July 7, 2014
Authored by: Michael Shumaker and Eliot Robinson
On May 9, 2014, the Georgia Securities Division issued a proposed rule to create a formal process for fairness hearings to be conducted by the Georgia Commissioner of Securities. The proposed rule would establish procedures for administrative hearings to determine the fairness of certain mergers and other business combinations in which securities are issued. If the Commissioner determines that the terms of the proposed transaction are fair to the shareholders receiving securities, the issuer would be able to claim an exemption from the registration requirements of the federal Securities Act of 1933 for the securities to be issued. Specifically, Section 3(a)(10) provides an exemption from the registration requirements of the federal Securities Act for securities issued in a transaction determined to be fair pursuant to a fairness hearing by a governmental authority. The exemption from registration with the SEC is particularly valuable for companies that are not currently subject to the periodic reporting requirements under the Securities Exchange Act of 1934.
In our view, fairness hearings conducted by the Georgia Commissioner will make it easier for private bank holding companies to use stock to fund the purchase price for acquisitions. Not only will the hearing process allow companies to avoid filing a Form S-4 registration statement for the acquisition with the SEC, it will also allow the companies to avoid triggering the significant ongoing expense associated with the periodic reporting and disclosure requirements of the Securities Exchange Act of 1934 and the Sarbanes-Oxley Act. We have seen circumstances in which the registration and ongoing reporting requirements have discouraged a company from using stock as a currency for an acquisition.
States such as California and North Carolina have conducted state fairness hearings similar to those described in the proposed rule for some time. Following the re-write of the Georgia Securities Act in 2008, Georgia has only conducted one fairness hearing, which involved the merger of two financial institutions in late 2013. The proposed rule would provide more clarity and certainty with respect to the fairness hearing process in Georgia.
As noted in our comments on the proposed rule, we believe that fairness hearings can be of particular use to community banks considering a potential acquisition. In addition to our comments supporting the proposed rule, we also discussed potential improvements to the proposal including broadening the jurisdictional reach of the proposed rule to permit additional companies to use the Georgia fairness hearing process, and protections for sensitive company information that may be disclosed to the Commissioner as part of a fairness hearing.
These potential improvements aside, however, we generally applaud the efforts of the Georgia Securities Division to formalize the fairness hearing process in Georgia. We believe that the fairness hearing process could provide significant benefits to a number of Georgia financial institutions that may be considering acquisitions and sales in the coming months.