Issuers Proposing Non-Public Offerings under Nasdaq Marketplace Rule 5635

Companies with stock listed on the Nasdaq Global Select Market are subject to the Nasdaq Marketplace Rules. Rule 5635 sets forth the circumstances under which shareholder approval is required prior to the issuance of securities in connection with various matters, including non-public offerings. In the case of private placements, Rule 5635(d) requires shareholder approval for the issuance of shares equal to 20 percent or more of the common stock or 20 percent or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.

In April of 2010, BNC Bancorp, Inc. (SEC file no. 0-50128) and Intervest Bancshares Corp. (0-23377) filed definitive Proxy Statements (Forms DEF14A) seeking approval to issue shares in one or more non-public offerings although neither company had any firm plans with respect to a specific deal.  The published interpretive guidance of Nasdaq indicates that, in those circumstances where a company has not obtained approval for a specific transaction, a general authorization will only be effective if it contains parameters specifying the maximum number of shares to be issued, the maximum dollar amount of any issuance, the maximum discount to market, and the duration of shareholder approval.  BNC and Intervest each note that the proposals would enable them to raise capital in a timely and cost effective manner.

Ruth’s Hospitality Group, Inc. on 1/21/10 (0-51485) and First PacTrust Bancorp, Inc. on 9/17/10 (0-49806) also seek shareholder approval to issue shares under Nasdaq Rule 5635, but in connection with a securities purchase agreement and subscription agreements, respectively.  Ruth's seeks to issue a new class of preferred shares to a private equity firm for $25 million in a transaction that would result in a change of control under applicable Rule 5635(b).  First PacTrust proposes to raise approximately $60 million through a private placement to selected institutional and other accredited investors of common stock priced at a 37.5% premium to the closing price of the stock as of July 26.  The primary purpose of the capital raise is to redeem preferred stock issued to the U.S. Treasury under the TARP Capital Purchase Program and to pursue growth opportunities. 

Exclusivity Agreements filed with Third Party Tender Offers

In addition to the merger agreement, most negotiated or friendly tender offer filings will include as exhibits any confidentiality agreement or exclusivity agreement that had been entered into between the parties.  Once the parties have commenced preliminary discussions regarding a possible strategic transaction, it is common for the issuer to grant a period of exclusivity to the bidder for detailed due diligence and the negotiation of definitive agreements. 

Hewlett-Packard Co. filed the initial Schedule TO in connection with its $1.52 billion all-cash tender offer for ArcSight, Inc. on September 22 (SEC file no. 005-83836).  The formal exclusivity agreement, which provided for an exclusive negotiation period of at least two weeks, was filed as Exhibit 99(d)(7).  Hewlett-Packard was represented by Gibson, Dunn & Crutcher during merger negotiations and ArcSight by Fenwick & West.

Master Limited Partnerships Eliminating IDRs to Lower Cost of Equity

Most master limited partnerships have a tiered structure for sharing available cash between the general and limited partners, with the general partner working from an initial two percent up to a potential 50% payout of available cash.  Incentive distribution rights (IDRs) give a LP's general partner the right to an increasing share of the incremental distributable cash flow generated by the partnership.  As the cash distribution per unit increases, the IDRs allow the general partner to receive an increasing percentage of the available cash flow.  IDRs are used to motivate the general partner to rapidly grow the distributions to the limited partners.

Natural Resource Partners L.P. has eliminated all of the IDRs held by its general partner and affiliates of the general partner, issuing 32 million common units to the contributing IDR-holders as consideration.  The contribution agreement was filed as Exhibit 10.1 to the Form 8-K filed on 9/21/10 (SEC file no. 001-31465).  Prior to the transaction, the IDRs received approximately 24% of the quarterly distribution and 48% of any increase in the distribution.  NRP states that elimination of the IDRs will improve its cost of capital through enhanced competitive position in the acquisition markets and increased returns to limited partner unitholders from acquisitions and growth projects.

SEC Amends Auditor Attestation Requirements of Non-Accelerated Filers

By Final Rule adopted September 15 and to be effective upon publication in the Federal Register, the SEC has amended its forms and rules to provide that Section 404(b) of the Sarbanes-Oxley Act will not apply to the audit reports prepared for issuers that are neither accelerated nor large accelerated filers as defined under Exchange Act Rule 12b-2.  Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 404(c) to Sarbanes-Oxley to exempt smaller public companies from the auditor attestation requirement of the Act. 

An accelerated filer is an issuer that had an aggregate worldwide market value of the voting and non-voting common equity held by non-affiliates of $75 million or more, but less than $700 million, as of the last business day of the most recently completed second fiscal quarter.  A large accelerated filer is an issuer that had an aggregate worldwide market value of the voting and non-voting common equity held by non-affiliates of $700 million or more as of the last business day of the most recently completed second fiscal quarter.  SEC rules do not define non-accelerated filers, but the term refers to a reporting company that does not meet the definitions of accelerated or large accelerated filers. 

