As filed with the Securities and Exchange Commission on October 26, 2022
No. 333-267393
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
(Exact name of registrant as specified in its charter)
| 6770 | ||||
| (State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
(
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Gregory Monahan, Chief Executive Officer
777 Third Avenue, 37th Floor
New York, New York 10017
(212) 319-7676
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies of all communications, including communications sent to agent for service, should be sent to:
|
David Alan Miller, Esq. |
William R. Rohrlich, II, Esq. Winstead PC 600 Travis Street Suite 5200 Houston, Texas 77002 Telephone: (713) 650-8400 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective and upon completion of the merger described herein.
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. ☐
If this Form is filed to registered additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
If applicable, please place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
| Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) | ☐ | |
| Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) | ☐ |
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary proxy statement/prospectus is not complete and may be changed. We may not issue these securities until the registration statement filed with the Securities and Exchange Commission is effective. This proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROXY STATEMENT/PROSPECTUS
DATED OCTOBER 26, 2022, SUBJECT TO COMPLETION
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
OF
LEGATO MERGER CORP. II
PROSPECTUS FOR UP TO 44,137,931 SHARES OF COMMON STOCK
On May 25, 2022, Legato Merger Corp. II, a Delaware corporation (“Legato II”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Legato Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Legato II (“Merger Sub”), and Southland Holdings LLC, a Texas limited liability company (“Southland”). Pursuant to the Merger Agreement, Merger Sub will merge with and into Southland, with Southland surviving the merger as a wholly-owned subsidiary of Legato II (the “Merger”). The transactions contemplated by the Merger Agreement are referred to herein collectively as the “Business Combination.” In connection with the Business Combination, Legato II will change its name to “Southland Holdings, Inc.” We refer to Legato II after the consummation of the Business Combination as “New Southland.”
Southland is one of the largest construction companies in North America. Based in Grapevine, Texas, Southland is the parent company of Johnson Bros. Corporation, a Southland Company (“Johnson Bros. Corporation”), American Bridge Company, Oscar Renda Contracting, Inc., Southland Contracting, Inc., Mole Constructors, Inc. and Heritage Materials, LLC. With the combined capabilities of these six subsidiaries, Southland has become one of the largest and most diversified industry leaders. Southland is a leading provider of specialized infrastructure construction services across North America including bridges, tunneling, transportation, marine, facility and water pipeline.
Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each membership interest of Southland (expressed as a percentage) (“Existing Southland Membership Interest”) issued and outstanding immediately before the Effective Time will be converted into and become the right to receive, subject to tax withholding, (I) a number of shares of common stock of New Southland, par value $0.0001 per share (the “New Southland Common Stock” and, such shares of New Southland Common Stock, the “Merger Stock Consideration”) equal to (a) (i) $343 million divided by (ii) $10.15, multiplied by (b) such member of Southland’s (“Southland Member”) percentage of all Existing Southland Membership Interests issued and outstanding immediately prior to the Effective Time (i.e., 100%), (II) the right to receive a number of shares of New Southland Common Stock (the “Merger Earnout Consideration”) equal to (a) (i) $105 million divided by (ii) $10.15, multiplied by (b) such Southland Member’s percentage of all Existing Southland Membership Interests issued and outstanding immediately prior to the Effective Time, upon the achievement of certain adjusted EBITDA targets in accordance with the Merger Agreement and (III) an amount of cash (the “Merger Cash Consideration” and together with the Merger Stock Consideration and Merger Earnout Consideration, the “Merger Consideration”) equal to (a) $50 million multiplied by (b) such Southland Member’s percentage of all Southland Membership Interests issued and outstanding immediately prior to the Effective Time (i.e., 100%); provided, however, that in lieu of receiving all or part of the Merger Cash Consideration, up to $50 million of cash held by Southland or its Subsidiaries (as defined below) may be distributed to the Southland Members, or to such other Persons (as defined below) as instructed by the Southland Members, if either (1) there are not sufficient funds in the Trust Account (as defined below) to pay such amount in cash or (2) Southland elects, in its sole discretion, to make such dividend at or prior to the closing of the Business Combination (the “Closing”). For the avoidance of doubt, Southland may elect, in its sole discretion, but shall not be obligated, to distribute any cash held by Southland or its Subsidiaries to the Southland Members, or to such other Persons as instructed by the Southland Members, up to a maximum of $50 million, if there are not sufficient funds in the Trust Account to pay the Merger Cash Consideration in cash. Any cash paid as a dividend on or prior to Closing pursuant to such provision shall reduce the Merger Cash Consideration payable to the Southland Members at Closing by a like amount.
Immediately after the Effective Time, without taking into effect shares of New Southland Common Stock which may be issued upon the exercise of outstanding warrants of Legato II, the current stockholders of Legato II (including Legato II’s current officers, directors and advisors) will hold approximately ___% of the issued and outstanding New Southland Common Stock, and the Southland Members prior to the Merger will hold approximately ___% of the issued and outstanding New Southland Common Stock, which pro forma ownership assumes: (i) no holders of Legato II common stock issued in Legato II’s initial public offering (“Public Shares”) exercise their redemption rights; (ii) that ___ shares of New Southland Common Stock are issued as Merger Stock Consideration to Southland Members; and (iii) that there are ___ shares of New Southland Common Stock outstanding following the consummation of the Business Combination. If the maximum number of Public Shares are redeemed which would allow Legato II to meet the minimum cash condition required by its Existing Charter as described herein, such percentages will be approximately __%, __% and __%, respectively. See the section entitled “Proposal No. 1 — The Business Combination Proposal — Structure of the Business Combination” for more information.
Proposals to approve the Merger Agreement and the other matters discussed in this proxy statement/prospectus will be presented at an annual meeting of Legato II stockholders scheduled to be held on _______, 2022 in virtual format.
Legato II’s units, common stock and warrants are publicly traded on the Global Market of the Nasdaq Stock Market LLC (“Nasdaq”) under the symbols “LGTOU,” “LGTO” and “LGTOW,” respectively. Legato II intends to apply to list the New Southland Common Stock and New Southland Warrants (as defined below). New Southland will not have units traded on Nasdaq following consummation of the Business Combination. It is a condition of the consummation of the Business Combination that the New Southland Common Stock is approved for listing on Nasdaq (subject only to official notice of issuance thereof and round lot holder requirements), but there can be no assurance such listing condition will be met. If such listing condition is not met, the Merger will not be consummated unless the listing condition set forth in the Merger Agreement is waived by the parties to the Merger Agreement.
Legato II is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and is therefore eligible to take advantage of certain reduced reporting requirements otherwise applicable to other public companies.
This proxy statement/prospectus provides you with detailed information about the proposed Business Combination. It also contains or references information about Legato II and Southland and certain related matters. You are encouraged to read this proxy statement/prospectus carefully. In particular, you should read the “Risk Factors” section beginning on page 28 for a discussion of the risks you should consider in evaluating the proposed Business Combination and how it will affect you.
Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of the Business Combination, the issuance of shares of New Southland Common Stock in connection with the Business Combination or the other transactions described in this proxy statement/prospectus or passed upon the adequacy or accuracy of the disclosure in this proxy statement/prospectus. Any representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated ___, 2022 and is first being mailed to stockholders of Legato II on or about such date.
PRELIMINARY — SUBJECT TO COMPLETION, DATED OCTOBER 26, 2022
LEGATO MERGER CORP. II
NOTICE OF THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON _______, 2022
TO THE STOCKHOLDERS OF LEGATO MERGER CORP. II:
NOTICE IS HEREBY GIVEN that the 2022 annual meeting (the “Annual Meeting”) of the stockholders of Legato Merger Corp. II, a Delaware corporation (“Legato II”), will be held on _______, 2022, at 10:00 a.m. Eastern Time, via a virtual meeting. In light of the novel coronavirus (“COVID-19”) pandemic and to support the well-being of Legato II’s stockholders, the Annual Meeting will be completely virtual. You may attend the Annual Meeting and vote your shares electronically during the meeting via live audio webcast by visiting https://___. You will need the control number that is printed on your proxy card to enter the Annual Meeting. Legato II recommends that you log in at least 15 minutes before the meeting to ensure you are logged in when the Annual Meeting starts. Please note that you will not be able to attend the Annual Meeting in person.
As previously disclosed, on May 25, 2022, Legato II entered into an Agreement and Plan of Merger (as it may be amended and/or restated from time to time, the “Merger Agreement”), by and among Legato II, Legato Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Legato II (“Merger Sub”), and Southland Holdings LLC, a Texas limited liability company (“Southland”), pursuant to which Merger Sub will merge with and into Southland, with Southland surviving the merger (“Merger”). As a result of the Merger, and upon consummation of the Merger and the other transactions contemplated by the Merger Agreement (collectively, the “Business Combination”), Southland will become a wholly-owned subsidiary of Legato II and the members of Southland (“Southland Members”) will become stockholders of Legato II.
At the Annual Meeting, Legato II’s stockholders will consider and vote upon the following proposals (the “Proposals”) and any and all other business that may properly come before the Annual Meeting or any continuation, postponement or adjournment thereof:
| 1. | The Business Combination Proposal — To consider and vote upon a proposal to approve the Merger Agreement and the transactions contemplated thereby. A copy of the Merger Agreement is attached to this proxy statement/prospectus as Annex A (Proposal No. 1); |
| 2. | The Charter Proposals — To consider and vote upon separate proposals to approve amendments to Legato II’s amended and restated certificate of incorporation (“Existing Charter”), which amendments will be effective following the consummation of the Business Combination and will be embodied in a second amended and restated certificate of incorporation of New Southland (the “Proposed Charter”), to: (a) increase the number of authorized shares of common stock from 50 million shares to 500 million shares and increase the number of authorized shares of preferred stock from one million shares to 50 million shares; (b) to change Legato II’s name from “Legato Merger Corp. II” to “Southland Holdings, Inc.”; and (c) remove the various provisions applicable only to special purpose acquisition companies that will no longer be applicable to Legato II after the consummation of the Business Combination. A copy of the Proposed Charter effectuating the foregoing amendments is attached to this proxy statement/prospectus as Annex B (Proposal Nos. 2.A through 2.C); |
| 3. | The Director Election Proposal — To consider and vote upon a proposal to elect seven directors to serve on the board of directors of Legato II until their respective successors are duly elected and qualified pursuant to the terms of the Proposed Charter (Proposal No. 3); |
| 4. | The Nasdaq Proposal — To consider and vote upon a proposal, as required by the rules of the Nasdaq Stock Market, to approve the issuance of New Southland Common Stock in the Business Combination in an amount greater than 20% of the number of shares of Legato II Common Stock before such issuance (Proposal No. 4); |
| 5. | The Incentive Plan Proposal — To consider and vote upon a proposal to approve and adopt the Southland Holdings, Inc. 2022 Equity Incentive Plan. A copy of the Incentive Plan is attached to this proxy statement/prospectus as Annex D (Proposal No. 5); and |
| 6. | The Adjournment Proposal — To consider and vote upon a proposal to adjourn the Annual Meeting to a later date or dates, if it is determined by Legato II that more time is necessary to consummate the Business Combination for any reason (Proposal No. 6). |
Only holders of record of Legato II common stock, par value $0.0001 per share (“Legato II Common Stock”), at the close of business on _________, 2022 are entitled to notice of the Annual Meeting and to vote at the Annual Meeting and any adjournments or postponements of the Annual Meeting. A complete list of Legato II stockholders of record entitled to vote at the Annual Meeting will be available for 10 days before the Annual Meeting at the principal executive offices of Legato II for inspection by stockholders during ordinary business hours for any purpose germane to the Annual Meeting. The eligible Legato II stockholder list will also be available at that time on the Annual Meeting website for examination by any stockholder attending the Annual Meeting via live audio webcast.
Legato II’s initial stockholders (the “Initial Stockholders”) and each other officer, director and advisor of Legato II (collectively, the “Legato II Insiders”) have agreed to vote all shares of Legato II Common Stock held by them in favor of the Business Combination Proposal. As of the record date for the Annual Meeting, these holders together beneficially owned and were entitled to vote an aggregate of 7,933,000 shares of Legato II Common Stock, which currently constitutes approximately 22.1% of the outstanding shares of Legato II Common Stock. In addition to such shares held by the Legato II Insiders, Legato II would need 10,022,501 shares, or approximately 36.3% of the 27,600,000 shares of Common Stock sold in Legato II’s initial public offering (the “IPO”), to be voted in favor of the Business Combination Proposal in order for it to be approved, assuming all outstanding shares are voted on such proposal and the shares of Legato II Common Stock held by EarlyBirdCapital, Inc. (the representative of the underwriters in the IPO (“EBC”)) and its designees are not voted in favor of the Business Combination Proposal. If only a quorum of shares of Legato II Common Stock is present at the Annual Meeting, Legato II would need only approximately 1,044,751 shares, or approximately 3.8% of the Legato II Common Stock, to be voted in favor of the Business Combination Proposal in addition to the Legato II Insiders in order for it to be approved (provided that consummation of the Business Combination is conditioned upon, among other things, approval of the Charter Proposals and Nasdaq Proposal and the requirement that Legato II have net tangible assets of at least $5,000,001 immediately prior to or upon consummation of the Business Combination). The Legato II Insiders have also indicated that they intend to vote their Legato II Common Stock in favor of all other proposals being presented by Legato II at the Annual Meeting.
Pursuant to the Existing Charter, Legato II will provide holders (“public stockholders”) of Legato II Common Stock sold in the IPO (“Public Shares”) with the opportunity to redeem their Public Shares for cash equal to their pro rata share of the aggregate amount on deposit in the trust account (the “Trust Account”), which holds the proceeds of the IPO and concurrent private placement of warrants as of two business days prior to the anticipated consummation of the Business Combination (including interest earned on the funds held in the Trust Account and not previously released to Legato II to pay taxes) upon the closing of the Business Combination. The per-share amount Legato II will distribute to public stockholders who properly redeem their shares will not be reduced by the deferred underwriting commissions that Legato II is required to pay to EarlyBirdCapital, Inc. and other FINRA members. For illustrative purposes, based on funds in the Trust Account of approximately $___ million on the record date, the estimated per share redemption price would have been approximately $___. Public stockholders may elect to redeem their shares regardless of whether they vote for or against the Business Combination Proposal, or do not vote at all, or are not holders of record on the record date. This means that any public stockholder holding Public Shares may exercise redemption rights regardless of whether they are entitled to vote on the Business Combination Proposal and regardless of whether they vote at all. At the time of the IPO, as a condition to their purchase of Legato II Common Stock, the Legato II Insiders agreed to waive their redemption rights in connection with the consummation of the Business Combination with respect to any shares of Legato II Common Stock they may hold.
Approval of the Business Combination Proposal, the Nasdaq Proposal, the Incentive Plan Proposal and the Adjournment Proposal will require the affirmative vote of the holders of a majority of the outstanding shares of Legato II Common Stock on the record date present in person (which would include presence at a virtual meeting) or represented by proxy at the Annual Meeting and entitled to vote thereat. Approval of each of the Charter Proposals will require the affirmative vote of the holders of a majority of the outstanding shares of Legato II Common Stock on
the record date. Approval of the election of each of the seven directors nominated in the Director Election Proposal requires a plurality of the votes cast at the Annual Meeting. The Legato II board of directors has approved each of the proposals.
As of the record date, there was approximately $___ million in the Trust Account, which Legato II intends to use for the purposes of consummating the Business Combination described in this proxy statement/prospectus and to pay $9,660,000 in deferred underwriting commissions to EBC and other FINRA members. Each redemption of Public Shares will decrease the amount in the Trust Account. Legato II will not consummate the Business Combination if the redemption of Public Shares would result in Legato II’s failure to have at least $5,000,001 of net tangible assets (as determined in accordance with Rule 3a51-1(g)(1) of the Exchange Act) (or any successor rule) as of immediately prior to or upon consummation of the Business Combination.
The closing of the Merger is conditioned on approval of each of the Proposals. If any of these proposals is not approved and the applicable closing condition in the Merger Agreement is not waived, the remaining proposals will not be presented to stockholders for a vote. The Incentive Plan Proposal and Director Proposal are conditioned on the approval of the Business Combination Proposal, each Charter Proposal and the Nasdaq Proposal. The Adjournment Proposal is not conditioned on the approval of any other proposal set forth in this proxy statement/prospectus. The proxy statement/prospectus accompanying this notice explains the Merger Agreement and the transactions contemplated thereby, as well as the proposals to be considered at the Annual Meeting. Please review the proxy statement/prospectus carefully.
The Legato II board of directors has set _________, 2022 as the record date for the Annual Meeting. Only holders of record of shares of Legato II Common Stock at the close of business on _________, 2022 will be entitled to notice of and to vote at the Annual Meeting and any adjournments or postponements thereof. Any stockholder entitled to attend and vote at the Annual Meeting may attend the meeting virtually and is entitled to appoint a proxy to attend and vote on such stockholder’s behalf. Such proxy need not be a holder of shares of Legato II Common Stock.
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES OF LEGATO II COMMON STOCK YOU OWN. Whether or not you plan to attend the Annual Meeting, please complete, sign, date and mail the enclosed proxy card in the postage-paid envelope provided at your earliest convenience. You may also submit a proxy by telephone or via the Internet by following the instructions printed on your proxy card. If you hold your shares through a broker, bank or other nominee, you should direct the vote of your shares in accordance with the voting instruction form received from your broker, bank or other nominee.
