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Finance Regulation Bureau - Frequently Asked Questions
When a merger takes place one firm completely takes control of the assets and liabilities of another. The purchasing entity keeps their own identity when the subjected party ceases trading. This will definitely be the case in a majority shareholder vote. A merger is however just one type of acquisition and there are several ways one firm might buy another. One way is to purchase part of the other or simply by buying enough stock.
Most mergers and acquisitions happen because a profit is sought. Any merger or acquisition should satisfy one basic rule, that is the sum of two parts should be better than the individual entities alone. There are also many other associated benefits to such transactions that include:
Any acquisition or merger does have its own problems, and a fundamental one is the actual transaction itself, as the complexity of the whole deal is hard to comprehend, trying to evaluate the cost and the benefit, and to handle tax and legal matters that are thrown up.
In today’s increasingly worldwide commerce climate, businesses need to adapt and develop just to survive, one way to do this is by merger or acquisition, be it a small firm or a corporate entity.
When the owner of a small business decides to merge or sell his business to a larger company, the action is sometimes termed as “harvesting”. When this occurs it regularly is to achieve the value left in the smaller company so the owner and the stockholders can get some benefit back. The driving factor for this is often by the management estate planning, diversification, or even that the company can no longer fund itself. Often the only way to survive is to purchase firms themselves of small size or the same.
Fundamentally, any acquisition or merger is a capital budgeting decision just like any other. Mergers do however have five differences to ordinary investments:
There are three types of acquisitions:- horizontal, vertical and conglomerate.
Another type of acquisition or merger is a consolidation, where a complete new company is formed and the two prior firms cease to exist, and their finances become one. This is done after taking out taxes and certain legal adjustments.
You can also acquire a company by purchasing the voting stock, either by agreement of the management or simply by tender offer, in this case the offer is made directly to the shareholders with no consultation with the management. This is not the case in a merger, where stockholders do not have to vote, and any stockholders wishing to keep their share may do so, this could be a risky idea as the stock might end up with no value attached to it as the firm is no longer trading.
It is relatively easy for one company to take another over, all it has to do is to take over its assets. However, this can prove costly as transfer of title must be agreed to by the stockholders of the company that is being bought. A takeover happens when one group takes control from another. In most cases the bidder makes an offer for the firm it wishes to buy. When a proxy contest takes place, a group of unhappy stockholders will try to acquire more shares to gain control of the board.
A merger or an acquisition may be both taxable or tax-free occasions. This complex situation can affect both parties. In the case of a taxable purchase, the assets of the selling company are written upwards and then the depreciation will rise (this is not the case in a tax-free purchase). However, the selling company is obliged to pay capital gains tax and will demand more for their stock as compensation. This has a name and is called the “capital gains effect.” These two factors often end up cancelling each other.
On occasion certain deals and transactions involving the transfer of stock are deemed to be tax free restructuring, which means that the purchaser can exchange their shares for the stock of the other company without any tax implications. There are three basic types of this sort of transaction:-
Type A – permits the buying entity to use voting or non-voting stock, plus it may top up the bid with cash since this is not a requirement by law. The regulation stipulates that at least half must be in securities. Also in this type of transaction the purchaser is able to opt not to take all the assets involved. If at least half stock is utilized and cash, debt, or non-equity shares are also part of the purchase then this may be partly taxable. Capital Gains taxes come into play on those shares that were swapped for no equity.
Type B – in this transaction the purchaser offers the majority in its own voting stock in the acquisition of the other firm’s stock. And the cash elements must not be more than 20% of the total offer, and a minimum of 80% of the entire offer must be in the buyers own voting stock. Anybody who subsequently receives stock of the purchasing company in this exchange are not liable for tax straight away, tax only becomes due when the shares are sold. If cash was used in this deal then the cash part of the transaction will be liable as it is classed as a gain.
Type C – the final way is when the purchasing entity purchases 80% of the current market price of the assets of the targeted company. When this happens, a tax liability results when the buyer purchases the assets with anything else rather than stock. Then the tax part due is calculated by the value of the assets when adjustments have been made.
