Companies subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are required to file quarterly reports on Form 10-Q and annual reports on Form 10-K.  In additional articles, I will discuss in depth the contents and specific disclosure requirements of both forms.  However, in summary, the quarterly report on 10-Q contains unaudited reviewed quarterly financial statements together with management discussion and analysis of those statements.

Form 10-K

The annual report on Form 10-K contains audited annual financial statements, together with management discussion and analysis of those statements as well as other disclosures including but not limited to management bios, management compensation, unregistered issuances of stock, generally background on the registrant, internal control reports, litigation matters and more.

Quarterly reports on form 10-Q are due 45 days from the end of the quarter and annual reports on Form 10-K are due 90 days from the end of the filers fiscal year end.  Each filer has the right to file for an extension on Form 12b-25 which will not result in the filing being deemed delinquent.

Filing Extensions

Extensions must be filed no later than the due date of the 10-Q or 10-K for which the extension is filed.  An extension of up to 15 calendar days is available for Form 10-K and up to 5 calendar days for Form 10-Q. In the event that the extension deadline ends on a weekend or holiday, the filing deadline is extended to the next business day.  The extension period begins to run the day after the report was due. No further extensions are available.  For example if a 10-Q is due on a Monday and a 12b-25 is filed on that Monday, the 10-Q would be due Saturday, however, since that is a weekend, the 10-Q could be filed the next Monday and not be deemed delinquent.

The Impact on Delinquent Filers

Failure to timely file a report will make the registrant a delinquent filer.  The ramifications of being a delinquent filer vary depending on where the registrant’s stock is quoted (over the counter market OTCBB or OTCQB or an exchange such as NASDAQ).  Delinquent filers trading on an exchange, generally face delisting from that exchange and are automatically quoted on the over the counter market.  The exchange, such as NASDAQ, has broad discretion and authority in working with filers to maintain their exchange listing.  The particular rules and regulations of each exchange, and effect of delinquent filing on a registrant’s stock quotation on that exchange, is beyond the scope of this article.

FINRA Rule 6530

FINRA Rule 6530 related to OTCBB eligible securities require that an OTCBB security be current in its Exchange Act reporting requirements.  Filing a report within the extension period following the filing of a 12b-25 is deemed current.  FINRA allows a 30 day grace period prior to removing a registrant from the OTCBB.  However, if a registrant is late in filing its reports 3 times in any 2 year period, it will become ineligible to quote on the OTCBB, without benefit of a grace period.  The registrant can re-apply for quotation after 12 months. The registrant will become ineligible regardless of whether it becomes current thereafter.  This is a bright line rule – one day late, is late!

OTC Markets and the OTCQB

The OTC Markets, which operates the OTCQB, is not a self regulatory organization, but rather is a privately owned and run, for profit, quotation platform.  Accordingly, it is not subject to legislative rules and regulations, its rules are not approved by the SEC, and are not subject to legislative review prior to change.  Quotation on the OTCQB requires that registrants be “current in their SEC reporting requirements.”  A search of the OTC Markets website did not provide any information as to any grace periods or particular standards related to late or delinquent filers.

All delinquent filers, regardless of where quoted, are subject to SEC enforcement proceedings for deregistration.  A deregistered security may not be quoted anywhere or by any medium or by any broker or dealer until re-qualified, either through registration or a new 15c2-11 application. Deregistration is separate and distinct from delisting.  Delisting is the removal of the stock from quotation from a specific exchange (such as NASDAQ or AMEX) or quotation service (such as OTC Markets).  A delisted security may still be quoted by other quotation mediums.  Deregistration is an action by the SEC.  A deregistered security may not be quoted by any medium.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

The main components of the acquisition agreement and a brief description of each are as follows:

Representations and Warranties

Representations and warranties generally provide the buyer and seller with a snapshot of facts as of the closing date.  In respect to the seller, facts are generally related to the business itself, such as that the seller has title to the assets, there are no undisclosed liabilities, there is no pending litigation or adversarial situation likely to result in litigation, taxes are paid and there are no issues with employees.  From the buyer the facts are generally related to legal capacity, authority and ability to enter into a binding contract.  The Seller also represents and warrants its legal ability to enter into the agreement.

Convenants

Covenants generally govern the parties’ actions for a period prior to and following closing.  An example of a covenant is that a seller must continue to operate the business in the ordinary course and maintain assets pending closing and if there are post closing payouts that the seller continues likewise.  All covenants require good faith in completion.