The Legato II board of directors has approved the Merger Agreement and the transactions contemplated thereby and recommends that you vote “FOR” the Business Combination Proposal, “FOR” each of the Charter Proposals, “FOR” the election of each of the seven directors nominated in the Director Election Proposal, “FOR” the Nasdaq Proposal, “FOR” the Incentive Plan Proposal and “FOR” the Adjournment Proposal, if presented.
If you have any questions or need assistance with voting, please contact Legato II’s proxy solicitor, MacKenzie Partners Inc., at _______ or email at ____________.
If you plan to attend the Annual Meeting and are a beneficial investor who owns your investments through a bank or broker, you will need to contact American Stock Transfer & Trust Company to receive a control number. Please read carefully the sections in the proxy statement/prospectus regarding attending and voting at the Annual Meeting to ensure that you comply with these requirements.
| BY ORDER OF THE BOARD OF DIRECTORS | |
| Brian Pratt | |
| Non-Executive Chairman of the Board |
TABLE OF CONTENTS
i
ii
BASIS OF PRESENTATION AND GLOSSARY
As used in this proxy statement/prospectus, unless otherwise noted or the context otherwise requires:
| ● | “Board” means the board of directors of Legato II before the Business Combination or New Southland after the Business Combination, as the case may be; |
| ● | “Business Combination” means the Merger and other transactions contemplated by the Merger Agreement; |
| ● | “Crescendo I” means Crescendo Advisors, LLC, an entity affiliated with Eric Rosenfeld, Legato II’s Chief SPAC Officer, which has agreed that it will be liable to Legato II if and to the extent any claims by a vendor for services rendered or products sold to Legato II, or a prospective target business with which Legato II has discussed entering into a transaction agreement, reduces the amount of funds in the Trust Account to below $10.15 per Public Share, except as to any claims by a third party who executed a waiver of any and all rights to seek access to the Trust Account and except as to any claims under Legato II’s indemnity of the underwriters of the IPO against certain liabilities, including liabilities under the Securities Act; |
| ● | “DGCL” means the General Corporation Law of the State of Delaware; |
| ● | “EBC” means EarlyBirdCapital, Inc., the representative of the underwriters in the IPO; |
| ● | “Effective Time” means the time at which the Merger becomes effective; |
| ● | “Exchange Act” means the Securities Exchange Act of 1934, as amended; |
| ● | “Existing Southland Membership Interest” means a limited liability company membership interest in and of Southland, expressed as a percentage; |
| ● | “Incentive Plan” means the proposed Southland Holdings, Inc. 2022 Equity Incentive Plan, in the form attached as Annex D, to become effective at the closing of the Business Combination assuming approval by the Legato II stockholders; |
| ● | “Initial Stockholders” means the stockholders of Legato II, including each of Legato II’s officers and directors, prior to the IPO; |
| ● | “IPO” means Legato II’s initial public offering, consummated on November 24, 2021, of 27,600,000 Units, including 3,600,000 Units subject to the underwriters’ over-allotment option, each Unit consisting of one share of Common Stock and one-half of one warrant with each whole warrant to purchase one share of Common Stock for $11.50 per share. |
| ● | “Legato II” means Legato Merger Corp. II, a Delaware corporation, before giving effect to the Business Combination; |
| ● | “Legato II Common Stock” means common stock of Legato II, par value $0.0001 per share, before giving effect to the Business Combination; |
| ● | “Maximum Redemptions” means a pro forma presentation scenario provided for illustrative purposes that assumes that 27,600,000 Public Shares are redeemed, which is the maximum redemption of the outstanding Legato II Common Stock, resulting in an aggregate payment of approximately $280.5 million out of the Trust Account, which is derived from the number of shares to be redeemed in connection with the Merger at an assumed redemption price of $10.16 per share based on the Trust Account balance as of _____, 2022; |
| ● | “Merger” means the proposed merger of Merger Sub with and into Southland; |
| ● | “Merger Agreement” means that Agreement and Plan of Merger, dated as of May 25, 2022 (as it may be amended from time to time), by and among Legato II, Merger Sub and Southland; |
| ● | “Merger Consideration” means the Merger Stock Consideration, Merger Earnout Consideration and Merger Cash Consideration, collectively; |
1
| ● | “Merger Cash Consideration” means the cash to be paid to each Southland Member in respect of their Existing Southland Membership Interest, in an amount equal to (a) $50 million multiplied by (b) such Southland Member’s percentage of all Existing Southland Membership Interests issued and outstanding immediately prior to the Effective Time (i.e., 100%); provided, however, that in lieu of receiving all or part of the Merger Cash Consideration, up to $50 million of cash held by Southland or its Subsidiaries may be distributed to the Southland Members, or to such other Persons as instructed by the Southland Members, if either (1) there are not sufficient funds in the Trust Account to pay such amount in cash or (2) Southland elects, in its sole discretion, to make such dividend at or prior to the Closing. For the avoidance of doubt, Southland may elect, in its sole discretion, but shall not be obligated, to distribute any cash held by Southland or its Subsidiaries to the Southland Members, or to such other Persons as instructed by the Southland Members, up to a maximum of $50 million, if there are not sufficient funds in the Trust Account to pay the Merger Cash Consideration in cash. Any cash paid as a dividend on or prior to Closing pursuant to such provision shall reduce the Merger Cash Consideration payable to the Southland Members at Closing by a like amount. |
| ● | “Merger Earnout Consideration” means the shares of New Southland Common Stock each Southland Member will have a right to receive in respect of their Existing Southland Membership Interest, in an amount equal to (a) (i) $105 million divided by (ii) $10.15, multiplied by (b) such Southland Member’s percentage of all Existing Southland Membership Interests issued and outstanding immediately prior to the Effective Time, upon the achievement of certain adjusted EBITDA targets in accordance with the Merger Agreement. |
| ● | “Merger Stock Consideration” means the shares of New Southland Common Stock to be paid to each Southland Member in respect of their Existing Southland Membership Interest, in an amount equal to (a) (i) $343 million divided by (ii) $10.15, multiplied by (b) such Southland Member’s percentage of all Existing Southland Membership Interests issued and outstanding immediately prior to the Effective Time (i.e., 100%). |
| ● | “Merger Sub” means Legato Merger Sub Inc., a Delaware corporation and wholly-owned subsidiary of Legato II; |
| ● | “Nasdaq” means the Nasdaq Stock Market LLC; |
| ● | “No Redemptions” means a pro forma presentation scenario provided for illustrative purposes that assumes that no Legato II public stockholders exercise their right to have their Public Shares converted into a pro rata share of the Trust Account; |
| ● | “New Southland” means Southland Holdings, Inc. after giving effect to the Business Combination; |
| ● | “New Southland Common Stock” means, at and following the Effective Time, the common stock of New Southland, par value $0.0001 per share; |
| ● | “Person” means any individual or any corporation, association, partnership, limited liability company, joint venture, joint stock or other company, business trust, trust, organization, governmental authority or other entity of any kind; |
| ● | “Private Placement Units” means those units of Legato II sold to its Initial Stockholders and EBC in a private placement simultaneously with the closing of the IPO, each unit representing one share of Common Stock and one-half of one warrant of Legato II, each whole warrant exercisable for one share of Common Stock at an exercise price of $11.50 per share; |
| ● | “Private Placement Warrants” means those warrants included in the Private Placement Units; |
| ● | “Public Warrants” means the publicly traded warrants of Legato II, each exercisable for one share of Common Stock at an exercise price of $11.50 per share; |
| ● | “Public Share” means each share of Common Stock issued in the IPO; |
| ● | “SEC” means the U.S. Securities and Exchange Commission; |
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| ● | “Securities Act” means the Securities Act of 1933, as amended; |
| ● | “Southland” means Southland Holdings LLC, a Texas limited liability company, before giving effect to the Merger; |
| ● | “Subsidiary” means, with respect to any specified Person, any other Person of which such specified Person, directly or indirectly through one or more Subsidiaries, (a) owns at least 50% of the outstanding equity interests entitled to vote generally in the election of the board of directors or similar governing body of such other Person or (b) has the power to generally direct the business and policies of that other Person, whether by contract or as a general partner, managing member, manager, joint venturer, agent or otherwise; |
| ● | “Transfer Agent” means American Stock Transfer & Trust Company; |
| ● | “Trust Account” means the trust account of Legato II that holds certain of the proceeds from the IPO and sale of the Private Placement Units; |
| ● | “Trustee” means American Stock Transfer & Trust Company; |
| ● | “Units” means units of Legato II, each unit representing one share of Common Stock and one-half of one Public Warrant, that were offered and sold by Legato II in its IPO, as well as the Private Placement Units; |
| ● | “Warrant Agent” means American Stock Transfer & Trust Company; and |
| ● | “Warrants” means, collectively, the Public Warrants and Private Placement Warrants. |
Defined terms in the financial statements contained in this proxy statement/prospectus have the meanings ascribed to them in the financial statements.
Unless otherwise specified, the share calculations and ownership percentages set forth in this proxy statement/prospectus with respect to New Southland’s stockholders immediately following the Effective Time are for illustrative purposes only and assume no exercise of the 13,800,000 Public Warrants or 585,500 Private Placement Warrants that will remain outstanding following the Business Combination, which will become exercisable 30 days after closing of the Business Combination at an exercise price of $11.50 per share, provided that Legato II has an effective registration statement under the Securities Act covering the shares of New Southland Common Stock issuable upon exercise of the Warrants and a current prospectus relating to them is available, for which Legato II has agreed to use reasonable best efforts to file and have declared effective within 90 days after the consummation of the Business Combination described herein.
Beneficial ownership throughout this proxy statement/prospectus with respect to New Southland’s stockholders is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants that are currently exercisable or exercisable within 60 days.
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QUESTIONS AND ANSWERS ABOUT THE BUSINESS COMBINATION AND ANNUAL MEETING
The following are answers to certain questions that you may have regarding the Business Combination and the Annual Meeting. We urge you to read carefully the remainder of this proxy statement/prospectus because the information in this section may not provide all the information that might be important to you in determining how to vote. Additional important information is also contained in the annexes to this proxy statement/prospectus.
| Q: | WHY AM I RECEIVING THIS PROXY STATEMENT/PROSPECTUS? |
| A: | On May 25, 2022, Legato II, Merger Sub and Southland entered into the Merger Agreement which, among other things, provides for the Merger of Merger Sub with and into Southland, with Southland surviving the Merger as a wholly-owned subsidiary of Legato II. As a result of this Business Combination, Legato II will become the holding company for the Southland business, and the Southland Members will become securityholders of Legato II. |
Legato II’s stockholders are being asked to consider and vote upon the matters to be considered at the Annual Meeting, which consist of the Business Combination Proposal, the Charter Proposals, the Director Election Proposal, the Nasdaq Proposal, the Incentive Plan Proposal and, if necessary, the Adjournment Proposal (collectively, the “Proposals”):
| ● | The Business Combination Proposal — To consider and vote upon a proposal to approve and adopt the Merger Agreement, a copy of which is attached to this proxy statement/prospectus as Annex A, and the Business Combination contemplated thereby, including the Merger. See the section of this proxy statement/prospectus entitled “Proposal No. 1 — The Business Combination Proposal.” |
| ● | The Charter Proposals — To consider and vote upon separate proposals to approve amendments to the Existing Charter, which amendments will be effective following the consummation of the Business Combination and will be embodied in a second amended and restated certificate of incorporation of New Southland (the “Proposed Charter”), to: (a) increase the number of authorized shares of common stock from 50 million shares to 500 million shares and increase the number of authorized shares of preferred stock from one million shares to 50 million shares; (b) change Legato II’s name from “Legato Merger Corp. II” to “Southland Holdings, Inc.”; and (c) remove the various provisions applicable only to special purpose acquisition companies that will no longer be applicable to Legato II after the consummation of the Business Combination. A copy of the Proposed Charter effectuating the foregoing amendments is attached to this proxy statement/prospectus as Annex B. See the section of this proxy statement/prospectus entitled “Proposals No. 2.A through 2.C — The Charter Proposals.” |
| ● | The Director Election Proposal — To consider and vote upon a proposal to elect seven directors to the board of directors of Legato II to serve following the consummation of the Business Combination and until their successors are duly elected and qualified. See the section of this proxy statement/prospectus entitled “Proposal No. 3 — The Director Election Proposal.” |
| ● | The Nasdaq Proposal — To consider and vote upon a proposal, as required by the rules of the Nasdaq Stock Market, to approve the issuance of New Southland Common Stock in the Business Combination in an amount greater than 20% of the number of shares of Legato II Common Stock before such issuance. See the section of this proxy statement/prospectus entitled “Proposal No. 4 — The Nasdaq Proposal.” |
| ● | The Incentive Plan Proposal — To consider and vote upon a proposal to approve the adoption of the Incentive Plan. A copy of the Incentive Plan is attached hereto as Annex D. See the section of this proxy statement/prospectus entitled “Proposal No. 5 — The Incentive Plan Proposal.” |
| ● | The Adjournment Proposal — To consider and vote upon a proposal to adjourn the Annual Meeting to a later date or dates, if it is determined by Legato II that more time is necessary to consummate the Business Combination for any reason. See the section of this proxy statement/prospectus entitled “Proposal No. 6 — The Adjournment Proposal.” |
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The closing of the Merger is conditioned on approval of each of the Proposals. If any of these proposals is not approved and the applicable closing condition in the Merger Agreement is not waived, the remaining proposals will not be presented to stockholders for a vote. The Incentive Plan Proposal and Director Proposal are conditioned on the approval of the Business Combination Proposal, each Charter Proposal and the Nasdaq Proposal. The Adjournment Proposal is not conditioned on the approval of any other proposal set forth in this proxy statement/prospectus.
This proxy statement/prospectus contains important information about the Business Combination and the other matters to be acted upon at the Annual Meeting. Legato II stockholders should read it carefully.
The vote of Legato II stockholders is important. Legato II stockholders are encouraged to vote as soon as possible after carefully reviewing this proxy statement/prospectus.
| Q: | WHY IS LEGATO II PROPOSING THE BUSINESS COMBINATION? |
| A: | Legato II was organized to effect a merger, capital stock exchange, asset acquisition or other similar business combination with one or more businesses or entities. |
On November 24, 2021, Legato II consummated the IPO of 27,600,000 Units at $10.00 per Unit, generating gross proceeds of $276 million. Simultaneously with the closing of the IPO, Legato II consummated the private placement to the Initial Stockholders and EBC of 1,171,000 Private Placement Units at a price of $10.00 per Private Placement Unit, generating gross proceeds of $11.7 million. Upon the closing of the IPO and private placement, $280.1 million of the net proceeds of the sale of Units and Private Placement Units was placed into the Trust Account.
Like the charters of most blank check companies, the Existing Charter provides for the return of the proceeds of the IPO held in the Trust Account to the holders of Public Shares if there is no qualifying business combination(s) consummated on or before a certain date (in Legato II’s case, May 24, 2023). Since the IPO, Legato II’s activity has been limited to the evaluation of business combination candidates.