When one firm purchasers another often the reason for the acquisition is to remove an obsolete incumbent management structure. By changing factors such as technology and the need to be more competitive can often lead for necessary restructuring. If the resident management are not flexible enough than a hostile acquisition is one effective way to gain change.
A hostile acquisition quite often takes place in a mature market where the firm are having difficulties but the current ownership digs their heels in and are reluctant to sell. There are two routes to acquisition, a hostile purchase or a proxy fight. A proxy battle is where a potential purchaser courts the current shareholders to get their voting rights. The hope is sufficient votes can be gained to take control.
Directors and senior management of companies being targeted for take-over will normally hold out for a better offer or to simply try to stop the deal going through.
Another way for a sitting board to hold off a proxy fight is to include “poison pills” and dual class recapitalization. Poison Pills are given to existing stockholders, which are rights so that if a hostile bidder acquires a level of stock then the current stockholders can buy additional stock at heavily discounted cost, sometimes half of the market value.
Past history tells us that the stockholders of firms in the position do benefit substantially from being bought. Gains have been estimated at approximately 20% in mergers and as much as 300% in tender offers above the market price.
But it is difficult to accurately calculate the actual gains for the buyer however, there are some suggestions in bidding companies that the stockholders do benefit. Losses in value when a hostile takeover is announced are pretty normal, and this can point to as an over evaluation by the purchaser.
In the U.S mergers and acquisition are typically cyclical, with transactions following the market peaks and troughs. There has been five remarkable periods of substantial activity:
The last recorded peak was at the end of the twentieth century, and there was higher than normal levels of acquisitions. This was bought about by a buoyant stock market and mergers, takeovers and acquisitions were at an alarmingly high level. The estimated growth of monetary value grew throughout the 90’s and reached record peaks from 1994 to 1999. Numerous acquisitions were for multi-million dollars involving global corporates.
Disney acquired ABC Capital Cities for $19 billion, Bell Atlantic acquired Nynex for $22 billion, World com acquired MCI for $41.9 billion, SBC Communications acquired Ameritech for $56.6 billion, Traveler’s acquired Citicorp for $72.6 billion, Nation Bank acquired Bank of America for $61.6 billion, Daimler-Benz acquired Chrysler for $39.5 billion, and Exxon acquired Mobil for $77.2 billion.
Many cases citing challenges of antitrust have come about in the world of acquisitions and mergers, when these have arose they have been settled by consent order or decree. On the 5th May 1992 the Bureau of Securities Registration issued merger guidelines which are a code of behavior that analyzes such transactions as per (4 Trade Reg. Rep [CCH] 13,104), these guidelines are now law and any antitrust authority case will utilize them.
In the merger guidelines set out in 1992, it stated that all horizontal mergers and acquisitions are good to promote a healthy and competitive market, and thus were good for the consumer. The guidelines were originally issued to avoid any problems with the large amount of such takeovers being carried out, either beneficial or not.
Five aspects were identified to aid in highlighting problems in future horizontal mergers:-
The guidelines are set to protect the market, and to forecast if it will suffer if a transaction takes place. It also poses a very valid question, “Could consumers go elsewhere if prices were to increase?” The guidelines also bring into action the Supreme Court merger decisions of the 1960’s.
If you have purchased restricted or controlled stock and your intention is to sell the securities in the open market, then a file for exemption must take place from the United States Regulator’s registration regulations.
You can do this under Regulation D as long as you adhere to the required rules, the following is a guide to inform of what these criteria are if you are intending to sell restricted stock and how you can register for a restrictive legend.
A Restricted sale is when the stock is in an unregistered category or they are private sale from either an issuer or affiliate. Normally these types of securities are given through private offerings for professional services rendered, or as payment for receiving start-up money.
