Regulation of Takeovers and Shareholder Communications/Cross-Border Tender and Exchange Offers, Business Combinations and Rights Offerings
October 19, 1999
On October 19, 1999 the Commission adopted two significant rules covering domestic and cross-border merger and acquisition transactions. These releases update the regulations to reflect the realities of today's markets, while preserving important investor protections.
The "Regulation M-A Release" updates, harmonizes and simplifies the regulation of tender offers, mergers and similar extraordinary transactions, as well as facilitate security holder communications. Among other things, the new regulatory scheme relaxes current restrictions on public communications relating to these transactions. The amendments are the result of a comprehensive review of all the Commission's rules governing mergers and acquisitions, including the Securities Act of 1933 registration provisions and the proxy, tender offer and going-private rules.
The "Cross-Border Release" facilitates the inclusion of U.S. security holders of foreign companies in cross-border tender and exchange offers, mergers and similar transactions, and rights offerings. Currently, U.S. security holders often are excluded from participating in these types of transactions, particularly when they own a relatively small percentage of the outstanding securities of the foreign company. The rule changes balance the need for the protections of the U.S. securities laws against the need to discourage issuers and bidders from excluding U.S. security holders in cross-border transactions.
I. The Regulation M-A Release
This release contains a comprehensive new regulatory scheme governing business combination transactions. These transactions include cash and stock tender offers, mergers and similar transactions. The amendments fall into three categories: reducing restrictions on communications, balancing the regulatory treatment of cash and stock tender offers, and updating, simplifying and harmonizing the disclosure requirements.
A. Reducing Restrictions on Communications
Parties to business combination transactions have indicated a need to disclose more information regarding planned extraordinary transactions earlier than the current regulations may permit. Due to the market's demand for information, companies must balance the need to disclose information with existing restrictions on communications. The amendments will relax restrictions on communications with security holders by permitting the dissemination of more information on a timely basis. This will promote more informed voting and tendering decisions. The amendments will not restrict the content of communications, but anyone relying on the new rules will need to file written communications on the date of first use, so that all security holders have access to the information. In particular, the amendments will permit more communications:
- before the filing of a registration statement relating to either a stock merger or a stock tender offer transaction;
- before the filing of a proxy statement (regardless of whether the solicitation involves a business combination transaction);
- regarding a proposed tender offer without "commencing" the offer and requiring the filing and dissemination of specified information.
The amendments also will harmonize the treatment of business combination transactions under the Securities Act, tender offer rules and proxy rules. Confidential treatment of merger proxy statements will be retained, but only under limited circumstances. The amendments will not change the current requirement that security holders receive a mandated disclosure document (prospectus, proxy statement or tender offer material) before being able to vote or tender the securities.
B. Balancing the Regulatory Treatment of Cash and Stock Tender Offers
Under the current rules, stock tender offers (exchange offers) registered under the Securities Act are subject to regulatory delays not imposed on cash tender offers. A cash tender offer may commence as soon as a tender offer schedule is filed and the information is disseminated to security holders. An exchange offer, however, may not commence before a registration statement is filed and becomes effective. The amendments will balance the regulatory treatment of cash and stock tender offers to the extent practicable.
The amendments will permit exchange offers to commence as early as the filing of a registration statement, or on a later date selected by the bidder, before effectiveness of the registration statement. As a result, a bidder offering securities will not need to wait until effectiveness to commence an offer. Early commencement will not be mandatory, but rather at the election of the bidder. Any securities tendered in the offer can not be purchased until after the registration statement becomes effective, the minimum 20 business day tender offer period has expired, and all material changes are disseminated to security holders with adequate time remaining in the offer to review and act upon the information. A bidder will not need to deliver a final prospectus to security holders if all material information has been disseminated to security holders. Security holders can withdraw tendered securities at any time before they are purchased by the bidder.
C. Updating, Simplifying and Harmonizing the Disclosure Requirements
Currently, the procedural and disclosure requirements for business combination transactions can vary depending upon the form of the transaction. These differences are often minor and unnecessary. The amendments under consideration will clarify and harmonize the requirements. The amendments also will make the requirements easier to understand and facilitate compliance with the regulations.