Based on its due diligence investigations of Southland and the industry in which it operates, including the financial and other information provided by Southland in the course of the negotiations, Legato II believes that the Business Combination will provide Legato II stockholders with an opportunity to participate in a company with significant growth potential. See the sections of this proxy statement/prospectus entitled “Proposal No. 1 — The Business Combination Proposal — Legato II’s Board of Directors’ Reasons for Approval of the Business Combination” and “Risk Factors.”
| Q: | DO ANY OF LEGATO II’S DIRECTORS OR OFFICERS HAVE INTERESTS IN THE BUSINESS COMBINATION THAT MAY DIFFER FROM OR BE IN ADDITION TO THE INTERESTS OF LEGATO II STOCKHOLDERS? |
| A: | Yes, Legato II’s officers and directors have interests in the Business Combination that may be different from, or in addition to, the interests of Legato II stockholders generally. For instance, it is presently contemplated that each of Brian Pratt and Greg Monahan will serve on the board of directors of New Southland following the Business Combination, which presumably will result in compensation by New Southland for such service. Additionally, Legato II’s officers, directors and/or their affiliates beneficially own an aggregate of 5,830,000 shares of Legato II Common Stock and 503,000 Private Placement Units that they purchased prior to, or simultaneously with, the IPO. Legato II’s executive officers, directors and their affiliates have no redemption rights with respect to their Legato II Common Stock and their Private Placement Warrants will expire worthless in the event the Business Combination or a business combination with another target(s) is not effected in the required time period. These financial interests may have influenced the decision of Legato II’s directors and officers to approve the Business Combination and to continue to pursue such Business Combination. In considering the recommendations of Legato II’s board of directors to vote for the Business Combination Proposal and other proposals, you, along with its other stockholders, should consider these interests. The Legato II board of directors was aware of and considered these interests, among other matters, in approving the Merger Agreement and in recommending that it be approved by the stockholders of Legato II. See “Proposal No. 1 — The Business Combination Proposal — Interests of Certain Persons in the Proposed Transaction” beginning on page 67 of this proxy statement/prospectus. |
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| Q: | Did the LEGATO II board of directors obtain a third-party valuation or fairness opinion in determining whether or not to proceed with the Business combination? |
| A: | Yes. Legato II’s board of directors considered the financial analyses prepared by Cassel Salpeter & Co., LLC (“Cassel Salpeter”) and the oral opinion of Cassel Salpeter to the Legato II board dated May 24, 2022 (which was subsequently confirmed in writing by delivery of Cassel Salpeter’s written opinion of the same date), as to, as of such date, (i) the fairness, from a financial point of view, to Legato II of the consideration to be issued and paid by Legato II in the Merger pursuant to the Merger Agreement and (ii) as to whether Southland had a fair market value equal to at least 80% of the balance of the Trust Account (less deferred underwriting commissions and taxes payable). See the section entitled “Proposal No. 1 — The Business Combination Proposal — Legato II’s Board of Directors’ Reasons for Approval of the Business Combination — Opinion of Legato II’s Financial Advisors.” The full text of the written opinion is attached to this proxy statement/prospectus as Annex E. |
| Q: | I HOLD PUBLIC SHARES. DO I HAVE REDEMPTION RIGHTS? |
| A: | If you are a holder of Public Shares, you have the right to demand that Legato II redeem such Public Shares for a pro rata portion of the Trust Account. |
Under the Existing Charter, the Business Combination may only be consummated if Legato II has at least $5,000,001 of net tangible assets immediately prior to, or upon the consummation of, the Business Combination after taking into account holders of Public Shares that have properly exercised their redemption rights.
| Q: | HOW DO I EXERCISE MY REDEMPTION RIGHTS? |
| A: | A holder of Public Shares may exercise redemption rights regardless of whether the holder votes on the Business Combination Proposal or is a holder of Public Shares on the record date. If you are a holder of Public Shares and wish to exercise your redemption rights, you must deliver such shares to the Transfer Agent physically or electronically using the DWAC (Deposit Withdrawal at Custodian) System no later than two business days prior to the Annual Meeting. Upon the closing of the Business Combination, any holder of Public Shares that has properly exercised redemption rights will be entitled to have his, her or its shares converted for a full pro rata portion of the amount in the Trust Account (including interest earned on the funds held in the Trust Account and not previously released to Legato II to pay taxes), calculated as of two business days prior to the anticipated consummation of the Business Combination. The per-share amount Legato II will distribute to public stockholders who properly redeem their shares will not be reduced by the deferred underwriting commissions that Legato II is required to pay to the underwriters of the IPO. Such amount is anticipated to be approximately $__ per share. Such amount will be paid promptly upon consummation of the Transaction. However, under Delaware law, the proceeds held in the Trust Account could be subject to claims which could take priority over those of Legato II’s public stockholders exercising redemption rights. Therefore, the per-share distribution from the Trust Account in such a situation may be less than originally anticipated due to such claims. |
Any request for redemption, once made by a holder of Public Shares, may be withdrawn at any time up to the time such shares are actually redeemed. If you deliver your shares for redemption to the Transfer Agent and later decide not to elect redemption, you may request that the Transfer Agent return the shares (physically or electronically). You may make such request by contacting the Transfer Agent at the phone number or address listed at the end of this section.
If a holder of Public Shares requests redemption of shares as described above, then, if the Business Combination is consummated, Legato II will redeem these shares for a pro rata portion of funds deposited in the Trust Account. If you exercise your redemption rights, then you will be exchanging your shares of Legato II Common Stock for cash and will no longer be a stockholder of Legato II upon consummation of the Business Combination.
If you are a holder of Public Shares and you exercise your redemption rights, it will not result in the loss of any of the Warrants that you may hold.
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| Q: | DO I HAVE APPRAISAL RIGHTS IF I OBJECT TO THE PROPOSED BUSINESS COMBINATION? |
| A: | No. Legato II stockholders and warrant holders do not have appraisal rights in connection with the Business Combination under the DGCL. |
| Q: | I HOLD LEGATO II PUBLIC SHARES. WHAT ARE THE ANTICIPATED U.S. FEDERAL INCOME TAX CONSEQUENCES OF EXERCISING MY REDEMPTION RIGHTS? |
| A: | The U.S. federal income tax consequences of exercising your redemption rights depend on your particular facts and circumstances. See the section entitled “— U.S. Federal Income Tax Considerations — Tax Consequences of the Business Combination and a Redemption of Public Shares.” You are urged to consult your tax advisor regarding the tax consequences of exercising your redemption rights. |
| Q: | I HOLD LEGATO II PUBLIC SHARES. WHAT ARE THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO ME AS A RESULT OF THE MERGER? |
| A: | Legato II’s public stockholders will retain their Public Shares and will not receive any additional Public Shares or other consideration in the Merger. As a result, there will be no material U.S. federal income tax consequences as a result of the Merger to the current holders of Public Shares, regardless of whether the Merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code. Furthermore, although the Merger is intended to qualify as a “reorganization” within the meaning of Section 368(a) of the Code, and the parties to the Merger Agreement intend to report the Merger consistent with such qualification, such treatment is not a condition to Legato II’s or Southland’s obligation to complete the Merger. See the section entitled “U.S. Federal Income Tax Considerations — Tax Consequences of the Business Combination and a Redemption of Public Shares.” |
| Q: | WHAT HAPPENS TO THE FUNDS DEPOSITED IN THE TRUST ACCOUNT AFTER CONSUMMATION OF THE BUSINESS COMBINATION? |
| A: | Upon consummation of the Business Combination, the funds in the Trust Account will be used by Legato II to pay holders of the Public Shares who exercise redemption rights, to pay Legato II’s tax obligations incurred prior to the closing, to pay $9,660,000 in deferred underwriting commissions to EBC and other FINRA members, to pay the Merger Cash Consideration and to pay certain expenses incurred in connection with the Business Combination, and any remaining balance will be used for working capital and general corporate purposes of New Southland after consummation of the Business Combination, including funding for organic growth and potential acquisitions. |
| Q: | WHAT HAPPENS IF A SUBSTANTIAL NUMBER OF PUBLIC STOCKHOLDERS VOTE IN FAVOR OF THE BUSINESS COMBINATION PROPOSAL AND EXERCISE THEIR REDEMPTION RIGHTS? |
| A: | Pursuant to the Existing Charter, all holders of Public Shares may vote in favor of the Business Combination and still exercise their redemption rights; provided that Legato II may not consummate the Business Combination, and Legato II and Southland are each entitled to terminate the Merger Agreement, if Legato II would have less than $5,000,001 of net tangible assets immediately prior to or upon consummation of the Business Combination. As of June 30, 2022, the most recent quarter end date, there was approximately $280.5 million in the Trust Account. Assuming a per share redemption price of $10.16, which is expected to approximate the redemption price per share as of two business days prior to completion of the Business Combination, under the Maximum Redemptions scenario, public stockholders holding an aggregate of 27,600,000 Public Shares may exercise their redemption rights without depleting the Trust Account, below $5,000,001. For more information regarding post-closing ownership of New Southland, see the section entitled “Ownership of New Southland.” |
Accordingly, the Business Combination may be consummated even though the funds available from the Trust Account and the number of public stockholders are substantially reduced as a result of redemptions of Public Shares. With fewer Public Shares and public stockholders, the trading market for the New Southland Common Stock following consummation of the Business Combination may be less liquid than the market for the Common Stock prior to the Business Combination and New Southland may not be able to meet the listing standards for Nasdaq or another national securities exchange.
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| Q: | WHAT HAPPENS IF THE BUSINESS COMBINATION IS NOT CONSUMMATED? |
| A: | If the Business Combination is not consummated by March 31, 2023, any party to the Merger Agreement may terminate it. If the Merger Agreement is terminated, Legato II would attempt to consummate an alternate business combination. If Legato II is unable to consummate a business combination on or before May 24, 2023, Legato II must redeem 100% of the outstanding Public Shares, at a per-share price, payable in cash, equal to the amount then held in the Trust Account divided by the number of Public Shares, net of taxes payable, and less up to $100,000 of interest to pay liquidation expenses, divided by the number of Public Shares. |
| Q: | WHEN DO YOU EXPECT THE BUSINESS COMBINATION TO BE COMPLETED? |
| A: | It is currently anticipated that the Business Combination will be consummated promptly following the Annual Meeting which is set for _______, 2022; however, such meeting could be adjourned. For a description of the conditions for the completion of the Business Combination, see the section of this proxy statement/prospectus entitled “Proposal No. 1 — The Business Combination Proposal — The Merger Agreement — Conditions to Closing.” |
| Q: | WHAT DO I NEED TO DO NOW? |
| A: | Legato II urges you to carefully read and consider the information contained in this proxy statement/prospectus, including the annexes, and to consider how the Business Combination will affect you as a stockholder and/or warrant holder of Legato II. Stockholders should then vote as soon as possible in accordance with the instructions provided in this proxy statement/prospectus and on the enclosed proxy card. |
| Q: | HOW DO I ATTEND THE ANNUAL MEETING? |
| A: | Due to health concerns stemming from the COVID-19 pandemic and to support the health and well-being of Legato II’s stockholders, the Annual Meeting will be held virtually. Any stockholder wishing to attend the Annual Meeting must register in advance and will be entitled to appoint a proxy to attend and vote on such stockholder’s behalf. To register for and attend the Annual Meeting, please follow these instructions as applicable to the nature of your ownership of Legato II Common Stock: |
Shares Held of Record. If you are a record holder, and you wish to attend the virtual meeting, go to https://__________, enter the control number you received on your proxy card or notice of the meeting and click on the “Click here to preregister for the online meeting” link at the top of the page. Immediately prior to the start of the Annual Meeting, you will need to log back into the meeting site using your control number. You must register before the meeting starts.
Shares Held in Street Name. If you hold your shares in “street” name, which means your shares are held of record by a broker, bank or nominee, and you who wish to attend the virtual meeting, you must obtain a legal proxy from the stockholder of record and e-mail a copy (a legible photograph is sufficient) of your proxy to _______. Holders should contact their bank, broker or other nominee for instructions regarding obtaining a proxy. Holders who e-mail a valid legal proxy will be issued a meeting control number that will allow them to register to attend and participate in the Annual Meeting. You will receive an e-mail prior to the meeting with a link and instructions for entering the Annual Meeting. “Street” name holders should contact American Stock Transfer & Trust Company on or before _______, 2022.
Stockholders will also have the option to listen to the Annual Meeting by telephone by calling: ________. You will not be able to vote or submit questions unless you register for and log in to the Annual Meeting webcast as described above.
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| Q: | HOW DO I VOTE? |
| A: | If you are a holder of record of Legato II Common Stock on the record date, you may vote by virtually attending the Annual Meeting and submitting a ballot via the live webcast or by submitting a proxy for the Annual Meeting. You may submit your proxy by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed postage paid envelope. |
If you hold your shares in “street name,” which means your shares are held of record by a broker, bank or nominee, you should contact your broker, bank or nominee to ensure that votes related to the shares you beneficially own are properly counted. In this regard, you must provide the broker, bank or nominee with instructions on how to vote your shares or, if you wish to attend the virtual meeting, obtain a proxy from your broker, bank or nominee.
| Q: | IF MY SHARES ARE HELD IN “STREET NAME,” WILL MY BROKER, BANK OR NOMINEE AUTOMATICALLY VOTE MY SHARES FOR ME? |
| A: | Your broker, bank or nominee can vote your shares without receiving your instructions on “routine” proposals only. Your broker, bank or nominee cannot vote your shares with respect to “non-routine” proposals unless you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker, bank or nominee. |
The Adjournment Proposal is considered a routine proposal. Accordingly, your broker, bank or nominee may vote your shares with respect to such proposals without receiving voting instructions.
The Business Combination Proposal, each Charter Proposal, the Director Election Proposal, the Nasdaq Proposal and the Incentive Plan Proposal are non-routine proposals. Accordingly, your broker, bank or nominee may not vote your shares with respect to these proposals unless you provide voting instructions.
| Q: | MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD? |
| A: | Yes. Stockholders may send a later-dated, signed proxy card so that it is received by the Transfer Agent prior to the vote at the Annual Meeting or virtually attend the Annual Meeting and submitting a ballot via the live webcast. Stockholders also may revoke their proxy by sending a notice of revocation to the Transfer Agent, which must be received prior to the vote at the Annual Meeting. |
| Q: | WHAT HAPPENS IF I FAIL TO TAKE ANY ACTION WITH RESPECT TO THE ANNUAL MEETING? |
| A: | If you fail to take any action with respect to the Annual Meeting and the Business Combination is approved by stockholders and consummated, you will continue to be a stockholder and/or warrant holder of New Southland. As a corollary, failure to deliver your stock certificate(s) to the Transfer Agent (either physically or electronically) no later than two business days prior to the Annual Meeting means you will not have any right in connection with the Business Combination to exchange your shares for a pro rata share of the funds held in the Trust Account. If you fail to take any action with respect to the Annual Meeting and the Business Combination is not approved, you will continue to be a stockholder and/or warrant holder Legato II. |
| Q: | WHAT SHOULD I DO WITH MY STOCK AND WARRANT CERTIFICATES? |
| A: | Legato II warrant holders and those stockholders who do not elect to have their Public Shares redeemed for their pro rata share of the Trust Account need not submit their stock certificates. Legato II stockholders who exercise their redemption rights must deliver their stock certificates to the Transfer Agent (either physically or electronically) no later than two business days prior to the Annual Meeting in order to properly demand such redemption rights. |
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| Q: | WHAT SHOULD I DO IF I RECEIVE MORE THAN ONE SET OF VOTING MATERIALS? |
| A: | Stockholders may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a holder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please complete, sign, date and return each proxy card and voting instruction card that you receive in order to cast a vote with respect to all of your Legato II shares. |
| Q: | WHO CAN HELP ANSWER MY QUESTIONS? |
| A: | If you have questions about the Business Combination or if you need additional copies of the proxy statement/prospectus or the enclosed proxy card you should contact: |
Legato Merger Corp. II
777 Third Avenue, 37th Floor
New York, New York 10017
Attn: Gregory Monahan, Chief Executive Officer
Telephone: (212) 319-7676
or
MacKenzie Partners Inc.
1407 Broadway, 27th Floor
New York, New York 10018
Telephone: (800) 322-2885
You may also obtain additional information about Legato II from documents filed with the Securities and Exchange Commission (“SEC”) by following the instructions in the section entitled “Where You Can Find More Information.” If you are a holder of Public Shares and you intend to seek redemption of your shares, you will need to demand redemption of your shares by delivering such shares (either physically or electronically) to the Transfer Agent at the address below no later than two business days prior to the Annual Meeting. If you have questions regarding the certification of your position or delivery of your shares, please contact:
Felix Orihuela
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, New York 11219
E-mail: forihuela@astfinancial.com
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SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
This summary highlights selected information included in this proxy statement/prospectus and does not contain all of the information that may be important to you. You should read this entire document and its annexes and the other documents to which we refer before you decide how to vote. Each item in this summary includes a page reference directing you to a more complete description of that item.
Parties to the Business Combination
Information about Legato II
Legato II is a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses. Legato II’s Units, Common Stock and Warrants are currently listed on Nasdaq under the symbols “LGTOU,” “LGTO” and “LGTOW,” respectively. The mailing address of Legato II’s principal executive office is 777 Third Avenue, 37th Floor, New York, New York 10017 and the telephone number of Legato II’s principal executive office is (212) 319-7676.
For more information about Legato II, see the section entitled “Information About Legato II.”
Information about Southland
Southland is one of the largest construction companies in North America. Based in Grapevine, Texas, Southland is the parent company of Johnson Bros. Corporation, American Bridge Company, Oscar Renda Contracting, Inc., Southland Contracting, Inc., Mole Constructors, Inc. and Heritage Materials, LLC. With the combined capabilities of these six subsidiaries, Southland has become one of the largest and most diversified industry leaders. Southland is a leading provider of specialized infrastructure construction services across North America including bridges, tunneling, transportation, marine, facility and water pipeline. The mailing address of Southland’s principal executive office is 1100 Kubota Drive, Grapevine, Texas 76051 and the telephone number of Southland’s principal executive office is (817) 293-4263.
For more information about Southland, see the section entitled “Information About Southland.”
The Merger and the Merger Agreement
The terms and conditions of the Merger are contained in the Merger Agreement, which is attached as Annex A to this proxy statement/prospectus. We encourage you to read the Merger Agreement carefully, as it is the legal document that governs the Merger.
If the Business Combination Proposal is approved and adopted and the Merger is subsequently completed pursuant to the terms of the Merger Agreement, Merger Sub will merge with and into Southland, with Southland surviving the Merger as a wholly-owned subsidiary of Legato II.
Merger Consideration
Pursuant to the Merger Agreement, at the Effective Time, by virtue of the Merger and without any further action on the part of the parties to the Merger Agreement, each Existing Southland Membership Interest (expressed as a percentage) issued and outstanding immediately before the Effective Time will be converted into and become the right to receive: (I) the Merger Stock Consideration of a number of shares of Legato II Common Stock equal to (a) (i) $343 million divided by (ii) $10.15, multiplied by (b) such Southland Member’s percentage of all Existing Southland Membership Interests issued and outstanding immediately prior to the Effective Time (i.e., 100%); (II) the Merger Earnout Consideration of a number of shares of Legato II Common Stock equal to (a) (i) $105 million divided by (ii) $10.15, multiplied by (b) such Southland Member’s percentage of all Existing Southland Membership Interests issued and outstanding immediately prior to the Effective Time, upon the achievement of certain targets described below; and (III) Merger Cash Consideration equal to (a) $50 million multiplied by (b) such Southland Member’s percentage of all Existing Southland Membership Interests issued and outstanding immediately prior to the Effective Time (i.e., 100%); provided, however, that in lieu of receiving all or part of the Cash Consideration, up to $50 million of cash held by Southland or its subsidiaries may be distributed to the Southland Members, or to such other persons as
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instructed by the Southland Members, if either (1) there is not sufficient funds in the Trust Account to pay such amount in cash or (2) Southland elects, in its sole discretion, to make such dividend at or prior to the Closing. For the avoidance of doubt, Southland may elect, in its sole discretion, but shall not be obligated, to distribute any cash held by Southland or its subsidiaries to the Southland Members, or to such other persons as instructed by the Southland Members, up to a maximum of $50 million, if there is not sufficient funds in the Trust Account to pay the Merger Cash Consideration in cash. Any cash paid as a dividend on or prior to the Closing pursuant to such provision shall reduce the Merger Cash Consideration payable to the Southland Members at Closing by a like amount.
