Speech by SEC Chairman:
Opening Remarks at Open Meeting
Chairman Christopher Cox
December 14, 2005
First Item Amendments to the Tender Offer Best-Price Rule
Good morning. This is a meeting of the Securities and Exchange Commission conducted under the Government in the Sunshine Act on December 14, 2005.
The first matter we have for consideration today involves the tender offer best-price rule. The staff of the Division of Corporation Finance is recommending that we modify the language of this rule to clarify that it applies only to the amount paid for securities tendered in a tender offer. The proposed amendments also would provide an exemption from the best-price rule for amounts paid for other reasons, such as for example employment compensation, severance or other benefit provided to employees or directors of the company that is the target of a tender offer.
The proposed changes to the tender offer best-price rule should be easily digestible. What I mean by that is there should be little confusion or controversy over the purpose of a rule that is colloquially termed the “best-price rule.” It requires a bidder in a tender offer to pay the same price to all shareholders of the target class for their securities.
This rule was originally codified by our predecessors almost 20 years ago to ensure that shareholders were treated equally in the context of tender offers. The premise was that bidders should be precluded from paying some shareholders more than others for their shares in a tender offer because such behavior would have a clear discriminatory effect.
The courts have also been asked by some shareholders to apply the best-price rule to other payments made in connection with tender offer transactions. Courts have responded in various ways. The differing judicial interpretations and opinions have caused some understandable uncertainty for bidders trying to engage in tender offers and have provided no clear answer to the questions posed by shareholders. In the meantime, some lawyers have counseled their clients to avoid tender offers and do their deals as statutory mergers when possible, since the best-price rule does not apply to mergers.
The staff of the Division of Corporation Finance has recommended rule changes addressing this issue by upholding the premise of equal treatment in payment for shares in a tender offer. The changes would also exclude payments that are not in consideration for shares, including payments under employment and severance arrangements.
We recognize that compensation, employment and severance issues in the context of a potential merger or acquisition, can be a crucial aspect of the overall transaction. Often the synergies that bidders hope to achieve in a merger or acquisition rest on the retention or severance of key employees. The proposed rule identifies these sorts of arrangements as not contributing to the price of tendered securities and thus not within the best-price rule. This makes sense. Legitimate employment or severance arrangements with an executive for his or her services should have nothing to do with whether or not that person holds shares and opts to tender them into the tender offer.
The benefits of the proposed exemption would be numerous. First, the recommended changes reinforce the original premise of the tender offer best-price rule, and that is ensuring that all shareholders who tender their securities in an offer are paid the same amount. If compensation is paid for securities tendered, in whatever form or pursuant to whatever type of arrangement, then that compensation is and will continue to be captured by the tender offer best-price rule. At the same time, bidders and target companies can proceed with a tender offer with greater certainty as to the manner in which the best-price rule will be applied to employment and severance arrangements, thanks to the added clarity in the proposed amendments.
I would like to thank the staff of the Division of Corporation Finance for their hard work on this proposal, as well as their colleagues in the Offices of General Counsel and Economic Analysis.
I’d like to thank Alan Beller, director of the Division of Corporation Finance, as well as our colleagues Brian Breheny and Mara Ransom of that Division for the work they’ve put into this. Alan will give now you a more detailed description of the proposals.
Second Item Termination of a Foreign Private Issuer’s Registration
Now we turn to the second item on our agenda. For several years now, the Commission has been considering the need to modernize our rules concerning Foreign Private Issuers, in particular the rules governing how a foreign company that has de-listed from U.S. exchanges can exit the SEC’s registration and reporting system. Serious concerns have been raised regarding these rules; and we have been listening. The most common concern we hear is that, while it is relatively easy to de-list from a U.S. market, it is exceptionally difficult to terminate the reporting obligation with the SEC. Indeed, in some instances, impossible. The last thing we want our U.S. markets to be known as is that famous place where you can always check in, but you can never leave. As a Californian I can tell you that the reason we get so many visitors and immigrants is that we let them leave if they wish. The Hotel California is a great song, but it is a lousy business model.
So we now turn to a recommendation by the Division of Corporation Finance that the Commission propose new rules addressing this issue by establishing significant new flexibility in the standards under which foreign private issuers may exit the Exchange Act registration and reporting system.
Under the current rules, a foreign private issuer must have fewer than 300 U.S. resident shareholders if it wishes to terminate its Exchange Act reporting. This standard may present a foreign issuer with the unfortunate situation in which it is not able to terminate its reporting obligations, even though there is relatively little investor interest in the United States.
The current standard was established several decades ago, when there was much less cross-border ownership of securities. The ongoing globalization of the securities markets likely has caused it to become seriously outdated. One need not look far for evidence of this globalization. In 1985, there were about 300 foreign companies with Exchange Act reporting obligations. As of last year there had been a 400% increase. There were over 1,200 foreign companies with Exchange Act reporting obligations at year end. Back in 1985, foreign private issuers represented 3.5% of NYSE-listed companies. Today private issuers account for over 16% of NYSE listings. The proposals we consider today are necessary to modernize the de-registration structure, to take into account the much larger number, and greater variety, of overseas issuers.
