must be required to file reports under the Exchange Act, and have done so for the last 12 months  Reports must have been timely filed for the last 12 months  Since the end of the last year covered by its audited financial statements, issuer cannot have failed to pay dividends on preferred stock or defaulted on installments on indebtedness or on material leases  Transaction requirements  4 Form S-1 and S-3 (cont.)  Using a Form Check: Start with the appropriate form;  Identify all the information it requires;  Consult the Rules (S-K and S-X) it refers to; and  Do the same with all incorporated documents.   Finding an appropriate model: comparable industry and comparable size 5 Deal Specific Registration vs. Shelf Registration Deal Specific Registration  More Details  You register the amount and type of securities and go effective Shelf  Fewer Details   Registration statement is filed for one or more classes of securities, not a specific transaction Less Time Needed  A deal can take less time off an effective shelf than filing a new deal-specific registration statement 6 WKSIs  WKSI – seasoned issuer that has either: $700 million of worldwide public common equity float; or  Issued $1 billion of non-convertible securities, other than common equity, in registered offerings for cash, in the preceding three years.   Automatic shelf registration – effective upon filing  Typically need a new registration statement every three years 7 Underwriting and Distribution Arrangements David K. Boston April 11, 2012 Copyright © 2012 by Willkie Farr & Gallagher LLP. All Rights Reserved. These course materials may not be reproduced or disseminated in any form without the express permission of Willkie Farr & Gallagher LLP. 8 Basic Underwriting Documents   Underwriting Agreement (“UA”)  Establishes basic relationship between issuer and underwriter  Sets forth rights and obligations of issuer and underwriter  Until executed, no binding agreement to purchase and sell securities Agreement Among Underwriters  Establishes terms of the relationship among members of an underwriting syndicate  Designates managing underwriter with the power to act on behalf of syndicate  Generally, the managing underwriter’s standing master agreement is used 9 Underwriting Agreement—Introduction  UA generally executed after effectiveness of registration statement and at the time the offering is priced  UA is basic agreement between the issuer (and any selling securityholders) and the underwriters  Contains issuer’s obligation to sell and the underwriters’ obligation to buy securities, including terms and conditions applicable to offering  Each underwriter’s obligation to purchase is several  The various component parts of the UA reflect that:   Closing of the sale of securities occurs 3-4 business days after the UA is signed – Closing conditions and termination provisions Underwriters resell the securities they buy to investors and have securities law liability for material misstatements in, and omissions from, the offering documents – Indemnification and contribution provisions; issuer and selling securityholder representations and warranties 10 UA—Negotiations  Underwriters prefer to negotiate UA as early in registration process as possible  Actual negotiations limited, and most often underwriters’ counsel drafts the UA based upon the managing underwriter’s form  Underwriters strongly resist straying too far from form UA  However, a few sections are generally subject to negotiation, including issuer’s representations and warranties, opinion of issuer’s counsel and the “comfort” letter 11 UA—Representations and Warranties     Review of representations and warranties while negotiating the UA is a helpful due diligence exercise Two basic categories: representations regarding the offering and representations regarding the issuer’s business In general, the representations regarding the business should be qualified by materiality; purpose is not to generate breach claims Offering representations include:     Absence of material misstatement or omission in the preliminary prospectus, prospectus or any free writing prospectuses (“FWPs”) Due authorization of the securities to be offered Due authorization of the UA Business representations include:        Absence of a material adverse change in the issuer’s business Absence of defaults under charter and contracts Absence of undisclosed liabilities and litigation Possession of all necessary licenses and permits Title to assets, etc. Not subject to sanctions administered by OFAC Absence of any violations of FCPA or anti-money-laundering laws 12 UA—Representations and Warranties (Cont’d)   Scope of business representations depends on the nature of the issuer’s business  IP and patent representations included for a technology company  Regulatory compliance representations included for a regulated business such as an insurer or a telecom company Subsidiaries: If issuer has many subsidiaries, issuer will seek to make