Related Agreements
Certain additional agreements were entered into concurrently with the execution of the Merger Agreement and certain additional agreements will be entered into in connection with the consummation of the Business Combination, which we refer to as the “Merger Agreement Related Agreements.” Merger Agreement Related Agreements include the Lock-Up Agreement, Support Agreement and A&R Registration Rights Agreement. For more information regarding each Merger Agreement Related Agreement, see the section entitled “Proposal No. 1 — The Business Combination Proposal — The Merger Agreement — Related Agreements.” Stockholders and other interested parties are urged to read such agreements in their entirety prior to voting on the proposals presented at the Annual Meeting.
Annual Meeting of Stockholders
The Annual Meeting will be held on _______, 2022, at 10:00 a.m. Eastern Time, via a virtual meeting. At the Annual Meeting, Legato II stockholders will be asked to approve the Business Combination Proposal, the Charter Proposals, the Director Election Proposal, the Nasdaq Proposal, the Incentive Plan Proposal and the Adjournment Proposal (if necessary). The virtual meeting may be accessed by using the following information:
Webcast URL:
US Toll Free:
International Toll:
Participant Passcode:
Voting Power; Record Date
The Legato II board of directors has fixed the close of business on _________, 2022 (“record date”) as the record date for determining the holders of Legato II Common Stock entitled to receive notice of and to vote at the Annual Meeting. As of the record date, there were 35,911,000 shares of Common Stock outstanding and entitled to vote at the Annual Meeting. Each share of Legato II Common Stock entitles the holder to one vote at the Annual Meeting on each proposal to be considered at the Annual Meeting. As of the record date, the Legato II Insiders owned and were entitled to vote 7,933,000 shares of Legato II Common Stock, representing approximately 22.1% of the shares of Legato II Common Stock outstanding on that date. The Legato II Insiders have agreed to vote all shares of Legato II Common Stock held by them in favor of the Business Combination Proposal. Accordingly, in addition to the shares held by the Legato II Insiders, Legato II would need 10,022,501 shares, or approximately 36.3% of the 27,600,000 shares of Common Stock sold in the IPO, to be voted in favor of the Business Combination Proposal in order for it to be approved, assuming all outstanding shares are voted on such proposal and the shares of Legato II Common Stock held by EBC and its designees are not voted in favor of the Business Combination Proposal. If only a quorum of shares of Legato II Common Stock is present at the Annual Meeting, Legato II would need only approximately 1,044,751 shares, or approximately 3.8% of the Legato II Common Stock, to be voted in favor of the Business Combination Proposal in addition to the Legato II Insiders in order for it to be approved (provided that consummation of the Business Combination is conditioned upon, among other things approval of the Charter Proposals and Nasdaq Proposal and the requirement that Legato II have net tangible assets of at least $5,000,001 immediately prior to or upon consummation of the Business Combination). The Legato II Insiders have also indicated that they intend to vote their Legato II Common Stock in favor of all other proposals being presented by Legato II at the Annual Meeting. As of the record date, Southland did not beneficially hold any shares of Legato II Common Stock.
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Quorum and Vote of Legato II Stockholders
A quorum of Legato II stockholders is necessary to hold a valid meeting. A quorum will be present at the Annual Meeting if a majority of the issued and outstanding shares of Legato II Common Stock on the record date that are entitled to vote at the Annual Meeting are represented by stockholders present at the Annual Meeting or by proxy. Abstentions will be counted towards the quorum requirement. Broker non-votes will not be counted towards the quorum requirement. If there is no quorum, a majority of the votes present at Annual Meeting may adjourn the annual meeting to another date.
The proposals presented at the Annual Meeting will require the following votes:
| ● | Business Combination Proposal — The approval of the Business Combination Proposal will require the affirmative vote of the holders of a majority of the Legato II Common Stock present in person (which would include presence at a virtual meeting) or represented by proxy at the Annual Meeting and entitled to vote thereat. Abstentions will have the same effect as a vote “against” the Business Combination Proposal because an abstention represents a share entitled to vote. Brokers are not entitled to vote on the Business Combination Proposal absent voting instructions from the beneficial holder and, consequently, broker non-votes will have no effect on the Business Combination Proposal. The Business Combination will not be consummated if Legato II has less than $5,000,001 of net tangible assets immediately prior to or upon consummation of the Business Combination. |
| ● | Charter Proposals — The approval of each of the Charter Proposals will require the affirmative vote of the holders of a majority of the outstanding shares of Legato II Common Stock on the record date. Abstentions will have the same effect as a vote “against” the Charter Proposals. Each Charter Proposal is considered a non-routine proposal, and, accordingly, brokers are not entitled to vote on those proposals without receiving voting instructions, and broker non-votes will have the same effect as a vote “against” such proposals. |
| ● | Director Election Proposal — The election of directors requires a plurality of the votes cast. “Plurality” means that the individuals who receive the largest number of votes cast “FOR” will be elected as directors (even if they receive less than a majority of the votes cast). Consequently, because this is an uncontested election, any director nominee who receives at least one vote “FOR” will be elected as a director. Brokers are not entitled to vote on the Director Election Proposal absent voting instructions from the beneficial holder because the Director Election Proposal is considered “non-routine”. Consequently, broker non-votes will have no effect with respect to the Director Election Proposal. |
| ● | Nasdaq Proposal — The approval of the Nasdaq Proposal will require the affirmative vote of the holders of a majority of the Legato II Common Stock present in person (which would include presence at a virtual meeting) or represented by proxy at the Annual Meeting and entitled to vote thereat. Abstentions will have the same effect as a vote “against” the Nasdaq Proposal because an abstention represents a share entitled to vote. Brokers are not entitled to vote on the Nasdaq Proposal absent voting instructions from the beneficial holder and, consequently, broker non-votes will have no effect on the Nasdaq Proposal. |
| ● | Incentive Plan Proposal — The approval of the Incentive Plan Proposal will require the affirmative vote of the holders of a majority of the Legato II Common Stock present in person (which would include presence at a virtual meeting) or represented by proxy at the Annual Meeting and entitled to vote thereat. Abstentions will have the same effect as a vote “against” the Incentive Plan Proposal because an abstention represents a share entitled to vote. Brokers are not entitled to vote on the Incentive Plan Proposal absent voting instructions from the beneficial holder and, consequently, broker non-votes will have no effect on the Incentive Plan Proposal. |
| ● | Adjournment Proposal — The approval of the Adjournment Proposal will require the affirmative vote of the holders of a majority of the shares of Legato II Common Stock present (which would include presence at a virtual meeting) or represented by proxy at the Annual Meeting and entitled to vote thereat. Abstentions will have the same effect as a vote “against” the Adjournment Proposal because an abstention represents a share entitled to vote. Brokers are entitled to vote on the Adjournment Proposal absent voting instructions from the beneficial holder because the proposal is considered “routine”. Consequently, broker non-votes will have the same effect as a vote “against” the Adjournment Proposal. |
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Under the Merger Agreement, the approval of the Business Combination Proposal, each of the Charter Proposals and the Nasdaq Proposal is a condition to the consummation of the Business Combination. If any of these proposals is not approved and the applicable closing condition in the Merger Agreement is not waived, the remaining proposals will not be presented to stockholders for a vote. The Incentive Plan Proposal and Director Proposal are conditioned on the approval of the Business Combination Proposal, each Charter Proposal and the Nasdaq Proposal. The Adjournment Proposal is not conditioned on the approval of any other proposal set forth in this proxy statement/prospectus.
Redemption Rights
Pursuant to the Existing Charter, a holder of Public Shares may demand that Legato II redeem such shares for a pro rata portion of the Trust Account if the Business Combination is consummated; provided that Legato II may not consummate the Business Combination if it has less than $5,000,001 of net tangible assets immediately prior to or upon consummation of the Business Combination. Holders of Public Shares will be entitled to receive cash for these shares only if they deliver their shares to the Transfer Agent no later than two business days prior to the Annual Meeting. Holders of Public Shares do not need to affirmatively vote on the Business Combination Proposal or be a holder of such Public Shares as of the record date to exercise redemption rights. If the Business Combination are not consummated, these shares will not be redeemed for cash. If a holder of Public Shares properly demands redemption, delivers his, her or its shares to the Transfer Agent as described above, and the Business Combination are consummated, Legato II will redeem each Public Share for a full pro rata portion of the Trust Account, calculated as of two business days prior to the anticipated consummation of the Business Combination. It is anticipated that this would amount to approximately $__ per share. If a holder of Public Shares exercises its redemption rights, then it will be exchanging its shares of Legato II Common Stock for cash and will no longer own the shares. See the section of this proxy statement/prospectus entitled “Annual Meeting of Stockholders — Redemption Rights” for a detailed description of the procedures to be followed if you wish to redeem your shares for cash.
Holders of the 14,385,500 currently outstanding Warrants will not have redemption rights with respect to such Warrants. However, holders of Public Shares will retain their Warrants even if they exercise redemption rights with respect to their Public Shares. Accordingly, they may sell their Warrants freely in the open market. As of the record date, the reported last sale price of the Warrants was $___ per Warrant, representing an aggregate value of the Warrants of $_______. However, Legato II cannot assure the holders of Warrants that they will be able to sell their Warrants in the open market as there may not be sufficient liquidity in such securities when warrant holders wish to sell their Warrants. Further, while the level of redemptions of Public Shares will not directly change the value of the Warrants because the Warrants will remain outstanding regardless of the level of redemptions, as redemptions of Public Shares increase, the holders of Warrants who exercise such Warrants will ultimately own a greater interest in New Southland because there would be fewer shares outstanding overall. See “Risk Factors — Future sales, or the perception of future sales, by New Southland or its stockholders in the public market following the Merger could cause the market price for New Southland Common Stock to decline.”
Recommendation of the Legato II Board of Directors
The Legato II board of directors has determined that the Business Combination, on the terms and conditions set forth in the Merger Agreement, is advisable and in the best interests of Legato II and its stockholders and has directed that the proposals set forth in this proxy statement/prospectus be submitted to its stockholders for approval at the Annual Meeting on the date and at the time and place set forth in this proxy statement/prospectus. The Legato II board of directors recommends that Legato II’s stockholders vote “FOR” the Business Combination Proposal, “FOR” each of the Charter Proposals, “FOR” the election of each of the seven directors nominated in the Director Election Proposal, “FOR” the Nasdaq Proposal, “FOR” the Incentive Plan Proposal and “FOR” the Adjournment Proposal, if presented. See “Annual Meeting of Stockholders — Recommendation of the Legato II Board of Directors and Reasons for the Business Combination” beginning on page 60.
Legato II’s Directors and Executive Officers Have Financial Interests in the Business Combination
Certain of Legato II’s executive officers and directors have interests in the Business Combination that may be different from, or in addition to, the interests of Legato II’s stockholders. These interests may have influenced the decision of Legato II’s directors and officers to approve the Business Combination and to continue to pursue such Business Combination. In considering the recommendations of Legato II’s board of directors to vote for the Business Combination Proposal and other proposals, its stockholders should consider these interests. The members of the
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Legato II board of directors were aware of and considered these interests, among other matters, when they approved the Merger Agreement and recommended that Legato II stockholders approve the proposals required to effect the Business Combination. These interests include:
| ● | If the Business Combination or another business combination is not consummated by the time period required by the Existing Charter (and not otherwise extended), Legato II will cease all operations except for the purpose of winding up, redeeming 100% of the outstanding Public Shares for cash and, subject to the approval of its remaining stockholders and its board of directors, dissolving and liquidating. In such event, the 6,900,000 shares of Common Stock held by the Legato II Insiders prior to the date of this proxy statement/prospectus, which shares of Common Stock were acquired for an aggregate purchase price of $25,000 prior to the IPO, would be worthless because the holders are not entitled to participate in any redemption or distribution with respect to such shares. Such shares had an estimated aggregate market value of $___ based upon the closing price of $___ per public share on Nasdaq on _________, 2022, the record date. |
| ● | The Initial Stockholders purchased an aggregate of 1,033,000 Private Placement Units from Legato II for an aggregate purchase price of approximately $10.3 million (or $10.00 per Private Placement Unit) in a private placement simultaneously with the consummation of the IPO. A portion of the proceeds Legato II received from these purchases were placed in the Trust Account. Such Units had an estimated aggregate value of $___ based on the closing price of $___ per Legato II unit on Nasdaq on _________, 2022, the record date. The Private Placement Units will become worthless if Legato II does not consummate a business combination. |
| ● | It is currently contemplated that Brian Pratt and Greg Monahan will be members of the board of directors of New Southland after the closing of the Merger (assuming that they are elected at the meeting). As such, in the future, each will receive any cash fees, stock options or stock awards that the board of directors of New Southland determines to pay its non-executive directors. |
| ● | If Legato II is unable to complete a business combination within the required time period, Crescendo I will be liable under certain circumstances described herein to ensure that the proceeds in the Trust Account are not reduced by the claims of target businesses or claims of vendors or other entities that are owed money by Legato II for services rendered or contracted for or products sold to Legato II. If Legato II consummates a business combination, on the other hand, Legato II will be liable for all such claims. |
| ● | The Legato II Insiders (or their affiliates) may make loans from time to time to Legato II to fund certain capital requirements. As of the date of this proxy statement/prospectus, the Legato II Insiders have loaned an aggregate of $___ to Legato II and additional loans may be made after the date of this proxy statement/prospectus. If the Business Combination is not consummated, the loans will not be repaid and will be forgiven except to the extent there are funds available to Legato II outside of the trust account. As of __________, 2022, no such loans were outstanding. |
| ● | Legato II’s officers and directors, and their affiliates, are entitled to reimbursement of out-of-pocket expenses incurred by them in connection with certain activities on Legato II’s behalf, such as identifying and investigating possible business targets and business combinations. However, if Legato II fails to consummate a business combination within the required period, they will not have any claim against the Trust Account for reimbursement. Accordingly, Legato II may not be able to reimburse these expenses if the Merger or another business combination, are not completed by May 24, 2023. As of _________, 2022 there were no reimbursable expenses outstanding. |
| ● | All rights specified in the Existing Charter and indemnification agreements relating to the right of officers and directors to be indemnified by Legato II, and of Legato II’s officers and directors to be exculpated from monetary liability with respect to prior acts or omissions, will continue after a business combination. If a business combination is not approved and Legato II liquidates, Legato II will not be able to perform its obligations to its officers and directors under those provisions. |
See “Proposal No. 1 — The Merger Agreement — Interests of Certain Persons in the Business Combination” beginning on page 67.
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Ownership of New Southland
As of the date of this proxy statement/prospectus, there are 35,911,000 shares of Legato II Common Stock issued and outstanding. As of the date of this proxy statement/prospectus, there are an aggregate of 13,800,000 Public Warrants and 585,500 Private Placement Warrants outstanding. Each Warrant entitles the holder thereof to purchase one share of Common Stock beginning 30 days after closing of the Business Combination.