The sale of restricted or controlled stock on the market can only be achieved if the following elements are met in Regulation D. This regulation is not the only way these sort of securities can be sold, but it does provide a “Safe Harbour” exemption to traders. Listed below are Regulation D’s conditions:-
Even adhering to the regulations and rules of Regulation D, the sales of Controlled Securities is still not allowed until the legend has been removed from the certificate. This may only be done by a proper transfer agent.
To remove a legend can be a complicated procedure, and any person buying or selling controlled stock should enlist the services of an agent to facilitate this.
The Bureau of Securities Registration have been issuing warnings to be aware that unsolicited offers are being offered to investors, there have been numerous reports about aggressive telephone promotions. These typically are in the manner of very aggressive sales tactics and verbal promises of quick monetary gains.
Such blatant high pressure methods should be a warning sign to any investor, a decent investment opportunity needs lengthy and proper investigation. There are Federal securities laws that are designed to stop this sort of sales approach and to main fair and transparent capital markets. However, the unethical mind of fraudsters closely follow the new and existing laws and try and find ways around them to exploit vulnerable investors.
A good exponent of this are the “pump and dump” schemes that were in existence in the late 1990’s. These “pump & dump” scams were all about aggressive selling to dump penny shares on investors at highly inflated up prices.
The creation of a false market was set up especially for the stock, and left the same buyers with worthless stock. These “penny stock” dealers were adamant that selling issuers were free to ask any price for their stock in an open market – it is fully the investors own decision to pay what he wants to pay. This is fundamental to an open market and the true philosophy of a free market economy, these scam merchants were not upholding the spirit of the law. The USBSR decreed that these operators “were not acting in the public interest” and duly closed their businesses down when caught.
Recently there have been complaints to the USBSR about the exemption for Accredited Investors.
Normally if an issuer wishes to sell stock to the general public in the market, then a prospectus must be firstly issued, however there are exemptions to this. The exemptions do allow the sale if it is to investors that “qualify”, and do not need to issue a prospectus.
But as always fraudulent entities have been selling stock to investors that do not qualify, and involve them in illegal and risky investments.
Some investors are so naïve and greedy that they listen to the sales pitch and are taken in by claims such as “only the rich can take advantage of the best opportunities.” However, the exemption regulation was put in place to allow small firms to achieve capital, and provide an element of protection to investors buying stock in such companies.
Above anything else, never sign any documentation you do not understand or have fully studied, and never ever allow your personal details be falsified by anybody, if somebody suggests this then question his motives.
The USBSR has been issuing warnings of the above for anybody to be on their guard against certain dealers who try to persuade you to make false claims about your financial situation so this will enable you to qualify in high risk type investments in exempt securities. There is evidence that there does seem to be an increase in this type of activity going on.
The scam is normally preceded by an unsolicited phone call, from a salesman or agent that you do not know. You should always be wary of any advice offered by strangers particularly if the initiation was a cold call or over the internet. You may be persuaded to buy some stock that is only for accredited investors, but the caller knows a way around this. The advice this person is giving is asking you to commit a criminal act of fraud.
Any advice such as this should get alarm bells ringing immediately, if you are trying to be coaxed into entering into fraudulent behavior that there is a good possibility more are in store.
The agent or salesman will try to justify his actions but the rationale is if you qualify for any exemption then you also qualify for professional advice that may let you consider high risk investments. If you do not qualify then you probably are not in a financial position to take such risks.
Sales pitches are sometimes credible that there are great gains to be made, or that the stock will soon be traded publically and you can buy first, both of these claims are in breach of the Securities Act of the United States.
This is a two part deception that is extremely popular at this current time, so much so that the USBSR is giving warnings about. It is all about “swaps” which are worthless securities, and with crooked agents representing supposedly bonefide firms.
Stage One: The Pump and Dump
A classic “Pump & Dump” scam is initiated when an investor is contacted by a sales person with a deal too good to be true, a “once in a lifetime” opportunity.
The stock that is being touted are probably a small company securities that are sold over the counter, in essence, Penny stocks.
