Essentials of Equity Trading for the Loan Market

Attorney Advertising

June 28, 2011

andrewskurth.com

Andrews Kurth2

Outline of Presentation

I. What Is A Security?

II. Section 5 Of Securities Act

III. 4(2) Private Placement Exemption

IV. 4(1) Exemption

V. What Is An Underwriter?

VI. Rule 144 - Safe Harbor From Being Considered An Underwriter

VII. Rule 144A

VIII. Section 4 (1½) Case Law Exemption

IX. In-Court Restructuring And Section 1145

X. Liabilities & Recourse

XI. “Big Boy” Letters

XII. Operative Issuer Documents

XIII. Other Regulatory and Statutory Concerns

XIV. Market Trends

Andrews Kurth3

What Is A Security?

– Section 2(a) of Securities Act of 1933, as amended (the “Securities Act”) defines what a “security” means broad definition

– Bank Debt/Syndicated Secured Loans Historically Not Considered A Security

– See Banco v. Expanol De ‘Cremin v. Security Pac. Nat’l Bank, 973 F.2nd 51 (2d Cir. 1992) (applying four factor family resemblance test under Reeves, court held notes issued in conjunction with participation interest similar to notes evidencing loans by commercial banks funding operations)

– Key statutory language in definition of security “unless context otherwise applies”

Not public trading market

Sophisticated parties who generally don’t need protections of securities laws / can fend for themselves

Andrews Kurth4

– Section 5 of Securities Act provides that “unless a Registration Statement is in effect as to a security, it shall be unlawful for any person” to sell such security

Section 5 Of Securities Act

Andrews Kurth5

4(2) Private Placement Exemption

Pursuant to Section 4(2) of the Securities Act, Section 5 of Act doesn’t apply to “transactions by an Issuer not involving any public offering”

– Supreme Court in Ralston Purina held that an offering to persons “who are shown to be able to fend for themselves is a transaction not involving any public offering”

– Safe Harbor of Regulation D

– No General Solicitation– Unlimited Accredited Investors and not » 35 other purchasers– Issuer availability– Securities issued are “Restricted Securities Typically will have

Legend

Andrews Kurth6

– Provides that provisions of Section 5 of Securities Act shall not apply to Section 4(1)

– 4(1) Exemption – Transactions by any person not involving an issuer, underwriter or dealer (ordinary investor exemption)

– What is an Issuer?

– What is a Dealer?

Any person who engages as agent, broker and principal in business of offering, buying or otherwise trading in securities

4(3) - Dealer Exemption

4(1) Exemption

Andrews Kurth7

– Under Section 2(a)(11) of Securities Act “Underwriter’ means any person who has purchased from an issuer with a view to distribution

– As used in Sec 2(a)(11) the term “Issuer” includes any person directly or indirectly controlling another person “Statutory Underwriter” concept

– Under Rule 405, “control” means power to direct or cause direction of management

– Since difficult to determine mental state at time of acquisition re whether purchased with a view to distribution, subsequent acts are looked at with respect to such determination (whether securities have come to rest)

What Is An Underwriter?

Andrews Kurth8

- Comply with 144 Rules not considered to be engaged in a “Distribution”

– Applies to sales of “Restricted” securities and “control” securities

Depending on type of securities sold different rules apply under Rule 144

– Securities acquired pursuant to Rule 144 are not “Restricted Securities”

– Calculation of holding period and tacking

Rule 144 – Safe Harbor From Being Considered An Underwriter

Andrews Kurth9

Rule 144 – Safe Harbor From Being Considered An Underwriter (continued)

Affiliate orPerson Selling on Behalf of an Affiliate

Non-Affiliate (and Has Not Been an Affiliate During the Prior Three Months)

Restricted Securities of

Reporting Issuers

During six-month holding period - no resales under Rule 144 permitted.

After six-month holding period - may resell in accordance with all Rule 144 requirements including:

• Current public information,• Volume limitations,• Manner of sale requirements for equity

securities, and• Filling of Form 144

During six-month holding period - no resales under Rule 144 permitted.