First, the new, alternative standards for foreign issuer de-registration would no longer gauge U.S. market interest in a class of securities by the current method, which is counting the number of U.S. resident shareholders. Instead, we would look to the percentage of U.S. ownership of, and the amount of U.S. trading activity in, that class of securities. The recommendations also would take account of the relative differences in the amount of U.S. ownership in a large foreign company, on the one hand, and in a small foreign company, on the other. That’s reflective of our view that a one size fits all standard for assessing U.S. market interest in securities isn’t reflective of today’s global trading environment.
Second: the proposals would provide relief from the current requirement that foreign private issuers search the entire planet for every U.S. beneficial owner who might hold securities through intermediaries. The search for U.S. beneficial owners, which we will still mandate, could henceforth be limited to three places: first, the United States of America; second, the issuer’s home country; and third, if different, the country of the issuer’s principal market. By requiring that foreign private issuers search for U.S. investors who hold through intermediaries in the most probable locations, we achieve the purpose of investor protection without imposing needless costs and burdens. The proposals also would permit foreign private issuers to use independent information services providers in specified situations.
Third, under current rules, a foreign private issuer that is able to cease reporting, in certain circumstances, can again become subject to our reporting requirements, even years later. The recommended proposals would make the cessation of reporting permanent—at least absent a new U.S. listing or public offering.
The proposed additional flexibility for foreign private issuers that wish to cease Exchange Act reporting should provide those issuers with meaningful options when, after electing to access the U.S. public capital markets, they find a diminished level of U.S. investor interest in their securities. This additional flexibility should make foreign issuers more willing to register their securities under the Securities Act and Exchange Act and list in U.S. markets because these changes, if adopted, would provide a more clearly defined and flexible exit process. In so doing, the proposed rules would help ensure that foreign companies continue to participate in U.S. capital markets to the benefit of U.S. investors. Competition is a beautiful thing.
I’d like to thank Alan as well as our colleagues Paul Dudek and Elliot Staffin from the Division of Corporation Finance for the work they’ve put into this proposal.
I have touched on only a few of the high points of the proposals, so I will turn it over to Alan Beller and his staff to provide us with the details.
Third Item Accelerated Filing Requirements
So far this morning we have considered two proposals for public comment. Now, we will consider final rules that the Division of Corporation Finance is recommending for adoption concerning, first, the definition of “accelerated filer”, and second, the periodic reporting deadlines that apply to accelerated filers.
Over three years ago, in September 2002, the Commission ushered in new rules to require larger public companies to file both their annual and their quarterly reports on a more timely basis. This was part of a series of steps to modernize and improve the usefulness of the periodic reporting system, and make it more useful to investors in an era of instant communication and real-time information sharing. The periodic report deadlines that are subject of this modernization effort are more than three decades old! They had not been updated since way back in 1970.
Of course, changing something that old isn’t always easy, so the Commission originally determined to phase in the new filing deadlines gradually, over a three-year period. The Commission staff has closely monitored implementation of the new filing requirements ever since the phase-in began. In the second year of the phase-in period, as companies and auditors prepared to comply for the first time with the Sarbanes-Oxley Section 404 requirements, several of them expressed concern about their ability to file their 2004 annual reports on the new schedule. In response to that, the Commission stretched out the phase-in period to a fourth year.
And yet there have been continuing concerns. For example, we have heard from companies and their auditors about the difficulty they will have in filing quarterly reports within 35 days. We also heard from the SEC Advisory Committee on Smaller Public Companies about changes they would recommend. So three months ago, in September, we proposed further changes to the filing deadlines, and to the definition of “accelerated filer.” To review the bidding, we proposed that quarterly reports be filed within 40 days for all accelerated filers. We proposed that annual reports be filed within 60 days for the largest public companies. And we left the deadline at 75 days for other accelerated filers.
We’ve now had a chance to consider all the public comment letters that we received on those proposals. And we are now finally ready to finally vote on final rules that will extend the annual reporting deadline for the largest companies the final time. What is before us today reflects an exceptionally patient, cautious and deliberate process of listening to and taking into our consideration the concerns of auditors and companies, and balancing that against the need for financial information to be transmitted in a timely way to markets and investors. The final rules we are considering today retain the framework for filing that we proposed in September, which is good for investors and good for the markets. But it also provides yet another phase-in year for the largest companies, in recognition of the fact that they that are in only their second year of reporting under Section 404, which has imposed significant new burdens on auditors and companies that were not contemplated when this accelerated filing framework was first introduced three years ago. Our caution in extending the phase-in period for filing of annual reports will benefit investors by helping to ensure that the annual reports they receive are well-prepared and accurate.
I’d like to thank Alan as well as our colleagues Paula Dubberly, Elizabeth Murphy and Katherine Hsu from the Division of Corporation Finance for the work they’ve put into this.
Alan, would you please give us the details of the proposals?