An issuer files a universal shelf registration statement with the
Securities and Exchange Commission to register various classes of the
issuer's securities for sale to the public in the future in single or
multiple offerings based on a single registration. Classes of
securities typically registered include common stock, preferred stock,
senior debt, subordinated debt, warrants, units, stock purchase
contracts, guarantees, depositary shares and trust preferred
securities. At the time of "take down," any of these securities can be
taken "off the shelf" and sold publicly without filing a new
registration statement or undergoing a new SEC review. This allows an
issuer seeking financing to act quickly to capitalize on favorable
market conditions with maximum flexibility to offer and sell different
kinds of equity, debt or other hybrid securities.
For example, Alcoa had filed its universal shelf in March 2008.
Immediately following the announcement of its first-quarter loss on
March 16, 2009 (which saw its stock prices fall 8.7% on the following
day), the aluminum producer was able to launch on March 18 a public
offering and sell overnight $900 million of common stock and $500
million of convertible notes.
As confidence is slowly on the rise and issuers are going back to
tap the capital markets, public companies should think about their
future capital markets needs and strategy and consider putting in place
a universal shelf registration so as to position themselves favorably
when the need arises.
Universal shelf registrations are most advantageous to issuers that
qualify as "well known seasoned issuers," or WKSIs. However, universal
shelf registrations also offer advantages to non-WKSIs (note that, in
each case, it is assumed that the issuer would be able to effect the
registration of the securities on Form S-3).
For those debating whether or not to employ universal shelf
registrations, there are numerous advantages, specifically with respect
to the quick access to capital markets that come without SEC review.
Once the registration statement is effective, which may be immediately
upon filing for WKSIs, securities can be issued and sold quickly by
means of a prospectus supplement that is filed with the SEC but not
reviewed. WKSIs' shelf registrations are automatically effective upon
filing, without review by the SEC. For non-WKSIs, the registration
statement will be subject to SEC review before it becomes effective.
Furthermore, the flexibility available is a major asset. Universal
shelf registrations offer companies the flexibility to issue a variety
of securities at different times or concurrently under a single
registration at any time, as well as the opportunity to sell securities
at various prices, including fixed prices, changing prices, negotiated
prices or market prices at the time of sale. They also offer the
flexibility to sell securities through various transactions, including
underwritten sales, direct sales to purchasers in negotiated sales or
competitively bid transactions, or sales through agents or dealers.
This permits offerings designed to reduce the downward pressures on
stock prices that could result from an underwritten offering.
Due to the speed, flexibility and ability to exploit short-term
pricing opportunities, lower underwriter fees and smaller discounts to
the last trading price of the stock enable lower direct issuance costs.
Universal shelf registrations can also be used for resale by selling
security holders. WKSIs also have the power to omit the names of the
selling security holders and the amount of securities offered by each
of them from the base prospectus. Non-WKSIs may only omit identifying
selling security holders from the base prospectus under certain
circumstances.
For WKSIs, universal shelf registrations provide the chance to sell
an unlimited amount of securities, while for non-WKSIs, the
registration will need to indicate a maximum aggregate offer price for
all securities to be registered. Additionally, WKSIs have the ability
to delay payment of the registration fee to the time of the "take-down"
("pay as you go") and then only pay the fee relating to the amount
being taken down. Non-WKSIs must pay a registration fee based on the
maximum aggregate amount being registered at the time the Form S-3 is
filed.
Simplified disclosure is also considered a substantial advantage,
since the registration statement will be filed with only a bare base
prospectus, which generally will incorporate most relevant information
from the issuer's periodic reports and will otherwise simply include a
description of the securities to be issued, risk factors, the plan of
distribution, a ratio of earnings to fixed charges (for debt
securities), a general use of proceeds section and an experts section.
One final advantage is the ability to delay the filing of most
exhibits to the time of a take-down, with certain exceptions (e.g.,
charter, indentures, Form T-1).
Yet despite these many advantages, there are several limitations to using universal shelf registrations.
Chief among these limitations is market overhang. Setting up a
universal shelf registration may depress the trading price of the stock
("market overhang") because investors may discount the market prices of
the stock in anticipation of a take-down. The exact scope of the
overhang will vary depending on the facts and circumstances of each
issuer.
Additionally, shelf registrations can only be used for sales for
cash and not in exchange for other securities. In particular, this
registration cannot be issued for securities to be issued in a business
combination for stock. The shelf registrations have a three-year life
from filing, then a new registration statement will need to be filed
before the old shelf terminates.
Each amendment to the registration statement will result in a
reassessment of WKSI status. If WKSI status is lost as a result of a
new assessment in connection with an amendment filing or in connection
with a Form 10-K filing, a new registration statement must be filed on
the appropriate form subject to SEC review (i.e., without automatic
effectiveness upon filing).
Finally, issuers remain subject to Regulation FD and any shareholder
approval requirements under stock exchange rules or otherwise.
Valerie Demont is a partner in the New York office of Pepper
Hamilton LLP. She focuses her practice on U.S. and cross-border mergers
and acquisitions, capital markets, corporate finance and securities
matters.
Comments
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