SEC Proposes Revisions to the Cross-Border Tender Offer, Exchange Offer, and Business Combination Rules as Well as Beneficial Ownership Reporting Rules for Certain Foreign Institutions
In May 2008, the U.S. Securities and Exchange Commission (the "SEC") proposed amendments to:
- Expand and refine current cross-border exemptions to address recurring issues and unintended consequences that have impeded the usefulness of the existing cross-border exemptions;
- Codify related interpretive guidance previously granted only on an individual basis; and
- Provide guidance on some of the interpretive issues that have arisen during the eight years since the cross-border exemptions were adopted.
The proposed amendments would expand and refine the cross-border exemptions adopted in 1999. These cross-border exemptions are structured as a two-tier system based broadly on the level of U.S. interest in a transaction. The level of U.S. interest is measured by the percentage of target securities of a foreign private issuer held by U.S. investors. Specifically, if no more than 10 percent of the target securities are held in the United States (Tier I), a qualifying cross-border transaction is exempt from most U.S. tender offer rules, from the registration requirements of Section 5 of the Securities Act of 1933 (the “Securities Act”), and from the disclosure requirements applicable to going-private transactions. If U.S. holders own more than 10 percent but no more than 40 percent of the target securities (Tier II), the cross-border exemptions provide targeted relief from some U.S. tender offer rules, but they do not provide relief from the registration requirements of Section 5 of the Securities Act and do not include an exemption from the additional disclosure requirements applicable to going-private transactions.
The proposed amendments address some of the issues presented by the increasing globalization of securities markets and are intended to make bidders more likely to extend offers to U.S. holders. The SEC believes that expanding the availability of the cross-border exemptions would benefit U.S. investors by leveling the playing field to allow U.S. investors to participate in cross-border business combination transactions from which they otherwise might be excluded. In addition, the SEC believes these changes may in turn increase U.S. investor interest in securities of foreign private issuers and reduce the cost of regulatory compliance.
The discussion below highlights the most important of the SEC's proposed amendments and guidance.
The proposed amendments would refine the tests for calculating U.S. ownership of the target company for purposes of determining eligibility to rely on the cross-border exemptions in both negotiated and hostile transactions. Specifically, the revisions would:
- Use the date of public announcement of the business combination as the reference point for calculating U.S. ownership;
- Permit the offeror to calculate U.S. ownership as of a date within a 60-day range before announcement; and
- Clarify when a bidder in a nonnegotiated tender offer "has reason to know" certain information about U.S. ownership that may preclude its ability to rely on the presumption of eligibility in nonnegotiated tender offers.
The proposed amendments to the eligibility threshold address timing and informational restrictions that impede the application of the current exemptions in certain jurisdictions. Under the current exemptions, companies faced with such impediments must request relief from the SEC staff on an individualized basis.
The SEC requested comments on alternative measures for assessing U.S. investor interest in establishing eligibility under the cross-border exemptions. Interestingly, the SEC stated that it does not believe a test based on average daily trading volume would, in the context of negotiated business combinations, be an accurate indicator of U.S. investor interest.
Proposed Changes to Tier I Exemptions
The proposed amendments would expand relief under Tier I for affiliate transactions subject to Rule 13e-3 of the Securities Exchange Act of 1934 (the "Exchange Act") to include transactions not covered under the current cross-border exemptions, such as schemes of arrangement, cash mergers, or compulsory acquisitions for cash.
Proposed Changes to Tier II Exemptions
The proposed amendments would:
- Modify the Tier II cross-border exemptions that currently permit a bidder conducting a tender offer to separate the offer into no more than two separate but concurrent offers - a U.S. offer and a foreign offer - for the same class of securities to permit multiple foreign offers;
- Allow non-U.S. holders of ADRs to be included in a U.S. offer;
- Allow U.S. holders to participate in non-U.S. offers where required under foreign law and where U.S. holders are provided with adequate disclosure about the implications of participating in the foreign offer;
- Eliminate issues relating to suspensions of "back-end" withdrawal rights and address matters relating to subsequent offering periods, including the length of those periods, prompt payment for and the payment of interest on securities tendered in those periods, and the use of separate offset and proration pools for securities tendered during the initial and subsequent offering periods;
- Codify existing exemptive orders with respect to the application of Rule 14e-5 under the Exchange Act, which prohibits purchases of securities outside a tender offer;
- Limit the SEC's current interpretive position as to when a bidder may waive or reduce the minimum acceptance condition in a Tier II tender offer without providing withdrawal rights during the remainder of the offer period;
- Codify relief as to when a bidder may terminate the initial offer period or any voluntary extension of that period before a scheduled expiration date; and
- Extend the specific relief afforded under the Tier II exemption to tender offers not subject to Rule 13e-4 under the Exchange Act, or Regulation 14D, thereby allowing tender offers governed by Regulation 14E that otherwise meet the conditions for reliance on Tier II to take advantage of the expanded relief.
