In an article published in Law360, Bass, Berry & Sims attorney Kevin Douglas discussed the complexities surrounding the use of stock as a form of currency for public companies working to acquire private companies. Though this practice has declined in recent years, rising interest rates could drive acquirers to return to the old ways.
“The use of stock as an acquisition currency by public companies making acquisitions of private companies plays a key role in many transactions,” Kevin explained. “While some market studies indicate that the percentage of acquisitions (involving private company targets) in which acquirer stock has been used as part of the transaction consideration has decreased in recent years, this trend may be reversed if interest rates continue to rise (thus increasing the costs to acquirers associated with leveraged transactions) and equity valuations remain high in comparison to recent historical norms.”
An initial structuring consideration when issuing stock in an acquisition is whether the stock will be issued on a taxable or tax-deferred basis, and whether the transaction can be structured in a manner which allows for the desired tax treatment of the stock consideration.
Parties should also confirm whether stockholder approval of the stockholders of the public company issuer is required under NYSE and Nasdaq rules in transactions where a large amount of stock will be issued by the public company issuer. This may require stockholder approval where public companies are issuing 20 percent or more of their outstanding common stock in the acquisition, though this has exceptions.
“Issuing stock in public company acquisitions of private companies can provide various deal benefits, including reducing the necessary cash outlay for a public company acquirer, allowing target company stockholders to receive a potential upside tied to future appreciation of the public company acquirer stock, and allowing for tax deferral on the stock component of the deal consideration,” he summarized. “However, acquisitions of this nature must be carefully structured to limit the legal and business risks associated with issuing stock in this context.”
The full article, “Tips for Using Private Co. Stock As Acquisition Currency,” was published by Law360 on December 20, 2018, and is available online. Kevin also authored content on this topic for our Securities Law Exchange blog.