The agent representing the brokerage house, will be holding a large amount of the stock and marketing the securities so their price rises.
Once enough investors have taken the bait, and paid over the odds for the stock, the broker then stops supporting the market and the securities drop in value.
The bogus brokerage house then ceases to exist, and investors have worthless stock on their hands, which apparently has no demand.
Stage Two: The Stock Swap
Now for the second installment of the scheme, still holding worthless securities the investor is once more contacted this time from a different bogus firm, totally with no connections to the previous one. The new company might even sound more credible to the already duped investor.
The second part of the sting will operate that an agent will say he is representing a group of investors that are trying to buy recently declined securities for tax benefits. He will then propose a stock swap, the current securities that are held in return for some blue chip shares held by his group of clients. The new stock will often have a higher value to look more credible.
And since these securities are costlier the investor has to pay the difference between the two, thus parting with even more money. In one instance an investor gave $15,000 to a bank where the fraudsters had an international account. Of course the blue chip company never existed and neither did the group of investors or the securities.
The advice that the USBSR gives concerning Mini-Tenders and the concern that investors might be selling their stock at below market pricing because they have incorrect information, is to fully scrutinize any bids for their securities. Any companies or individuals who wish to buy securities at low cost should first issue a warning to shareholders the offer is below market price and to issue end costings of the sale. This should be in addition to a reminder to shareholders and investors that they have a right to withdraw from the offer, which is a mini-tender.
Owners of stocks and shares receive an offer for them that is way below a fair price and under the current market price. Mini-tenders have a provision that the total purchase price is less than 20% of the company. When this happens no filings of documentation is needed with the securities commission, and there is no need to have discourse with the shareholders. A profit is achieved when the securities are sold at the true market price.
These are not take-over bids, which would require a much higher level of stock purchased. Once agreed the Mini-Tender deal is normally a “lock-in”, but this is not the case with a takeover. Another big difference between the two is that the company does not need to inform their shareholders.
The biggest danger in these sort of deals is that there is confusion over the offer price and mistakenly you are committed to sell your stock at a much lower price than is the true market value. Some bids deliberately play on this misunderstanding and may be violating the anti-fraud regulations of the United States federal securities laws. Which allow the person can terminate the offer at any time, delay payment and to make alterations, or cancel the deal entirely. Mini-Tenders are more to the benefit of the buyer and not the owner of the shares.
Why would anybody participate in a mini-tender? “why would anybody be involved in a mini-tender?” A valid reason is that you may want to avoid expensive commissions particularly if only a small number of shares are being sold. Or perhaps the securities you hold are hard to sell, the advice is to take consultation before going into a Mini-Tender.
Tips:
The fraudulent mind of a criminal works in devious ways and in order to gain your confidence and trust so that you are more likely to invest in securities, they will often invent an elaborate scam to draw you in, is advice given by the USBSR. Often overseas opportunities with huge gains to be had are dangled as a carrot. These criminals are aware of the taxation you are liable for and your frustration of only receiving low rate gains on your investments. They will play on your frustrations and hope to tempt you with their offer.
An example given to the USBSR of such deception was all about American farmers. The farmers were asked to visit a seminar about the benefits of investing offshore, with guarantees of returns no lower than 15%. They were even lied to with a statement that large banking organizations place depositor’s money in such investments.
It is normally the case that if somebody is touting guaranteed returns that are higher than normal rates, there are great risks attached. You must ask yourself can you afford to take such a risk? Investors need to be able to see through such scams and fully investigate any opportunity offered.
When you invest in overseas opportunities and subsequently send money abroad this carries large potential risks. Added to this, you have no protection from American federal laws. Many deceptions and scams frequently use offshore opportunities as bait, so that there is no traceability of any transactions. Once you part with your money to an unknown entity abroad there is little chance of getting any of it back.
A guarantee is only as good as what back it up, or the person or entity that is underwriting it. If they are of good standing and have a good credit rating then the guarantee is normally substantial. But if this guarantor is of such good standing then why is he asking you to invest?