representations only with respect to “important” subsidiaries 13 UA—Representations and Warranties (Cont’d)  In a secondary offering by securityholders:  Each selling securityholder should represent as to its authority to act, title to securities being sold and accuracy of information contained in prospectus with respect to that selling securityholder  Often a debate on whether and to what extent a selling securityholder should give representations overlapping the issuer’s representations 14 UA—Issuer’s Covenants       Refrain from using issuer FWPs without underwriters’ prior written consent File issuer FWPs and any necessary amendments or supplements to registration statement and prospectus and make requisite filings pursuant to Rule 430A, 430B or 430C Advise underwriters of any action taken by SEC or state authorities Refrain from selling securities of same class, or securities convertible into same class (often for 90 to 180 days), without consent of underwriters  Time period may be extended if expiration of lock-up coincides with issuer’s earnings release, so as to comply with FINRA rules regarding publication of research reports by underwriters participating in a previous offering of issuer Qualify securities for listing on NYSE or Nasdaq Deliver an “earning statement” as contemplated by Rule 158 15 UA—Conditions to Closing     Registration Statement declared effective, Rule 424 prospectus filed, no stop order Issuer has not suffered a material adverse change Neither the registration statement, prospectus nor pricing disclosure package includes an untrue statement of a material fact or omits to state a material fact  The pricing disclosure package is the information conveyed to investors at the time of sale – the most recent preliminary prospectus plus any pricing term sheet (or comparable pricing information) Underwriters receive certificates from senior officers of the issuer certifying that:  The issuer’s representations and warranties are accurate as of closing date  The issuer performed all its obligations under UA  The registration statement, prospectus and pricing disclosure package are materially correct  No event has occurred since the pricing that would be required to be set forth in an amendment or supplement to the registration statement or prospectus 16 UA—Conditions to Closing (Cont’d)   Opinion of issuer’s counsel  Subject to extensive negotiation and varies widely from offering to offering  Possible “split” of opinions between issuer’s inside and outside counsel Opinion covers matters such as:  Valid existence and good standing of issuer  Securities, upon issuance, will be duly authorized, validly issued, fully paid and nonassessable  Effectiveness of registration statement and that no stop order is in effect  UA is duly authorized, executed and delivered by issuer 17 UA—Conditions to Closing (Cont’d)  Opinion covers matters such as (Cont’d):  Issue and sale of securities will not conflict with issuer’s charter or by-laws, applicable law or specified material contracts  Other issuer-specific matters related to intellectual property, regulatory approvals and regulatory disclosure, and material foreign subsidiaries (these opinions often require intellectual property, special regulatory and/or foreign counsel) 18 UA—Conditions to Closing (Cont’d)  Issuer’s counsel delivers:  Negative Assurance Letter (also referred to as a “10b-5 statement”) – Not an opinion, but instead a statement of the counsel’s view regarding the absence of material misstatements in or omissions from the offering documents – Financial statements and sometimes statistical data excluded from scope of negative assurances – Also addresses pricing disclosure package as of the time of pricing 19 UA—Conditions to Closing (Cont’d)  “Comfort” letter  Issuer must provide “comfort” letter from its independent registered public accountants to underwriters in a form satisfactory to the underwriters  Delivered at time of execution of UA and on the closing date (referred to as a “Bring-Down Comfort Letter”)  Covers audited and unaudited financial statements and specified financial information appearing throughout the preliminary prospectus and the prospectus 20 UA—Indemnification  Issuers indemnify underwriters for losses arising out of untrue statements and omissions of material facts or alleged untrue statements or omissions of material facts contained in the registration statement, any preliminary prospectus, any prospectus, the pricing disclosure package and any issuer FWP  Selling securityholders indemnify underwriters for information provided by selling securityholders and sometimes with respect to information about the issuer’s business 21 UA—Indemnification (Cont’d)   An underwriter’s obligations are narrow: to severally indemnify the issuer (and any selling securityholders) for losses arising out of any material misstatements or omissions made in reliance upon information furnished by the underwriter  Information provided