The following table illustrates varying beneficial ownership levels in New Southland immediately following the consummation of the Business Combination assuming the levels of redemptions by the public stockholders indicated:
|
Share Ownership in New Southland(1) |
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| No Redemptions(2) | 50% Redemptions(3) | Maximum Redemption Scenario(4) |
||||||||||||||||||||||
| Number of Shares | Percentage of Outstanding Shares | Number of Shares | Percentage of Outstanding Shares | Number of Shares | Percentage of Outstanding Shares | |||||||||||||||||||
| Former Southland Members | 33,793,103 | 48.5 | % | 33,793,103 | 60.5 | % | 33,793,103 | 80.3 | % | |||||||||||||||
| Legato II’s public shareholders | 27,600,000 | 39.6 | % | 13,800,000 | 24.7 | % | — | 0 | % | |||||||||||||||
| Legato II’s Initial Stockholders, officers and directors and other advisors to Legato II | 8,311,000 | 11.9 | % | 8,311,000 | 14.8 | % | 8,311,000 | 19.7 | % | |||||||||||||||
| Total | 69,704,103 | 100 | % | 55,904,103 | 100 | % | 42,104,103 | 100 | % | |||||||||||||||
| (1) | Percentages may not sum to 100%. This is because SEC rules require that shares of New Southland Common Stock receivable upon exercise of 13,800,000 Public Warrants owned by Legato II’s public stockholders and 585,500 Private Placement Warrants held by Legato II’s Initial Stockholders, officers and directors, collectively, which will become exercisable 30 days after the closing of the Business Combination, be disclosed herein as beneficially owned by such group, but such shares of New Southland Common Stock are not counted in determining the total number of outstanding shares upon which the percentages stated in the table are calculated. |
| (2) | This scenario assumes that no Public Shares are redeemed. |
| (3) | This scenario assumes that 13,800,000 Public Shares are redeemed. |
| (4) | This scenario assumes that 27,600,000 Public Shares are redeemed. |
Underwriting Fees as a Percentage of IPO Proceeds Net of Redemptions
The deferred commissions are payable to EBC if a business combination is consummated without regard to the number Public Shares redeemed by holders in connection with a business combination. The following table presents the deferred commissions as a percentage of the aggregate proceeds from the IPO net of redemptions for the No Redemption Scenario, 50% of Redemption Scenario, and the Maximum Redemption Scenario:
| No Redemption Scenario(1) | 50% Redemption Scenario(2) | Maximum Redemption Scenario(3) | ||||||||||
| IPO deferred commissions | $ | 9,660,000 | $ | 9,660,000 | $ | 9,660,000 | ||||||
| IPO proceeds net of redemptions | $ | 276,000,000 | $ | 138,000,000 | $ | 0 | ||||||
| Underwriting fees as a % of IPO proceeds net of redemptions | 3.5 | % | 7.0 | % | N/A | |||||||
| (1) | This scenario assumes that no Public Shares are redeemed. |
| (2) | This scenario assumes that 13,800,000 Public Shares are redeemed. |
| (3) | This scenario assumes that all 27,600,000 Public Shares are redeemed. |
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Effect of Redemptions and Underwriting Fees on Book Value Per Share
| Southland Historical | Legato II Historical | Minimum Redemption(1) | 50% Redemption(2) | Maximum Redemption(3) | ||||||||||||||||
| June 30, 2022 | ||||||||||||||||||||
| Book value per diluted share | — | 0.24 | 7.26 | 6.55 | 5.37 | |||||||||||||||
| Impact of redemptions on book value per share | — | (0.67 | ) | (1.34 | ) | |||||||||||||||
| Impact of underwriter fee on book value per share | (0.14 | ) | (0.19 | ) | (0.23 | ) | ||||||||||||||
| (1) | This scenario assumes no Public Shares are redeemed. |
| (2) | This scenario assumes that half of all Public Shares (13,800,000) are redeemed. |
| (3) | This scenario assumes all Public Shares (27,600,000) are redeemed. |
Sensitivity Analysis
To illustrate all of the potential sources of dilution to existing Legato II stockholders, we have set forth in the table below scenarios that illustrate the potential sources of dilution arising out of the Business Combination:
| No Redemption(1) |
50% of Maximum Redemption(2) |
Maximum Redemption(3) |
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| Legato II public shares | 27,600,000 | 32.8 | % | 13,800,000 | 19.6 | % | — | — | |||||||||||||||
| Legato II public warrants | 13,800,000 | 16.4 | % | 13,800,000 | 19.6 | % | 13,800,000 | 24.4 | % | ||||||||||||||
| Legato II private warrants | 585,500 | 0.7 | % | 585,500 | 0.8 | % | 585,500 | 1.1 | % | ||||||||||||||
| Legato II founders shares | 6,900,000 | 8.2 | % | 6,900,000 | 9.8 | % | 6,900,000 | 12.2 | % | ||||||||||||||
| Legato II private placement shares | 1,171,000 | 1.4 | % | 1,171,000 | 1.7 | % | 1,171,000 | 2.1 | % | ||||||||||||||
| Representative shares | 240,000 | 0.3 | % | 240,000 | 0.4 | % | 240,000 | 0.4 | % | ||||||||||||||
| Former Southland Member shares | 33,793,103 | 40.2 | % | 33,793,103 | 48.1 | % | 33,793,103 | 59.8 | % | ||||||||||||||
| Total | 84,089,603 | 100.0 | % | 70,289,603 | 100.0 | % | 56,489,603 | 100.0 | % | ||||||||||||||
| (1) | This scenario assumes that no Public Shares are redeemed. | |
| (2) | This scenario assumes that 13,800,000 Public Shares are redeemed. | |
| (3) | This scenario assumes that 27,600,000 Public Shares are redeemed. |
Organizational Structure
Following the Business Combination, Southland will be a wholly-owned subsidiary of New Southland and the Southland Members and the security holders of Legato II will all be security holders of New Southland.
Regulatory Approval Required for the Business Combination
Completion of the Business Combination is subject to expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). Legato II and Southland agreed to use their reasonable best efforts to obtain all required regulatory approval and Southland agreed to request early termination of any waiting period under the HSR Act. On July 12, 2022, Legato II and Southland filed the required forms under the HSR Act with respect to the Business Combination with the U.S. Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“Antitrust Division”) and the applicable waiting period expired on August 11, 2022. The regulatory approval to which completion of the Merger is subject is described in more detail in the section of this proxy statement/prospectus entitled “Proposal No. 1 — The Business Combination Proposal — Regulatory Matters”.
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Appraisal Rights
Legato II stockholders will not have appraisal rights in connection with the proposed Business Combination under the DGCL.
Listing
Legato II’s Units, Common Stock and Warrants are currently listed on Nasdaq under the symbols “LGTOU” “LGTO” and “LGTOW,” respectively. It is a condition of the consummation of the Business Combination that the New Southland Common Stock is approved for listing on Nasdaq (subject only to official notice of issuance thereof and round lot holder requirements), but there can be no assurance such listing condition will be met. If such listing condition is not met, the Business Combination will not be consummated, unless the listing condition set forth in the Merger Agreement is waived by the parties to the Merger Agreement.
Risk Factors and Risk Factor Summary
An investment in our securities involves a high degree of risk. In evaluating the proposals set forth in this proxy statement/prospectus, you should carefully read this proxy statement/prospectus, including the annexes, and especially consider the discussion of material risks discussed in this section. This summary of material risks should be read in conjunction with the “Risk Factors” section below and should not be relied upon as an exhaustive summary of the material risks facing our business and the proposed Business Combination. References in this section to the “Company,” “we,” “our,” or “us” refer to Southland, Legato II or New Southland as the context requires. The occurrence
of one or more of the events or circumstances described in the section entitled “Risk Factors,” alone or in combination with other events or circumstances, may materially adversely affect our business, financial condition and operating results. Such material risks include, but are not limited to:
Risks Related to Southland’s Business and Industry
| ● | The COVID-19 pandemic has adversely impacted, and could continue to adversely impact, our business, financial condition and results of operations. |
| ● | We may lose business to competitors through competitive bidding processes. |
| ● | Our backlog is subject to unexpected adjustments and cancellations. |
| ● | The loss of one or more customers could have an adverse effect on us. |
| ● | The timing of new contract starts, including delays, cancellations and scope alterations, may result in unpredictable fluctuations in our business. |
| ● | We are vulnerable to the cyclical nature of the markets we serve. |
| ● | Demand for our services may increase or decrease during economic recessions or volatile economic cycles, and a reduction in demand in end markets may adversely affect our business. |
| ● | Adverse credit and financial market conditions could impair our, our customers’ and our partners’ borrowing capacity, which could negatively affect us. |
| ● | The nature of our contracts subjects us to risks associated with delays and cost overruns, which may not be recoverable and may result in reduced profits or losses that could have a material impact on us. |
| ● | If we are unable to accurately estimate contract risks, revenue or costs, economic factors such as inflation, the timing of new awards or the pace of project execution, we may incur a loss or achieve lower than anticipated profit. |
| ● | We may incur higher costs to lease, acquire and maintain equipment necessary for our operations. |
| ● | We use certain commodity products that are subject to significant price fluctuations. |
| ● | Supply chain interruptions, including availability of materials, products or equipment, may have a negative impact on our ability to complete projects. |
| ● | Some of our contracts have penalties for late completion. |
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| ● | Weather can significantly affect our revenue and profitability. |
| ● | Climate change and related environmental issues could have a material adverse impact on us. |
| ● | If we are unable to attract and retain qualified managers and skilled employees, our operating costs may increase. |
| ● | We depend on key personnel and we may not be able to operate and grow our business effectively if we lose the services of any of our key persons or are unable to attract qualified and skilled personnel in the future. |
| ● | Our employees work on projects that are inherently dangerous and in locations where there are high security risks, and a failure to maintain a safe work site could result in significant losses. |
| ● | We may incur liabilities or suffer negative financial or reputational impacts relating to health and safety matters. |
| ● | We are dependent upon suppliers and subcontractors to complete many of our contracts. |
| ● | Our participation in joint ventures exposes us to liability and/or harm to our reputation for failures by our partners. |
| ● | Employee, agent or partner misconduct or our overall failure to comply with laws or regulations could impair our ability to compete for contracts. |
| ● | Changes in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect our business, investments and results of operations. |
| ● | We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws. |
| ● | During the ordinary course of our business, we may become subject to material lawsuits or indemnity claims. |
| ● | Systems and information technology interruption and breaches in data security and/or privacy could adversely impact our ability to operate and negatively impact our results of operations. |
| ● | Our inability to recover on contract modifications against project owners or subcontractors for payment or performance could negatively affect our business. |
| ● | Our failure to adequately recover on affirmative claims brought by us against project owners or other project participants for additional contract costs could have a negative impact on our liquidity and future operations. |
| ● | We may experience delays and defaults in customer payments, and we may pay our suppliers and subcontractors before receiving payment from our customers for the related services, which could result in a material adverse effect on our business. |
| ● | In connection with acquisitions or divestitures, we may become subject to liabilities. |
| ● | If we fail to integrate acquisitions successfully, we may experience operational challenges and risks, which may have an adverse effect on our business. |
| ● | Our financial results are based upon estimates and assumptions that may differ from actual results. |
| ● | Our reported results of operations could be adversely affected as a result of impairments of goodwill, other identifiable intangible assets or investments. |
| ● | New Southland’s financial position may be impacted by the Merger. |
| ● | Our accounting for revenue recognized over time could result in a reduction or elimination of previously reported revenue and profit. |
| ● | Our indebtedness could lead to adverse consequences or adversely affect our financial position and prevent us from fulfilling our obligations under such indebtedness, and any refinancing of this debt could be at significantly higher interest rates. |
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| ● | Our bonding requirements may limit our ability to incur indebtedness, which could limit our ability to refinance our existing credit facilities or to execute our business plan. |
| ● | We may be unable to win new contracts if we cannot provide customers with letters of credit or performance or other bonds. |
| ● | It can be difficult and expensive to obtain the insurance we need for our business operations. |
| ● | We have international operations that are subject to foreign economic and political uncertainties and risks. Unexpected and adverse changes in the foreign countries in which we operate could result in project disruptions, increased cost and potential losses. |
| ● | Foreign currency risks could have an adverse impact on revenue, earnings and/or backlog. |
| ● | We could be adversely impacted if we fail to comply with domestic and international import and export laws. |
| ● | Compliance with and changes in tax laws could adversely affect our performance. |
Risks Related to the Business Combination
| ● | If Legato II’s stockholders fail to properly demand redemption rights, they will not be entitled to redeem their Public Shares for a pro rata portion of the Trust Account. |
| ● | Legato II’s current directors, executive officers, advisors and their affiliates own shares of Legato II Common Stock and Private Placement Units that will be worthless if the Business Combination are not approved. Such interests may have influenced their decision to approve the Business Combination. |
| ● | Legato II’s current directors, executive officers, advisors and their affiliates stand to make a substantial profit on the shares of Legato II Common Stock that they own, even if the New Southland Common Stock subsequently declines in value or is unprofitable for public stockholders, and such interests may have influenced their decision to approve the Business Combination. |
| ● | An entity affiliated with Legato II’s officers and directors has agreed to be liable to ensure that proceeds of the Trust Account are not reduced by vendor claims in the event the Business Combination is not consummated. Such liability may have influenced management’s decision to pursue the Business Combination and the Board’s decision to approve it. |
| ● | Legato II’s directors may decide not to enforce the indemnification obligations of Crescendo I, resulting in a reduction in the amount of funds in the Trust Account available for distribution to Legato II’s public stockholders. |
| ● | The exercise of Legato II’s directors’ and officers’ discretion in agreeing to changes or waivers in the terms of the Business Combination may result in a conflict of interest when determining whether such changes to the terms of the Business Combination or waivers of conditions are appropriate and in Legato II’s stockholders’ best interest. |
| ● | If Legato II is unable to complete the Business Combination or another business combination by May 24, 2023 or such later date as may be approved by Legato II’s stockholders, Legato II will cease all operations except for the purpose of winding up, redeeming 100% of the outstanding Public Shares and, subject to the approval of its remaining stockholders and its board of directors, dissolving and liquidating. In such event, third parties may bring claims against Legato II and, as a result, the proceeds held in the Trust Account could be reduced and the per-share liquidation price received by stockholders could be less than approximately $__ per share. |
| ● | In the event that the proposed Business Combination is not approved, public stockholders who tendered their shares for redemption may be unable to sell their shares when they wish. |
| ● | Legato II’s stockholders may be held liable for claims by third parties against Legato II to the extent of distributions received by them. |
| ● | Actions taken by existing Legato II stockholders to increase the likelihood of approval of the Business Combination Proposal and other proposals could have a depressive effect on the Common Stock. |
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| ● | Legato II and Southland will incur significant transaction and transition costs in connection with the Business Combination, and New Southland will incur additional costs and obligations as a result of being a public operating company following the Business Combination. |
| ● | The Business Combination may be completed even though material adverse effects may result from the announcement of the Business Combination, industry-wide changes and other causes. |
| ● | The Business Combination may be completed even if a majority of the Public Shares do not vote in favor of the Business Combination Proposal. |
| ● | Delays in completing the Business Combination may substantially reduce the expected benefits of the Business Combination. |
| ● | Legato II is an “emerging growth company” and it cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make the New Southland Common Stock less attractive to investors. |
| ● | The Existing Charter provides, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit stockholders’ ability to obtain a favorable judicial forum for disputes with Legato II or its directors, officers, employees or stockholders. |
| ● | If Legato II’s due diligence investigation of Southland was inadequate, then Legato II’s stockholders following the consummation of the Business Combination could lose some or all of their investment. |
| ● | Because New Southland will become a public reporting company by means other than a traditional underwritten IPO, New Southland’s stockholders may face additional risks and uncertainties. |
| ● | Unsolicited takeover proposals, governance change proposals, proxy contests and certain proposals/actions by activist investors may create additional risks and uncertainties with respect to our financial position, operations, strategies and management, and may adversely affect our ability to attract and retain key employees. |
Additional Risks Relating to Ownership of New Southland Common Stock following the Business Combination
| ● | An established market for our securities may not develop following consummation of the Business Combination. |
| ● | Nasdaq may delist New Southland’s securities from trading on its exchange, which could limit investors’ ability to make transactions in its securities and subject New Southland to additional trading restrictions. |
| ● | Although publicly traded, the trading market in New Southland Common Stock may become substantially less liquid than the average trading market for a stock listed on the Nasdaq Stock Market following the consummation of the Business Combination, and this low trading volume may adversely affect the price of the New Southland Common Stock. |
| ● | New Southland’s stock price may change significantly following the Business Combination and you could lose all or part of your investment as a result. |
| ● | Future sales, or the perception of future sales, by New Southland or its stockholders in the public market following the Merger could cause the market price for New Southland Common Stock to decline. |
| ● | If securities analysts do not publish research or reports about New Southland’s business or if they downgrade New Southland’s stock or New Southland’s sector, New Southland’s stock price and trading volume could decline. |
| ● | A registration statement may not be in place when an investor desires to exercise Public Warrants, thus precluding such investor from being able to exercise its Public Warrants except on a cashless basis and potentially causing such Public Warrants to expire worthless. |
| ● | The Public Warrants and Private Placement Warrants are being accounted for as liabilities and are being recorded at fair value upon issuance with changes in fair value each period reported in our earnings. The changes in value of the Public Warrants and Private Placement Warrants could have an adverse effect on |
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| the market price of the Legato II Common Stock prior to the Business Combination or the New Southland Common Stock following the Business Combination, and may have an adverse effect on our financial results and/or make it more difficult for us to consummate the Business Combination. |
| ● | Our actual operating and financial results in any given period may differ from guidance we provide to the public, including our most recent public guidance. |
| ● | We do not intend to pay dividends for the foreseeable future. As a result, you will be relying solely on the appreciation in value of our securities to achieve a return on your investment. |
Tax Considerations
For a discussion of the material U.S. federal income tax considerations for holders of Public Shares, see the section entitled “U.S. Federal Income Tax Considerations.” You are urged to consult your tax advisor regarding the tax consequences of exercising your redemption rights.
Accounting Treatment
It is anticipated that the Business Combination will be accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles (“GAAP”). Under this method of accounting, Legato II will be treated as the acquired company and Southland will be treated as the acquirer for financial reporting purposes.
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SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following summary unaudited pro forma condensed combined financial information has been derived from the unaudited pro forma condensed combined balance sheet as of June 30, 2022, and the unaudited pro forma condensed combined statements of operations for the year ended December 31, 2021, and the six months ended June 30, 2022, included in “Unaudited Pro Forma Condensed Combined Financial Information.”
The summary unaudited pro forma condensed combined financial information should be read in conjunction with the unaudited pro forma condensed combined balance sheet and the unaudited pro forma condensed combined statements of operations, and the related notes. In addition, the unaudited condensed combined pro forma financial information was based on and should be read in conjunction with the historical financial statements of Southland and Legato II, including the related notes, which are included elsewhere in this proxy statement/prospectus.
As Legato II does not represent a business for accounting purposes and its primary asset represents cash and cash equivalents held in trust, the Merger will be accounted for as a reverse capitalization and Southland will be the acquiring entity for accounting purposes. The equity in Southland is being exchanged primarily for issuance of Legato II Common Stock. The net assets of Southland will be stated at historical cost, with no goodwill or other intangible assets recorded in relation to the Merger.
