Introducing the M&A Broker

What is an m&a broker?  It is a new term recently introduced by the Securities and Exchange Commission (SEC) to describe a business broker who may be involved in private company merger and/or acquisition transactions involving stock without registering as a broker-dealer. This is great news for unregistered business brokers and the small, mid-sized and family owned privately-held companies that they typically represent.

Previously, business brokers were required to be registered with the SEC if they were in the business of effecting transactions in securities, such as the sale of stock.  However, there is no SEC registration requirement to serve as a broker in the sale of assets.  So under the prior law, an unregistered business broker could earn a commission on the sale of 100% of a business’s assets, but could not earn a commission for the sale of 100% of the same business’s stock. Many felt that different treatment for stock deals and assets deals made little sense. The old rules often required buyers and sellers to structure transactions as a sale of assets, even in cases when a sale of stock would make more sense for the buyer and seller from the standpoint of tax, accounting, regulatory or other considerations.

On February 4, 2014, the SEC came to the relief of unregistered business brokers and their clients by issuing a no-action letter creating the m&a broker exemption from SEC broker-dealer registration requirements. A copy of the no-action letter is available here. The m&a broker exemption permits unregistered business brokers to be involved in transactions involving the sale of control stock of a privately-held company to a buyer who will actively control the business.  The transaction may be structured as a merger, acquisition, business sale or business combination.  There is no dollar limit on the size of the private company that may be involved in the transaction.  There are other restrictions on use of this exemption set forth in the no-action letter, including that the broker may not bind either party, provide financing for the transaction or handle funds.

Easing the regulatory burden on business brokers should result in brokers bringing more buyers and sellers to each other’s attention, thereby facilitating the closing of more business transactions, which in turn should result in fairer prices and greater liquidity for business owners seeking to sell their company.      

Risks of Electronic Contracting

How easy is it to enter into a multi-million dollar (or more) contract via e-mail?  As easy as clicking "send" on an e-mail, it would seem.

Under the Texas Uniform Electronic Transactions Act (UETA), parties can enter into a legally binding agreement by e-mail or other electronic communications, even for matters that traditionally were required to be in writing, such as agreements to purchase real property, including oil and gas interests.  Under UETA, if the parties intend to enter into an agreement electronically, an otherwise enforceable agreement will not be unenforceable solely because it was entered into electronically.

A recent court case, 2001 Trinity Fund, LLC v. Carrizo Oil & Gas, Inc., which was decided by a Texas state appeals court in Houston, illustrates the danger of negotiating the terms of a business transaction over e-mail.  In that case, the trial court analyzed a series of e-mail messages between two oil and gas companies and concluded that the e-mails collectively constituted a binding legal agreement to amend and revive their existing participation agreement.  The e-mails including statements such as:

• “I agree in principle, but need to have this interest flow directly back to me.”

• “[i]f you are in agreement in principle, then I’m assuming we can work out the mechanics.”

• “That will work.  I will call before the day is over and give you an exact time.”

• “Yes, has been my final answer.  I will give you the final date ASAP.”

• “As I told you before, I intend on being involved in the drilling program.”

The trial court initially awarded one of the parties over $10 million in damages for the other party’s breach of the alleged electronic agreement. That trial court verdict was later overturned on appeal when the appellate court reached the opposite conclusion, finding that the evidence was legally insufficient to support the jury’s conclusion that an electronic agreement existed.

Nonetheless, the takeaway is obvious.  When in discussing a business transaction via e-mail or other electronic means, one should make sure it is crystal clear whether or not the party desires or intends to enter into an electronic agreement, or if the party does NOT have such desire or intent.  Otherwise, courts may be deciding whether or not an electronic agreement exists, and you may not like its decision.