Conditions

Conditions generally refer to pre-closing conditions such as shareholder and board of director approvals, that certain third party consents are obtained and proper documents are signed. Closing conditions usually include the payment of the compensation by the buyer.  Generally, if all conditions precedent are not met, the parties can cancel the transaction.

Indemnification/Remedies

Indemnification and remedies provide the rights and remedies of the parties in the event of a breach of the agreement, including a material inaccuracy in the representations and warranties or in the event of an unforeseen third-party claim related to either the agreement or the business.

Schedules

Schedules generally provide the true substance of what the seller is purchasing, such as a complete list of customers and contracts, all equity holders, individual creditors and terms of the obligations.  The schedules provide the details.

In the event that the parties have not previously entered into a letter of intent or confidentiality agreement providing for due diligence review, the acquisition agreement may contain this provision.  Likewise the agreement may contain no shop provisions, break up fees, non compete and confidentiality provisions if not previously agreed to separately.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Not All PCAOB Auditors are Created Equal

Licensing and membership with the PCAOB has stringent requirements. In fact, shortly after the enactment of SOX the number of accounting firms that provide public company services declined dramatically. Being held to a higher standard isn’t for everyone. However, as time has passed, even with PCAOB oversight, it has become clear that not all PCAOB qualified and licensed auditors are created equal. The recent rash of Chinese company accounting fraud cases has certainly brought the issue to light. Like all areas of the “public company world”, choosing a PCAOB auditor requires due diligence.

Review Their Client Filings

In choosing a PCAOB firm to act as an auditor for a public company, the public company should consider how many other SEC clients does the firm have and when the firm was last inspected by the PCAOB. All accounting firms with 100 or more public company clients are inspected annually; however, those with less than 100 public clients are only inspected every three years. As the bigger firms with more than 100 clients can be cost prohibitive to smaller public companies, it is very important that a smaller public company find out when the last inspection was, and what the result of that inspection was. The PCAOB prepares a written report following an inspection, portions of which are available to the public.

Pending Enforcement Proceedings

Another factor to consider is whether any of the accounting firms clients are currently subject to an SEC enforcement proceeding. Enforcement proceedings are a matter of public record on the SEC website. Investigations are not public information; however, a public company should ask a potential PCAOB service provider if they or any of their clients are currently subject to investigation by the SEC. In line with this area of due diligence, is whether the PCAOB firm has a Chinese company practice and how large that practice is.

Unfortunately, if they have a large Chinese company practice there is a good chance that they may become subject to an investigation in today’s environment.

In addition, to specific issues relating to a potential auditor’s PCAOB qualifications, a public company should consider general criteria for hiring any professional: what is the firm’s pricing; how busy (responsive) will they be to your needs; will you be assigned a single accountant for most communications or a team; will that accountant/team change each year (thereby having to teach someone new every year about your business); how do you get along with the individuals; and does your SEC attorney have a relationship with the firm.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Duty to Disclose

The duty to disclose (like other duties) only extends to material facts and circumstances. “Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976). In the case of a merger or acquisition requiring shareholder vote for instance, directors must provide shareholders with material information necessary to make an informed decision. In the case of press releases or other public disclosures, information provided must meet the disclosure obligations as well as the meet the standards for the duties of care and good faith.

Transparency and Shareholders

In In Re Pure Res., 808 A.2d 448, the court held that the directors had a duty to disclose to shareholders the substantive work performed and total involvement of investment bankers in pending merger transaction. The court reasoned that this information would assist an investor in determining whether the value being paid was fair. Other courts have concurred with this opinion and specified that shareholders are entitled to see valuation reports and financial projections prepared by investment bankers in a merger transaction, and it is the board of director’s duty to supply this information. Moreover, other courts have held that shareholders are entitled to be informed of financial advisors roles and compensation in a merger or acquisition transaction.

A director’s duty of disclosure is based in state law and is separate and distinct from a company’s duty to disclose under both the Securities Act of 1933 and Securities Exchange Act of 1934. Whereas the state law duty to disclose supports private causes of action, including possible class action lawsuits, the federal duty supports both private causes of action (including class actions) and regulatory enforcement proceedings.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Balancing Common and Preferred Shares

A common question I am asked by directors is how to balance the interest of two competing classes of stock (such as common and preferred). In such a case, the entire fairness standard of reviewing a corporate transaction (discussed in last blog) will not automatically be invoked, but first the court will utilize the business judgment rule. Accordingly, a director who is not conflicted and who otherwise takes all measures required (in-depth involvement in the process, review of all documents, advice of outside professionals, seeking highest price for all classes of stock) will be protected from liability.

