New Guidance Should Increase Attractiveness of Registered Exchange Offers as Means of Restructuring Outstanding Debt Securities
On November 16, 2009, the Staff of the Securities and Exchange Commission's Division of Corporation Finance (the "Staff") issued a new Compliance and Disclosure Interpretation (Interpretation #139.29) facilitating the ability of an issuer to enter into lock-up agreements (i.e., agreements to tender) with holders of its debt securities in connection with a registered exchange offer under the Securities Act of 1933, as amended (the "Securities Act"), for the issuer's outstanding debt securities (the "Lock-Up Interpretation").
As noted in our previous Update, "Debt–for-Debt Exchanges and Other Debt Modification Strategies in the Current Environment" (April 13, 2009), many corporate debt issuers are focused on the restructuring of their outstanding debt securities. One tool available to issuers in restructuring their outstanding debt securities is a registered debt exchange offer. However, many issuers have viewed registered exchange offers as not being attractive, relative to other available options, because of the need to register the transactions under the Securities Act and comply with tender offer rules under the Securities Exchange of 1934, as amended (the "Exchange Act"). The need to register under the Securities Act and comply with the tender offer rules under the Exchange Act (particularly in the case of exchange offers for convertible debt and other equity securities) can limit transaction structuring options and increase transaction execution risk.
Prior to the issuance of the Lock-Up Interpretation, restrictions imposed by Section 5 of the Securities Act and under the tender offer rules under the Exchange Act could dissuade an issuer from entering into lock-up agreements with its key debtholders prior to commencing a registered exchange offer in the debt restructuring context. The perceived inability to enter into pre-filing lock-up agreements with key debtholders represented one of the most significant deterrents to using registered exchange offers as a means to restructure outstanding debt securities. This often made registered exchange offers an unattractive option as compared to a private exchange transaction. As a result, issuers would often seek to structure exchange transactions privately, which would result in the exclusion of certain debtholders who might otherwise wish to participate in the transaction and lead to a less than comprehensive restructuring solution. The Lock-Up Interpretation should enhance the attractiveness of registered exchange offers as a debt restructuring option.
Under the Lock-Up Interpretation, the Staff formally recognizes the usefulness of lock-up agreements in the context of registered exchange offers by issuers for their outstanding debt securities. The Staff has agreed to not object to such lock-up agreements where the following criteria are met:
- the lock-up agreements are signed only by accredited investors;
- the persons signing the lock-up agreement collectively own less than 100% of the outstanding principal amount of the particular series of debt securities;
- a tender offer will be made to all holders of the particular series of debt securities; and
- all holders of debt securities of the series eligible to participate in the exchange offer will receive the same amount and form of consideration.
The Staff cautioned that when lock-up agreements are executed before the filing of a registration statement and the criteria noted above are not satisfied, the subsequent registration of the exchange offer on Form S-4 may be inappropriate, since an exchange offer is viewed as a single transaction, and any transaction that has commenced privately must be completed privately. Also, if a holder actually tendered its debt securities before the filing of the Form S-4, the Staff might object to the subsequent registration of the exchange offer. In addition, the Staff warned that an issuer must also consider whether efforts relating to obtaining lock-ups represents the commencement of a tender offer (in which case, the solicitation of lock-ups itself may be required to comply with applicable tender offer rules).
We believe the issuance of the Lock-Up Interpretation should provide issuers and their financial advisors with greater comfort that the use of registered exchange offers is a viable way to restructure an issuer's outstanding debt securities. As opposed to privately negotiated exchange transactions with a limited number of debt holders, a registered exchange offer allows all of an issuer's debt holders to participate on the same terms. In addition, unlike an unregistered exchange offer pursuant to Section 3(a)(9) of the Securities Act (which also can be made to all holders of a series), in a registered exchange offer there is no prohibition on the payment of compensation for soliciting exchanges. By facilitating the use of lock-up agreements, the Lock-Up Interpretation allows issuers to structure transactions that establish market clearing terms and provide for greater transaction certainty, while at the same time allowing for a more comprehensive restructuring transaction in which all debt holders can now participate.
At the same time the Staff issued the Lock-Up Interpretation, it also issued similar guidance (Interpretation 139.30) relating to the obtaining of lock-up agreements from management and principal security holders of a target company in connection with negotiated third-party exchange offers.
 For a detailed discussion of issues raised by convertible debt exchange offers, see James Moloney, Glenn Pollner and Matthew Shaw of Gibson, Dunn & Crutcher LLP, "Convertible Debt Exchange Offers: Considerations for Distressed Issuers" [PDF], Deal Lawyers, September-October 2009. The Lock-Up Interpretation is not on its face limited to exchange offers for non-convertible debt securities. Accordingly, we believe that the Lock-Up Interpretation will be useful in the context of convertible debt exchange offers as well.
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