Speech by SEC Staff:
Opening Remarks at the SEC Open Meeting
Senior Special Counsel, Division of Corporation Finance
U.S. Securities and Exchange Commission
August 27, 2008
Good morning. Thank you John, Chairman Cox and members of the Commission.
Today we recommend that the Commission adopt changes to the cross-border exemptions and beneficial ownership reporting requirements for certain foreign institutions. We also recommend that the Commission issue guidance on several issues relating to cross-border business combinations, to address matters of concern to practitioners in this area. These rule changes and interpretive guidance have been carefully crafted to balance U.S. investor protection, while facilitating cross-border transactions that may benefit U.S. investors. In many instances, these rule changes codify staff interpretive positions and will eliminate the need for parties to seek individual relief.
Specifically, we recommend that the Commission adopt a number of significant changes to the current look-through test for identifying beneficial owners when determining eligibility to rely on the cross-border exemptions. First, we recommend changing the timing of and reference date for the eligibility calculation of U.S. ownership. If the recommended changes are adopted, an acquiror seeking to rely on the cross-border exemptions may calculate U.S. ownership as of any date no more than 60 days before and no more than 30 days after the public announcement of the cross-border transaction. An acquiror in a business combination transaction that is unable to calculate within this period may calculate as of a date up to 120 days before public announcement.
Next, we recommend eliminating the current requirement to exclude from the U.S. ownership calculation securities held by persons who hold more than 10 percent of the subject securities. Securities held by the bidder would continue to be excluded from the calculation. We believe this change will significantly expand the number of cross-border business combinations eligible for the exemptions, while still providing appropriate investor protections.
Finally, for issuers and acquirors who are unable to conduct the modified look-through analysis, we recommend an alternate eligibility test based in part on a comparison of the average daily trading volume of the subject securities in the United States as compared to the trading volume worldwide. In addition to the comparison of trading volumes for the subject securities, the alternate test would require the acquiror or issuer to take into account U.S. ownership figures reported in filings with the Commission, the home country regulator or in the jurisdiction of the primary trading market for the subject securities, as well as other information about U.S. beneficial ownership that the acquiror or issuer knows or has reason to know from other sources. These additional elements of the alternative test reflect changes proposed-and that we recommend you adopt today-to the elements of the existing test for non-negotiated transactions. We believe inclusion of this alternate test appropriately balances the concerns raised in the comments we received with our investor protection goals.
Today we are also recommending rule changes to the Tier I and Tier II exemptions for cross-border transactions. For the Tier I exemption, we recommend expanding its scope to cross-border transactions currently subject to Rule 13e-3 by eliminating the requirement that a cross-border transaction be conducted under Rule 802 or Rules 13e-4(h)(8) or 14d-1(c) in order to be eligible for this exemption.
For the Tier II exemptions, we recommend changing the exemptions to:
- Extend the availability of these exemptions to unregistered tender offers, such as tender offers for securities that are not registered under Section 12 of the Exchange Act;
- Allow multiple foreign offers to be conducted contemporaneously with a U.S. offer and relax our rules regarding who may be included in each offer;
- Permit the suspension of withdrawal rights after the expiration of a tender offer, while tendered securities are being counted and before they have been accepted for payment by the bidder;
- Modify the rules applicable to the subsequent offering period in a tender offer;
- Permit the early termination of the initial offering period in a Tier II cross-border tender offer, upon the satisfaction of all offer conditions; and
- Codify the exemptive relief previously provided by the Division of Trading and Markets to permit purchases outside of a tender offer conducted under the Tier II cross-border exemptions.
For both U.S. and cross-border tender offers, we recommend eliminating the current 20 U.S. business day limit on the maximum length of a subsequent offering period. We also support expanding the types of exchange offers that may commence before the effectiveness of the registration statement for the securities being offered by the bidder for both cross-border and U.S. exchange offers.
Our recommendations today also include adopting the changes proposed to permit certain kinds of foreign institutions to file on Schedule 13G to the same extent as would be permitted for their domestic counterparts. To file on Schedule 13G, a foreign institution would be required to certify that it is subject to a regulatory scheme substantially comparable to the regulatory scheme applicable to U.S. institutions, and that the subject securities are acquired and held in the ordinary course of business and without the purpose or effect of influencing control of the issuer. We also recommend making a corresponding change to the rules governing beneficial ownership for purposes of Section 16.
Finally, we recommend that the Commission provide guidance on the following issues on which the staff frequently receives inquiries:
- limitations on prior Commission guidance on the ability of bidders to reduce or waive a minimum acceptance condition in a tender offer without providing withdrawal rights after this change in the terms of the offer;
- the ability of bidders in tender offers for U.S. companies to exclude foreign target security holders in tender offers subject to U.S. equal treatment principles;
- the ability of bidders in cross-border tender offers to exclude U.S. target security holders without violating U.S. tender offer rules; and
- the ability of bidders in cross-border exchange offers to provide cash to U.S. security holders while offering shares to foreign target holders, through the use of a procedure known as a "vendor placement."
This guidance is consistent with that previously provided in the cross-border proposing release issued on May 6, 2008-although we recommend providing some additional detail.
Thank you. We would be happy to answer any questions you may have.