After six-month holding period but before one year - unlimited public resales under Rule 144 except that the current public information requirement still applies.

After one-year holding period - unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.

Restricted Securities of Non-Reporting Issuers

During one-year holding period - no resales under Rule 144 permitted.

After one-year holding period - may resell in accordance with all Rule 144 requirements, including:

• Current public information,• Volume limitations,• Manner of sale requirements for equity

securities, and • Filing of Form 144.

During one-year holding period - no resales under Rule 144 permitted.

After one-year holding period - unlimited public resales under Rule 144; need not comply with any other Rule 144 requirements.

Andrews Kurth10

– 144A Transaction Acquire “Restricted Securities”

– Available for securities not fungible with securities listed on exchange

– Sales must be made to “Qualified Institution Buyers” that have access to issuer information

– QIB generally means an entity that owns at least $100,000,000 in securities of unaffiliated issuers

Rule 144A

Andrews Kurth11

– Not formal statutory registration exemption

– Used by practicioners and recognized by case law and SEC as technique for transferring restricted securities see Gilligan Will & Co. v. SEC, 267 F.2d 461 (2d. Cir.); Ackerberg v. Johnson, 892 F.2d 1328 (8th Cir. 1989)

– Represents Hybrid between 4(1) and 4(2) in which the selling shareholder utilizes practices that an issuer uses to sell securities in 4(2) private placement

– Limiting resale to only sophisticated parties/accredited investors

– Able to fend for themselves

– Offer made without any publicity or other “General Solicitation”

– Buyer acknowledges that securities Buyer shall acquire shall be restricted securities

Section 4 (1½) Case Law Exemption

Andrews Kurth12

In-Court Restructuring and Section 1145

– In Chapter 11 reorganization equity typically issued pursuant to 1145

– Need to check plan and confirmation order

– Under Section 1145 offers and sales of securities done in accordance with 1145(a)(1) are deemed to be a public offering

– Disclosure Statement akin to prospectus in registered offering

– If sold in accordance with 1145(a)(1) such securities may be freely traded

– However, 1145(a)(1) doesn’t apply to entities that are “Bankruptcy Underwriters”

Andrews Kurth13

In-Court Restructuring and Section 1145 (continued)

– Unless “ordinary trading” transaction exemption applies, an entity is a bankruptcy underwriter if:

– Purchases claim with a view to distribution of any security received or to be received in respect of such claim

– Generally will not be a bankruptcy underwriter if original holder of claim or plan not proposed when acquire claim

– An entity is also a bankruptcy underwriter if it is a control person/affiliate of issuer

– When buying need rep Seller not an Affiliate to ensure getting freely tradable securities

– LSTA Proceeds Letter provides “no affiliate” rep by Seller

Andrews Kurth14

In-Court Restructuring and Section 1145 (continued)

– Note no underwriter status for “non-affiliates” engaging in “ordinary trading transactions” narrow definition of bankruptcy underwriter

– Ordinary trading transactions do not have indicia of classic underwriting activity

– No coordinated action to acquire and distribute securities with special incentive to resell such securities

– Securities issued in bankruptcy not pursuant to 1145

– Rights Offering where new $ put in such securities acquired are generally “restricted” unless subsequently registered or exemption applies

– Visteon example– May have haircut for sale of restricted securities as opposed to

freely tradeable shares without restriction

Andrews Kurth15

– Section 12(a)(i) of Securities Act

– Gives Purchaser right of recission for any offer or sale of a security in violation of Section 5

– Statute of Limitations – One year of the Section 5 violation

Liabilities & Recourse

Andrews Kurth16

Big Boy Letters

– Rules 10b-5 requires that a person who has material non-public information either disclose such information or abstain from trade– 10b-5 prohibits any person in connection with the purchase or sale of a security

(whether public or private) from making any untrue statement of a material fact or omitting to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading

– No disparity of information– Disclosing information may create issues with respect to confidentiality

agreements

– Parties sometimes use “Big Boy Letters”