Directors’ Financial Motivation

Delaware courts have emphasized that involvement by disinterested, independent directors increases the probability that a board’s decisions will receive the benefits of the business judgment rule and helps a board justify its action under the more stringent standards of review such as the entire fairness standard. Independence is determined by all the facts and circumstances, however, a director is definitely not independent where they have a personal financial interest in the decision or if they have domination or motive other than the merits of the transaction. Simply stated, the greater the degree of independence the greater the protection. Many companies hire special committees of outside professionals to review and recommend course of action on a transaction as added protection.

Duty of Loyalty

In some circumstances the duty of loyalty requires that a director make a business opportunity available to the corporation before the director may pursue the opportunity personally. Whether such an opportunity must first be offered to the corporation will depend on the following factors: (i) the circumstances in which the director became aware of the opportunity; (ii) the significance of the opportunity to the corporation and the degree of interest of the corporation in the opportunity; (iii) whether the opportunity relates to the corporation’s existing or contemplated business; and (iv) whether there is a reasonable basis for the corporation to expect that the director should make the opportunity available to the corporation.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Duty of Loyalty

The duty of loyalty demands that there be no conflict between the director’s duty to the company and their own self-interest. A director breaches that duty when he appropriates a corporate asset or opportunity or uses his corporate office to promote, advance or effectuate a transaction between the corporation and himself or a related party which isn’t entirely fair to the corporation.

Business Judgment Rule

The business judgment rule will not protect a director where there is a violation of the duty of loyalty. Moreover, a director cannot rely on either exculpation or indemnification for a violation of the duty of loyalty but they may be able to rely on these protections for a violation of the duty of care, or even the sub duty of good faith. Accordingly in McPadden v. Sidhu, 964 A.2d 1262 (Del. Ch. 2008) the court found gross negligence but not a breach of the duty of loyalty where the director accepted a price at the lowest end of the valuation range, did not ensure a thorough sale process and was not actively involved in negotiations and other aspect of the sale. As there was no violation of the duty of loyalty, the case was dismissed in reliance on an exculpation provision in the Certificate of Incorporation.

Delaware General Corporate Law

Some states, including Delaware, statutorily codify the duty of loyalty, or at least the impact on certain transactions. Delaware’s General Corporations Law Section 144 provides that a contract or transaction in which a director has interest is not void or voidable if: (i) a director discloses any personal interest in a timely matter; (ii) a majority of the shareholders approve the transaction after being aware of the director’s involvement; or (iii) the transaction is entirely fair to the corporation and was approved by the disinterested board members.

The third element listed by the Delaware statute has become the crux of review by courts. That is, where a director is interested, the transaction must be entirely fair to the corporation (not just the part dealing with the director). In determining whether a transaction is fair, courts consider both the process (i.e. fair dealing) and the price of the transaction. Moreover, courts looks at all aspects of the transaction and the transaction as a whole in determining fairness, not just the portion or portions of the transaction involving a conflict with the director. The entire fairness standard can be a difficult hurdle and is often used by minority shareholders to challenge a transaction where there is a potential breach of loyalty and where such minority shareholders do not think the transaction is fair to them or where controlling shareholders have received a premium.

Informing Shareholders

To protect a transaction involving an interested director, it is vital that all directors take a very active role in the merger or acquisition transaction; that the interested director inform both the directors, and ultimately shareholders, of the conflict; that the transaction resemble an arm’s length transaction; that it be entirely fair; that negotiations are diligent and active and that the advice and counsel of independent third parties, including attorneys and accountants, be actively sought

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Indemnification of Corporate Officers

Many states’ corporate laws allow entities to include provisions in their corporate charters allowing for the exculpation and/or indemnification of directors. Exculpation refers to a complete elimination of liability whereas indemnification allows for the reimbursement of expenses incurred by an officer or director.

Delaware, for example, allows for the inclusion of a provision in the certificate of incorporation eliminating personal liability for directors in stockholder actions for breaches of fiduciary duty, except for breaches of the duty of loyalty that result in personal benefit for the director to the detriment of the shareholders. Indemnification generally is only available where the director has acted in good faith. Exculpation is generally only available to directors whereas indemnification is available to both officers and directors.

Operating In Good Faith

To demonstrate that a director acted in good faith, the director must meet the same general test of showing that they met their duties of care, loyalty and disclosure. The best way to do this is to be fully informed and to participate in the process, whether that process involves a merger or acquisition or some other corporate transaction. Courts will consider facts such as attendance at meetings; the number and frequency of meetings; knowledge of the subject matter; time spent deliberating; advice and counsel sought by third party experts; requests for information from management; requests for and review of documents and contracts).