The substantive disclosure requirements for tender offers, going-private transactions and other extraordinary transactions will appear in one central location within the rules, called "Regulation M-A." The amendments also will update the rules in several respects. The more significant amendments:
- combine the existing schedules for issuer and third-party tender offers into one new schedule, called "Schedule TO";
- require a plain English summary term sheet in all tender offers, mergers and going-private transactions, except when the transaction is already subject to the plain English rules under the Securities Act;
- update and generally reduce the financial statements required for business combinations;
- require pro forma and related financial information in negotiated cash tender offers when the bidder intends to engage in a back-end securities transaction;
- permit an optional subsequent offering period after completion of a tender offer during which security holders can tender their shares without withdrawal rights; and
- clarify the rule that prohibits purchases outside a tender offer (Rule 10b-13), codify prior interpretations of and exemptions from the rule; add several new exceptions to the rule, and redesignate it as new Rule 14e-5.
II. The Cross-Border Release
This release contains exemptions from certain U.S. securities laws for cross-border tender and exchange offers, mergers and similar transactions, and rights offerings. Many foreign companies are unwilling to comply with U.S. securities law requirements, which they view as burdensome, and are hesitant to subject themselves to increased litigation risk. In addition, U.S. regulation of these offers often conflicts with foreign regulation. As a result, U.S. security holders are frequently placed at a disadvantage because they are excluded from these transactions.
New provisions in the tender offer rules will exempt:
- tender offers for the securities of foreign private issuers from most provisions of the Exchange Act and rules governing tender offers when U.S. security holders hold 10 percent or less of the foreign company's securities that are subject to the offer (the "Tier I exemption").
- tender offers from certain limited provisions of the Securities Exchange Act of 1934 and rules governing tender offers when U.S. security holders hold 40 percent or less of a foreign private issuer's securities that are subject to the offer (the "Tier II exemption"). The Tier II exemption represents a codification of current exemptive and interpretive positions that eliminate frequent areas of conflict between U.S. and foreign regulatory requirements.
- tender offers for the securities of foreign private issuers from new Rule 14e-5 of the Exchange Act, which will permit purchases outside the tender offer during the offer when U.S. security holders hold 10 percent or less of the subject securities.
In addition, two new exemptions from the Securities Act registration provisions will exempt:
- under new Rule 801, rights offerings of equity securities by foreign private issuers from the registration requirements of the Securities Act when U.S. security holders hold 10 percent or less of the securities.
- under new Rule 802, securities issued in an exchange offer, merger or similar transaction for a foreign private issuer from the registration requirements of the Securities Act and the qualification requirements of the Trust Indenture Act when U.S. security holders hold 10 percent or less of the subject class of securities.
The U.S. anti-fraud and anti-manipulation rules and civil liability provisions will, however, continue to apply to these transactions.
The rule changes differ from the proposals that were published in November 1998 in the following significant respects:
- The U.S. ownership thresholds for the Rule 801 and Rule 802 registration exemptions have been increased from five to 10 percent.
- Under a "cash-only alternative" for Tier I tender offers, bidders will be permitted to offer cash in the United States while offering securities offshore without violating the equal treatment requirements of the tender offer rules. The bidder must have a reasonable basis to believe that the cash being offered to U.S. security holders is substantially equivalent to the value of the consideration being offered to non-U.S. holders.
- In determining U.S. ownership, an offeror will be required to "look through" the record ownership of certain brokers, dealers, banks or nominees holding securities for the accounts of their customers. Ten percent holders, foreign or domestic, will be excluded from the calculation, rather than just foreign 10 percent holders as had been proposed. Securities held by the bidder also will be excluded from the calculation.
- Securities issued in an exchange offer, mergers or similar transactions, or rights offering under the new rules will be restricted only to the extent that the securities held by the U.S. holder at the time of the offering are restricted. This is less restrictive for rights offerings than was originally proposed.
- The Tier II exemption has been revised to harmonize it with the amendments to the tender offer rules contained in the Regulation M-A Release.
- The release expands upon the 1998 Internet Release by providing guidance on what precautions bidders can take when posting offshore tender and exchange offer materials on the Internet so as not to trigger U.S. tender offer and registration requirements.