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)