The unaudited pro forma condensed combined financial information has been prepared using the assumptions below with respect to the potential redemption of Legato II Common Stock into cash:
| ● | Assuming No Redemptions: This presentation assumes that no existing holder of Legato II Common Stock exercised their redemption rights with respect to their Legato II Common Stock upon consummation of the Merger. |
| ● | Assuming 50% Redemptions: This presentation assumes that 13,800,000 shares of Legato II Common Stock are redeemed for an aggregate payment of $140.2 million, based on an estimated redemption price of $10.16. |
| ● | Assuming Maximum Redemption. This presentation assumes that 27,600,000 shares of Legato II Common Stock are redeemed for an aggregate payment of $280.5 million, based on an estimated redemption price of $10.16. |
| Historical | Pro Forma Combined | |||||||||||||||||||
| (in thousands, except per unit or share amounts) | Southland | Legato II | No Redemption Scenario | 50% Redemptions Scenario | Maximum Redemptions Scenario | |||||||||||||||
| Statement of Operation Data – For the Year ended December 31, 2021 | ||||||||||||||||||||
| Revenue, net | $ | 1,279,186 | — | $ | 1,279,186 | $ | 1,279,186 | $ | 1,279,186 | |||||||||||
| Total operating expenses | 1,223,134 | 163 | 1,223,297 | 1,223,297 | 1,223,297 | |||||||||||||||
| Income (loss) from operations | 56,052 | (163 | ) | 55,889 | 55,889 | 55,889 | ||||||||||||||
| Net income (loss) attributable to common unitholders or shareholders | 38,720 | (139 | ) | 38,557 | 38,557 | 38,557 | ||||||||||||||
| Diluted net earnings per share | $ | 0.50 | $ | 0.61 | $ | 0.79 | ||||||||||||||
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| Historical | Pro Forma Combined | |||||||||||||||||||
| (in thousands, except per unit or share amounts) | Southland | Legato II | No Redemption Scenario | 50% Redemptions Scenario | Maximum Redemptions Scenario | |||||||||||||||
| Statement of Operation Data – For the Six Months ended June 30, 2022 | ||||||||||||||||||||
| Revenue, net | $ | 531,502 | $ | — | $ | 531,502 | $ | 531,502 | $ | 531,502 | ||||||||||
| Total operating expenses | 516,623 | 750 | 517,373 | 517,373 | 517,373 | |||||||||||||||
| Income (loss) from operations | 14,879 | (750 | ) | 14,129 | 14,129 | 14,129 | ||||||||||||||
| Net income (loss) attributable to common unitholders or shareholders | 5,805 | (435 | ) | 4,991 | 4,991 | 4,991 | ||||||||||||||
| Diluted net earnings per share | $ | 0.07 | $ | 0.08 | $ | 0.10 | ||||||||||||||
| Historical | Pro Forma Combined | |||||||||||||||||||
| (in thousands | Southland | Legato II | No Redemption Scenario | 50% Redemptions Scenario | Maximum Redemptions Scenario | |||||||||||||||
| Balance Sheet Data – As of June 30, 2022 | ||||||||||||||||||||
| Total current assets | $ | 757,018 | $ | 824 | $ | 978,640 | $ | 838,411 | $ | 757,842 | ||||||||||
| Total assets | 1,026,574 | 281,282 | 1,248,196 | 1,107,967 | 1,027,398 | |||||||||||||||
| Total current liabilities | 421,042 | 120 | 421,162 | 421,162 | 430,822 | |||||||||||||||
| Total liabilities | 717,319 | 9,780 | 741,839 | 741,839 | 801,499 | |||||||||||||||
| Southland common shareholder equity | 273,521 | — | — | — | — | |||||||||||||||
| Legato II Common Stock | — | 280,295 | — | — | — | |||||||||||||||
| Southland preferred shares | 24,400 | — | — | — | — | |||||||||||||||
| Total shareholders’ (deficit) equity | 309,255 | (8,793 | ) | 506,357 | 366,128 | 225,899 | ||||||||||||||
| (1) | Prior to the Merger, Southland will convert the Southland preferred shares to debt. For purposes of this unaudited pro forma condensed combined financial information, this conversion will be presented as if it had occurred on June 30, 2022. |
The following table sets forth the unaudited pro forma total shareholder equity, shares outstanding, and book value per share of Legato II as if the Merger were consummated on June 30, 2022.
| Pro Forma Combined | ||||||||||||
| (in thousands, except per unit or share amounts) | No Redemption Scenario | 50% Redemptions Scenario | Maximum Redemptions Scenario | |||||||||
| As of June 30, 2022 | ||||||||||||
| Total shareholders’ (deficit) equity | $ | 506,357 | $ | 366,128 | $ | 225,899 | ||||||
| Outstanding shares classified as permanent equity | 69,704 | 55,904 | 42,104 | |||||||||
| Book value per share | $ | 7.26 | $ | 6.55 | $ | 5.37 | ||||||
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UNAUDITED HISTORICAL COMPARATIVE AND
PRO FORMA COMBINED PER SHARE INFORMATION
The following table sets forth:
| ● | historical per share information of Southland for the year ended December 31, 2021, and for the six months ended June 30, 2022; |
| ● | historical per share information of Legato II for the period from November 22, 2021 (inception) through December 31, 2022, and for the six months ended June 30, 2022; and |
| ● | unaudited pro forma per share information for the combined company for the year ended June 30, 2022, after giving effect to the Merger. |
| ● | Assuming No Redemptions. This presentation assumes that no existing holder of Legato II Common Stock exercised their redemption rights with respect to their Legato II Common Stock upon consummation of the Merger. |
| ● | Assuming 50% Redemptions. This presentation assumes that 13,800,000 shares of Legato II Common Stock are redeemed for an aggregate payment of $140.2 million, based on an estimated redemption price of $10.16. |
| ● | Assuming Maximum Redemption. This presentation assumes that 27,600,000 shares of Legato II Common Stock are redeemed for an aggregate payment of $280.5 million, based on an estimated redemption price of $10.16. |
The pro forma book value information reflects the Merger as if it had occurred on June 30, 2022. Pro forma net (loss) earnings information reflects the Merger as if it had occurred on January 1, 2021.
This information is only a summary and should be read together with the selected historical financial information summaries included elsewhere in this proxy statement/prospectus, and the historical financial statements of Southland and Legato II and related notes that are included elsewhere in the proxy statement/prospectus. The unaudited pro forma combined per share information of Southland and Legato II is derived from, and should be read in conjunction with, the unaudited pro forma condensed combined financial statements and related notes included elsewhere in this proxy statement/prospectus.
The unaudited pro forma combined net earnings per share information below does not purport to represent the net earnings per share which would have occurred had the companies been combined during the periods presented, nor net earnings per share for any future date or period. The unaudited pro forma combined book value per share information below does not purport to represent what the value of Southland and Legato II would have been had the companies been combined during the periods presented.
The table below sets forth the calculation of the book value per share, as applicable, of Southland and Legato II as of June 30, 2022, and the pro forma book value per share for Legato II for the three redemption scenarios as if the Merger had occurred June 30, 2022.
| Historical | Pro Forma Combined | |||||||||||||||||||
| Southland(1) | Legato II | No Redemption Scenario | 50% Redemptions Scenario | Maximum Redemptions Scenario | ||||||||||||||||
| Book value per share (1) | $ | 7.56 | $ | 7.26 | $ | 6.55 | $ | 5.37 | ||||||||||||
| For the Year Ended December 31, 2021 | ||||||||||||||||||||
| Net (loss) earnings per share | (0.01 | ) | $ | 0.55 | $ | 0.69 | $ | 0.92 | ||||||||||||
| For the Six Months Ended June 30, 2022 | ||||||||||||||||||||
| Net (loss) earnings per share | (0.01 | ) | $ | 0.07 | $ | 0.09 | $ | 0.12 | ||||||||||||
| (1) | The structure of Southland’s historical common equity structure was in the form of membership percentages and no shares were issued. As no book value per share or net (loss) earnings per share can be presented, the unaudited pro forma book value per share and net (loss) earnings per share will be displayed historically for Legato II and the unaudited pro forma combined book value per share and net (loss) earnings per share will be calculated under each scenario presented using the number of shares to be outstanding at the time of the Merger, as presented elsewhere in this section. |
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FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus includes forward-looking statements regarding, among other things, the plans, strategies and prospects, both business and financial, of Legato II and Southland prior to the Business Combination, and New Southland following the consummation of the Business Combination. These statements are based on the reasonable beliefs and assumptions of the management of Legato II and Southland. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Generally, statements that are not historical facts, including statements concerning possible or assumed future actions, business strategies, events or results of operations, are forward-looking statements. These statements may be preceded by, followed by or include the words “believes,” “estimates,” “expects,” “projects,” “forecasts,” “may,” “will,” “should,” “seeks,” “plans,” “scheduled,” “anticipates,” “intends” or similar expressions. Forward-looking statements contained in this proxy statement/prospectus include, but are not limited to, statements about the ability of Legato II and Southland prior to the Business Combination, and New Southland following the Business Combination, to:
| ● | access, collect and use personal data about consumers; |
| ● | execute its business strategy, including monetization of services provided and expansions in and into existing and new lines of business; |
| ● | anticipate the impact of the COVID-19 pandemic and its effect on business and financial conditions; |
| ● | manage risks associated with operational changes in response to the COVID-19 pandemic; |
| ● | meet the closing conditions to the Merger, including approval by stockholders of Legato II on the expected terms and schedule; |
| ● | realize the benefits expected from the proposed Business Combination; |
| ● | anticipate the uncertainties inherent in the development of new business lines and business strategies; |
| ● | retain and hire necessary employees; |
| ● | increase brand awareness; |
| ● | attract, train and retain effective officers, key employees or directors; |
| ● | upgrade and maintain information technology systems; |
| ● | acquire and protect intellectual property; |
| ● | meet future liquidity requirements and comply with restrictive covenants related to long-term indebtedness; |
| ● | effectively respond to general economic and business conditions; |
| ● | maintain the listing on, or the delisting of Legato II’s or New Southland’s securities from, Nasdaq or an inability to have our securities listed on Nasdaq or another national securities exchange following the Business Combination; |
| ● | obtain additional capital, including use of the debt market; |
| ● | enhance future operating and financial results; |
| ● | anticipate rapid technological changes; |
| ● | comply with laws and regulations applicable to its business, including laws and regulations related to data privacy and insurance operations; |
| ● | stay abreast of modified or new laws and regulations applying to its business; |
| ● | anticipate the impact of, and respond to, new accounting standards; |
| ● | anticipate the rise in interest rates which would increase the cost of capital; |
| ● | anticipate the significance and timing of contractual obligations; |
| ● | maintain key strategic relationships with partners and distributors; |
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| ● | respond to uncertainties associated with product and service development and market acceptance; |
| ● | anticipate the ability of the renewable sector to develop to the size or at the rate it expects; |
| ● | manage to finance operations on an economically viable basis; |
| ● | anticipate the impact of new U.S. federal income tax law, including the impact on deferred tax assets; |
| ● | successfully defend litigation; and |
| ● | successfully deploy the proceeds from the Business Combination. |
Forward-looking statements are not guarantees of performance and speak only as of the date hereof. While Legato II and Southland believe that these forward-looking statements are reasonable, there can be no assurance that New Southland will achieve or realize these plans, intentions or expectations. You should understand that the following important factors, in addition to those discussed under the headings “Risk Factors” and “Proposal No. 1 — The Business Combination Proposal “ and elsewhere in this proxy statement/prospectus, could affect the future results of Legato II and Southland prior to the Business Combination, and New Southland following the Business Combination, and could cause those results or other outcomes to differ materially from those expressed or implied in the forward-looking statements in this proxy statement/prospectus:
| ● | any delay in closing of the Business Combination; |
| ● | risks related to disruption of management’s time from ongoing business operations due to the proposed transactions; |
| ● | litigation, complaints, product liability claims and/or adverse publicity; |
| ● | the impact of changes in consumer spending patterns, consumer preferences, local, regional and national economic conditions, crime, weather, demographic trends and employee availability; |
| ● | increases and/or decreases in utility and other energy costs, increased costs related to utility or governmental requirements; |
| ● | privacy and data protection laws, privacy or data breaches or the loss of data; and |
| ● | the impact of the COVID-19 pandemic and its effect on business and financial conditions of Southland. |
These and other factors that could cause actual results to differ from those implied by the forward-looking statements in this proxy statement/prospectus are more fully described under the heading “Risk Factors” and elsewhere in this proxy statement/prospectus. The risks described under the heading “Risk Factors” are not exhaustive. Other sections of this proxy statement/prospectus describe additional factors that could adversely affect the business, financial condition or results of operations of Legato II and Southland prior to the Business Combination, and New Southland following the Business Combination. New risk factors emerge from time to time and it is not possible to predict all such risk factors, nor can Legato II or Southland assess the impact of all such risk factors on the business of Legato II and Southland prior to the Business Combination, and New Southland following the Business Combination, or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements attributable to Legato II or Southland or persons acting on their behalf are expressly qualified in their entirety by the foregoing cautionary statements. Legato II and Southland prior to the Business Combination, and New Southland following the Business Combination, undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
In addition, statements of belief and similar statements reflect the reasonable beliefs and opinions of Legato II or Southland, as applicable, on the relevant subject. These statements are based upon information available to Legato II or Southland, as applicable, as of the date of this proxy statement/prospectus, and while such party believes such information forms a reasonable basis for such statements, such information may be limited or incomplete, and statements should not be read to indicate that Legato II or Southland, as applicable, has conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain, involve risks and are subject to change based on various factors, including those discussed under the headings “Risk Factors,” “Proposal No. 1 — The Business Combination Proposal — Legato II’s Board of Directors’ Reasons for Approval of the Business Combination — Certain Forecasted Financial Information” and “Southland’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this proxy statement/prospectus.
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RISK FACTORS
In addition to the other information contained in this proxy statement/prospectus, including the matters addressed under the heading “Forward-Looking Statements” and “Proposal No. 1 — The Business Combination Proposal — Legato II’s Board of Directors’ Reasons for Approval of the Business Combination — Certain Forecasted Financial Information,” you should carefully consider the following risk factors in deciding how to vote on the proposals presented in this proxy statement/prospectus. References in this section to the “Company,” “we,” “our,” or “us” refer to Southland, Legato II or New Southland as the context requires.
Risks Relating to Southland’s Business and Industry
The COVID-19 pandemic has adversely impacted, and could continue to adversely impact, our business, financial condition and results of operations.
The COVID-19 pandemic has created volatility, uncertainty and economic disruption for the Company, our customers, subcontractors and suppliers and the markets in which we do business. The scope and impact of the COVID-19 pandemic continues to evolve, and new strains of the COVID-19 virus have emerged. As a result of the COVID-19 pandemic, we have experienced delays in certain bidding activities and also in legal proceedings and settlement discussions where we have claims against project owners or customers. Consequently, our ability to resolve and recover on these types of claims has been and may continue to be delayed, which may adversely affect our liquidity and financial results. It remains difficult to assess the full impact that the COVID-19 pandemic may have on our business, including the impact of actions that may continue to be taken in response to the pandemic and the impacts that the pandemic will have on our employees, our operating segments and practices, our customers, subcontractors and suppliers and the regions that we serve, or on our financial condition and results of operations as a whole. The full impact depends on many factors that remain uncertain and subject to ongoing volatility, or that are not yet identifiable, and in many cases are out of our control. The COVID-19 pandemic and the volatile economic conditions stemming from the pandemic, as well as reactions to future pandemics or resurgences of COVID-19, could also aggravate or heighten the risks posed by other risk factors that we have identified herein, which in turn could materially and adversely affect our business, financial condition and results of operations. There may be other adverse consequences to our business, financial condition and results of operations from the spread of COVID-19 that are not presently known or that have not yet become apparent. As a result, we cannot we provide any assurance that if the COVID-19 pandemic continues, it would not have a further adverse impact on our business, financial condition and results of operations.
We may lose business to competitors through competitive bidding processes.
We are engaged in highly competitive businesses in which most customer contracts are awarded through bidding processes based on price and the acceptance of certain risks, along with other factors. We compete with other general and specialty contractors, regional, national and international, as well as small local contractors. The strong competition in our markets requires maintaining skilled personnel and investing in technology and also puts pressure on profit margins. We do not obtain contracts from all of our bids and our inability to win bids at acceptable profit margins could adversely affect our business.
Our backlog is subject to unexpected adjustments and cancellations.
Our backlog generally consists of projects for which we have an executed contract or commitment with a customer and reflects our expected revenue from the contract or commitment, which is often subject to revision over time. We cannot guarantee that the revenue projected in our backlog will be realized or profitable or will not be subject to delay or suspension. Project cancellations, scope adjustments or deferrals or foreign currency fluctuations may occur with respect to contracts reflected in our backlog, which could reduce the dollar amount of our backlog and the revenue and profits that we actually earn or cause the rate at which we perform on our backlog to decrease. In addition, projects may remain in our backlog for an extended period of time. During periods of economic slowdown, the risk of projects being suspended, delayed or canceled generally increases. Finally, poor project or contract performance could also impact our backlog and profits. Such developments could have a material adverse effect on our business and our profits.
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The loss of one or more customers could have an adverse effect on us.
A few customers, including the U.S. government, state and local governments and governmental agencies, comprise a significant portion of our revenue. Our customers may unilaterally reduce, fail to renew or terminate their contracts with us at any time. Some of our contracts may have “termination for convenience” provisions in them. The loss of business from a significant customer could have a material adverse effect on our business, financial position and results of operations.
