CORPORATE FINANCE

CHAPTER 2

THE REGULATORY ENVIRONMENT

 Main content
1. The M&A regulatory in US
 Federal Securities Laws
 Antitrus Legislation

2. The M&A regulatory in VN

 The Law on Competition 2004
 The Law on Enterprises 1999, 2005, 2014
 The Law on Investment 2005
 The Law on Securities 2006
 The Law on Credit Institutions 2010
 …
 The M&A regulatory in US

Federal
Securities Laws

Securities
Securities Act of The William Act of The Sarbanes –
Exchange Act of
1933 1968 Oxley of 2002
1934

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 Securities Act of 1933
 requires that securities offered to the public be registered with the government.
 requires, but does not guarantee, that the facts represented in the registration
statement and prospectuses are accurate.
 makes providing inaccurate or misleading statements in the sale of securities to
the public punishable with a fine, imprisonment, or both.
 The registration process requires:
• a description of the company’s properties and business
• a description of the securities
• information about management
• financial statements certified by public accountants.
 Securities Exchange Act of 1934

• extends disclosure requirements stipulated in the Securities Act of 1933 to

include securities already trading on the national exchanges.
• established the Securities and Exchange Commission (SEC)
• In 1964, coverage was expanded to include securities traded on OTC Market. The
act also covers proxy solicitations (i.e., mailings to shareholders requesting their
vote on a particular issue) by a company or shareholders.
• The 2010 DoddFrank Act allowed SEC to impose financial penalties against any
person, rather than against just entities.
 Securities Exchange Act of 1934

Reporting Requirements
• Companies required to file annual and other periodic reports with the SEC are
those for which any of the following are true.
 The firm has assets of more than $10 million and whose securities are held by more than 499
shareholders;
 it is listed on any of the major US or international stock exchanges;
• An M&A transaction is subject to federal securities laws if a portion of the
purchase price is going to be financed by an initial public offering of securities.
 Securities Exchange Act of 1934
Insider Trading Regulations
• Insider trading involves individuals who buy or sell securities based on knowledge
that is not available to the general public.
• The SEC is responsible for investigating insider trading.
 The William Act of 1968
Regulation of Tender Offers
 A tender offer is an offer to purchase some or all of shareholders' shares in a corporation. The price
offered is usually at a premium to the market price. (Investopedia.com)

The William Act protects target shareholders from fast takeovers in which they do not have enough
time to assess adequately the value of an acquirer’s offer:
• requiring more disclosure by the bidding company
• establishing a minimum period during which a tender offer must remain open
• authorizing targets to sue bidding firms.
 Section 13(D): Any person or firm acquiring 5% or more of the stock of a public firm must file a
Schedule 13(D) with the SEC within 10 days.
 Section 13(G): any stock accumulated by related parties, such as affiliates, brokers, or investment
bankers working on behalf of the person or firm, are counted toward the 5% threshold.
 The William Act of 1968
Regulation of Tender Offers
Section 14(D):
• Acquirer obligations: an acquirer must disclose its intentions, business plans, and any
agreements between the acquirer and the target firm in a Schedule 14(D)-1. The schedule is
called a tender offer statement.
• Target obligations: the management of the target company cannot advise its shareholders
how to respond to a tender offer until it has filed a recommendation statement with the SEC
within 10 days after the tender offer’s commencement date.
• Shareholder rights: the tender offer must be left open for a minimum of 20 trading days.
Shareholders have the right to withdraw shares tendered previously as long as the tender
offer remains open. When a new bid for the target is made from another party, the target
firm’s shareholders must have an additional 10 days to consider the bid.
• The “best price” rule: all shareholders holding the same class of security be paid the same
price in a tender offer.
 The Sarbanes – Oxley of 2002

 The SOA was signed after scandals at Enron, MCI WorldCom, ImClone, Qwest,
Adelphia, and Tyco.
• requires quarterly certification of financial statements and disclosure controls and
procedures for CEOs and CFOs.
• requires most public companies to certify annually that their internal control system
is operating successfully.
• requires a greater number of directors on the board who do not work for the
company
• requires board audit committees to have at least one financial expert, while the full
committee must review financial statements every quarter
The Sarbanes – Oxley of 2002
 The M&A regulatory in US
Antitrust
Legislation

The Hart – Scott -

Rodino (HSR)
The Sherman Act The Clayton Act Antitrust …
Improvements Act of
1976

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 The Sherman Act of 1890
The Sherman Act makes illegal all contracts,
combinations, and conspiracies that restrain
trade “unreasonably”: agreements to fix prices,
rig bids, allocate customers among competitors,
or monopolize any part of interstate commerce.
• Section I: prohibits new business combinations
resulting in monopolies or in a significant
concentration of pricing power in a single firm.
• Section II: applies to firms that already are
dominant in their targeted markets.
 The Clayton Act of 1914
the Clayton Act was created to outlaw certain practices not prohibited
by the Sherman Act and to help government stop a monopoly before it
developed.
• price discrimination between customers is illegal
• prohibits one company from buying the stock of another company if their
combination results in reduced competition.
• As a civil statute, the Clayton Act allows private parties that were injured by
the antitrust violation to sue in federal court for 3 times their actual damages.
 The Hart-Scott-Rodino
Antitrust Improvements Act of 1976
 The act gives the DoJ the power to request internal corporate records if it
suspects potential antitrust violations.
 HSR filing is necessary when:
• (1) Size-of-transaction test: The buyer purchases assets or securities > $75.9
million or
• (2) Size-of-person test: Buyer or seller has annual sales or assets >=$151.7
million and any other party has sales or assets >=$15.2 million.
• (3) If the acquisition value > $303.4 million, a filing is required regardless of
whether (2) is met.
 These thresholds are adjusted annually by the increase in GDP.
 The Herfindahl-Hirschman Index (HHI)
The FTC measures concentration using the Herfindahl-Hirschman Index (HHI),
which is calculated by summing the squares of the market shares for each firm
competing in the market.:

(s is the market share of each firm expressed as a whole number, not a decimal)
 The Herfindahl-Hirschman Index (HHI)
Example: Consider the following hypothetical industry with four total firms:
• Firm one market share = 40%
• Firm two market share = 30%
• Firm three market share = 15%
• Firm four market share = 15%
 The HHI is calculated as:
HHI = 40^2 + 30^2 + 15^2 + 15^2 = 1,600 + 900 + 225 + 225 = 2,950
 This is considered a highly concentrated industry, as expected since
there are only four firms.
 The M&A regulatory in Vietnam

M&A
regulatory

The Law on
The Law on The Law on The Law on
Enterprises 1999,
Competition 2004 Investment 2005 Securities 2006 …
2005, 2014

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 CHAPTER SUMMARY
1. The M&A regulatory in US
 Federal Securities Laws
 Antitrus Legislation

2. The M&A regulatory in VN

 The Law on Competition 2004
 The Law on Enterprises 1999, 2005, 2014
 The Law on Investment 2005
 The Law on Securities 2006
 The Law on Credit Institutions 2010
 …