As discussed in this earlier post, Facebook, Inc. has requested a fairness hearing before the California Department of Corporations. Technically, the hearing is being held pursuant to Corporations Code Section 25142 in connection with Facebook's application for a permit authorizing the issuance of securities to effect its proposed acquisition of Instagram, Inc. Since a permit may be issued without a hearing, the raison d'être for the hearing is to obtain the exemption from federal registration pursuant to Section 3(a)(10) of the Securities Act of 1933. In general, the fairness hearing process is both quicker and cheaper than federal registration.
One unusual aspect of fairness hearings is that they are held before the Department of Corporations, rather than an administrative law judge on the staff of the Office of Administrative Hearings. Thus, fairness hearings are governed by the Commissioner's hearing rules, 10 CCR § 250.17 et seq., rather than Chapter 5 of the Administrative Procedure Act (§ 11500 et seq.) governing formal agency adjudications. As a practical matter, the Commissioner doesn't usually serve as the hearing officer, as she or he will invariably appoint a senior lawyer in the Securities Regulation Division. The Department itself will be represented at the hearing by another SRD attorney. In this case, I understand that Rafael Lirag and Ivan Griswold will be serving as the hearing officer and counsel, respectively.
Also present at the hearing will be the lawyers representing Facebook and Instagram and their respective witnesses. The hearing will be transcribed (at the applicant/issuer's expense). I expect that Facebook's hearing will proceed as follows:
- The hearing officer will make opening remarks announcing the time, date and place of the hearing;
- The individuals present will introduce themselves for the record;
- The court reporter will administer oaths to the witnesses;
- The Department's counsel will introduce as evidence the application, notice of hearing and certificate of posting of the notice;
- Facebook's counsel will introduce the applicant's exhibits, including (and this is very important) an affidavit of mailing;
- Facebook's counsel will make an opening statement and then call the applicant's witnesses;
- Instagram's counsel will make a statement and call his or her client's witnesses;
- Any dissenting security holders will be given the opportunity to question the witnesses and/or call their own witnesses.
The hearing officer and the Department's counsel may also question the witnesses. I am often asked if the outcome is a foregone conclusion. It is not. However, in most cases an applicant will not proceed with the hearing if it appears likely that a permit will be denied. Furthermore, most hearings are not contested.
If the application is not contested and the hearing officer determines that the transaction meets the Commissioner's standards, that finding will be stated on the record and a permit will be issued forthwith. Occasionally, fairness hearings are contested. If there is a contest, then it is likely that the hearing officer will take the matter under submission and he may ask for additional submissions from the parties and/or the Department's counsel. The hearing officer will then prepare and submit to the Commissioner a proposed decision.
Since fairness hearings are evidentiary hearings, they are subject to the general requirements for administrative adjudication pursuant to Chapter 4.5 of the Administrative Procedure Act (Government Code § 11400 et seq.). These requirements include the administrative adjudication "bill of rights" set forth in Sections 11425.10 - 11425.60. As such, the hearing must be open to public observation as provided in Section 11425.20 of the Government Code.