The timing of new contract starts, including delays, cancellations and scope alternations, may result in unpredictable fluctuations in our business.
Substantial portions of our revenue are derived from project-based work that is awarded through a competitive bid process. It is generally very difficult to predict the timing and geographic distribution of the projects that we will be awarded. The selection of, timing of or failure to obtain projects, delays in award of projects, the re-bidding or termination of projects due to budget overruns, cancellations of projects or delays in completion of contracts could result in the under-utilization of our assets and reduce our cash flows. Even if we are awarded contracts, we face additional risks that could affect whether, or when, work will begin. For example, some of our contracts are subject to financing, permitting and other contingencies that may delay or result in termination of projects. We may have difficulty in matching workforce size and equipment location with contract needs. In some cases, we may be required to bear the cost of a ready workforce and equipment that is larger than necessary, resulting in unpredictability in our cash flow, expenses and profitability. If any expected contract award, or the related work release is delayed or not received, we could incur substantial costs without guaranteed receipt of any corresponding revenue. Finally, the winding down or completion of work on significant projects could reduce our revenue and earnings if these projects have not been replaced.
We are vulnerable to the cyclical nature of the markets we serve.
The demand for our services is dependent upon the existence of projects with construction needs. Our customers’ interest in approving new projects, budgets for capital expenditures and need for our services may be adversely affected by, among other things, poor economic conditions, including an economic recession, low oil prices, political uncertainties and currency devaluations. Customers may be selective in how they allocate and expend their capital, which could result in a reduction of the number of projects we may bid on and win. Many of the industries that we serve are vulnerable to general downturns, which in turn could materially and adversely affect the demand for our services.
Demand for our services may increase or decrease during economic recessions or volatile economic cycles, and a reduction in demand in end markets may adversely affect our business.
A substantial portion of our revenue and profit is generated from construction projects, the awarding of which we do not directly control. The engineering and construction industry has historically experienced cyclical fluctuations in financial results due to economic recessions, downturns in business cycles of our customers, material shortages, price increases by subcontractors, interest rate fluctuations and other economic factors beyond our control. When the general level of economic activity deteriorates, our customers may delay or cancel upgrades, expansions and/or maintenance and repairs to their systems. Many factors, including the financial condition of the industry, could adversely affect our customers and their willingness to fund capital expenditures in the future. Economic, regulatory and market conditions affecting our specific end markets may adversely impact the demand for our services, resulting in the delay, reduction or cancellation of certain projects and these conditions may continue to adversely affect us in the future. We are also dependent on the amount of work our customers outsource. In a slower economy, our customers may decide to outsource less infrastructure services, reducing demand for our services. In addition, consolidation, competition or capital constraints in the industries we serve may result in reduced spending by our customers.
Adverse credit and financial market conditions could impair our, our customers’ and our partners’ borrowing capacity, which could negatively affect us.
Our ability to generate cash is important for the funding of our operations, investing in ventures, the servicing of our indebtedness, paying dividends and making acquisitions. To the extent that existing cash balances and operating cash flow, together with borrowing capacity under our credit facilities, are insufficient to make investments or
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acquisitions or provide needed working capital, we may require additional financing from other sources. Our ability to obtain such additional financing will depend upon prevailing capital market conditions, including those arising due to events occurring in our industry, as well as conditions in our business and our operating results; and those factors may affect our efforts to negotiate terms that are acceptable to us. Furthermore, if global economic, industry, political or other market conditions adversely affect the financial institutions that provide credit to us, it is possible that our ability to establish or draw upon our credit facilities may be impacted. In addition, a downgrade in our credit rating could increase the cost of our borrowings or their refinancing, limit access to sources of financing or lead to other adverse consequences. If adequate funds are not available, or are not available on acceptable terms, we may be unable to make future investments, take advantage of acquisitions or other opportunities or respond to competitive challenges. In addition, adverse credit and financial market conditions also adversely affect our customers’ and our partners’ borrowing capacity, which could result in contract cancellations or suspensions, project award and execution delays, payment delays or defaults by our customers. These disruptions could materially impact our backlog and profits. If we extend a significant portion of credit to our customers or projects in a specific geographic region or industry, we may experience higher levels of collection risk or non-payment if those customers are impacted by factors specific to their geographic industry or region.
The nature of our contracts subjects us to risks associated with delays and cost overruns, which may not be recoverable and may result in reduced profits or losses that could have a material impact on us.
Because our projects are often technically complex, with multiple phases occurring over several years, we incur risks in our project execution activities. These risks could result in project delays, cost overruns or other problems and can include the following:
| ● | Incorrect assumptions related to productivity, scheduling estimates or future economic conditions, including with respect to the impacts of inflation contracts; |
| ● | Unanticipated technical problems, including design or engineering issues; |
| ● | Inaccurate representations of site conditions and unanticipated changes in the project execution plan; |
| ● | Project modifications creating unanticipated costs or delays and failure to properly manage project modifications; |
| ● | Inability to achieve guaranteed performance or quality standards with regard to engineering, construction or project management obligations; |
| ● | Insufficient or inadequate project execution tools and systems needed to record, track, forecast and control cost and schedule; |
| ● | Reliance on historical cost and/or execution data that is not representative of current or future economic and/or execution conditions; |
| ● | Failure to accurately estimate the timing and cost of projects, including due to inflation, supply chain disruption, rising construction costs or unforeseen increases in the cost of labor; |
| ● | Unanticipated increases in the cost of raw materials, components or equipment, including due to inflation or the imposition of import tariffs; |
| ● | Failure to properly make judgments in accordance with applicable professional standards, including engineering standards; |
| ● | Failure to properly assess and update appropriate risk mitigation strategies and measures; |
| ● | Difficulties related to the performance of our customers, partners, subcontractors, suppliers or other third parties; |
| ● | Delays or productivity issues caused by weather; and |
| ● | Changes in local laws or difficulties or delays in obtaining permits, rights of way or approvals. |
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These and other risks may result in our failure to achieve contractual cost or schedule commitments, safety performance, overall customer satisfaction or other performance criteria. As a result, we may receive lower fees or lose our ability to earn incentive fees. In other cases, our fee will not change but we will have to continue to perform work without additional fees until the performance criteria is achieved. We may also be required to pay liquidated damages if we fail to complete a project on schedule. In addition, if we, or third parties working on our behalf or supplying equipment or material on our behalf, fail to meet guaranteed performance or quality standards, we may be held responsible under the guarantee or warranty provisions of our contract for cost impact to the customer, generally in the form of contractually agreed-upon liquidated damages or an obligation to re-perform work. To the extent these events occur, the total cost to the project (including any liquidated damages we become liable to pay) could be material and could, in some circumstances, equal or exceed the full value of the contract. In such events, our financial condition or results of operations could be materially and negatively impacted.
If we are unable to accurately estimate contract risks, revenue or costs, economic factors such as inflation, the timing of new awards or the pace of project execution, we may incur a loss or achieve lower than anticipated profit.
Accounting for contract-related revenue and costs requires management to make significant estimates and assumptions that may change substantially throughout the project lifecycle, which could result in a material impact to our consolidated financial statements. In addition, cost overruns, including unanticipated cost increases on fixed price contracts could result in lower profits or losses. Economic factors, including inflation, could also subject us to higher costs, which we may not be able to fully recover in future projects that we are bidding, and could also decrease profit on our existing contracts, in particular with respect to fixed price contracts. Changes in laws, policies or regulations, including tariffs and taxes, could impact the prices for materials or equipment. Further, our results of operations have historically fluctuated, and may continue to fluctuate, quarterly and annually depending on when new awards occur and the commencement and progress of work on projects already awarded.
We may incur higher costs to lease, acquire and maintain equipment necessary for our operations.
To the extent that we are unable to buy or lease equipment necessary for a project, either due to a lack of available funding or equipment shortages in the marketplace, we may be forced to rent equipment on a short-term basis, or to find alternative ways to perform the work without the benefit of equipment ideally suited for the job, which could increase the costs of completing the project. If market rates for rental equipment increase, our margins for the project may be reduced. In addition, our equipment requires continuous maintenance, which we generally provide through our own repair facilities. If we are unable to continue to maintain the equipment in our fleet, we may be forced to obtain additional third-party repair services at a higher cost or be unable to bid on contracts.
We use certain commodity products that are subject to significant price fluctuations.
We use certain commodity products that are subject to significant price fluctuations. We are exposed to various commodity price risks, including, but not limited to, diesel fuel, natural gas, propane, steel, cement and liquid asphalt arising from transactions that are entered into in the normal course of business. We use petroleum based products, such as fuels, lubricants and liquid asphalt, to power or lubricate our equipment, and as a significant ingredient in the asphaltic concrete we manufacture for sale to third parties and use in our asphalt paving construction projects. We also use steel and other commodities in our construction projects that can be subject to significant price fluctuations. In order to manage or reduce commodity price risk, we monitor the costs of these commodities at the time of bid and price them into our contracts accordingly. Additionally, some of our contracts may include commodity price escalation clauses that partially protect us from increasing prices. We may enter into supply agreements or pre-purchase commodities to secure pricing and may use financial contracts to further manage price risk. Significant price fluctuations could have a material adverse effect on financial position, results of operations, cash flows and liquidity
Supply chain interruptions, including availability of materials, products or equipment, may have a negative impact on our ability to complete projects.
Our ability to complete projects may be affected by supply chain disruptions. We source input materials, including raw materials, products and or equipment, from domestic suppliers and suppliers from other geographies. In some cases, the downstream effect of supply chain issues will be compounded by delays impacting our suppliers.
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Some of our contracts have penalties for late completion.
In some instances, we guarantee that we will complete a project by a certain date. If we subsequently fail to complete the project as scheduled, we may be held responsible for costs resulting from the delay, generally in the form of contractually agreed-upon liquidated damages. To the extent these events occur, the total cost of the project could exceed our original estimate and we could experience reduced profits or a loss on the project, which could result in a material adverse impact to our financial position, results of operations, cash flows and liquidity.
Weather can significantly affect our revenue and profitability.
Our ability to perform work and meet customer schedules can be affected by weather conditions such as heat, wind, snow, ice and rain. Weather may affect our ability to work efficiently and can cause project delays and additional costs. Our ability to negotiate change orders for the impact of weather on a project could impact our profitability. In addition, the impact of weather can cause significant variability in our quarterly revenue and profitability.
Climate change and related environmental issues could have a material adverse impact on us.
Climate change related events, such as increased frequency and severity of storms, floods, wildfires, droughts, hurricanes, freezing conditions and other natural disasters, may have a long-term impact on our business, financial condition and results of operation. While we seek to mitigate our business risks associated with climate change, we recognize that there are inherent climate related risks regardless of where we conduct our businesses. For example, a catastrophic natural disaster could negatively impact any of our office locations and the locations of our customers, has the potential to disrupt our and our customers’ businesses and may cause us to experience work stoppages, supply chain disruptions, project delays, financial losses and additional costs to resume operations, including increased insurance costs or loss of cover, legal liability and reputational losses. Further, the risks caused by climate change span across the full spectrum of the industries we serve. The direct physical risks that climate change poses through chronic environmental changes, such as rising sea levels and temperatures, and acute events, such as hurricanes, droughts and wildfires, is common to each of these industries. Our customers could face increased costs to maintain their assets, which could result in reduced profitability and fewer resources for strategic investment. These types of physical risks could in turn lead to transitional risks (i.e., the degree to which society responds to the threat of climate change). For example, growing concerns about climate change may result in legislation, international protocols or treaties, regulation or other restrictions on greenhouse gas emissions or that otherwise seek to address climate change that could affect our customers, including those who (a) are involved in the exploration, production or refining of fossil fuels, (b) emit greenhouse gases through the combustion of fossil fuels or (c) emit greenhouse gases through the mining, manufacture, utilization or production of materials or goods. Such legislation or restrictions could increase the costs of projects for us and our customers or, in some cases, prevent a project from going forward, thereby potentially reducing the need for our services, which would in turn have a material adverse impact on us. We cannot predict when or whether any of these legislative proposals may become law or what effect will be on us and our customers.
If we are unable to attract and retain qualified managers and skilled employees, our operating costs may increase.
Our business is labor intensive and our ability to maintain our productivity and profitability may be limited by our ability to employ, train and retain skilled personnel necessary to meet our requirements. We may not be able to maintain an adequately skilled labor force necessary to operate efficiently and to support our growth strategy. We have from time-to-time experienced, and may in the future experience, shortages of certain types of qualified personnel. For example, periodically there are shortages of engineers, project managers, field supervisors and other skilled workers capable of working on and supervising construction projects, as well as providing engineering services. The supply of experienced engineers, project managers, field supervisors, journeyman linemen and other skilled workers may not be sufficient to meet current or expected demand. The beginning of new, large-scale infrastructure projects, or increased competition for workers currently available to us, could affect our business, even if we are not awarded such projects. Labor shortages and/or increased labor costs could impair our ability to maintain our business or grow our revenue. If we are unable to hire employees with the requisite skills, we may also be forced to incur significant training expenses.
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We depend on key personnel and we may not be able to operate and grow our business effectively if we lose the services of any of our key persons or are unable to attract qualified and skilled personnel in the future.
We are dependent upon the efforts of our key personnel, and our ability to retain them and hire other qualified employees. The loss of our executive officers or other key personnel could affect our ability to run our business effectively. Competition for senior management is intense, and we may not be able to retain our personnel. The loss of any key person requires the remaining key personnel to divert immediate and substantial attention to seeking a replacement, as well as to performing the departed person’s responsibilities until a replacement is found. In addition, as some of our key persons approach retirement age, we need to provide for smooth transitions. If we fail to find a suitable replacement for any departing executive or senior officer on a timely basis, such departure could adversely affect our ability to operate and grow our business.
Our employees work on projects that are inherently dangerous and in locations where there are high security risks, and a failure to maintain a safe work site could result in significant losses.
We often work on complex projects, frequently in geographically remote or high-risk locations that are subject to political, social or economic risks or civil unrest. In those locations where we have employees or operations, we may expend significant efforts and incur substantial security costs to maintain safety. In addition, our project sites can place our employees and others near large equipment, dangerous processes or substances or highly regulated materials and in challenging environments. Safety is a primary focus of our business and is critical to our reputation and performance. Many of our customers require that we meet certain safety criteria to be eligible to bid on contracts, and some of our contract fees or profits are subject to satisfying safety criteria. Unsafe work conditions also have the potential of increasing employee turnover, increasing project costs and raising our operating costs. If we fail to implement appropriate safety procedures and/or if our procedures fail, our employees or others may suffer injuries or loss of life, the completion of a project could be delayed and we could experience investigations or litigation. Although we have a safety function to implement effective health, safety and environmental procedures throughout our company, the failure to comply with such procedures, customer contracts or applicable regulations could subject us to losses and liability. Despite these activities we cannot guarantee the safety of our personnel, nor can we guarantee our work, equipment or supplies will be free from damage.
We may incur liabilities or suffer negative financial or reputational impacts relating to health and safety matters.
Our operations are subject to extensive laws and regulations relating to the maintenance of safe conditions in the workplace. While we have invested, and will continue to invest, substantial resources in our environmental, health and safety programs, our industry involves a high degree of operational risk and there can be no assurance that we will avoid significant liability exposure. Serious accidents, including fatalities, may subject us to substantial penalties, civil litigation or criminal prosecution. Claims for damages to persons, including claims for bodily injury or loss of life, could result in substantial costs and liabilities, which could materially and adversely affect our financial condition, results of operations or cash flows. In addition, if our safety record were to substantially deteriorate over time or we were to suffer substantial penalties or criminal prosecution for violation of health and safety regulations, our customers could cancel our contracts and not award us future business.
We are dependent upon suppliers and subcontractors to complete many of our contracts.
Some of the work performed under our contracts is performed by third-party subcontractors. We also rely on third-party suppliers to provide certain equipment and materials used for projects. If we are unable to hire qualified subcontractors or find qualified suppliers, our ability to successfully or timely complete a project could be impaired. If the amount we are required to pay for subcontractors or equipment and supplies exceeds what we have estimated, we may suffer losses on these contracts. If a supplier or subcontractor fails to provide supplies, technology, equipment or services as required under a contract to us, our joint venture partner, our customer or any other party involved in the project, or provides supplies, technology, equipment or services that are not an acceptable quality, we may be required to source those supplies, technology, equipment or services on a delayed basis or at a higher price than anticipated, which could impact our profitability. In addition, faulty workmanship, equipment or materials could impact the project, resulting in claims against us for failure to meet required project specifications. These risks may be intensified during an economic downturn if these suppliers or subcontractors experience financial difficulties or find it difficult to obtain sufficient financing to fund their operations or access to bonding and are not able to provide the services or supplies necessary for our business. In addition, in instances where we rely on a limited number of suppliers or subcontractors,
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there may be no available replacement technology, equipment, materials or services on a timely basis or at the costs we had anticipated. A failure by a third-party subcontractor or supplier to comply with applicable laws, rules or regulations could negatively impact our business and reputation and could result in fines, penalties or suspension.
Our participation in joint ventures exposes us to liability and/or harm to our reputation for failures by our partners.