Expanding Availability of Early Commencement for Exchange Offers
The SEC acknowledges that a regulatory disparity continues to exist between cash and stock tender offers because the option of early commencement is not available for exchange offers not subject to Rule 13e-4 or Regulation 14D. To address this disparity, a new provision in the Tier II exemptions would permit early commencement for any exchange offer that meets specified conditions.
Beneficial Ownership Reporting by Foreign Institutions
Only certain U.S. institutions or entities are permitted to report beneficial ownership on the short-form Schedule 13G rather than the more extensive Schedule 13D. The proposed beneficial ownership revisions would permit certain foreign institutions or entities meeting specified conditions to report on Schedule 13G to the same extent as their U.S. counterparts, without the need for obtaining individual no-action relief.
In addition to the proposed changes noted above, the proposing release provides the following SEC interpretive guidance:
- The all-holders provisions in the tender offer rules apply equally to U.S. and non-U.S. target holders, and as a result, neither type of holder may be excluded from a tender offer subject to those rules. However, the SEC has not interpreted these provisions as requiring dissemination of offering materials outside the United States.
- A non-U.S. bidder for target securities of a foreign private issuer may exclude U.S. target security holders only if the offer is made outside the United States and U.S. jurisdictional means are not used. Procedures adapted to the particular circumstances must be used, and the SEC staff will be closely monitoring exclusionary offers to determine whether U.S. target holders are being adequately protected.
- Bidders may seek to avoid the registration requirements of the Securities Act by establishing a vendor placement arrangement that provides for the sale of exchange securities and delivery of cash consideration to benefit U.S. target security holders. Whether or not vendor placement procedures for exchange offers will be subject to the registration requirements of the Securities Act will depend on a number of factors relating to the securities, the trading market for the securities, and the vendor placement procedures.
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Thomas C. Daniels
Alexander A. Gendzier
Christopher M. Kelly
Richard M. Kosnik
Timothy J. Melton
John T. Perugini
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 Offers subject to the U.S. tender offer rules may involve the payment of cash or the exchange of securities for target securities. For a description of the cross-border exemptions, see Section I.A.2 of the proposing release. "Revisions to the Cross-Border Tender Offer, Exchange Offer, and Business Combination Rules and Beneficial Ownership Reporting Rules for Certain Foreign Institutions," Securities Act Release No. 33-8917, Exchange Act Release No. 34-57781 (May 6, 2008); see also "Cross-Border Tender and Exchange Offers, Business Combinations and Rights Offerings," Securities Act Release No. 33-7759, Exchange Act Release No. 34-42054 (Oct. 22, 1999).
 The proposals are among a series of SEC rulemaking initiatives affecting foreign private-issuer reporting and registration requirements.
In March 2007, the SEC amended the deregistration rules for exiting the U.S. regulatory system when the level of U.S. interest in a foreign private issuer’s securities has decreased, such that continued registration is no longer justified. "Termination of a Foreign Private Issuer’s Registration of a Class of Securities Under Section 12(g) and Duty to File Reports Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934," Exchange Act Release No. 34-55540 (Mar. 27, 2007).
In January 2008, the SEC adopted amendments permitting foreign private issuers to use financial statements prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, without reconciliation to U.S. generally accepted accounting principles. "Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP," Securities Act Release No. 33-8879, Exchange Act Release No. 34-57026 (Dec. 21, 2007); see also Jones Day Commentary, "SEC Allows Foreign Private Issuers to Use Financial Statements Prepared in Accordance With International Financial Reporting Standards" (Jan. 2008), available at https://www.jonesday.com/pubs/pubs_detail.aspx?pubID=S4876.
In February 2008, the SEC proposed changes to the manner of determining the availability of the Rule 12g3-2(b) exemption from Exchange Act registration. "Exemption from Registration Under Section 12(g) of the Securities Exchange Act of 1934 for Foreign Private Issuers," Exchange Act Release No. 34-57350 (Feb. 19, 2008); see also Jones Day Commentary, "SEC Proposes Amendments to Rule 12g3-2(b) Exemption From Registration Under Section 12(g) of the Securities Exchange Act of 1934 and Other Rules and Forms" (Apr. 2008), available at https://www.jonesday.com/pubs/pubs_detail.aspx?pubID=S5054.
Finally, in February 2008, the SEC proposed rule revisions applicable to foreign issuers intended to improve the accessibility of the U.S. public capital markets and enhance the information available to investors. "Foreign Issuer Reporting Enhancements," Securities Act Release No. 33-8900, Exchange Act Release No. 34-57409 (Feb. 29, 2008); see also Jones Day Commentary, “SEC Proposes Amendments to Rule 12g3-2(b) Exemption From Registration Under Section 12(g) of the Securities Exchange Act of 1934 and Other Rules and Forms” (Apr. 2008), available at https://www.jonesday.com/pubs/pubs_detail.aspx?pubID=S5054.
 Comments on the SEC's proposals must be received on or before June 23, 2008.