Retail investors are becoming an increasingly significant source of capital on public markets, and dealmakers should be aware of how this development can impact M&A transactions and the decision to go public. After the latest garnering of widespread attention in the news, the retail investment community has been estimated to constitute as much as 25% of total stock market activity. This increase can be at least partly attributed to the development of 0% commission trading mobile applications as well as the extra time retail investors have to develop their own personal trading strategies due to COVID-19 social restrictions. Not only are there simply more retail investors, but retail investors now have the ability to easily coordinate investing strategies through social media platforms. These developments allow retail investors to create substantial trends and market fluctuations in the prices of securities, as well as being a relatively-newfound and rather robust source of capital. It is important to note, however, that securities regulators are currently investigating and contemplating how to regulate these types of social media investing forums under the possible purview of stock manipulation.
Implications for Dealmakers
Public companies involved in or procuring M&A opportunities need to be aware of the potential value and volatility that has emerged due to the rise of retail investors in both negotiating the deal and communicating its details to the public.
First, the potential for large price fluctuations may make it more difficult for the parties to a transaction to negotiate a price for the target company. This is because it can become more difficult to value companies as the share price may experience large fluctuations during negotiations due to the increased presence of speculative retail investing. For such situations, in which the share price may not reflect the actual value of the target company, deal negotiators will need to work more diligently to find a mutually agreeable price that both parties believe is reflective of the true value of the target company.
Second, companies may begin to reconsider contractual provisions that are based on (or directly tied to) the future value of the share price. Agreements to pay the seller an increased amount based on the share price at a certain point in time (commonly, for example, one year after the closing date) or the issuance of convertible securities that convert upon the share price reaching a particular level may no longer be appropriate as markets have become exposed to this volatility surge. This concern may be remedied by ensuring that the increase in share price must be sustained for a significant period of time before the contemplated contractual terms are triggered.
Finally, dealmakers must rethink traditional disclosure and marketing methods as online social media investment platforms continue to transform from just spaces to discuss investment opportunities to communities with non-traditional investment values. These communities have shown at times that their investment decisions are not just guided by financial returns, but other corporate governance factors as well. Management must be increasingly aware of how the details of a deal are communicated to the public and consider reviewing their standard disclosure methods and documents in order to better address the concerns of retail investment communities that continue to gain exponential prevalence. In an era when a single Tweet from management can cause an internet backlash, the need for counsel with a nuanced understanding of the ever-changing trends and values of shareholders and the investment market is becoming a must.
Many factors affect a private company’s decision to go public – whether through initial public offerings or “go-public” M&A transactions – including being the target of a reverse takeover or a special purpose acquisition company. Important considerations for management when assessing whether to go public include the reduced control by the private owners of the company and the increased price volatility inherent in publicly traded companies. This concern multiplies as the rise of retail investing communities continue to increase both market volatility and public scrutiny.
The rise of retail investing and online investment communities can be a source of immense unpredictability or great value for companies. It will be important for dealmakers to enlist legal counsel that is aware of retail investing trends in order to ensure that any deal contemplated is not only effectively negotiated, but also prudently communicated to the general public.
The author would like to thank Arron Chahal, Articling Student, for his significant contribution to this blog post.
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