As part of our business, we enter into joint venture arrangements, typically to jointly bid on and execute particular projects, thereby reducing our risk profile while enhancing execution capabilities and increasing surety bonding capacity. Success on these joint projects depends in large part on whether our joint venture partners satisfy their contractual obligations. Generally, we and our joint venture partners are jointly and severally liable for all liabilities and obligations of our joint ventures. If a joint venture partner fails to perform or is financially unable to bear its portion of required capital contributions or other obligations, including liabilities stemming from lawsuits, we could be required to make additional investments, provide additional services or pay more than our proportionate share of a liability to make up for our partner’s shortfall. Further, if we are unable to adequately address our partner’s performance issues, the customer may terminate the project, which could result in legal liability to us, harm our reputation, reduce our profit on a project or result in a loss.
Employee, agent or partner misconduct or our overall failure to comply with laws or regulations could impair our ability to compete for contracts.
Misconduct, fraud, non-compliance with applicable laws and regulations or other improper activities by one of our employees, agents or partners could have a significant negative impact on our business and reputation. Such misconduct could include the failure to comply with anti-corruption, export control and environmental regulations, federal procurement regulations, regulations regarding the pricing of labor and other costs in government contracts, regulations regarding the protection of sensitive government information, regulations on lobbying or similar activities, regulations pertaining to internal control over financial reporting and various other applicable laws or regulations. The precautions we take to prevent and detect fraud, misconduct or failures to comply with applicable laws and regulations may not be effective, and we could face unknown risks or losses. Failure to comply with applicable laws or regulations or acts of fraud or misconduct could subject us to fines and penalties, loss of security clearance and suspension or debarment from contracting with government agencies, which could weaken our ability to win contracts and have a material adverse impact on our revenues and profits.
Changes in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect our business, investments and results of operations.
We are subject to laws and regulations enacted by national, regional and local governments. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied, could result in fines, injunctive relief or similar remedies which could be costly to us or limit our ability to operate.
We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.
The U.S. Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to officials or others for the purpose of obtaining or retaining business. While our policies mandate compliance with these anti-bribery laws, we operate in many parts of the world that have experienced corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. We train our personnel concerning anti-bribery laws and issues, and we also inform our partners, subcontractors, suppliers, agents and others who work for us or on our behalf that they must comply with anti-bribery law requirements. We also have procedures and controls in place to monitor compliance. However, there is no assurance that our internal controls will always protect us from the possible reckless or criminal acts committed by our employees or agents. If we are found to be liable for anti-bribery law violations (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others including our partners, agents, subcontractors or suppliers), we could suffer from criminal or civil penalties or other sanctions, including contract cancellations or debarment, and damaged reputation, any of which could have a material adverse
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effect on our business. Litigation or investigations relating to alleged or suspected violations of anti-bribery laws, even if ultimately such litigation or investigations demonstrate that we did not violate anti-bribery laws, could be costly and could distract management.
During the ordinary course of our business, we may become subject to material lawsuits or indemnity claims.
We have in the past been, and may in the future be, named as a defendant in lawsuits, claims and other legal proceedings during the ordinary course of our business. These actions may seek, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination, breach of contract, cyber-security and related incidents, property damage, punitive damages and civil penalties or other losses or injunctive or declaratory relief. In addition, we generally indemnify our customers for claims related to the services we provide and actions we take under our contracts with them, and, in some instances, we may be allocated risk through our contract terms for actions by our customers or other third parties. Because our services in certain instances may be integral to the operation and performance of our customers’ infrastructure, we may become subject to lawsuits or claims for any failure of the systems on which we work, even if our services are not the cause of such failures, and we could be subject to civil and criminal liabilities to the extent that our services contributed to any property damage, personal injury or system failure. The outcome of any of these lawsuits, claims or legal proceedings could result in significant costs and diversion of management’s attention from the business. Payments of significant amounts, even if reserved, could adversely affect our reputation, our cash flows and our business.
Systems and information technology interruption and breaches in data security and/or privacy could adversely impact our ability to operate and negatively impact our results of operations.
We rely on computer, information and communication technology and other related systems, some of which are hosted by third party providers, for various business processes and activities, including project management, accounting, financial reporting and business development. These systems have been and may, in the future, be subject to interruptions or damage by a variety of factors including, but not limited to, cyber-attacks, natural disasters, power loss, telecommunications failures, acts of war, computer viruses, email phishing, corporate espionage, obsolescence and physical damage. Such interruptions can result in a loss of critical data, a delay in operations, damage to our reputation or an unintentional disclosure of customer confidential or personally identifiable information, any of which could have a material adverse impact on us and our operating results. Cybersecurity risks include potential attacks on both our information technology infrastructure and those of third parties (both on premises and in the cloud) attempting to gain unauthorized access to our confidential or other proprietary information, classified information or information relating to our employees, customers and other third parties. We dedicate considerable attention and resources to the safeguarding of our information technology systems. Nevertheless, due to the evolving nature, persistence, sophistication and volume of cyber-attacks, we may not be successful in defending our systems against all such attacks. Consequently, we have employed, and may need to continue to employ, significant resources to remediate the impact of, or further mitigate the risk of, such an attack. Any successful cyber-attack can result in the criminal, or otherwise illegitimate use of, confidential data, including our data or third-party data for which we have the responsibility for safekeeping. Additionally, such an attack could have a material adverse impact on our operations, reputation and financial results. In addition, various privacy and security laws and regulations requiring us to protect sensitive and confidential information from disclosure continue to evolve and pose increasingly complex compliance challenges. Compliance with evolving data privacy laws and regulations may cause us to incur additional costs, and any violation could result in damage to our reputation and/or subject us to fines, payment of damages, lawsuits and restrictions on our use of data, which could have a material adverse impact on our results of operations.
Our inability to recover on contract modifications against project owners or subcontractors for payment or performance could negatively affect our business.
We periodically present contract modifications to our customers and subcontractors for changes in contract specifications or requirements. We consider unapproved change orders to be contract modifications for which customers have not agreed to both scope and price. We consider claims to be contract modifications for which we seek, or will seek, to collect from customers, or others, for customer-caused changes in contract specifications or design or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers. Claims can also be caused by non-customer-caused changes, such as rain or other weather delays. In some cases, settlement of contract modifications may not occur until after completion of work under the contract. A
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failure to promptly document and negotiate a recovery for contract modifications could have a negative impact on our cash flows, and an overall inability to recover contract modifications could have a negative impact on our financial condition, results of operations and cash flows.
Our failure to adequately recover on affirmative claims brought by us against project owners or other project participants for additional contract costs could have a negative impact on our liquidity and future operations.
In certain circumstances, we assert affirmative claims to which we believe the Company is entitled against project owners, engineers, consultants, subcontractors or others involved in a project for additional costs exceeding the contract price or for amounts not included in the original contract price. These types of affirmative claims occur due to matters such as, but not limited to, delays or changes from the initial project scope, or differing site conditions, incomplete or inaccurate plans and drawings, which may result in additional costs. Often, these affirmative claims can be the subject of lengthy arbitration or litigation proceedings, and it is difficult to accurately predict when and on what terms they will be fully resolved. The potential gross profit impact of recoveries for affirmative claims may be material in future periods when they, or a portion of them, become probable and estimable or are settled. When these types of events occur, we use working capital to cover cost overruns pending the resolution of the relevant affirmative claims and may incur additional costs when pursuing such potential recoveries. A failure to recover on these types of affirmative claims promptly and fully could have a negative impact on our financial position, results of operations, cash flows and liquidity. In addition, while customers and subcontractors may be obligated to indemnify us against certain liabilities, such third parties may refuse or be unable to pay us.
We may experience delays and defaults in customer payments, and we may pay our suppliers and subcontractors before receiving payment from our customers for the related services, which could result in a material adverse effect on our business.
We use subcontractors and material suppliers for portions of certain work, and our customers pay us for those related services. If we pay our suppliers and subcontractors for materials purchased and work performed for customers who fail to pay us, or such customers delay paying us for the related work or materials, we could experience a material adverse effect on our business and financial performance. In addition, if customers fail to pay us for work we perform, we could experience a material adverse effect on our business and profitability.
In connection with acquisitions or divestitures, we may become subject to liabilities.
In connection with any acquisitions, we may acquire liabilities or defects such as legal claims, including but not limited to third party liability and other tort claims, claims for breach of contract, employment-related claims, environmental liabilities, conditions or damage, permitting, regulatory or other compliance with law issues or tax liabilities. If we acquire any of these liabilities and they are not adequately covered by insurance or an enforceable indemnity or similar agreement from a creditworthy counterparty, we may be responsible for significant out-of-pocket expenditures. In connection with any divestitures, we may incur liabilities for breaches of representations and warranties or failure to comply with operating covenants under any agreement for a divestiture. We may also retain exposure on financial or performance guarantees, contractual, employment, pension and severance obligations or other liabilities of the divested business and potential liabilities that may arise under law because of the disposition or the subsequent failure of an acquiror. As a result, performance by the divested businesses or other conditions outside of our control could have a material adverse effect on our business, financial condition and results of operations. In addition, we may indemnify a counterparty in a divestiture for certain liabilities of the divested business or operations subject to the divestiture transaction. These liabilities, if they materialize, could have a material adverse effect on our business, financial condition and results of operations.
If we fail to integrate acquisitions successfully, we may experience operational challenges and risks, which may have an adverse effect on our business.
As part of our business strategy, we may acquire companies that expand, complement or diversify our business. Acquisitions may expose us to operational challenges and risks, including, among others:
| ● | The diversion of management’s attention from the day-to-day operations of the company; |
| ● | Managing a significantly larger company than before completion of an acquisition; |
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| ● | The assimilation of new employees and the integration of business cultures; |
| ● | Training and facilitating our internal control processes within the acquired organization; |
| ● | Retaining key personnel; |
| ● | The integration of information, accounting, finance, sales, billing, payroll and regulatory compliance systems; |
| ● | Challenges in keeping existing customers and obtaining new customers; |
| ● | Challenges in combining service offerings and sales and marketing activities; |
| ● | The assumption of unknown liabilities of the acquired business for which there are inadequate reserves; |
| ● | The potential impairment of acquired goodwill and intangible assets; and |
| ● | The inability to enforce covenants not to compete. |
Failure to effectively manage the integration process could adversely impact our business, financial condition, results of operations and cash flows.
Our financial results are based upon estimates and assumptions that may differ from actual results.
In preparing our consolidated financial statements in conformity with generally accepted accounting principles, many estimates and assumptions are used in determining the reported revenue, costs and expenses recognized during the periods presented and disclosures of contingent assets and liabilities known to exist as of the date of the financial statements. These estimates and assumptions must be made because certain information that is used in the preparation of our financial statements cannot be calculated with a high degree of precision from data available, is dependent on future events or is not capable of being readily calculated based on generally accepted accounting principles. Often times, these estimates are particularly difficult to determine, and we must exercise significant judgment. Estimates may be used in our assessments of the allowance for doubtful accounts, useful lives of property and equipment, fair value assumptions in analyzing goodwill and long-lived asset impairments, self-insured claims liabilities, accounting for revenue recognized over time and provisions for income taxes. Actual results could differ materially from the estimates and assumptions that we use.
Our reported results of operations could be adversely affected as a result of impairments of goodwill, other identifiable intangible assets or investments.
When we acquire a business, we record an asset called “goodwill” for the excess amount we pay for the business over the net fair value of the tangible and identifiable intangible assets of the business we acquire. Under current accounting rules, goodwill and other identifiable intangible assets that have indefinite useful lives cannot be amortized, but instead must be tested at least annually for impairment, while identifiable intangible assets that have finite useful lives are amortized over their useful lives. Significant judgment is required in completing these tests. Any impairment of the goodwill or identifiable intangible assets recorded in connection with could negatively impact our results of operations. In addition, we may enter into various types of investment arrangements, such as an equity interest we hold in a business entity. Equity investments are reviewed for impairment by assessing whether any decline in the fair value of the investment below its carrying value is other than temporary. In making this determination, factors such as the ability to recover the carrying amount of the investment and the inability of the investee to sustain future earnings capacity are evaluated in determining whether an impairment should be recognized.
New Southland’s financial position may be impacted by the Merger.
New Southland’s financial position may be negatively impacted by the Merger. As outlined in the “Unaudited Pro Forma Condensed Combined Financial Statements” section, New Southland’s balance sheet may have certain additional assets and liabilities as a result of the Merger. The actual amounts of certain assets or liabilities are unknown prior to the Merger. The amount of current Legato II shareholders who choose to redeem their Public Shares for cash may also negatively impact the financial position of New Southland and may negatively impact New Southland’s ability to satisfy future obligations.
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Our accounting for revenue recognized over time could result in a reduction or elimination of previously reported revenue and profit.
For contracts where scope is adequately defined, and therefore we can reasonably estimate total contract value, we recognize revenue over time as work is completed. Accounting for long-term contracts involves the use of various techniques to estimate total transaction price and costs. For long-term contracts, transaction price, estimated cost at completion and total costs incurred to date are used to calculate revenue earned. Unforeseen events and circumstances can alter the estimate of the costs and potential profit associated with a particular contract. Total estimated costs, and thus contract revenue and income, can be impacted by changes in productivity, scheduling, the unit cost of labor, subcontracts, materials and equipment. Additionally, external factors such as weather, customer needs, customer delays in providing permits and approvals, labor availability, governmental regulation and politics may affect the progress of a project’s completion, and thus the timing of revenue recognition. Actual results could differ from estimated amounts and could result in a reduction or elimination of previously recognized earnings. It is possible that such adjustments could be significant and could have an adverse effect on our business.
Our indebtedness could lead to adverse consequences or adversely affect our financial position and prevent us from fulfilling our obligations under such indebtedness, and any refinancing of this debt could be at significantly higher interest rates.
Our indebtedness could have important consequences, including but not limited to:
| ● | Increasing our vulnerability to general adverse economic and industry conditions; |
| ● | Requiring us to dedicate a substantial portion of our cash flow from operations to servicing our debt, thereby reducing the availability of cash to fund working capital, capital expenditures, acquisitions and investments and other general corporate purposes; and |
| ● | Limiting our flexibility in planning for, or reacting to, challenges and opportunities, and changes in our businesses and the markets in which we operate. |
Our ability to service our debt will depend on our future operating performance and financial results, which may be subject to factors beyond our control, including general economic, financial and business conditions. If we do not have sufficient cash flow to service our debt, we may need to refinance all or part of our existing debt, borrow more money or sell securities or assets, some or all of which may not be available to us at acceptable terms or at all. In addition, we may need to incur additional debt in the future in the ordinary course of business. Our current debt and any future additional debt we may incur may impose significant operating and financial restrictions on us. A breach of any of these restrictions could result in a default. If a default occurs, the relevant lenders could elect to accelerate payments due. If our operating performance declines, or if we are unable to comply with any restrictions, we may need to obtain amendments to our credit agreements or waivers from the lenders to avoid default. These factors could have a material adverse effect on us.
Our bonding requirements may limit our ability to incur indebtedness, which could limit our ability to refinance our existing credit facilities or to execute our business plan.
Our ability to obtain surety bonds depends upon various factors including our capitalization, working capital, tangible net worth and amount of our indebtedness. In order to obtain required bonds, we may be limited in our ability to incur additional indebtedness that may be needed to refinance our existing credit facilities upon maturity, to complete acquisitions and to otherwise execute our business plans.
We may be unable to win new contracts if we cannot provide customers with letters of credit or performance or other bonds.
For many of our customers, surety bonds provide an adequate form of security, but for some customers security in the form of a letter of credit may be required. Failure to provide either a bond or a letter of credit when required by a customer may result in our inability to compete for, win or retain a project.
It can be difficult and expensive to obtain the insurance we need for our business operations.
We maintain insurance both as a risk management strategy and to satisfy the requirements of many of our contracts. Although we have been generally able to cover our insurance needs, there can be no assurances that we can
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secure all necessary or appropriate insurance in the future or that such insurance can be economically secured. For example, catastrophic events can result in decreased coverage limits, more limited coverage or increased premium costs or deductibles. We also monitor the financial health of our insurance. If any of our third party insurers fail, abruptly cancel our coverage or otherwise cannot satisfy their obligations to us, then our overall risk exposure and operational expenses could increase and our business operations could be interrupted.
We have international operations that are subject to foreign economic and political uncertainties and risks. Unexpected and adverse changes in the foreign countries in which we operate could result in project disruptions, increased cost and potential losses.
Our business is subject to international economic and political conditions that may change for reasons that are beyond our control. Operating in the international marketplace exposes us to a number of risks including:
| ● | Abrupt changes in government policies, laws, treaties (including those impacting trade), regulations or leadership; |
| ● | Embargoes or other trade restrictions, including sanctions; |
| ● | Restrictions on currency movement; |
| ● | Tax or tariff changes and withholding requirements; |
| ● | Currency exchange rate fluctuations; |
| ● | Changes in labor conditions and difficulties in staffing and managing international operations, including logistical and communication challenges; |
| ● | U.S. government trade or other policy changes in relation to the foreign countries in which we operate; |
| ● | Other regional, social, political and economic instability, including recessions and other economic crises; |
| ● | Natural disasters and public health crises, including pandemics; |
| ● | Expropriation and nationalization of our assets; |
| ● | International hostilities; and |
| ● | Unrest, civil strife, acts of war, terrorism and insurrection. |
Our level of exposure to these risks may vary with each project, depending on the location of the project and its stage of completion. To the extent that our international business is affected by unexpected and adverse foreign economic and political conditions and risks, we may experience project disruptions and losses.
Foreign currency risks could have an adverse impact on revenue, earnings and/or backlog.
Our contracts may subject us to foreign currency risk, particularly when project revenue is denominated in a currency different than the expected costs. A project may be denominated in different currencies at various points in time