At the conclusion of a hearing held yesterday morning, the Department of Corporations approved the acquisition of Instagram, Inc. by Facebook, Inc. Technically, the Department approved the issuance of a permit to offer and sell the securities. The hearing was was held pursuant to Corporations Code Section 25142.
Bishop goes on to offer a number of observations about the hearing. Readers may recall that when the deal was announced I raised questions about whether the Instagram board satisfied its fiduciary duties in approving the deal and later wondered how the shareholders felt about the deal with FB's stock price tanking. Neither of those issues, of course, was at stake in the 25142 hearing.
A Kirkland briefing paper explains why a section 25142 hearing can be advantageous:
California Corporations Code Section 25142 ... allows companies interested in issuing securities in a merger or share exchange transaction to seek a “fairness hearing” as part of its application for qualification of the offer and sale of securities. This provision of California corporate securities law—which very few other states have adopted — provides an avenue by which a potential acquirer that desires to use its securities as consideration in the acquisition of target can avoid the time and expense of registering such securities under the federal securities laws. Under the Section 25142 process, the potential acquirer can take advantage of the exemption provided by Section 3(a)(10) of the Securities Act of 1933, as amended, which provides exemption from registration for securities issued in exchange for outstanding securities of an issuer, if done pursuant to a fairness hearing. Though often thought of in the context of hearings that are relatively common in certain international jurisdictions, Section 3(a)(10) also permits a U.S. state law hearing on the fairness of the terms and conditions of the proposed issuance or exchange of securities.
California Corporations Code Section 25142 process remains a viable means by which a potential acquirer can circumvent the time, expense, and potential SEC-engendered hassles sometimes involved in register- ing securities under the Securities Act.
So not only did the poor Instagram shareholders potentially get screwed by their board on the negotiations, their board has now helped Facebook deprive them of the protections offered by registration under the federal Securities Act of 1933 of the rapidly falling in price shares they are to receive from Facebook. (Assuming you think said act provides any such protections.)