Fiduciary Duty and Best Efforts

In advising the board of directors, counsel should stress that the director be actively involved in the business decision making process, review the documents and files, ask questions and become fully informed. The higher the level of diligence, the greater the level of protection.

It is not important whether the decision ultimately turns out to be good or bad. Hindsight is 20/20. The significant factor, in seeking protection (via the business judgment rule, and through exculpation and indemnification) is that best efforts are made. Of course, directors should be careful to document their diligence.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Mergers and Acquisitions

However, in certain instances, such as in a merger and acquisition transaction, where a board may have a conflict of interest (i.e. get the most money for the corporation and its shareholders vs. getting the most for themselves via either cash or job security), the board of directors actions face a higher level of scrutiny. This is referred to as “enhanced scrutiny business judgment rule.” The same standards apply to officers of a corporation.

Fiduciary Duties

A director’s fiduciary duties to a corporation include the duty of care, duty of loyalty and a duty of disclosure. In short the duty of care requires the director to perform their duty with the same care a reasonable person would use, to further the best interest of the corporation and to exercise good faith, under the facts and circumstances of that particular corporation. The duty of loyalty requires that there be no conflict between duty and self interest. The duty of disclosure requires the director to provide complete and materially accurate information to a corporation.

Determining Negligence

In the seminal case of Smith vs. Van Gorkom, 488 A.2d 858 (Del. 1985), the Court found that the board was grossly negligent where it approved the sale of the company after only a few hours of deliberation, failed to inform itself of the Chairman’s role and benefits in the sale and did not seek the advice of outside counsel. Similarly in Cede & Co. v. Technicolor, Inc., 634 A.2d 345 (Del. 1993) found that the board was negligent in approving the sale of a company where it did not search for real alternatives, did not attempt to find a better offer and had insufficient knowledge of the terms of the proposed merger agreement.

On the other hand, the court in In re CompuCom Sys., Inc. Shareholders Litigation., 2005 Del. Ch. LEXIS 145 (Del. Ch. Sept. 29, 2005) upheld the board of directors business judgment even though the transaction price per share was less than market value as the board showed it was adequately informed, acted rationally and sought better deals.

The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (”Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (”Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

Registration Requirements for Sales

During the pre-filing period, Section 5(c) of the Securities Act of 1933, as amended (the “Securities Act”) makes it “unlawful for any person, directly or indirectly, to… offer to sell or offer to buy… any security, unless a registration statement has been filed as to such security.” An offer to sell or offer to buy are broadly defined to include every attempt or offer to dispose of a security for value, including any effort to simulate investor interest in such security.

Moreover, the SEC considers all communications with the public as potential gunjumping violations. A famous example is associated with the IPO of Google, Inc. In a pre-IPO interview with founders Sergey Brin and Larry Page, published in Playboy magazine, Brin and Page made favorable comments about Google – of course. The interview did not include any mention of the offering or the securities of the Company. Moreover, the statements appeared innocuous including such generalities as “people use Google because they trust us.”

SEC’s Stance on Public Communications

The SEC determined that the interview resulted in gunjumping and required Google to: (1) revise its prospectus to include a risk factor warning that the Playboy interview may have violated Section 5; (2) include the full text of the Playboy article in the prospectus (thus subjecting its contents to the strict liability standards for the truth and accuracy of information filed with the SEC); and (3) address certain discrepancies between statistics in the article and prospectus.

Prospectus Content

In Google and several other cases the SEC has found that gunjumping is any information that is not contained in the prospectus and that could stimulate investors’ interest. In addition to requiring revisions to a prospectus, as a result of gunjumping, the SEC can require an Issuer to offer to buy back its already issued stock, to delay an offering to allow a cooling off period, or can initiate enforcement proceedings seeking both injunctive and monetary penalties.

There are exceptions and safe harbors to the gunjumping prohibition. Rule 135 of the Securities Act allows for limited notices of proposed offerings. The notice must clearly indicate that it is not an offer to buy or sell securities. The content of the notice is limited to: (i) the name of the issuer; (ii) intention to make a public offering; (iii) amount and type of security and basic terms of the offering; (iv) anticipated timing of the offering; (v) whether the offering is limited to a certain class of investors (such as only accredited or only existing security holders); and (vi) any other required statement required by a certain state or foreign governmental body.

Thirty Day Blackout on Public Communications

Rule 163A of the Securities Act provides a thirty (30) day safe harbor for communications made at least 30 days prior to the filing of a registration statement and which communications do not mention or refer to the proposed offering.

