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Microcap & Penny Stocks : PLNI - Game Over -- Ignore unavailable to you. Want to Upgrade?

To: shortsinthesand who wrote (1831)	1/19/2006 9:02:55 PM
From: scion	Respond to of 12518

The acquisition of a private company (or a foreign public company that has not entered the U.S. market) by a public acquiror may create even more difficult issues since the target probably will have no significant history of SOX observance and may have less robust reporting and internal controls. In this situation, the pro forma compliance issues must be orchestrated carefully. The recent enactment of SOX, combined with the flood of SEC pronouncements and the uncertain status of the stock exchange and Nasdaq rules, make this process more challenging than it likely will become when best practices are more clearly established. Moreover, SOX will have an impact on some acquisitions that at first glance do not appear to involve public companies. A private equity buyer engaged in the leveraged acquisition of a private company may conclude that a possible exit through an initial public offering is sufficiently far in the future that it need not affect the manner in which the acquisition is consummated.3 However, if the acquisition financing includes a tranche of high-yield debt, the company will become an “issuer” subject to at least some of the requirements of SOX a few months after the closing upon the filing of the registration statement for the A/B exchange offer. 4 Set forth below are recommendations regarding appropriate supplements to the due diligence process following SOX’s enactment. There follows an analysis of contractual representations, covenants and conditions that should be considered when negotiating the purchase by a public acquiror (as well as perhaps the target in transactions in which the target shareholders obtain equity in the acquiror). The article concludes with our thoughts on SOX’s impact on the fundamental structure of M&A transactions. Due Diligence Under SOX Financial Condition SOX—and the SEC rulemaking in its aftermath—clearly have signaled the necessity of transparent financial reporting for public companies. Thus, financial due diligence must be expanded to include not only the consistency of financial reporting under GAAP, but also all transactions, liabilities and obligations (including off-balance sheet transactions) that affect the target’s financial condition, results of operations and prospects, regardless of their GAAP treatment.5 The acquiring company must thoroughly understand the target’s critical accounting policies, with an emphasis on significant accounting estimates. If the acquiror and target are in the same business segment but employ variant policies or estimation methodologies, a plan for their rationalization should be devised pre-closing. The financial due diligence will often include a review of the target’s auditors workpapers6 and should include a review of the impact that acquisition-related charges, including write downs, may have on the acquiring company’s future financial statements. 7 The forfeiture provisions contained in Section 304—and the certification requirements of Sections 302 and 906—of SOX underscore the need for thorough financial due diligence. The forfeiture provisions mandate that if misconduct (by whom is unclear) results in material non-compliance with SEC financial reporting, and as a result of this non-compliance a public company is required to restate its financials, the CEO and CFO must disgorge all performance-based compensation and all profits realized from the sale of the issuer’s securities during the 12 months following the first public issuance of the document containing the non-compliant report. Although the application of this new law is not yet clear, it is reasonable to expect that the acquiring company’s CEO and CFO will not wish to expose themselves to potentially significant personal liability based on target misconduct that affects the combined financial statements. This new emphasis on financial statement diligence is reinforced by SOX’s certification requirements, which are designed to force senior management to obtain sufficient information to form a basis for the certification. In those situations in which the acquiring company is unable to get comfortable with the financial condition of the target to the extent necessary to allow the CEO and CFO to include these results in their certifications, consideration should be given to a pre-closing closing audit to provide the necessary comfort. realcorporatelawyer.com