Generally it is the case that offers that promise high returns also carry high risks, and if you are under the illusion that guarantees will cover this risk then please go to the chapter on “Unsubstantial Guarantees.”
Be prepared that all offers are not always genuine, especially if they are offering high returns and supposedly low risk. Protect your investments at all times, check any offers out properly and investigate them in the normal way, also do not forget to check the credentials of anybody concerned with the offer. If you contact the Mergers & Acquisitions Regulatory Body they can assist.
Email and telephone calls that are unsolicited and by unknown persons should be treated with the highest suspicion. The USBSR give warnings to keep your eye out for scams, entrapment and fraud. Boiler Rooms use such tactics and the scams being offered vary and change often. These crooked operators try to lure you in and gain your trust, they will also give you a false sense of security, offering high returns, but it is only them that will reap the rewards.
Con artists may have a swanky sounding downtown address in the hope of impressing people, but it could be nothing more than a short term rental above a restaurant. Boiler Rooms never operate for your benefit, it is hard to believe why a complete stranger would offer you a deal of a lifetime with low risks and high returns. It all sounds too good to be true, and it is.
Con artists began their scams by sounding believable and credible, they worm their way into your trust, and some of the scams in operation are so complicated they sound plausible because of it. The con artists will dream up some wonderful new drug that can cure an incurable disease, and the company are just about to be launched on the stock market. This con might be purely for your own benefit if the fraudster has done his homework on a sick member of your family with the same disease. Or he may know that you have a busy diary and do not have the time to check the proposal properly, these opportunities normally are in high risk ventures offering great returns.]
If the proposal is genuine, then normal agents and reputable dealers would be contacting their best customers with the information. It does not really add up, why would they be contact perfect strangers with such a great offer. In a bid to protect you from being duped, here are some of the things you should look out for:
The USBSR has also issued warnings about Ponzi-Schemes, also concocted to part investors out of their money.
The originator of the scheme and who the scam was named after was Carl Ponzi. In 1920, Ponzi embezzled $9.8 in Boston. From over ten thousand duped investors, three quarters were the Boston Police.
Carl Ponzi did return some cash to investors, somewhere in the region of $9 million but retained the remainder of the ill gotten gains. The first investors into the scheme were pleased with the dividends returned so passed the world on about the opportunity to their friends and family. The scam grew until it was exposed by the media. Ponzi was finally taken into custody and sent to court but not until all investors lost money, even the original investors who made money on the scam were sued.
It was strange how Ponzi managed to get so many people to invest, but probably it was the promise of high gains that was the biggest allurement. The fraud worked by giving investors dividends that were not earned for the profits but from the money paid by new investors entering the scheme. It was the classic borrowing from Peter to pay Paul.
Ponzi Schemes today are more sophisticated and look like real investment opportunities. The fraudulent schemes work because:
The criminals that operate these sort of schemes often are masters of persuasion and they lure investors to reinvest any profits gained back into the scheme. Obviously as time goes on they lose everything, but new investors line up as they have been referred by friends. It is pure greed that so many people queue up to give money, in the hope they make quick money.
Eventually the whole thing falls down when there is not enough new investors paying in at the bottom of the scam, so dividends and profits eventually dry up even to the early investors. A classic Ponzi scheme rarely pays any money back to hapless investors.
The Bureau of Securities Registration advises that investors to watch out for sales and marketing materials that are punted about as “real investment” advice. This sort of bumph normally comes by email by marketing companies that are paid to do it. Take this material as general information and remember to do your own investigation on any offers or proposals.
There are several well used phrases used in marketing hyped material, such as “Once in a lifetime opportunity” or “One Off Deal”. These blockbuster headlines are meant to grab attention, and will claim that they offer real information.
Look carefully at the information and see if it makes unsubstantiated statements and guarantees that are not true. And do not be fooled into rushing into a decision by lines like, “don’t miss out, and act now.” Any good investment will stand the time for thorough checking out.