Prior to the adoption of the Dodd-Frank Act, non-accelerated filers would have been required to include an attestation report by their registered public accounting firms on internal control over financial reporting in their annual reports filed with the SEC on or after June 15, 2010.  All issuers continue to be subject to Sarbanes-Oxley Act Section 404(a), which requires that the annual report include a report by management on the issuer’s internal control over financial reporting.

Recent filers have made note of the new rules in Item 9A Controls and Procedures of Form 10-K: USA Technologies, Inc. on September 21 (SEC file no. 0-50054) and Bio-Matrix Scientific Group, Inc. on September 22 (0-32201).  Drinks Americas Holdings, Ltd. referenced the changes in the notes to consolidated financial statements of its Form 10-Q filed September 20 (0-19086).

The Energy Smart Grid: Opportunities and Risks

There is no uniform definition of "smart grid" but the term generally conveys the notion of integrating information technologies with current energy infrastructure.  The need to decrease fossil fuel consumption has led to strong public and private initiatives to develop energy-efficient technologies and to extend the useful life of aging infrastructure.  The smart grid initiative got a boost with the passage of the American Recovery and Reinvestment Act of 2009 (ARRA), which includes over $4.3 billion of funding for smart grid technology investment, including energy storage systems.  SEC filers that have reported grants under ARRA in support of smart grid initiatives include Black Hills Power, Inc. (SEC file no. 1-7978), FirstEnergy Corp. (333-21011), Progress Energy, Inc. (1-15929), and Southern Co. (1-3526).  

Elster Group SE, which offers integrated metering products and solutions to the gas, electricity and water industries, is seeking to list on the NYSE.  The European public limited liability company headquartered in Germany filed the Form F-1 Registration Statement for its initial public offering on September 13 (333-169347).  In 2009, smart grid-related products, components and services accounted for approximately 26% of Elster Group revenues, compared to 19% in 2008.

Tax Benefits Preservation Plan Seeks to Preserve Net Operating Losses

As of June 30, 2010, Leap Wireless International Inc. had net operating loss carryforwards (NOLs) of approximately $1.7 billion.  Leap's ability to use these NOLs to offset future taxable income obligations could be substantially limited if it were to experience an “ownership change” as defined under Section 382 of the Internal Revenue Code.  In short, an ownership change occurs if the percentage of stock owned by a "five percent stockholder" increases by more than 50% over the lowest percentage owned by that stockholder during the previous three years. 

To protect its ability to carry forward net operating losses, the Leap board of directors adopted a Tax Benefit Preservation Plan on Sept. 13 which is included as Exhibit 4.1 to the Form 8-K filed by the company on 9/14/10 (SEC file no. 000-29752).   Similar to the mechanics of a "poison pill" shareholder rights plan that seeks to deter takeover bids, the Board has declared a dividend of one preferred stock purchase right on each outstanding Leap common share.  If any person or group acquires 4.99% or more of Leap common stock, or if any 4.99% holder acquires additional shares, the rights become exercisable for common stock having a market value equal to twice the exercise price, resulting in significant dilution to the ownership interests.

Several companies have enacted similar tax benefit preservation plans in the past year, including the Form 8-K filers listed below.  Like Leap, each also filed a Form 8-A on the same day to register the preferred stock purchase rights under the Securities Exchange Act of 1934.

PMI Group Inc. on 8/13/10 (SEC file number 001-13664)
Autobytel Inc. on 6/2/10 (SEC file number 001-34761)
Radian Group Inc. on 5/4/10 (SEC file number 001-11356)

Issuers Entering Into Forward Sales Agreements for Shelf Offerings

NiSource Inc. Form 424B2 on 9/9/10 (SEC file no. 333-148239)
Xcel Energy Inc. Form 424B2 on 8/4/10 (file no. 333-161521)
Regency Centers Corp. Form 424B5 on 12/7/09 (file no. 333-158635)

In connection with equity shelf takedown offerings of common stock, each filer of the prospectus supplements listed above entered into forward sales agreements with affiliates of the underwriters (the "forward purchaser").  At the request of the issuer, the underwriter, acting as agent for the forward purchaser (the "forward seller" in such agency capacity), borrows a fixed number of common shares from third parties which are sold to underwriters.  If the forward sellers are unable to borrow all of these shares of common stock, the company will issue and sell a number of shares equal to the number of shares that the forward sellers do not borrow and sell.