– Are “Big Boys” enforceable? – See SEC v. Barclays Bank; R2 v. Salomon

– Section 29 of Exchange Act (contract cannot waive compliance with rules of Exchange Act)

– Certain institutions reluctant to utilize Big Boys with counterparties

– LSTA Proceeds Letter has no waiver of disparity of information

Andrews Kurth17

– Shareholders Agreement

– Registration Rights Agreement

– Articles of Incorporation / Bylaws

– LLC Agreement / Partnership Agreement

Operative Issuer Documents

Andrews Kurth18

– Shareholders Agreement

– Comply with transfer provisions

– Typical provisions

– No sale to competitor– Sign joinder– Sale won’t result in > 500 holders– Opinion Letter (if requested) or certifications to company– Pre-emptive rights– ROFR– Tag-along / Drag-along– Confidentality Provisions– Advance notice of sale– Consent by company or board may be required

Operative Issuer Documents (continued)

Andrews Kurth19

– Articles of Incorporation / By-Laws

– Transfer Provisions

– May include restrictions to preserve NOL’s

– May limit transfers to ensure compliance with regulated industry rules limiting foreign ownership

– May limit transfers to foreign entities for tax reasons

Operative Issuer Documents (continued)

Andrews Kurth20

- Broker-Dealer Regulations– FINRA Rules

– Regulation T (Delivery v. Payment timing)

– Rule 10b-10 of Exchange Act (Confirmation Delivery)

– Gaming industry

– Energy industry (FERC) (Mach Gen Example)

– Broadcasting / Telecommunications (FCC)– Tribune / Young Broadcasting

– Foreign Underwriter Issues

– Hart Scott Rodino– Size of Transaction and size of person test

– $66,000,000 size of transaction

– Anti-takeover and Business Combination Statutes– DGCL Section 203

– Section 13 and Section 16 (Publicly Traded Equities)

– Tax Concerns Offshore Investors

Other Regulatory and Statutory Concerns

Andrews Kurth21

Market Trends

– When Outside Counsel Used?

– Equity that has some form of transfer restrictions & not generally traded on public markets

– Equity with legend and/or restricted

– Use of Documentation by Market

– Wide spectrum of views with respect to use of private purchase and sale agreement (”PSA”) between buyer and seller

– Most dealers & buy-side parties utilize some form of PSA– However, certain dealer parties generally push back on use

of PSA

Andrews Kurth22

Market Trends (continued)

– Trade Confirmations:

– Majority of participants use a form of trade confirmation signed by both parties

– Parties in market give different titles to such agreements

– Trade Confirmation– Notice of Execution– Equity Trade Confirmation– Commitment Letter

Andrews Kurth23

Market Trends (continued)

– Substance of Trade Confirm

– Substantively trade confirms are generally similar

– Trade date– Party names– Issuer name– Price/amount of equity– Dividends benefit buyer from and after trade date– Subject to reasonably acceptable contracts and instruments of

trade– Binding Trade no impact by subsequent events– Costs and expenses (“Opinion Letter” costs?)– Confidentiality– Transfer complies with operative documents (i.e. LLC Agreement)– Delivery of Operative Documents (if not SH)

Andrews Kurth24

Market Trends (continued)

– Trade Confirmation Issues for Market Maker in Middle of Trade

– Right of First Refusal (“ROFR”) and tag-along rights

– Insert “Subject to” successful completion of purchase of equity being sold and purchased

– “Assignment only” and default to economic equivalent

– Common provision

– Aware of certain reps & warranties specific to issuer’s equity?

– Regulator’s concerns?– Competitor representation?

– Big Boy reps and warranties – often in confirm

– Sophisticated party and financial wherewithal– Own investment decision– Non-reliance– “Accredited Investor” or “QIB”

Andrews Kurth25

Market Trends (continued)

– Necessary to Use Private Purchase and Sale Agreement?