by underwriters is limited to specified information about the underwriters or the mechanics of the offering  Underwriters are not responsible for information about the issuer or the issuer’s business even if the underwriters were involved in drafting the information Contribution: UA contains contribution provisions due in part to the possibility that the indemnification provisions could be challenged  If indemnification is unavailable, contribution is based on either the relative benefits of the offering between the issuer and the underwriter or the relative fault of the parties 22 UA—Termination   UA is terminable by the underwriters if any conditions to the underwriters’ obligations are not met Underwriters also typically retain the right to terminate UA if certain events occur before closing. Some of the events are specific to the issuer; others relate to the markets generally. They include:  Suspension in trading of the issuer’s securities  Downgrading of the issuer’s debt by a credit-rating agency  General suspension or limitation of trading on stock exchanges  Declaration of general banking moratorium  Material disruption in securities settlement, payment or clearance services  Attack, outbreak or escalation of hostilities, declaration of war or act of terrorism involving the United States makes it impractical or inadvisable to conduct offering  Underwriters’ belief, in their discretion, that financial, political or economic conditions have adversely affected the market for the securities (sometimes called the “market out” clause) 23 At the Market Offerings  Alternative method of raising capital to an underwritten offering  Used by more issuers, including several large, high-profile companies  Prevalence of at the market offerings a response to a volatile financial market in which an issuer may be unable to complete a larger underwritten offering  Issuer sets up a program to “dribble out” shares into the market over time  At prevailing market price  On a registered basis 24 At the Market Offerings  Different from an underwritten offering  Conducted over a period of time (but there is generally a maximum aggregate offering price)  Issuer engages one or more broker-dealers to act as agents under the program to sell shares on an agency (rather than firm commitment underwritten) basis  “Equity Distribution Agreement” versus Underwriting Agreement  Neither the issuer nor the agent is obligated to sell any shares: – on any day in which the issuer intends to sell shares, it notifies the agent, and – the agent uses reasonable efforts to sell shares 25 Equity Distribution Agreement (EDA)  Similar to a UA, in part because agent may have statutory underwriter liability  Similar provisions and points of negotiation (for example, extensive representations on the issuer’s business; indemnification and contribution provisions)  Agent typically requires customary diligence protections given to underwriters in firm commitment underwritten offerings, such as:   Legal opinions  Comfort letter Updates of diligence, including legal opinions and comfort letter, at least quarterly so long as program is in effect 26 EDA—Setting Up and Maintaining the Program   EDA describes procedures by which to set up and maintain the program:  Issuer must have an effective shelf registration statement  Issuer files prospectus supplement relating to the at the market offering  Parties sign EDA  Agent receives legal opinions, 10b-5 statements and comfort letter  Issuer files 8-K that includes the EDA Termination – either the agent or issuer can suspend or terminate program anytime 27 EDA—Continuing Obligations  EDA sets forth continuing obligations of the parties under the program:  Opinions and 10b-5 statements  Comfort letters  Certificates  Bring-down due diligence  Prospectus supplements or disclosure in 1934 Act periodic reports 28 Offering Mechanics April 11, 2012 Presented by Robert Evans III Shearman & Sterling LLP NYDOCS01/1293301.2 29 29 Base Prospectus and Supplement What is filed as part of a shelf registration statement (the “base” prospectus):            Cover of the Prospectus Inside Front Cover Incorporation by Reference (a.k.a. Where you can find more information) The Company Risk Factors Use of Proceeds Ratio of Earnings to Fixed Charges Description of the Various Types of Securities Offered Plan of Distribution Legal Opinions Experts 30 Base Prospectus and Supplement (cont.) What is filed with the prospectus supplement?        Risk Factors Terms of the Securities Proceeds Table Identity of the Underwriters Specific Use of Proceeds Tax Considerations Underwriting Section 31 Pricing and Closing Pricing:  Delivery of the Comfort Letter and execution of the Underwriting Agreement Closing  T+3 standard, or if you price after market close, T+4  Wiring of the funds, delivery of the securities  Delivery of the Bring-down Comfort Letter and Legal Opinions 32 Corporation Finance’s “Top 10” List for the IPO Process 33 Thank You 34