Peer-To-Peer Social Lending Platform Seeks to Offer Notes to Lender Members

Seeking to become the third P2P Internet-based platform to complete registration of notes with the SEC, United Power and Media, Inc. (UPM) filed Form S-1 on Sept. 3 (SEC file no. 333-169240).

UPM lender members would be eligible to buy Borrower Member Payment Dependent Notes issued by the company.  By making an offer on a borrower member loan request posted on the UPM platform, a lender member is committing to purchase a Note equal in principal amount to the dollar value of that offer at the stated interest rate and term, if the loan is funded and subsequently originated by UPM, or by an alternate institution to be selected in the future.  The proceeds of the Notes will be designated by the lender members to fund corresponding borrower loans and subsequently allocated to a trust account for the benefit of the borrower.

Community Development Banks Exchange TARP Preferred With U.S. Treasury

Carver Bancorp, Inc. Form 8-K on 9/2/10 (SEC file no. 001-13007)
M&F Bancorp, Inc /NC/ Form 8-K on 8/23/10 (file no. 000-27307)
Citizens Bancshares Corp /GA/ Form 8-K on 8/18/10 (001-14913)

Each of the bank holding companies has exchanged preferred stock previously issued under the Troubled Asset Relief Program Capital Purchase Program (TARP CPP) for an equivalent amount under the Community Development Capital Initiative (CDCI).  The CPP program carried a preferred dividend rate of 5% for 5 years, after which the dividend rate increased to 9%. Under the CDCI program, the preferred dividend rate is 2% for 8 years.

The Treasury Department established the CDCI program in February 2010 to invest lower cost capital in Community Development Financial Institutions (CDFI), supporting their lending activities to small businesses or disadvantaged communities.  Participation in TARP CDCI is limited to financial institutions certified by the Community Development Financial Institution Fund as a CDFI.  The Letter Agreement and Exchange Agreement with the United States Department of the Treasury is included as Exhibit 10.1 of each Form 8-K listed above.

IPO Auditing Fees In the Third Year of Market Uncertainty

Average auditor fees paid by issuers that have completed initial public offerings on U.S. exchanges or the OTC Bulletin Board have been on a steady rise since 2005.  Despite economic turmoil, the average amount paid to accounting firms by issuers that completed IPOs in 2008 and 2009 exceeded $1 million.  Through August, however, 2010 is shaping up to look more like 2007 when the average cost of getting the IPO books in order was $892,000.

Among underwritten IPOs launched this year, the $5.55 million auditor fee paid to Ernst & Young Hua Ming by China Hydroelectric Corp. in connection with its $96 million offer is the largest (SEC file no. 333-163558).  However, it is the only deal so far this year where the auditor fee has exceed $3 million.  In 2009, eight of the 63 companies that completed IPOs in U.S. markets paid auditor fees above $3 million. 

Prior to China Hyro, the last IPO with a larger auditor fee was Visa Inc.'s $17.86 billion deal in 2008, for which KPMG earned $13 million (file no. 333-147296).   2008 saw an unusual concentration of IPO auditor fees below the $200,000 threshold, encompassing approximately 45% of the companies that went public.  By contrast approximately 24% of the 2009 and 21% of 2010 deals have auditor fees that fall below the $200K level, which is more in line with recent historical experience.

The information reported herein was gathered using IPO Vital Signs, a Web-based system that includes all SEC registered IPOs, including REITs and those non-U.S. IPO filers seeking to list in the U.S. markets. IPO Vital Signs does not track closed-end funds, best efforts or non-underwritten deals, or IPO offerings for amounts less than $5 million.

AbitibiBowater Inc. to Withdraw NAFTA Notice of Arbitration

Following AbitibiBowater's December 2008 announcement of the permanent closure of its Grand Falls newsprint mill, the Government of Newfoundland and Labrador, Canada passed legislation to expropriate all of the company's timber rights, water rights, leases and hydroelectric assets in the province, whether partially or wholly owned through subsidiaries and affiliated entities.  As a result of the expropriation, in the fourth quarter of 2008, the company recorded, as an extraordinary loss, a non-cash write-off of the carrying value of the expropriated assets of $256 million.

AbitibiBowater filed a Form 8-K on August 30, 2010 (SEC file no. 001-33776) to announce a formal settlement agreement with the government of Canada whereby the government has agreed to pay the company’s post-emergence Canadian operating entity CAD$130 million (approximately USD$123 million) following the emergence from the creditor protection proceedings under Chapter 11 of the U.S. Bankruptcy Code and the Companies’ Creditors Arrangement Act (Canada), as applicable.  The settlement agreement is subject to approval by each of the U.S. Bankruptcy Court for the District of Delaware and the Superior Court of Quebec in Canada, and the Courts’ approval of the company’s plans of reorganization.