– Depends on factors

– What is required issuer documentation?– Do reps and warranties inure to benefit of buyer and seller? – Full-blown PSA?– Simple certificates?

– UCC Article VIII – Is it applicable?

– Under §8-108 of UCC, certain reps and warranties automatically apply to transfers of certain “securities” for value will transferred equity security be governed by UCC Article VIII?

– Corporation applicable

– LLC’s or partnerships opt-in?

– Need to review & see organization documents

Andrews Kurth26

Market Trends (continued)

– If UCC Article VIII applicable then purchaser of equity security for value without knowledge of adverse claim receives warranty from seller (automatically by law) that “there is no adverse claim to security” become a “protected purchaser”

Andrews Kurth27

Market Trends (continued)

Benefits of using PSA

– Get direct representation and warranties from counter parties

– Indemnity provision—attorney fees

– Set forth conditions to closing

– Delivery v. payment (who goes first?)

– Need Title Rep if UCC Article VIII not applicable

Andrews Kurth28

Market Trends (continued)

– Typical Representations and Warranties and Other Provisions in PSA– Clean title representation free from liens

– Sophisticated party and financial wherewithal

– No reliance on other party

– Accredited investor (if 144A need higher QIB Standard)

– No general solicitation

– Not acquiring with a view to “distribution” in violation of Securities Act

– Affiliate representation from seller

– Is it 1145 or 4(2) issuance?

– Affects seller rep regarding acquisition of security– Bankruptcy Underwriter rep from seller

– Buyer rep acknowledging limitations on transfer on resale

– Depends if 1145 or private issuance

– Distributions

Andrews Kurth29

Market Trends (continued)

– Other Typical Provisions of PSA

– Closing conditions

– Fact-specific representations

– Not acquiring > 25% (i.e., no tag-along implicated)– Not competitor

– Buyer Rep - Received & Reviewed Operative Documents (aware of contractual restrictions on resale)

– Further assurances

Andrews Kurth30

Market Trends (continued)

– Miscellaneous Matters

– Opinion Letter requirement (certifications in lieu of opinion available?)

– Develop good relationship with issuer counsel & transfer agent early in process

– Determine steps needed for closing

Andrews Kurth31

Market Trends (continued)

EXAMPLES:

- 1145 Issuance

– Readers Digest (LSTA proceeds letter; officer’s certificates & no opinion unless 10% holder selling)

- MGM (LSTA proceeds letter; officer’s certificate (not affiliate; not acquire with view to distribution and own less than 10%)

- Philly News (1145; certificated)

- Mark IV (1145; form of transfer agreement for all parties benefit)

- 4(2) Issuance

- Panavision (shares issued as amendment fee; opinion required by company)

- Mach Gen (FERC issues; restricted selling to < 10% holders; transfers not of record approved by Milbank)

Copyright © 2011 by Andrews Kurth LLP. All rights reserved. This presentation has been prepared for informational purposes only and does not

constitute legal advice. This information is not intended to create (and receipt of it does not constitute) an attorney-client relationship. Readers

should not act on this information without seeking professional counsel. Prior results do not guarantee a similar outcome and depend on the

facts of each matter.

AUSTIN111 Congress AvenueSuite 1700Austin, Texas 78701512.320.9200

BEIJINGRoom 2007, Capital MansionNo. 6 Xin Yuan Nan Lu,Chao Yang DistrictBeijing, China 10000486.10.8486.2699

DALLAS1717 Main StreetSuite 3700Dallas, Texas 75201214.659.4400

HOUSTON600 Travis StreetSuite 4200Houston, Texas 77002713.220.4200

LONDONLevel 16, City Tower40 Basinghall StreetLondon EC2V 5DEEngland44.20.7382.0550

NEW YORK450 Lexington AvenueNew York, New York 10017212.850.2800

THE WOODLANDSWaterway Plaza Two10001 Woodloch Forest DriveSuite 200The Woodlands, Texas 77380 713.220.4800

WASHINGTON DC1350 I Street, NWSuite 1100Washington, DC 20005202.662.2700