The Curious Case of How To Sell Securities Obtained in an M&A Transaction: Rules 144 and 145

We’ve previously addressed revised Rule 144 in the context of when legends could be removed from restricted securities held by non-affiliates in the absence of an actual resale (i.e., the question when the issuer can instruct the transfer agent to remove restricted legends).

Today, we discuss a different issue under revised Rule 144 and related Rule 145 – resales of securities in the context of M&A transactions.1
Setting – Large Law Firm Office – DayA prosperous law firm in a city center. We move past glass-fronted individual offices ... landing in a conference room where two lawyers sit in front of a speaker phone...

SPEAKER PHONE VOICE (from off-screen): so the target shareholders will get stock in the merger.

LAWYER 1: Will they register the transaction?

SPEAKER PHONE VOICE (from off-screen): I don’t know. They haven’t told us. Can the target shareholders freely resell? Does that make a difference? We need to know the answers, and fast!

LAWYER 2: We’ll get right on it.

OK, we can safely predict that this is not likely to win “best screenplay” at the Academy Awards. But what about the question? Can you freely resell stock acquired in a stock-for-stock merger? Here’s how you go about sorting out the answer.

Do we need to worry whether the shareholder is an affiliate of the target?

Not any more, unless the transaction involves a “shell company“ (other than a business combination related shell company), under the revisions to Rule 145 which took effect in February 2008.2 The only resale restrictions you need to worry about now are contained in Rule 144. For these purposes, it does not matter whether the transaction is registered (on Form S-4 or F-4) or unregistered (i.e., is a private exchange).

OK, I will put Rule 145 aside. But what about Rule 144?To answer that question, you need to know whether the transaction is registered or unregistered, and in addition, whether the shareholder in question is or is not an affiliate of the issuer (i.e., an affiliate of the acquiring company). We will take each scenario in turn.


Scenario 1 – a Public Merger; Target Shareholder is Not an Affiliate

This is the simplest scenario. The shareholder can freely resell his or her securities and Rule 144 does not apply because the securities were not issued in a private offering and therefore are not “restricted securities” within the meaning of Rule 144.

Scenario 2 – Private Merger; Target Shareholder is Not an Affiliate

Rule 144 applies because the target shareholder takes restricted securities in the transaction. Under Rule 144, this means that the target shareholder will need to comply with the following holding period requirements:

  • Six months if the issuer is an SEC reporting company and current in its filings; or
  • One year if the issuer either is not an SEC reporting company or is not current in its SEC filings.3

After one year, there are no restrictions on further resale.

Scenario 3 – Private Merger; Target Shareholder is an Affiliate

Rule 144 applies again. This means that the target shareholder will need to comply with the following requirements:

  • Holding period: The same provisions apply as outlined under Scenario 2 above.
  • Volume limitations: In each three-month period, the total amount of securities of the class sold (restricted and unrestricted) cannot exceed the greater of (i) 1% of the total outstanding class of securities; or (ii) the average weekly trading volume on US national securities exchanges during the prior four weeks; or (iii) if the securities sold are debt securities, 10% of the principal amount of the tranche attributable to the securities sold.
  • Manner of sale: If the securities to be sold are equity securities, they must be resold in (i) unsolicited brokers’ transactions; (ii) transactions with a market maker; or (iii) riskless principal transactions
    Notice of sale: If more than 5,000 shares or $50,000 worth of securities are resold in any three-month period, the seller must file a notice on Form 144 with the SEC.
  • Current information: Certain basic information about the issuer must be available.

Scenario 4 – Public Merger; Target Shareholder is an Affiliate

This is apt to strike you as the most counterintuitive of the scenarios. You would initially think that because the transaction is registered, the affiliate should be freely able to resell the securities it acquires. You could even continue to hold that view after looking at Rule 144, which does not appear to address the question.

However, the right answer is that Rule 144 applies because securities acquired by an affiliate in a registered transaction are considered control securities subject to restrictions on resales even though they are not restricted securities. Don’t look for the definition of control securities in Rule 144 – it is not there.4

In the case of control securities, there is no holding period. Otherwise, all of the remaining requirements of Rule 144 apply as if the affiliate were reselling restricted securities (volume limitations; manner of sale requirements; notice of sale requirements; current information requirements).


1   A summary of the February 2008 revisions to Rules 144 and 145 can be found in our Client Alert: “SEC Reduces Restrictions on Resale of Restricted Securities.” Except as specifically indicated, all references to Rules 144 and 145 are to the revised rules.

2   Under the “presumptive underwriter” provision of old Rule 145, parties to or affiliates of parties to a business combination transaction were deemed to be underwriters with respect to sales of shares received in the transaction. As a result, even if the acquiring company registered the issuance of its shares, affiliates of the target could not publicly sell the shares they received unless they were sold pursuant to a resale registration statement or in compliance with the provisions of old Rule 144.

3   See Release No. 33-8869 at 21 (discussing the “current public information” requirements of Rule 144(c), which apply for six months after the initial six month holding period in the case of non-affiliate sales of securities of SEC reporting companies).

4   See Release No. 33-8869 at 6-7 (noting that “although it is not a term defined in Rule 144, ‘control securities’ is used commonly to refer to securities held by an affiliate of the issuer, regardless of how the affiliate acquired the securities”).

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