Rule 169 allows an Issuer to continue with the release of regular factual information in the ordinary course of business related to the goods and services of the company. The communications cannot mention the offering or securities of the Company and cannot contain forward looking statements regarding the Company.

Communications from Broker Dealers

Rules 137, 138 and 139 address communications by or to broker dealers. Basically, communications and negotiations between a potential underwriter or participating broker dealer and an Issuer, as long as confidential, will not be deemed gunjumping.

Section 5(b) of the Securities Act makes it unlawful to transmit or use a prospectus which does not meet the requirements of Section 10 of that Act. Moreover, a prospectus is broadly defined to include any communication, including radio and tv broadcasts and, of course, written communications. Section 10 and the rules promulgated thereunder, set forth the information and content requirements for a prospectus.

The “waiting period” of an offering is the time following the filing of a registration statement with the SEC and its being declared effective. Oral offers to sell and certain limited communications are allowed during this time, though no sales can be consummated until after the prospectus is declared effective. Moreover, and obviously, no communications may be made that go beyond the contents of the prospectus as set forth above.

Quiet Period

Finally, the quiet period is the time following the effectiveness of a registration statement and is generally considered to be 30 days. As investors may still be buying into an IPO for this period, Company communications are limited to the contents of the prospectus, updates filed with the SEC and communications regarding products, in the ordinary course of business.

Securities Attorney Laura Anthony

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!

FINRA and the OTCBB

FINRA (the Financial Industry National Regulatory Authority) operates the OTC Bulletin Board and processes corporate actions for changes such as splits and name changes. FINRA also issues trading symbols to over the counter (non-exchange) traded issuers and maintains a symbols database for issuers. When processing by FINRA of a corporate action is complete, FINRA notifies the OTC marketplace of such changes and actions, such as repricing securities following a forward or reverse split, or issuing a new trading symbol following a name change or merger.

Historically, FINRA’s role has been largely ministerial with limited jurisdiction to impose informational or other requirements, and no power to reject requested changes. However, the SEC began to express concern that certain parties were using FINRA to assist in fraudulent activities, such as usurping the corporate identity of publicly traded entities by either reinstating an entity with no authority or creating new entities with the same name as the public entity. Accordingly, Rule 6490 was created.

FINRA and Issuer Actions

The Rule codifies FINRA’s authority to conduct in-depth reviews of company related actions and allows the staff discretion not to process such actions where the information or forms are incomplete or when certain indicators of potential fraud exist. The staff now has broad discretion to ask for additional documents and evidence to support and verify the accuracy of submitted information.

Factors that may be considered by FINRA to deny an application for a change are limited to: (1) FINRA staff reasonably believes the forms and provided documentation is not complete or accurate; (2) a reporting issuer is not current with its reporting obligations; (3) FINRA has actual knowledge that the Company or Company related parties are the subject of a pending investigation by a regulatory body or have been adjudicated against adversely; (4) a government authority or regulatory has informed FINRA that the company related action may be potentially related to fraud or pose a threat to public investors; or (5) there is significant uncertainty in the settlement clearance process for that security.

FINRA and Processing Fees

In addition, the new Rule allows FINRA to charge fees to issuers for processing these corporate actions. In furtherance of the Rule and its new duties, FINRA has created certain forms and information requirements for Issuers to complete and submit. In addition to information forms which must be completed by the Issuers, FINRA now requires notarized and verified background corporate records, board and shareholder resolutions, proof of change of control (including resignations and appointments for all changes in officers and directors) and attorney opinion letters. All requests must be accompanies with the newly imposed fees. The new FINRA fees range from $200 for a timely notice to $5,000 for a late notice (with $1,000 and $2,000 in between fees), and a $4,000 fee to appeal an adverse decision.

Securities Attorney Laura Anthony

Securities attorney Laura Anthony provides expert legal advice and ongoing corporate counsel to small public Companies as well as private Companies seeking to go public on the Over the Counter Bulletin Board Exchange (OTCBB). Ms. Anthony counsels private and small public Companies nationwide regarding reverse mergers, due diligence on public shells, corporate transactions and all aspects of securities law.

Ms. Anthony is the Founding Partner of Legal & Compliance, LLC, a national corporate, securities and civil litigation law firm based in West Palm Beach, Florida. The firm’s corporate and securities attorneys provide technical legal services to small and mid-size private and public (OTCBB) Companies, entrepreneurs, and business professionals nationwide. Contact us today for a FREE consultation!